Financial turbulences in the West Topic The breakdown of the BW exchange regime 5.2.

Breakdown in seven acts (1 to 3)

Nov 9, 1971

1. May 71: DM (including the DM area - Austria, Belgium, Neth. & Switz.) floated 1st act of rebellion by the Bundesbank: internal social indiscipline (GroBe Koalition 1966-69 / Billy Brandt 1969-74) + US exported inflation via fixed-exchange rate  endangering the central axis of German macroeconomic policy -It gave credence to the threat of France of mass conversions -Combined pressure from France & FRG, key to the demise of the system

Breakdown in seven acts (1 to 3)

Nov 9, 1971

1. Aug. 71: end of the ‘gold window’ -President Nixon suspended $ convertibility
2. Dec. 71: Smithsonian agreement -Parity re-alignment among the G10+1 (8% $ devaluation and revaluation of the currencies of Germany, Benelux, Switzerland and Japan)
3. Feb. 72: further dollar devaluation -It failed to restore confidence in BW -Widening of the margin of fluctuation +/-2.25

Breakdown in seven acts (4 to 7)

Nov 9, 1971

1. April 72  The Basle agreement among West European countries • ± 2.25% with respect to $ but ± 1.125% among European currencies
2. Jan. 73: $ & £ inability to stay in the band; new $ devaluation
3. March 73: definitive collapse of the fixed exchange-rate regime • Flotation for all currencies!

Exchange-rate stability abandoned in 1971-73  floating rates The BW exchange-rate system:fixed (but adjustable) exchange-rate system (I)

Nov 9, 1973

• The convertibility anchorage
(classic convertibility)
• $ was the only currency convertible into
gold at fixed price (35$/ounce)
• Right to conversion in gold
• After March 1968, limited de facto to central
banks • $ became the reserve currency for the
entire system

1968: Limitado a los bancos centrales.

Nov 9, 1973

Otro curencia tenia convertibilidad moneda/ nominales. A USD.
1) Mantener el precio sin fluctuación
2) No se puede restricta

Hasta 1958: Europa quiera condicionar.
Cualcuier sistema monetario debe responder a:

The BW exchange-rate system:fixed (but adjustable) exchange-rate system (II)

Nov 9, 1973

• Other currencies enjoyed nominal convertibility
• Exchange rates pegged to $
• A band of fluctuation of ± 1% around parity
• Beyond the 2% band, any adjustment was restricted (not
unilateral)  “fundamental disequilibrium" in balance of
payments
• National authorities responsible for
– parity stability
– removing exchange controls for current account transactions
– maintenance of private capital controls (progressively
weakened)

Turbulencias financia en Oeste

Nov 10, 1973

Sube de los salarios minimales en Francia negociación. 1968 DeGaulles. Turbulancias de los tipos de cambios .
Breakdown of BW Exchange- Porque se rompe la estabilidad en el sistema de cambio internacional ? Exactamente como la crisis europea de 2010.
1970-73: Desparece de la disciplinada de los precios. Los precios no están estable, es difícil de .
El esistema de BW era necesario para marcar y condicionar. La gente piensa que una regulación conditionada era buena

Any exchange-rate system has to face four questions

Nov 11, 1973

1. Adjustment (mechanism for)
2. Liquidity (provision of)
3. Credibility (in terms of perdurability)
4. The leader’s attitude (degree of its responsible commitment)

Problem # 1: AdjustmentFixed but adjustable exchange-rate system

Nov 11, 1973

Adjustable?
It lacked an efficient exchange rate adjustment mechanism
• Reluctance of deficit countries to devalue
• Opposition from surplus countries to revalue
• Asymmetric: no debtor/surplus countries co-responsibility
• Policy instrument transformed into a policy dogma!
– Exchange-rate stability good in itself
– IMF: 'exchange rate stability' at all costs
• Why then ‘adjustable’ if it functioned as a fixed regime?

