The International Monetary System: A Brief History 211 flexibility. For example, on the gold standard a government could not increase the money supply to ward off a recession. Such flexibility is necessary in a globalized monetary system, where quick adjustments to wide swings in a currency’s value may be necessary. Economist Paul Krugman points out that this flexibility is the reason the 1987 stock market crash did not cause a depression similar to that of 1929.7 THE BRETTON WOODS SYSTEM The 1944 discussions among 44 Allied nations at Bretton Woods (NH) to plan for post– World War II monetary arrangements reached a consensus that stable exchange rates were desirable, but that experience might dictate adjustments. Representatives at the conference also agreed that floating or fluctuating exchange rates had proved unsatisfactory. In establishing the International Monetary Fund (IMF), they also set up the new Bretton Woods system, also called the gold exchange standard and the fixed-rate system. This historic agreement served as the basis of the international monetary system from 1945 to 1971. Bretton Woods set up fixed exchange rates among member nations’ currencies, with par value based on gold and the U.S. dollar, which was valued at $35 per ounce of gold. Governments agreed that their central banks would keep their currencies tied to the value of the dollar, which was tied to gold. For example, the British pound’s par value was US$2.40, the French franc’s was US$0.18, and the German mark’s was US$0.2732. There was an understanding that the U.S. government would redeem dollars for gold and that the dollar was the only currency to be redeemable for gold. This dollar-based gold exchange standard established the U.S. dollar as both a means of international payment and a reserve currency for governments to hold in their treasuries. Reserves are funds held by a nation’s central bank or treasury and used to back its liabilities; they can include various hard currencies (Japanese yen, U.S. dollar, British pound sterling, EU euro) and gold. They are often called central reserves. The Bretton Woods system supported substantial international trade growth during the 1950s and 1960s. Other countries changed their currency’s value against the dollar and gold, but the U.S. dollar remained fixed at $35 per ounce of gold. This meant that the United States, in order to satisfy the growing demand of other countries for reserves (because countries would hold dollars as a proxy for gold), had to run a balance-of-payments deficit. That is, the demand for and flow of dollars out of the United States was greater than the flow in. People outside the United States wanted to hold dollars because they operated as a proxy for gold. The external holdings far exceeded the inflow of dollars due to U.S. export sales and investments by foreigners in the United States. From 1958 through 1971, the United States ran up a cumulative deficit of $56 billion, which it financed partly by using its own gold reserves and partly by incurring liabilities to foreign central banks. As a result, U.S. gold reserves shrank from $24.8 billion to $12.2 billion,8 and U.S. liabilities increased from $13.6 billion to $62.2 billion.9 By 1971, the U.S. Treasury held only 22 cents worth of gold for each U.S. dollar held by foreign central banks. An interesting paradox associated with reserve currencies was first pointed out by economist Robert Triffin. The reserve-currency nation’s deficit, which is unavoidable, eventually inspires a lack of confidence in the reserve currency, which leads to a financial crisis. That is, the more of the reserve currency foreigners hold, the less confidence they have in the currency. This Triffin paradox is exactly what arose when, after trade deficits occurred in the late 1960s, President Charles De Gaulle pushed the Bank of France to redeem its dollar holdings for gold. Eventually, in 1971, President Nixon suspended the dollar’s convertibility into gold. Finance ministers at Bretton Woods had foreseen the dangers of using one currency as a reserve currency and tried to make adjustments to avoid the impending crisis by creating an international reserve asset, special drawing rights (SDR), which came into being in 1969. The SDR is a virtual currency with no tangible, physical presence; its value is based on a trade-weighted basket of four currencies: the euro, the Japanese yen, pound Bretton Woods system The international monetary system in place from 1945 to 1971, with par value based on gold and the U.S. dollar fixed exchange rate Exchange rate regime in which the currency’s value is tied to the value of another currency or gold par value Stated value reserves Assets held by a nation’s central bank, used to back up government liabilities Triffin paradox A problem in which a national currency that is also a reserve currency will eventually run a deficit, leading to lack of confidence in the reserve currency and a financial crisis special drawing rights (SDR) An international reserve asset established by the IMF; the unit of account for the IMF and other international organizations CCULTURE FACTS CULTURE FACTS @internationalbiz Treasuries in collectivistic countries are willing to take more financial risk than are those in individualistic countries because the collectivist ingroups that control the investments in these cultures, such as finance ministers and leaders of major companies, provide downside protection if the risks prove costly. #risktakers #downsideprotection
Geringer_InternationalBusiness
To see the actual publication please follow the link above