Proposal preview

Global Imbalances and the Burden of Adjustment in Historical Perspective

Global imbalances were identified in the 2000s as a potential weakness in the internatioal monetary system, but they had a long legacy. The Bretton Woods meeting in 1944 to design the international monetary system, the United States managed to scupper Keynes’ proposal for symmetric penalties on surplus and deficit countries in the pursuit of global balance. Expecting to be in balance of payments surplus, the US ensured that the onus of adjustment would be on deficit countries. Yet by the early 1960s, the US position deteriorated and American negotiators began to struggle to force countries with current account surpluses (and corresponding US deficits) to appreciate their currencies or otherwise adopt expansionary policies. This tension between persistent surplus and deficit economies has persisted despite liberalisation of capital flows and greater flexibility in exchange rates. This session will examine historical instances of such policy debates and disagreements between deficit and surplus countries through the 20th century.

Organizer(s)

  • Catherine R Schenk University of Oxford catherine.schenk@history.ox.ac.uk England
  • Atish Ghosh International Monetary Fund agosh@imf.org USA

Session members

  • Harold James, Princeton University
  • Laure Quennoelle-Corre, Ecole des Haute Etudes en Sciences Sociales
  • Kazuhiko Yago, Waseda University
  • Michael Bordo, Rutgers University
  • Catherine Schenk, University of Oxford
  • Marta Musso, King's College London
  • Nishikawa Teru, Yokohama National University
  • George Hall, Brandeis University
  • Daniel Diatkine, Universite Paris Est
  • Sylvie Diatkine, University Paris Saclay

Discussant(s)

  • Atish Ghosh International Monetary Fund aghosh@imf.org

Papers

Panel abstract

Global imbalances were identified in the 2000s as a potential weakness in the international monetary system, but they had a long legacy. At the Bretton Woods meeting in 1944 to design the new international monetary system, the USA managed to scupper Keynes’ proposal for symmetric penalties on surplus and deficit countries in the pursuit of global balance. Expecting to be in balance of payments surplus, the US ensured that the onus of adjustment would be on deficit countries. Yet by the early 1960s, the US position deteriorated and American negotiators began to struggle to force countries with current account surpluses to appreciate their currencies or otherwise adopt expansionary policies. This tension between persistent surplus and deficit economies has persisted despite liberalisation of capital flows and greater flexibility in exchange rates. This session will examine historical instances of such policy debates and disagreements between deficit and surplus countries.

1st half

Complications for the US from International Credits 1913-40

George J. Hall and Thomas J. Sargent

The start of World War I in August 1914 brought investment decisions by private US citizens that influenced US foreign policy and then federal expenditure, monetary, debt management, and taxation policies in unintended and long-lasting ways. After the US entered the War in April 1917, the US Treasury borrowed $23 billion from US citizens and lent $12 billion to 20 foreign nations. What began as foreign loans during the war had by the early 1930s become gifts.

The start of World War I in August 1914 brought investment decisions by private US citizens that influenced US foreign policy and then federal expenditure, monetary, debt management, and taxation policies in unintended and long-lasting ways. After the US entered the War in April 1917, the US Treasury borrowed $23 billion from US citizens and lent $12 billion to 20 foreign nations. What began as foreign loans during the war had by the early 1930s become gifts.

How to manage global imbalances - debates among economists 1940 to 1970

Sylvie Diatkine, Daniel Diatkine

Our paper is concerned with the history of economic and political ideas. It focuses on the debates between academics and higher officials which took place within two central periods and is based upon exploitation of original texts by these authors. The first one is related to the building and beginning of the Bretton Woods international monetary system and the second one developed during the crisis of this system in the late 1960s and early 1970s. These debates center on two major issues. The first question concerns the international adjustment mechanism and the means of managing global imbalances while obtaining greater freedom for national economic policy and limiting the burden of adjustment. Was the exchange rate the most important variable in this field or were international reserves more important? Who has to support the burden of adjustment ? The second question concerned the way of obtaining the stability of the exchange...

Our paper is concerned with the history of economic and political ideas. It focuses on the debates between academics and higher officials which took place within two central periods and is based upon exploitation of original texts by these authors. The first one is related to the building and beginning of the Bretton Woods international monetary system and the second one developed during the crisis of this system in the late 1960s and early 1970s. These debates center on two major issues. The first question concerns the international adjustment mechanism and the means of managing global imbalances while obtaining greater freedom for national economic policy and limiting the burden of adjustment. Was the exchange rate the most important variable in this field or were international reserves more important? Who has to support the burden of adjustment ? The second question concerned the way of obtaining the stability of the exchange rates and more generally of other economic variables. Which regime is responsible for the destabilization resulting from speculation?

