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The International Position of the Dollar in a Changing World

Published online by Cambridge University Press:  22 May 2009

Peter B. Kenen
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Peaceable relations between states require that each nation affected by another's acts be induced to acquiesce in all those acts, but this acquiescence may take many forms. It may be quite positive, involving affirmation and, at times, concerted action, or it may be negative, involving mere silence or pro forma protest and, most importantly, total abstinence from countervailing acts. Economic and financial relations between states display all forms of acquiescence and too often demonstrate the sad results of failure to obtain consent. Their history, however, manifests gradual progress from an erratic reliance on tacit consent to a wide-ranging reliance on positive, explicit undertakings frequently accompanied by concerted action. Increasingly, moreover, that concerted action has been multilateral, not just bilateral. The tariff warfare of the twenties and earlier decades has now given way to the formal regulation of tariff policies, and the bilateral trade agreements of the 1930's, covering exclusively tariff reductions, have been replaced by a single comprehensive multilateral arrangement, the General Agreement on Tariffs and Trade (GATT) dealing with all aspects of commercial policy. The competitive exchange-rate depreciations of the thirties have likewise given way to formal regulation, beginning with the Tripartite Declaration of 1936 involving the United Kingdom, France, and the United States and culminating in the Articles of Agreement adopted by the Bretton Woods Conference of 1944 establishing the International Monetary Fund (IMF).

Type
Research Article
Information
International Organization , Volume 23 , Issue 3 , Summer 1969 , pp. 705 - 718
Copyright
Copyright © The IO Foundation 1969

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References

1 An increase of United States tariffs could, of course, injure American consumers and might also injure foreign consumers. Unfortunately, this more important effect is rarely perceived; it is the direct gain-loss effect on home and foreign output that too often dominates tariff policy (and exchange-rate policy, discussed below).

2 There has been much confusion on this point generated by a loose use of words. The United States defines the international value of the dollar in terms of gold (at $35 an ounce) and can change that valuation unilaterally. A change in the declared gold price of the dollar, however, is not devaluation in the strict sense of the term. The United States cannot alter the foreign-currency price of the dollar if foreign central banks continue to stabilize their own currencies in terms of the dollar (tacitly altering their currencies' gold values). More on this matter later.

8 That revaluation amounts to some 375 percent since 1948, if measured by the weighted-average change in fourteen countries' exchange rates (Canada, Japan, Australia, India, the United Kingdom, France, West Germany, the Netherlands, Belgium, Italy, Spain, Brazil, Mexico, and Venezuela) but Brazil accounts for all but 39 percent. It amounts to some 485 percent if measured by the weighted average change in the exchange rates of all countries (except the Republic of Korea) accounting for more than 0.5 percent of United States exports. Notice, however, that most countries have suffered more rapid inflation than the United States so that a “purchasing-power-parity” computation based on changes in exchange rates and consumer prices would show a modest devaluation of the United States dollar: 59 percent for fourteen countries (and 17 percent without Brazil), or 113 percent for all major trading countries. Data from International Fund, Monetary, International Financial Statistics indexes weighted by United States exports in 1967Google Scholar. I am indebted to Miss Carol Gersd for these computations.

4 It should be pointed out that certain IMF transactions do increase reserves (automatic drawing rights) but only in an indirect, imperfect way. When one country buys another's currency, beyond its automatic (gold tranche) drawing rights, the other obtains additional automatic drawing rights known in the jargon as super-gold-tranche drawing rights. But the size and distribution of these extra drawing rights depends haphazardly on the size and currency distribution of conditional drawings at any point in time.

5 Deficit computed on the “official settlements” basis.

6 Data from Board of Governors, Federal Reserve System, Federal Reserve Bulletin, and International Monetary Fund, International Financial Statistics. Figures for early years approximate.

7 See, e.g., Karlik, John R., “The Costs and Benefits of Being a Reserve-Currency Country” (unpublished PhD. dissertation, Columbia University, 1966)Google Scholar, Chapter III.

8 The United States decision to buy and sell gold, reaffirmed at Bretton Woods, is sometimes cited as contrary evidence—that the United States sought to make the dollar a more attractive reserve asset. This is to miss the point. The decision was designed to make gold more attractive. Nations needing dollars for intervention would not have dared to hold gold as a reserve asset without the American pledge to buy gold for dollars.

9 For a brief survey of current proposals for reform of the exchange-rate system, including formulas to regulate changes, see the Economic Report of the President (Washington: U.S. Government Printing Office, 01 1969), pp. 1458Google Scholar. See also Williamson, J. R., The Crawling Peg (Princeton Essays in International Finance, No. 50) (Princeton, N.J: International Finance Section, Department of Economics, Princeton University, 1965)Google Scholar; and Modigliani, F. and Kenen, P. B., “A Suggestion for Solving the International Liquidity Problem,” Quarterly Review (Banca Nazionale del Lavoro), 03 1966, pp. 3–17Google Scholar.