The Euromarkets

A major element in the increasingly intense European crises of the late 1960s was the greatly increased volatility of capital movements. Capital movements had already begun to play a much larger role in the late 1950s than had been anticipated at Bretton Woods. Even with tight controls on capital movements (the establishment of convertibility applied only to current account transactions), money movements responded to market signals. In addition, a pool of unregulated and uncontrolled capital emerged and grew rapidly over the course of the 1960s: the “Euromarket,” first in dollars, and then later also in other currencies used for financial operations outside their national areas.

Already in the interwar years, deposits and loans in “third” or nonnational currencies had provided an element of competition between currencies. There had been British, Dutch, and Swiss dollar loans to Central Europe. The postwar Eurodollar market began in the late 1940s, when the new Chinese communist government placed its dollar earnings with a Soviet bank in Paris (the Banque Commerciale pour l’Europe du Nord). In the early 1950s, after Yugoslav gold in New York was sequestered by the U.S. government, the U.S.S.R. and China made a consistent practice of not depositing dollars derived from export earnings with American banks, but rather using an extraterritorial (often called an offshore) market. The Federal Reserve Board’s Regulation Q, limiting interest payments on U.S. domestic bank deposits added an American incentive to hold dollars abroad. U.S. capital exports and military spending resulted in additional accumulations: because the dollars spent in this way were not used to buy American goods and services, some Europeans began to argue that Americans were buying companies abroad and maintaining their soldiers for free.

In the early 1960s, the majority of Eurodollars were held by central banks. After exchange controls on current transactions were lifted in 1958, Swiss and British commercial banks were free to accept foreign currency deposits and could offer more favorable rates than those on the U.S. domestic market. A much larger and more active private market developed after 1966 as U.S. money market interest rates rose above the levels permitted on bank deposits under Regulation Q. Once the market had reached a certain size, it generated transactions no longer necessarily limited to outflows from the United States. By 1971, one observer believed that “perhaps more than one half of all Eurodollars now in existence have been ‘made in Europe.’”³ In 1967, private banks began a practice of rolling over short-term deposits into what were effectively long-term loans. In 1963 the first postwar dollar bond issues outside the United States were concluded. As a result of these developments, during the course of the 1960s, the Eurodollar market grew to a very substantial size: from $1,500 million in 1959 to $46,000 million at the end of 1970. Since there were by then other currencies than the dollar used for extraterritorial transactions, the total “Euromarket” was larger: $57,000 million for 1970 and $71,000 million for 1971.⁴ One U.S. banker described the new markets as “a marvelous platform from which it is easy to rebound, in any direction, to any country, into any currency—and with anonymity.” The British Chancellor of the Exchequer of the mid-1970s referred to “the faceless men who managed the growing atomic cloud of footloose funds, which had accumulated in the Euro-markets to evade control by national governments.”⁵

Banking in Eurodollars increased the international money supply, in an analogous way to the operation of banks as a domestic money multiplier. The development of the Eurocurrency markets meant a definitive end of the Bretton Woods attempt to create an internationally controlled money supply. It challenged as a result both national monetary authorities and the IMF. By increasing the options available for the transfer of money, it also inevitably made for greater instability on currency markets.⁶

Central bankers were puzzled as how to deal with the potential disturbances caused by the new flows. Intervention in the markets, even if immediately successful, might in the longer run be counterproductive. One former Executive Director of the Bank of England argued at the end of the 1960s that “if central banks lend their names permanently to forward-exchange operations in any of the leading currencies using the largest domestic banks as agents, they will vastly increase the scope of these markets and, incidentally, will make much easier than need be the path of the speculator and the hedging of fixed assets in countries with a weak currency.”⁷ As the Euromarkets made exchange rate management much harder, they also acted, perhaps paradoxically, as a disincentive to authorities to contemplate rate changes. Such problems are inherent in any system relying on adjustable pegs. Any parity change would be interpreted as a signal, not that the right rate had been arrived at, but that further changes might be undertaken. It would destroy part of the credibility associated with a fixed rate system, and set off yet more intense speculative onslaughts on exchange parities. This consideration had moved Per Jacobsson to oppose the German revaluation of 1961 so vigorously. Such calculations applied even more forcefully in the case of currencies that served as international reserves—the dollar and sterling—and ensured that the problems of the Bretton Woods order appeared in these cases as peculiarly intractable.

Institutional Mechanisms

The IMF concerned itself with systemic reform as well as with the discussion of specific balance of payments problems. In particular, the debate over liquidity and reserve creation that eventually led to the innovation of the SDR involved the question of who would bear the main responsibility for adjustment. France and the United States tussled over how a new reserve system might reduce the potential strain on the dollar (the U.S. objective) and prevent the continuance of the U.S. “exorbitant privilege” (the French objective). At the same time elsewhere, in a different forum, surveillance of country policies and an attempt to provide solutions to balance of payments problems represented attempts at improving the operation of the existing system. These discussions were carried out by the G-10 deputies (who became involved in the SDR debate through the structural connection of the G-10 and the IMF), and also within the OECD, the successor to the Organization for European Economic Cooperation (OEEC) when the United States, Canada, and later Japan joined as full members.