Shaping the IMF - Approach to the BOP Adjustment

Teru Nishikawa

The aim of this paper is to shed light on the historical experience of the BOP adjustment in the post war transitional period. After the WWⅡ, major western economies faced serious dollar gap and hence sustained exchange restrictions for a longer time than expected at Bretton Woods conference. It is well-known that the US government financed the dollar gap and the EPU facilitated regional imbalances. It is also mentioned that the exchange rate adjustment in 1949 reduced adjustment burden. On the other hand, in this paper, I focused on the IMF approach to the BOP adjustment. In the 1950s, the IMF economists formalized theory of macroeconomic adjustment. In the IMF consultation, they required deficit countries to correct imbalances with tightened policies. The findings of this paper will enrich the historical experience under the fixed rate regime with restrictions on capital account

The aim of this paper is to shed light on the historical experience of the BOP adjustment in the post war transitional period. After the WWⅡ, major western economies faced serious dollar gap and hence sustained exchange restrictions for a longer time than expected at Bretton Woods conference. It is well-known that the US government financed the dollar gap and the EPU facilitated regional imbalances. It is also mentioned that the exchange rate adjustment in 1949 reduced adjustment burden. On the other hand, in this paper, I focused on the IMF approach to the BOP adjustment. In the 1950s, the IMF economists formalized theory of macroeconomic adjustment. In the IMF consultation, they required deficit countries to correct imbalances with tightened policies. The findings of this paper will enrich the historical experience under the fixed rate regime with restrictions on capital account

The Imbalances in the Bretton Woods System 1965-73 - US inflation, the elephant in the room

Michael D. Bordo

This paper argues that the key deep underlying fundamental for the growing international imbalances in the period 1965-1973 was rising U.S. inflation since 1965, in turn driven by expansionary monetary and fiscal policies—the elephant in the room. What was kept in the background in August 15 1971 was that U.S. inflation, driven by U.S. macro policies, was the main problem facing the Bretton Woods System, and that for political and doctrinal reasons was not directly addressed. Instead President Nixon blamed the rest of the world instead of correcting mistaken U.S. policies. In addition, at the urging of Federal Reserve Chairman Arthur F. Burns, Nixon adopted wage and price controls to mask the inflation, hence punting the problem into the future. This paper revisits the story of the collapse of the Bretton Woods system and the origins of the Great Inflation . Based on narratives and conversations with the Honorable George...

This paper argues that the key deep underlying fundamental for the growing international imbalances in the period 1965-1973 was rising U.S. inflation since 1965, in turn driven by expansionary monetary and fiscal policies—the elephant in the room. What was kept in the background in August 15 1971 was that U.S. inflation, driven by U.S. macro policies, was the main problem facing the Bretton Woods System, and that for political and doctrinal reasons was not directly addressed. Instead President Nixon blamed the rest of the world instead of correcting mistaken U.S. policies. In addition, at the urging of Federal Reserve Chairman Arthur F. Burns, Nixon adopted wage and price controls to mask the inflation, hence punting the problem into the future. This paper revisits the story of the collapse of the Bretton Woods system and the origins of the Great Inflation . Based on narratives and conversations with the Honorable George P. Shultz, a crucial player in the events of the period 1969 to 1973, I argue the case that the pursuit of sound monetary and fiscal policies could have avoided most of the turmoil in the waning years of Bretton Woods. Moreover I point out some similarities between the imbalances of the 1960s and 1970s –-especially fiscal and the use of tariff protection as a strategic tool, as well as some differences –relatively stable monetary policy and floating exchange rates.

Learning to Swim in the Ocean - How could the floating exchange rate system manage international liquidity

Kazuhiko Yago

Jacques de Larosière, former Managing Director of the IMF and Governor of the Banque de France, recently fired harsh criticism against the floating exchange system. The floating exchange rate system was, according to his claims, the origin of repeated global financial turmoil. Several decades passed after the foundation of the floating system, but the system is still the target of condemnation, even by responsible figures like de Larosière, who was in charge of managing the international monetary system. However, it was also true that capital movement in the late 1960s forced European countries to float their currencies, and in fact floating was the only choice to protect national economies from the impact of capital inflows and outflows. Which one came earlier, and which was the cause of crises, the floating system or capital movement? Thus the “chicken and egg” relationship between the exchange rate system and capital movement has been...

