the IMS in history: dollar dominance during bretton woods and beyond Flashcards
what were the pillars of the bretton woods system?
pegged exchange rates: countries had to declare parity in terms of golds or a currency convertible to gold and hold the excahnge rate within 1% of that level
capital controls
the international monetary fund was created with powers of surveillance and financial resources
why did the US balance of payments go from a surplus to a defecit?
post war europe had no choice but to run defecits with the US given the war destruction and the need for goods
european countries struggled to restore convertability of their currencies with britains early attempt in 1947 leading to a massive loss in reserves
as economic growth picked up in europe in the 1950s, the situation changed: the united states started to run current account defecits. the need for foreign exchange reserves to supplement gold reserves strengthened. the system became increasingly asymmetric consolidating the role of the dollar as reserve currency.
what was triffins dilema?
triffin argued that the tendency to meet excess demand for reserves through growth of foreign exchange reserves in dollars made the system unstable. the united states was exposing itself to the risk of the internation equivalent of a bank run, destabilising the international monetary system. however if the US were to limit its provisions of reserve assets to the world, there would be a shortage of reserve assets which would impede international transactions
what caused the crisis of the dollar?
in 1960, the price of gold in private markets rose to 40$ an ounce where 35$ was the parity. adjusting the peg could have been a solution however the other countries were not willing to contemplate this idea. devaluation would of been seen as a failure. the US tried to control capital movements and to restrict imports unsuccessfully and their military and social spending committments meant that expenditure reducing policies to reduce the deficit was unavailiable. absorbing dollars rather than forcing the US to devalue meant that inflation was rising in other countries. in 1971 there was a massive outflow from the dollar to the deutsche mark. germany allowed the mark to float. the flight from the dollar was not contained and other european countries followed which led the nixon administration to suspend convertability.
what are the lessons from the bretton woods?
changing political circumstances meant that adjustments of balance of payments disequillbria were not possible.
tightening financial conditions to eliminate deficits was incompatible with other domestic objectives.
as international capital mobility rose in 1960s, defending a parity proved increasingly difficult and there was a fear that devaluing meant exposing the country to speculative attacks
the survival of the system for so long was due to the cooperation of central banks eg the gold pool
what were fixed exchange rates effective for?
fixed exchange rates proved effective for high inflation countries
what countries tended to float?
large countries such as the united states and japan opted to float
what did small open countries opt for after bretton woods?
smaller open countries with underdeveloped financial markets opted for a fixed currency peg to avoid volatile exchange rates combined with tight capital controls
what are currency boards?
the currency peg is enshrined in the constitution the currency peg to be free from political pressure and promote the confidence of the markets
what is the two effects of a currency depreciation in a developing country?
1) expansionary: the relative price of domestic goods falls, which boosts export, GDP and employment ( conventional mundell fleming paradigm)
2) contractionary : the value of assets falls leading to a negative balance sheet effect reducing the value of the countries collateral
