Int’l Monetary Crisis - I

The Crisis of Bretton Woods & the Shift to Floating Exchange Rates

Readings

$ Peter Tosh: “The Day the Dollar Die”

$ Dollar Charts

$ IMF Terminology

$ BusinessWeek Articles on Dollar & Dirty Float

$ Optional: Monetary Chronology

Review of Causes

$ Adjustment increasingly rigid due to increasing speculative flows

$ Int’l liquidity dependent on US bal. of payments

$ Growing foreign dollar holdings > US gold reserves undermined confidence

$ Failure of reform, benign neglect

$ Speculative push against dollar Spring 1971

August 15, 1971

$ No more gold for dollars

$ 15% surtax on imports

¢ attack on workers

¢ taken as nationalist action, fueled diplomatic crisis

$ Wage-price freeze within US

¢ attack on workers, wages frozen more than prices

Chronology - I

$ Aug. 15, 1971: TV announcement

$ Dec. 1971: Smithsonian Agreement

¢ $ devalued from $35 to $38/oz

$ 1972: IMF Reform Report calls for

¢ substitution account to deal with $ overhang

$ Feb. 1973: 2nd Devaluation of $ after massive speculation

Chronology - II

$ Mar. 1973: general float of major monies

$ Late 1973: 4X oil price increase

¢ dramatic increase in demand for dollars

$ 1974: IMF creates “oil facility”

$ 1974-75: Great Recession

¢ increase in unemployment

¢ acceleration in inflation

$ 1975: Rambuillet Agreement legalizes float

$ 1976: Jamaica Agreement ratifies changes

Floating Exchange Rates

$ Shift from fixed to float

¢ shifted responsibility for adjustment

¢ from nationstate to market (automatic)

$ E.g. US trade deficit (M>X) Þ supply $ > demand $, so “price” of $ should ¯

$ ¯ of $ should exports, ¯ imports and move toward M = X

Parallels

$ Work out the inverse adjustment, i.e., the results of a trade surplus

$ Similar effect will occur through int’l capital flows

– for direct investment

– for portfolio investment

– foreign aid

Dirty Floats

$ Automatic adjustment?

$ No, govt’s intervened to manipulate markets for their currencies

$ Intervention

– subverted mechanism

– demonstrated failure to finesse

– political management

Intervention

$ Jaw-boning

$ Central Bank buying or selling currencies

– selling own currency supply

– buying own currency demand

$ Converted:

– depreciation to devaluation

– appreciation to revaluation

Miss-valuations

$ Holding exchange rate above market rate Þ overvalued currency

$ Holding exchange rate below market rate Þ undervalued currency

$ Amidst world awash with petrodollars, global inflation and accelerating speculation

Causes of Dirty Float

$ Prestige? e.g., does US support dollar to point of overvaluation to defend its role as THE

international money?

$ Competition? Do govt’s intervene to devalue currency to boost exports?

Deep Causes - I

$ Behind preocupation w/exports lies concern with unemployment

$ UK, for example, intervened to undervalue the pound

$ Behind concern with w/exports has also been concern with profits

Deep Causes - II

$ Behind concern with trade has also been inflation worries

$ Germany is classic case of avoiding local stimulation of economy

$ Behind fear of inflation is fear of workers and wage increases which outstrip productivity increases

Deep Causes - III

$ Behind concern w/unemployment lies conflicts with workers that limit austerity

$ “Few govt’s willing to pay political price”

$ In language of Marazzi, all this amounts to manipulation of money against workers, for business

$ But this manipulation sign of weakness

Consequences

$ Rapid growth in int’l banking

$ Rapid growth of Eurocurrency markets

$ Rapid growth of speculation

$ uncertainty for business, costs of coping with fluctuations

$ uncertainty Þ less investment

$ Float as political finesse failed

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