This PDF FILE is a variety from a great out-of-print volume from the Countrywide Bureau of Economic Analysis
Volume Name: A Retrospective on the Bretton Woods System: Lessons pertaining to International Economic Reform Quantity Author/Editor: Michael D. Lado and Barry Eichengreen, editors Volume Author: University of Chicago Press Volume ISBN: 0-226-06587-1 Volume level URL: http://www.nber.org/books/bord93-1 Conference Particular date: October 3-6, 1991 Publication Date: January 1993
Section Title: The Collapse of the Bretton Hardwoods Fixed Exchange Rate Program Chapter Author: Peter M. Garber Phase URL: http://www.nber.org/chapters/c6876 Chapter internet pages in publication: (p. 461 - 494)
The Collapse of the Bretton Woods Fixed Exchange Rate Program Peter M. Garber
The collapse with the Bretton Timber system of fixed exchange costs was probably the most accurately and generally predicted of major economic events. ' Hindsight, of course , sharpens the perception with the inevitability of events besides making great prophets of those users of the variety of experts who took place to obtain their predictions proper. But the standard outlines in least in the key situations from 1967 through 1971 were foreseen, starting from the task of Triffin (1960), in whose warnings supplied the compass to policymakers implementing serious changes in the dotacion of fluid and the administration of capital controls within a vain attempt to preserve the device. The heyday of Bretton Woods, when the system in fact operated since envisioned underneath full convertibility, lasted from 1959 through 1968. Linked to steady growth in world creation and trade, these 9 years as well as the preceding 10 years of movement toward currency convertibility are considered a thing of a gold age unlike the six-year debacle in the interwar platinum standard. But, from the moment of full convertibility on saving account transactions in 1959, the steady growth of established and private liquid dollar promises in the hands of foreigners and the reduction in official rare metal holdings, and particularly U. H. gold coalition, convinced policymakers that, barring some modification, the system was on a flight headed toward collapse. two Peter Meters. Garber is definitely professor of economics at Brown College or university and a research associate in the National Bureau of Financial Research. The author is thankful to Willem Buiter, Dale Henderson, the editors with this volume, and other conference members for very useful suggestions and also to Robert Reville for research assistance. 1 . For example , Triffin (1960) warned of the potential for the collapse of the program, and Rueff stated, " What I believe of is the fact, if we stay in the same plan, we shall someday anive at the end of the way of external payments by the United States. This will imply that, whether they desire or not really, whatever the agreement in the IMF and the GATT, they will have to establish an embargo in gold, create quotas on import, impose restrictions including the one vehicle studying in foreign travel around, and slice the links between nationsвЂќ (Rueff and Hirsch 1965, 14). 2 . How come the cumulation of international liquid money claims was obviously a problem is not clear. Of course , if perhaps U. H. gold holdings far surpassed foreign the liquid dollar promises, either in private or perhaps in recognized hands,
Peter M. Garber
Starting from 60, efforts to patch identified deficiencies in the operation from the system believed the form of perfecting surgery in the exclusive gold marketplace through the corporation of the Precious metal Pool as well as the establishment of varied formal liquidity-increasing techniques-the Standard Arrangements to Borrow (GAB), currency swaps among central banks, and exceptional drawing rights (SDRs). Essentially, these were new forms of lines of credit jerry-built on top of the current credit lines just like intergovernmental and private bank loans and drawings under the IMF's initial credit provisions. Analogous to interbank lines of credit in a home banking system, such changes would have were known...
