Int’l Monetary Crisis - I

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



$ 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












$ 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



$ Jaw-boning

$ Central Bank buying or selling currencies

selling own currency ­ supply

buying own currency ­ demand

$ Converted:

depreciation to devaluation

appreciation to revaluation



$ 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



$ 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