Global Trade And The Currency Market
Whereas in the original Bretton Woods the greatest limiter was the availability of gold, now it has become and remains to be the whim of the US governments monetary authorities.
Once the monetary system discussed in the Bretton Woods conference was configured according to the US plan, the chance of having a means of payment to cover the needs of international transactions and to establish reserves to address potential deficits, that is, to have the necessary international liquidity, was given by the gold reserves and US Dollars of those countries with some power over the International Monetary Fund.
As many economies grew, more Dollars were demanded to be used in international trade. The fundamental dilemma was: on the one hand, the US had to print more Dollars and run a balance-of-payments deficit in order to satisfy that growing liquidity demand; on the other hand, a continued deficit led the US Dollar to a loss of credibility as a sound reserve currency.
After the WWII, the United States was the only country able to provide all the material needs for the reconstruction. European countries did not have enough Dollars and, since their reserves were low, they had to become debtors of the United States, which meant that their balance of payments would have a surplus. There was no other solution than to "beg" the Unites States to run a balance-of-payments deficit, which by the way was also in the interest of the US.
The perpetuation of US deficits year after year would inevitably entail substantial risks for the gold convertibility which was the backbone of the system. But the only way to provide international liquidity, given the limited flexibility in the extraction of new gold, was deficits in the north-American balance-of-payments or, put in another way, that other countries would deliberately run a surplus in their balance-of-payments by accumulating Dollars.
To this contradiction between the need for Dollars (hence need for US deficits), and the confidence in the Dollar's convertibility to gold (based on US metal reserves), we must add another aspect of the system. This aspect discriminates different countries in relation to the US creating an asymmetry in their economical decision taking processes: if a country had a deficit in its balance-of-payments and expected the situation to continue, that country was under the obligation to proceed with an internal deflationary policy. Ultimately, because the lack of sufficient reserves, the country had to take contractionary measures to devalue its currency. But the US, being the creator of the system's underlying currency, was not forced to take that kind of action. previous , next
Whereas in the original Bretton Woods the greatest limiter was the availability of gold, now it has become and remains to be the whim of the US governments monetary authorities.Once the monetary system discussed in the Bretton Woods conference was configured according to the US plan, the chance of having a means of payment to cover the needs of international transactions and to establish reserves to address potential deficits, that is, to have the necessary international liquidity, was given by the gold reserves and US Dollars of those countries with some power over the International Monetary Fund.
As many economies grew, more Dollars were demanded to be used in international trade. The fundamental dilemma was: on the one hand, the US had to print more Dollars and run a balance-of-payments deficit in order to satisfy that growing liquidity demand; on the other hand, a continued deficit led the US Dollar to a loss of credibility as a sound reserve currency.
After the WWII, the United States was the only country able to provide all the material needs for the reconstruction. European countries did not have enough Dollars and, since their reserves were low, they had to become debtors of the United States, which meant that their balance of payments would have a surplus. There was no other solution than to "beg" the Unites States to run a balance-of-payments deficit, which by the way was also in the interest of the US.
The perpetuation of US deficits year after year would inevitably entail substantial risks for the gold convertibility which was the backbone of the system. But the only way to provide international liquidity, given the limited flexibility in the extraction of new gold, was deficits in the north-American balance-of-payments or, put in another way, that other countries would deliberately run a surplus in their balance-of-payments by accumulating Dollars.
To this contradiction between the need for Dollars (hence need for US deficits), and the confidence in the Dollar's convertibility to gold (based on US metal reserves), we must add another aspect of the system. This aspect discriminates different countries in relation to the US creating an asymmetry in their economical decision taking processes: if a country had a deficit in its balance-of-payments and expected the situation to continue, that country was under the obligation to proceed with an internal deflationary policy. Ultimately, because the lack of sufficient reserves, the country had to take contractionary measures to devalue its currency. But the US, being the creator of the system's underlying currency, was not forced to take that kind of action. previous , next