References: Buiter, Willem They would. 1986. Fiscal Prerequisities for a Viable Managed Exchange Charge Regime. In Wisselkoersen in Een Veranderende Wereld, 99-1 17. Laborieren: Stenfert Kroese.. 1987. Borrowing to Defend the Exchange Charge and the Timing and Size of Speculative Attacks. Journal o Foreign Economics twenty three: 221-39. n. 1989. An affordable Gold Regular Requires Adaptable Monetary and financial Policy. Assessment o Monetary Studies 56(January): 101-18. farreneheit Flood, L. P., and P. M. Garber. 1983. A Model of Stochastic Process Switching. Econometrica 3537-5 1 .. 1984a. Falling apart Exchange Charge Regimes: A lot of Linear Good examples. Journal um International Economics 17: 1-1 3. f. 1984b. Rare metal Monetization and Gold Discipline. Journal of Political Economic climate 92(February): 90-107.. 1989. The Linkage between Speculative Attack and Target Zone Types of Exchange Costs. NBER Doing work Paper no . 2918. Krugrnan, Paul. 1979. A Model of Balance of Payments Crises. Journal of Money, Credit, and Banking I 1: 311-25. Krugman, Paul, and Julio Roternberg. 1990. Target Areas and specific zones with Limited Reserves. NBER Working Conventional paper no . 3418. August. Muth, J. F. 1961. Logical Expectations as well as the Theory of Price Movements. Econometrica 29(July): 3 15-35. Obstfeld, M. 1986. Logical and Self-Fulfilling Balance of Payments Entree. American Economic Review 76: 72-8 1 ) Salant, H. W. 1983. The Weakness of Value Stabilization Schemes to Risky Attack. Log o Political Economy 91: l-38. farrenheit Salant, S i9000. W., and D. W. Henderson. 1978. Market Anticipations of Government Guidelines and the Value of Gold. Journal u Political Economy 86: 627-48. f Townsend, R. M. 1977. The Eventual Failing of Selling price Fixing Techniques. Journal o f Economical Theory 13: 190-99.
Fred Bergsten, Paul Krugman, and Robert Solomon took issue with the daily news for concentrating on the liquidity and confidence problems. Bergsten argued which the key problem of Bretton Woods was adjustment. Even though the Triffin dilemma was a issue, the true component precipitating the collapse of Bretton Forest was that the United States finally determined that it desired to adjust-it desired to strengthen their economy by reducing the trade discrepancy. It was as well felt that adjustment might head off growing protectionist pressure. The U. S. budgetary authorities recognized that the Bretton Woods program precluded them from modifying by reduction of value in the money, leaving only the option of breaking with rare metal. The authorities used the dollar overhang, threats of runs, and British requests for a precious metal value assurance as excuses. Paul Krugman argued that
Peter M. Garber
speculative assault models should be viewed simply as parables that may be relevant for the recent experiences of capital flight in Latin America. These designs, he stated, are not helpful for the evaluation of the break of Bretton Woods-which was driven by adjustment issue, not liquidity issues. Philip Garber replied that he did not view the adjustment difficulty and speculative attacks since inconsistent. The adjustment trouble just means that you have many things to finance, including the fixed exchange rate. What leads to a speculative strike is that there is also a limit around the amount of financing that the monetary specialist is ready to use to conserve the fixed exchange rate system. Maurice Obstfeld pointed out that, in principle, generally there need not certainly be a confidence difficulty, even if the excellent stock of dollar debts grows very large relative to the U. H. monetary rare metal stock. A gold standard could operate on a very sleek reserve so long as there is a limit on the sum of fiduciary money released by the center country. He argued that, if the additional G10 countries wanted to level a operate on the U. S. monetary gold share, they may easily do it by funding reserves abroad and just obtaining gold. So how the essential threshold arises in speculative attack models is unclear. Alexander Swoboda disagreed with Dale Henderson's remark the fact that Gold Pool area arrangement can be viewed as a determination by the additional major countries to share the responsibility of offering gold to the rest of the world. The Platinum Pool was only a brief commitment because ultimately the members from the Gold Pool could right outstanding buck liabilities and recoup the gold sold. Bennett McCallum argued which the formation with the Gold Pool area was a sign that the Usa was not willing to let it is price level be influenced by the commitment to the 35 dollars. 00 fixed price of gold.