POLI 311 Lecture Notes - Lecture 20: German Federal Bank, Municipal Disinvestment, Pound Sterling
12 May 2018
School
Department
Course
Professor
Bretton woods
Operation and failure
Inherent instabilities emerge
• Recovery period took longer than expected
o Loopholes in the original agreement where no countries were expected to adhere to the
rules 5 years after WW2 (they thought that was going to be the recovery time but was
underestimated)
o Problems with the shortage of dollars
o Countries were encouraged to go back onto fixed exchange rates to help them earn dollars
from imports
• Would boost liquidity
• Others make currencies convertible beginning in 1958
o Loopholes in the original agreement where no countries were expected to adhere to the
rules 5 years after WW2 (they thought that was going to be the recovery time but was
underestimated)
o Problems with the shortage of dollars
o Countries were encouraged to go back onto fixed exchange rates to help them earn dollars
from imports
• Would boost liquidity
• US balance of payments worsening in 1960s
o Policies (talked about in last lecture- pumping dollars out/investing abroad ) worsens
balance of trade and in turn the balance of payments
o Difficult for US to reverse policies because they were strategic and unilateral
• "Dollar glut" not easily reversed
o By pumping more liquidity into the system
o Confidence in dollar erodes
• How to adjust, when dollar numeraire
o Complicated because dollar was reserve asset backing IMF currencies
o Dollar must be revalued vis-a-vis these foreign currencies (but difficult because the
currencies are back up by the dollar)
• Speculators have "one-way bet"
o There are tensions in the notion that you can have a fixed exchange rate and also have
independent domestic monetary policies
• There are pressures for currencies to fluctuate
• But the agreement is promising that the price will not change that much
• This is not possible
• Thus, governments go onto market to stabilize the price of currencies through
intervention
▪ But speculators can predict when the government will do this in order to make
profits
Crises begin
• Dollar vs gold (1960)
o Because in this time period US government had promised a fixed value
o US government had promised private citizens 35$=1 ounce of gold
o To prevent running out of gold, US increases the value of gold
o Speculators are encouraged to ask for gold for US dollars to make profit
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