El esistema de BW era necesario para marcar y condicionar. La gente piensa que una regulación conditionada era buena

Nov 11, 1973

1) Convertibilidad clásica= estabilidad. Moneda vale oro a un precia fijo: mantiene este mismo precion, con intervención.
2) Liberalisar, autorizar este tipo de moneda. (de las 5 monedas que eran convertible al final solo el USD se converte en la moneda central del sistema
a. El sistema era funcionado con este moneda también
b. La capacidad de convertir dinero en oro  Convertibilidad sin restricciones.

Cualcuier sistema monetario debe responder a:1) Como se ajuste: los precios cambio- alteración de precio entre las monedas

Nov 12, 1973

a. No se he ajustado nunca, fluctuación de 2%. En principio la barrera de fluctuación era de 10%, pero debía justificar el déficit y la devaluación. No quiera hacerlo. No quieren hacer ajustes en los balances de pagos.
b. El desequilibro, hacía que el sistema es desequilibro. Déficit estructural desinado en contra de ellos que tiene balances de pagos?
i. Porque asymetrico: EEUU- 1944 Keynes: lo quería, sistema internacional de pagos asi.

b. El desequilibro, hacía que el sistema es desequilibro. Déficit estructural desinado en contra de ellos que tiene balances de pagos?

Nov 12, 1973

ii. Asimetrico es el Euro también es por eso que quasi disaparece.
iii. Sistema asimétrico no son quiero.
c. Ajuste están raro, el franco Francesa lo ha hecho, la Francia ha devaluado su franco/ tipo de cambio para ganar competitividad. Para tener un sistema más balanceado.

d. Si devaluación , hace un devaluación interna (se paso en ESP 2010) no podía devaluar, como ajustar? Desocupacion por el desempleo.

b. El desequilibro, hacía que el sistema es desequilibro. Déficit estructural desinado en contra de ellos que tiene balances de pagos?

Nov 12, 1973

d. Si devaluación , hace un devaluación interna (se paso en ESP 2010) no podía devaluar, como ajustar? Desocupacion por el desempleo.
e. Ajustes de la libre esterlina: 2nda moneda internacional  las reservas de los otros países necesitaba de estar estable, que no se desevalua.
i. 1967: Crisis de la libre devaluación pero no el USD. Importaba a todos
ii. 1968: fundo de estabilidad para sostener a la libra esterlina. Como el fundo europeo de estabilidad.

f. El marco alemán es la única moneda que de revalúa, con el marco suizo.

Nov 13, 1973

i. DM: Revaluacion del DM en 1961
ii. DM secunda revaluacion: 1969
iii. Es un problema que Alemania y Francia (que desvaluaba su moneda) cuando tenían a precios comunes. Como no están coordinado era muy complicado.

g. Problema de ajuste poco flexible  Puede romperse. Demaciado rigida. Falta un punto de equilibro no puede combinar estabilidad con flexibilidad. Vulnerabilidad.

Any exchange-rate system has to face four questions

Nov 13, 1973

h. Los capitales están creciendo. Desarrollo progresivo de los euros dólares: mercado financiero  Dolares que escapan del sistema regulatorio de la reserva federal de los EEUU. Propio mercado de estabilidad.
i. Crece con la cisis del oil,shock, -- USD

6The adjustment problem

Nov 13, 1973

Rigidity = vulnerability
– Lack of flexibility impedes adaptation
– Massive conversion of weak currencies into strong
currencies in anticipation of drastic devaluation, and not
a soft market adjustment
• Increasing importance of capital flows  national central
banks with progressively lesser capacity to control capital
markets
– Trade liberalisation and current account transactions
generated important capital flows
– Progressive development of international financial
markets («euro-dollar» mark

Definition of euro-dollars, U.S.-dollar denominated deposits at foreign banksor foreign branches of U.S. banks.

