Summarized by JUAN ARFAN AL BERZINJI

 

Harold VanBuren Cleveland,

"How the Dollar Standard Died,"

Foreign Policy, #5 (Winter, 1971-72)

 

THE MAIN POINT:

The basic argument of this article is that the dollar standard system died out due to the fact that it gave the U.S one-sided power to induce monetary conditions all over the trading world when it no longer had the great economic and political power as before(Europe and Japan were catching up) and therefore this system standard had to be altered .

 

SUMMARY:

The article begins with the lack of discipline this misleading name of the system operates. Then the article presents the characteristics and the leading anarchy of this system. The article informs us of the backward ideas of resolutuions to the dollar system and then ends the article with his own idea on a new ; a global monetary system that ids divided into two regions – one pegged to the dollar  and the other to the strongest Euro currency.

 

BRETTON WOODS BLUEPRINT:

This is the system that the architects of the post war era had in mind. The characteristics of this system are:

. Decentralized and a somewhat flexible system

. Each country would enjoy some liberty in managing its own money supply

.Equilibrium attained by national regulation on international capital flow through inland monetary and fiscal actions and modifing exchange rates.

. It was Wilsonian in context i. countries were confident, ready and able to accept the stringent discipline of gold.

 

DOLLAR SYSTEM:

This is the system that actually developed. It has two main characteristics:

. Reserve assets were dollars.

.Assumed that the parallelism of major currencies(dollars) were pegged permanently

 

This system abated the balance of payment restraints on domestic expansion everywhere throughout the world as well as it caused everything to rely on the world accepting volountarily  to finance  payment deficits by using dollars as their official reserve. Basically using this system gave the U.S  banks the upper hand!

 

ANACHRONISTIC HEGEMONY:

The dollar system was no longer acceptable for a number of reasons:

. The European economies and Japan were catching up with the U.S economy

.Change in the world politics (Decrease  of Europe’s dependence on U.S)

.Growing  mobilty of money internationally

.Speedy build up of dollar holdings caused some questioning if the dollar will devaluate

.War interference and inflation lowered U.S competitive stance on trade account

.Federal Reserve’s huge augmentation of U.S money supply in January-July 1971.

 

LOOKING BACKWARDS:

 

This “anarchy” caused the common market as well as U.S authorities to search for a model of international monetary order but the outcome become visible to be looking backwards. The Common Market implied a Balance Of Payment even more stringent than that of Bretton Woods (Gold replaced instead of dollars as the reserve assets). And the U.S authorities came up with a similar idea of using fixed exchange rates and dollar standards that the common market governments will never accept (ie dollar holdings).

 

EXCHANGE RATE FLEXIBILTY:

For countries that are small or midsize, exchange rates have a big force on domestic price, unemployment and income distribution.

For large countries where Foreign trade reliance is low, a flexible exchange rate system is more favorable to the independence of external transactions  than a fixed rate system.

A NEW REGIONALIZED SYSTEM:

 

Mr. Cleaveland came up with a system where the global system is divided into two regional groupings;

1.      Western hemisphere and the pacific area (Japan included) where the currencies are  pegged to the dollar.

2.      Common Markets (Eorope, Africa and the middleeast) where the currencies are pegged to the strongest Europe currency.

Then between these two groups, ther would be flexible exchange rates  and their necessity for reserves is small due to it restricted amount.

“The outcome (to Mr. Cleaveland) depends critically  on the spirit and style of transatlantic economic diplomacy and on thr Common Market’s ability to pull together.”