permanent changes.
As the center of the system, the United States supplied dollars. The Bretton Woods period, 1945–1971, saw recovery in Europe and Japan. At first, most currencies remained inconvertible. By 1958 Western Europe agreed to convertibility on current account, and West Germany made the mark fully convertible. The United States began to experience balance of payments deficits. Payments for military assistance, defense, foreign aid, investment in Europe, and imports of consumer goods exceeded revenues.
The president and other officials repeatedly pledged their commitment to the $35 gold price. Whenever a problem arose during the Kennedy and Johnson administrations, they took administrative action—usually controls—to reduce the payments imbalances. Until 1968, the Treasury paid gold in exchange for dollars.
The Federal Reserve had a secondary role. Exchange rate and balance of payments remained a Treasury responsibility. The Banking Act of 1933 reduced the role taken by the New York Federal Reserve Bank in the 1920s. The Federal Reserve chose domestic policy, especially high employment, over international policy. To avoid painful increases in the unemployment rate, it did not persist in efforts at disinflation when unem ployment rose. In 1971, President Nixon ended convertibility of the dollar into gold.
Attempts to restore a fixed exchange rate system after 1971 failed. By the mid-1970s, countries agreed to permit exchange rates to fluctuate. Principal European countries preferred fixed exchange rates, so they moved toward, and later adopted, a single currency.
Critics of floating exchange rates found many reasons to complain. Different effects of oil price increases, different rates of inflation, and changes in relative productivity growth produced large changes in exchange rates. Intervention to limit or prevent these changes added to the initial problems. Critics did not show that fixed exchange rates would be a better solution. Floating continued and remains.
A remarkable feature of policy under the Bretton Woods system was the inability or unwillingness to solve the basic problem—overvaluation of the dollar. Policymakers spent considerable effort developing a substitute for gold, the special drawing right (SDR). It had little importance. They did nothing to correct the more serious—and more obvious—problem, the overvalued dollar. Unilateral action by the United States forced attention to the so-called adjustment problem.
With some exceptions, the United States allows the dollar to float freely. The Federal Reserve sterilizes intervention. From 1985 to 1987, Treasury Secretary Baker first undertook to depreciate the exchange rate by agreement with other countries and then agreed to stabilize exchange rates. Like many political decisions, this one did not distinguish between real and nominal exchange rates. The agreement ended following the large worldwide decline in stock prices in October 1987.
RESEARCH
Improved research is one of the Federal Reserve’s significant achievements. From the 1920s on, the System encouraged research on monetary theory, banking, and aggregate economics. At first, researchers concentrated on developing data series useful for judging the current position of the financial and economic system. Research expanded in the postwar years at the Board and the reserve banks. Research at Richmond and St. Louis was helpful in changing policy by pointing out deficiencies in accepted ideas and proposing alternatives. Minneapolis has been a leading developer and advocate of rational expectations models.
The Board’s research staff took a leading role in developing large, econometric models of the economy. This effort focused staff attention on details of particular sectors. Policymakers have not found the forecasts from these models useful and have usually not followed them.
SUMMARY OF THE VOLUME
In the years 1951 to 1986 discussed in this volume, the world economy
As the center of the system, the United States supplied dollars. The Bretton Woods period, 1945–1971, saw recovery in Europe and Japan. At first, most currencies remained inconvertible. By 1958 Western Europe agreed to convertibility on current account, and West Germany made the mark fully convertible. The United States began to experience balance of payments deficits. Payments for military assistance, defense, foreign aid, investment in Europe, and imports of consumer goods exceeded revenues.
The president and other officials repeatedly pledged their commitment to the $35 gold price. Whenever a problem arose during the Kennedy and Johnson administrations, they took administrative action—usually controls—to reduce the payments imbalances. Until 1968, the Treasury paid gold in exchange for dollars.
The Federal Reserve had a secondary role. Exchange rate and balance of payments remained a Treasury responsibility. The Banking Act of 1933 reduced the role taken by the New York Federal Reserve Bank in the 1920s. The Federal Reserve chose domestic policy, especially high employment, over international policy. To avoid painful increases in the unemployment rate, it did not persist in efforts at disinflation when unem ployment rose. In 1971, President Nixon ended convertibility of the dollar into gold.
Attempts to restore a fixed exchange rate system after 1971 failed. By the mid-1970s, countries agreed to permit exchange rates to fluctuate. Principal European countries preferred fixed exchange rates, so they moved toward, and later adopted, a single currency.
Critics of floating exchange rates found many reasons to complain. Different effects of oil price increases, different rates of inflation, and changes in relative productivity growth produced large changes in exchange rates. Intervention to limit or prevent these changes added to the initial problems. Critics did not show that fixed exchange rates would be a better solution. Floating continued and remains.
A remarkable feature of policy under the Bretton Woods system was the inability or unwillingness to solve the basic problem—overvaluation of the dollar. Policymakers spent considerable effort developing a substitute for gold, the special drawing right (SDR). It had little importance. They did nothing to correct the more serious—and more obvious—problem, the overvalued dollar. Unilateral action by the United States forced attention to the so-called adjustment problem.
With some exceptions, the United States allows the dollar to float freely. The Federal Reserve sterilizes intervention. From 1985 to 1987, Treasury Secretary Baker first undertook to depreciate the exchange rate by agreement with other countries and then agreed to stabilize exchange rates. Like many political decisions, this one did not distinguish between real and nominal exchange rates. The agreement ended following the large worldwide decline in stock prices in October 1987.
RESEARCH
Improved research is one of the Federal Reserve’s significant achievements. From the 1920s on, the System encouraged research on monetary theory, banking, and aggregate economics. At first, researchers concentrated on developing data series useful for judging the current position of the financial and economic system. Research expanded in the postwar years at the Board and the reserve banks. Research at Richmond and St. Louis was helpful in changing policy by pointing out deficiencies in accepted ideas and proposing alternatives. Minneapolis has been a leading developer and advocate of rational expectations models.
The Board’s research staff took a leading role in developing large, econometric models of the economy. This effort focused staff attention on details of particular sectors. Policymakers have not found the forecasts from these models useful and have usually not followed them.
SUMMARY OF THE VOLUME
In the years 1951 to 1986 discussed in this volume, the world economy
Similar Books
![The Dom Protects His Puma [Unchained Love 2] (Siren Publishing Ménage Everlasting)](https://fs.collectorofbookboyfriends.com/590313/thumbs/152x264/the-dom-protects-his-puma-unchained-love-2-siren-publishing-menage-everlasting.png)
