Читать книгу Foreign Exchange: The Complete Deal - James McDowell. Sharpe - Страница 10

Before long – in fact prior to the end of the Second World War – it was recognised that a new international monetary framework was required in order to determine how exchange rates would be valued and how deficits would be financed. With the aim of resolving this dilemma, at Bretton Woods in 1944 the International Monetary Fund (IMF) was established and the member countries of the fund assented to have their currencies expressed either in terms of a given amount of gold or an amount of US dollars. Each member country agreed to see that these values were maintained within a given range. At the same time the US agreed with the IMF that its currency would always be convertible into gold and that it in turn would always buy and sell gold at a fixed price of $35 per ounce. This became the basis of the US dollar reserve function. The dollar had become the predominant medium for the settlement of international transactions.

For instance, from 1949 to 1967 the pound was valued at $2.80. This was known as par value for the currency. The Bank of England agreed to maintain prices within a 1% range so the pound could fluctuate from $2.78 to $2.82. If the price drifted below or above these levels the Bank of England would intervene in the market, buying or selling pounds as appropriate.

The Bretton Woods System is the best example of an adjustable peg system. In the short term, currencies are fixed in value against one another. In the longer term, currencies could be devalued or revalued if dictated by economic fundamentals. Exchange rate stability was maintained by buying and selling currencies and was therefore crucially dependent on gold and currency reserves held by the central banks.

Up to the late 1950s the US gold reserves exceeded the total dollar reserves of all foreign central banks by a ratio of 3:1. At this time the most typical response to heavy selling pressure on a currency was to raise interest rates. This attracted speculative flows from overseas, raising the demand for, and hence the price of, the currency. This could also be allied to exchange controls. The last resort, when reserves were depleted, was to borrow from the IMF. In practice governments tended to deflate their economies, reducing imports and hence restoring a current account balance.

The 1950s can viewed as a period of relative calm. With exchange rates set by Bretton Woods and tight exchange control regulations, trading opportunities were limited and dealers did little more than execute customer orders. Therefore, the dealing function of a bank attracted little interest. In the 1950s and through the late 1960s the US was the cornerstone around which international economic policy was based. The dollar played a role as a safe haven currency within a stable price environment. If a country faced an outflow of dollars it signalled the need to take corrective measures. This could be via tighter monetary and fiscal policies, incomes policies or even devaluation. At this time it was adjustment to the US that coordinated policies amongst the industrialised nations, which in turn provided the basis of international currency stability. The key point is that if stable exchange rates were desired, price levels had to be relatively stable, or at least moving in line with one another.

The pre-eminent position of the US, crafted from the two World Wars, was becoming strained in the 1960s as cost differences and levels of productivity started to widen between industrial countries. This was most visible in Germany and Japan. Post-war both countries channelled their savings into rebuilding new, efficient industrial plants, and arms expenditures were restricted by the victorious powers. This was coupled with significantly lower labour costs.

The US, in contrast, was channelling savings into military expenditures, which later increased further as a product of the Vietnam War. The result was that the dollar was fixed at an overvalued level and sales of goods from Germany and Japan flourished. The first cracks started to appear in the US economy by late 1958. From 1958 to 1960 the US ran up deficits of $11.2bn. This led to an accumulation of dollars held by foreign corporations, which in turn spawned the Euro-dollar market. A portion of these dollars were converted into gold and so began the reversal of the reserves the US had built up as a result of the First World War.