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.”