Jacques de Larosière, former Managing Director of the IMF and Governor of the Banque de France, recently fired harsh criticism against the floating exchange system. The floating exchange rate system was, according to his claims, the origin of repeated global financial turmoil. Several decades passed after the foundation of the floating system, but the system is still the target of condemnation, even by responsible figures like de Larosière, who was in charge of managing the international monetary system. However, it was also true that capital movement in the late 1960s forced European countries to float their currencies, and in fact floating was the only choice to protect national economies from the impact of capital inflows and outflows. Which one came earlier, and which was the cause of crises, the floating system or capital movement? Thus the “chicken and egg” relationship between the exchange rate system and capital movement has been a subject of financial studies, from the classical Mundell-Fleming model and the Trilemma framework, to recent studies on financial and macroeconomic adjustments. However, the weakness of the above theoretical studies is that they are missing a view of the contemporaries, i.e., what contemporaries were watching and thinking at the time the floating exchange system and capital movement deregulation were introduced. In fact, the financial history of the era was that of “learning” and harsh “on the job training” on the new system under unprecedented conditions. This paper tries to restage the learning process of the floating rate system by policy-makers and international actors, mainly the OECD, IMF and the United Nations.

2nd half

France and the Reform of the International Monetary System after 1971

Laure Quennouëlle-Corre

During the 1950s, France was not favourable towards the gold exchange standard set up under the Bretton Woods agreement; then in the 1960s it proposed reforms aiming to define new “rules of the game” for monetary discipline and international cooperation between central banks (Bussiere 1999, Monnet 2013). This paper wish to shed light on the French position at the end of the Bretton Woods system and up until the signing of the Louvre Accord. Three key areas can be identified: the French position after the general floating of currencies; the tensions and evolution of positions resulting from the rise of the dollar (1979-1984); finally, the convergences that started to emerge from 1985. The French persistent attachment to gold and fixed parities can be considered as an expression of the state’s enduring desire to maintain its influence and its control over the currency. From this ensued the quest for coordination in...

During the 1950s, France was not favourable towards the gold exchange standard set up under the Bretton Woods agreement; then in the 1960s it proposed reforms aiming to define new “rules of the game” for monetary discipline and international cooperation between central banks (Bussiere 1999, Monnet 2013). This paper wish to shed light on the French position at the end of the Bretton Woods system and up until the signing of the Louvre Accord. Three key areas can be identified: the French position after the general floating of currencies; the tensions and evolution of positions resulting from the rise of the dollar (1979-1984); finally, the convergences that started to emerge from 1985. The French persistent attachment to gold and fixed parities can be considered as an expression of the state’s enduring desire to maintain its influence and its control over the currency. From this ensued the quest for coordination in control of international liquidities.

Petrodollar recycling and the rise of a new world order

Marta Musso

Using previous bibliography on the topic and comparing it to new sources from the OPEC archives, this paper reconstructs the negotiations around petrodollars in the period 1971-1975 between the US and Saudi Arabia, as well as those of European countries with other OPEC countries. These negotiations will be put in comparison with the instances raised by the Non-Aligned Movement through UNCTAD. The research will show that petrodollar recycling was a fundamental tool for the US to maintain its role of guarantor of the global financial system after the end of the gold exchange standard, and that the oil crisis represented a watershed moment in the relations between the US, Europe, and the Global South.

Using previous bibliography on the topic and comparing it to new sources from the OPEC archives, this paper reconstructs the negotiations around petrodollars in the period 1971-1975 between the US and Saudi Arabia, as well as those of European countries with other OPEC countries. These negotiations will be put in comparison with the instances raised by the Non-Aligned Movement through UNCTAD. The research will show that petrodollar recycling was a fundamental tool for the US to maintain its role of guarantor of the global financial system after the end of the gold exchange standard, and that the oil crisis represented a watershed moment in the relations between the US, Europe, and the Global South.