Nov 14, 1973

By locating
outside of the United States, euro-dollars escape
regulation by the Federal Reserve. Originally, dollardenominated
deposits not subject to U.S. banking
regulations were held almost exclusively in Europe;
hence the name euro-dollars. Since the euro-dollar
market is relatively free of regulation, banks in the
euro-dollar market can operate on narrower
margins than banks in the United States.v

2) Liquides: proporcionar liquidez al sistema de pago2) Liquides: proporcionar liquidez al sistema de pago

Nov 15, 1973

a. El sistema necesita a VER PPT
b. Los dólares son convertible, el mercado que hay dólares americano entonces no había proportionalidad.
c. Dilema: ¿?? O Maintaner al USD
d. 1959: Declaracion de la convertibilidad, 1962: completp
e. Hyperdependencia del dólar de la reserva federal (vulnerabilidad)

Problem # 2: liquidity, BW was a gold-$ standard (fixed parity between the two)

Nov 15, 1973

– increased scarcity of gold as a reserve asset: price rice
– provision of liquidity only in dollars (de facto dollar standard
rather than a gold-dollar standard): limits to avoid eroding
credibility
• Dilemma: a situation that requires a choice between
options that are or seem equally unfavorable or
excluding mutually
– Provide the liquidity demanded by the global economy or
ensure confidence in the future value of the dollar?
– Is it possible to choose between the depression that would
result

Excessive dependence upon the U.S. $ How much liquidity did world trade need?

Nov 16, 1973

3) Credibilidad del USD: 2011- crisis de la durabilidad: .
a. 25B en oro. 1 Pagos pendientes : 8%
b. 1969 Bancarrota : cuando los europeo entreo en el sistema de convertibilidad, los dólares fisión –BW no funciona
c. PROBLEMA DE LIQUIDES CONO HACEMOS? Pides dinero, o inventar una moneda nueva, y todos asumen la moneda como una moneda común.
d. Cuando se acaba: moneda fiduciaria: USD equivalía a ORO. En todo parte lo aceptaba.

3) Credibilidad del USD: 2011- crisis de la durabilidad: .

Nov 16, 1973

e. SDR: Moneda equivalente al USD, 8 años antes que entran en valor. Es un falso USD, cree confusión con el actual USD.
i. Francia decía que BW era mal desenado.
ii. Generacion de un sistema de crédito G10+1 *Suiza. US
Manera paliativas no regle el problema de verdad Para contar a las liquidez:
1) Pool del oro. 1968  3B
a. Mercado publico y privado, mercado privado compre todo el oro y no era esustenible.

Attempts to tuckle the dilemma

Nov 17, 1973

IMF proposal to relieve the pressure upon the dollar:
– A new currency - Special Drawing Rights (SDR)
• Opposed by U.S. and France (for different reasons)
• The Federal Reserve sought to shore up the credibility of
the system via new schemes of co-operation with the G10
(+1)* (*) G10: Belgium, France, FRG, Italy, Netherlands, Sweden, UK, Canada, USA
and Japan + Switzerland
– Joint intervention by central banks in the gold market to
hold the official price of gold (Gold Pool, prior to 1968)

4) Actitud del leader: quie manda? Negligencia de los EEUU

Nov 17, 1973

a. Competente: GB con el patro oro
b. 1949: 324% de la deuda impagada VS UK 505% de deuda externa, economía en bancarrota –reduce de 100% en 20 anos.
i. Negligente: EEUU – 1968: problema de balanca de pagos, todo en saldo negativo. Balance de pagos creciente
c. CAMBIO de fuerza, EU no tenia problema de pago PPT
d. 1955 guerra de Vietnam, sin fin. Hasta 1975. El problema es como se paga – primera guerra televisada muy impopular.
i. Impuestos aparición de paraísos fiscales (1915)

– A network of swaps (short-time credit lines betweentheir central banks, to be returned at the initial changeratelevel)• USA recurred increasingly to this mechanism

Nov 17, 1973

The Gold Pool • Fully ineffective
– Private agents willing to buy all the gold offered by central
banks at the official price due the increased gap between
official and market prices
– March 1968  after selling $3 billion worth of gold,
participating countries announced that gold from the central
banks would only be used for transactions between the
central banks themselves.
• Double market for gold.
The Gold Pool’s failure meant breaking
the $-gold direct link, i.e.
one of the pillars of BW

