external balance problem of the united states
DESCRIPTION
External Balance Problem of the United States. Bretton Woods System. A system where foreign countries’ central banks pegged their currency against the U.S. dollar. U.S. Federal Reserve held the dollar price of gold at a constant $35/oz. to allow for a stable rate of exchange. - PowerPoint PPT PresentationTRANSCRIPT
A system where foreign countries’ central banks pegged their currency against the U.S. dollar.
U.S. Federal Reserve held the dollar price of gold at a constant $35/oz. to allow for a stable rate of exchange.This allowed foreign central banks to exchange
their dollars for gold.
The U.S. was responsible for holding gold @ $35/oz, but gold supplies were not growing fast enough.
Foreign central banks would hold onto dollars, since they accumulated interest. Good business from an investment point of
view.Dollar represented international money par
excellence
Central Banks and world economic growth trends showed a long-run problem with Bretton Woods. Central banks would stop accumulating dollars.A feared “run on the bank” by foreign banks
would deplete all reserves.
1965-1968 Macroeconomic package Government purchases expanded greatly
Military ( Vietnam) Great Society Programs: public education and
urban redevelopment. Taxes were never raised.
There was no offset to the government spending that occurred.
1966 mid-term election: Pres. Johnson avoided asking for tax increase, for fear of congressional scrutiny on spending.
• Substantial fiscal expansion policy• Sharp fall in current account’s surplus• Rising domestic prices: inflation increased
• Monetary policy• It was contractionary as output expanded• High interest rates caused Fed. to expand its
monetary policy, as a remedy.• Inflation rate was close to 6% per year by the end of
the 60’s
• Speculation of Gold: late 1967 and 1968 The gold bought up on London gold market:
Pushed gold prices up. Caused speculation
Creation of two-tier gold market ( turning point) Private market: gold’s price was allowed to fluctuate Official tier: Central banks kept gold at an official
$35/oz. Link severed
Supply of dollars tied to a fixed market price of gold. Official price of gold became an arbitrary number to
balance accounts between among central banks.
Devaluing the DollarIncrease employmentBalance U.S. current account
Two optionsDepreciate domestic prices, while increase in
foreign pricesOR, depreciate Dollar’s nominal value against
foreign currencies
Option two choosen: depreciating Dollar against foreign currencies.Multilateral agreement would be needed.
Foreign currencies are pegged to Dollar, but Dollar is fixed to gold’s set price.
Many countries were resistant to the ideaHurt their import/export competing industries with
revaluation.Nixon arrangement: August 1971
Ended the selling of gold for Dollars.Last connection to gold.
Imposed 10% tax on imports, until trading partners agreed to revalue their currency.
http://www.nationmaster.com/encyclopedia/U.S.-dollar
International exchange rate agreementSmithsonian Realignment: Dec. 1971
Dollar was devalued against foreign currencies by 8%.The 10% import-surcharge was lifted.Gold was raised to a new official price of $38/oz.
No significance: The U.S. never sold gold for Dollars after this arrangement.
15 months later: Feb. 12, 1973 & Mar. 1, 1973 Speculation attacks against Dollar closed exchange
marketsDollar was devalued 10% more.
Floating exchange ratesMarch 19, 1973: Exchange rates of Japan and most
European countries were floating against the Dollar.A temporary fix that has become permanent solution
for now.