Coping with Imbalances in the 1980s – the search for institutional solutions

Catherine R. Schenk

The global imbalances that emerged in the 1970s, and the sovereign debt crisis that struck in the early 1980s, ended the mirage that private capital markets would resolve the problem of persistent global imbalances. This acknowledgement provoked a flurry of activity to find institutional solutions to a range of perceived underlying causes. Many of these causes were a continuation of flaws in the Bretton Woods pegged exchange rate system, despite the on-set of the floating exchange rate regime a decade earlier. These included addressing the global role of the dollar, spill-over effects from US monetary policy, the identification of persistently inappropriate exchange rates, and the asymmetric burden of adjustment on surplus and deficit countries. This paper will survey and assess a range of initiatives to resolve these issues through the G7, IMF and other multilateral and bilateral negotiations. The proposals include many institutional responses that persist in current discourse, including...

The global imbalances that emerged in the 1970s, and the sovereign debt crisis that struck in the early 1980s, ended the mirage that private capital markets would resolve the problem of persistent global imbalances. This acknowledgement provoked a flurry of activity to find institutional solutions to a range of perceived underlying causes. Many of these causes were a continuation of flaws in the Bretton Woods pegged exchange rate system, despite the on-set of the floating exchange rate regime a decade earlier. These included addressing the global role of the dollar, spill-over effects from US monetary policy, the identification of persistently inappropriate exchange rates, and the asymmetric burden of adjustment on surplus and deficit countries. This paper will survey and assess a range of initiatives to resolve these issues through the G7, IMF and other multilateral and bilateral negotiations. The proposals include many institutional responses that persist in current discourse, including coordinated exchange rate intervention, revitalising the SDR, and formalising multilateral surveillance.

The Evolving Legal and Analytical Framework for Fund Exchange Rate Surveillance

Atish Ghosh

This paper examines how the International Monetary Fund’s legal and analytical framework for exchange rate surveillance has evolved in recent years. It argues that the Fund has long grappled with two asymmetries in the international monetary system. The first is well-known: with the notable exception of reserve currency countries, the eventual loss of financing will always force a deficit country to adjust, whereas no such market mechanism exists for surplus countries. An essential function of Fund surveillance is therefore to bring greater symmetry in the burden of adjustment between surplus and deficit countries. The second asymmetry concerns the distinction between “domestic” policies and “exchange rate policies”. While the Fund sought to address both asymmetries in its 2007 Surveillance Decision and its 2012 Integrated Surveillance Decision, it was only partly successful, reflecting diverging views, interests, and concerns of its membership. In turn, this had important ramifications for the global imbalances, and...

This paper examines how the International Monetary Fund’s legal and analytical framework for exchange rate surveillance has evolved in recent years. It argues that the Fund has long grappled with two asymmetries in the international monetary system. The first is well-known: with the notable exception of reserve currency countries, the eventual loss of financing will always force a deficit country to adjust, whereas no such market mechanism exists for surplus countries. An essential function of Fund surveillance is therefore to bring greater symmetry in the burden of adjustment between surplus and deficit countries. The second asymmetry concerns the distinction between “domestic” policies and “exchange rate policies”. While the Fund sought to address both asymmetries in its 2007 Surveillance Decision and its 2012 Integrated Surveillance Decision, it was only partly successful, reflecting diverging views, interests, and concerns of its membership. In turn, this had important ramifications for the global imbalances, and the Fund’s surveillance over advanced economies’ monetary policies and consequent capital flows to emerging markets.

What Can Bretton Woods Teach Modern Europe

Harold James

Europe has long had a Bretton Woods fixation, and has repeatedly tried to create Bretton Woods style institutions and frameworks. The 1944 Bretton Woods conference created both an international monetary system with rules, designed to maintain an open trading regime, and an institution to arbitrate and enforce those rules, the International Monetary Fund. This paper considers a range of coordination problems to which Bretton Woods style institutions might offer a solution. The first three are technical-economic in nature, the final one is concerned with political economy: current account imbalances; debt sustainability; conditionality and ownership; security linkages and leadership. The paper examines each in turn historically to see how effectively the coordination issue was solved internationally or globally, and what the specifically European problems might be.

Europe has long had a Bretton Woods fixation, and has repeatedly tried to create Bretton Woods style institutions and frameworks. The 1944 Bretton Woods conference created both an international monetary system with rules, designed to maintain an open trading regime, and an institution to arbitrate and enforce those rules, the International Monetary Fund. This paper considers a range of coordination problems to which Bretton Woods style institutions might offer a solution. The first three are technical-economic in nature, the final one is concerned with political economy: current account imbalances; debt sustainability; conditionality and ownership; security linkages and leadership. The paper examines each in turn historically to see how effectively the coordination issue was solved internationally or globally, and what the specifically European problems might be.