Swap lines 1st line of defense against shortcomings in the BWS (as earlyas 1960)- Provide cash for routine transactions in US$ and cover forcentral banks’ unwanted dollar exposures (therebyforestalling claims on the U.S. gold stock)

Nov 18, 1973

• Supply dollar liquidity to countries facing temporary balance-of-payments deficits (thereby bolstering the confidence in their parities)
• Provide the Federal Reserve System access to additional supply of foreign currencies. Growing use of swap lines  a failure to distinguish between temporary and fundamental disequilibrium forces (substituting temporary for fundamental adjustments). Ultimately they proved inadequate.

Problem # 4: Negligent leadership

Nov 19, 1973

iii. Imprimir moneda fue la solución utilizada, va a depreciar el USD por la inflación eg. Un café de 1$ cuesta 2$ en USD en Alemania pagaba el doble. EEUU exportaba inflación con tipo de cambio fijo Exportando la inflación en Europa al momento que todas las economías entraba en inflación: Espana tenia problema con inflación. Alemana:
iv. Bundesbank decide de romper el sistema de BW 1971, May.

Problem # 4: Negligent leadership

Nov 19, 1973

v. Flotación del marco alemán – genera que las críticas , se convertirían en un movimiento. :La reserva se queda sin Euro . Banco EU querían cambiar el dólar en oro
1. Nixon suspende la convertibilidad.
2. Escata
e. Reluctant : Alemania en Returno de la estabilidad en Europea Oeste

Increasing external liabilitieswhen the dollar was supposed to be a goldequivalentreserve for other currencies

Nov 20, 1973

Western Europe moved in the opposite direction U.S. unwillingness to subordinate its domestic
concerns to its international monetary role (I) Exchange-rate turmoil during the late 1960s reflected the misalignment
of cross-rates among the different currencies (notable the
£, Ff & DM)
• A more fundamental threat to BW was inflation in the USA
• The onset of a recession in early 1970 induced the Federal
Reserve to again loose monetary policy and maintain an
accommodative stance in 1970 and 1971

Problem # 4: Negligent leadership

Nov 20, 1973

• The U.S. economy
registered deficit in bof-
p since 1968
• Deficit in trade,
services and capital
balances, plus huge
military expenditure
• Large $ holdings
abroad ($71 bill. in
1971)
Weakening the $ in
world capital markets

U.S. unwillingness to subordinate its domesticconcerns to its international monetary role

Nov 20, 1973

Expansionary monetary and fiscal policy in the U.S. led to a
deterioration of the purchasing power of the $ at home but not
necessarily abroad
• There was no exchange-rate adjustment for the $ (no
devaluation)  exporting inflation via fixed exchange rate
• By 1970 BW faced an inflation-induced dollar crisis

The confidence in U.S. monetary policywas rapidly evaporating

Nov 20, 1973

Heavy financial flows out of dollar-denominated
assets soon became a problem for countries like
Germany, the Benelux and Switzerland in
pushing their currencies to their upper parity
limits – BW forced their central banks to
intervene by selling their currencies to purchase
dollars which in turn offset domestic monetary
restraint programs designed to reduce inflation.
By 1969 many European countries were
tightening monetary policy to ward off inflation
pressures

How long did the BW monetary system last?

Nov 9, 2015

. Convertibility of European currencies was not
declared until Dec. 1958 (in 1961 for no residents)
2. Even with rapid economic growth, the BW system of
fixed but adjustable exchange rates ended after
being in full operation for only 12 years (1959-1970)
• But key-pieces of the BW monetary system were
dismantled before (gold convertibility after March
68) – nine years and three months
3. In contrast, the classical gold standard lasted for 40
years
(why it came into being and why it was feared co

PPT 2.4.5.7-9.11-14-19

Nov 9, 2015