In April 1961 the OEEC Economic Policy Committee had created Working Party 3, with the intention that it should “analyze the effect on international payments of monetary, fiscal and other policy measures, and will consult together on policy measures, both national and international, as they relate to international payments equilibrium.” WP-3 was composed of senior officials from Belgium, Canada, France, Germany, Italy, the Netherlands, Switzerland, the United Kingdom, the United States, and a Scandinavian country (in practice, Sweden), with the later addition of Japan. Intentionally it then replicated the composition of the G-10. Members of the Working Party were required to consult with other members of the OEEC, as well as with “the Board of Management of the European Monetary Authority and with other international organizations.”.

WP-3’s essential function lay in multilateral surveillance of balance of payments issues. In order to accomplish this, it needed to analyze broader macroeconomic developments. Meetings began characteristically with a tour d’horizon of crucial economic indicators in a number of the large industrial countries. But in the increasingly serious currency crises of the late 1960s, the WP-3 played an ever more peripheral role. This was not for lack of foresight. There was an urgent awareness of the gravity of the problem by the mid-1960s, but also, already then, an increasing sense of impotence and ineffectiveness.

In August 1966 WP-3 produced a report entitled “The Balance of Payments Adjustment Process.” Its major recommendation concerned the creation of an “early warning system”: “to try and ensure that as soon as evidence of an actual or potential imbalance begins to accumulate, it is the subject of a collective evaluation of the situation of the country or countries concerned, with a view to facilitating the adoption of appropriate policies.” The key objective, spelled out in Paragraph 70, was to entice countries to begin the process of domestic adjustment earlier: before the outbreak of a major crisis. The report largely ignored exchange rate adjustment and gave the subject only two brief references.

Within WP-3, the German central banker Otmar Emminger (who at the time was also the chairman of the G-10 deputies) devoted himself to the development of a mechanism for such an early warning system. Instead of looking indiscriminately at a large collection of data, policymakers should pay attention to a number of key indicators (money supply, bank lending, bank liquidity, short-term interest rates, and use of central bank credit). The function of the surveillance exercise was to focus attention on macroeconomic data that should initiate a policy change or policy response. Emminger concluded that “due emphasis should be placed on the interrelationship between the developments in the field of money, credit and public finance on the one hand, and the balance of payments, on the other.”⁸

The problem that made surveillance less than effective did not simply lie in the political task of prompting countries to take earlier, and less dramatic response, to potential balance of payments difficulties. There was also the almost insuperable intellectual challenge of convincing some monetary authorities that there existed such a link between money and the balance of payments.

The parallel institution that occupied itself with multilateral surveillance fared Little better. The G-10 had an intrinsically strong position thanks to the purse power established through its connection with the General Arrangements to Borrow (GAB). But a combination of political and intellectual resistance blocked its evolution as an effective provider of surveillance. In the mid-1960s, U.S. officials were referring to the G-10 as “more mouse than elephant.”⁹ They resented the leverage that its composition inevitably gave to the Europeans who regularly caucused before meetings, and, as a consequence, the United States tried to make that body as much of a mouse as it could by restricting the policies that could be considered. The influence of the United States, and the American wish not to have the dollar discussed, led to a refusal to consider parity alterations as a solution to balance of payments issues. In 1964, the deputies’ report included the following list of “appropriate … instruments of economic policy”: budgetary and fiscal policies, incomes policies, monetary policies, measures relating to international capital transactions, commercial policies, selective measures on housing or hire purchases. The document added that “such instruments must be employed with proper regard for obligations in the field of international trade and for the IMF obligation to maintain stable exchange parities which are subject to change only in cases of fundamental disequilibrium.”¹⁰ In other words, exchange rate changes were not to be considered as a usable instrument of policy.

Even the IMF was only willing to present the option of altering exchange rates in the most cautious of terms. When discussing balance of payments adjustment, the Annual Report of 1964 stated: “Adjustments in exchange rates are of course not precluded by the par value system, and are indeed foreseen by the Articles in the event that a country has fallen into fundamental disequilibrium; but such situations should arise less frequently to the extent that the policies described above are followed.”¹¹ Subsequent reports, however, fell entirely silent on the issue of parity changes.

The United Kingdom and the Sterling Issue

Dealing with the United Kingdom in the 1960s exemplified the problems inherent in the concept of surveillance. The regular British balance of payments traumas occurring between 1961 and 1967 might have been held to justify nonstop “early warnings” of the kind envisioned by OECD’s WP-3. Long before the belated devaluation of 1967, it became abundantly clear that the pound was significantly overvalued. But no one wished to speak about parity changes in the context of international discussions between officials. Devaluation or revaluation involved such a degree of political sensitivity (and market sensitivity) that these options simply could not be debated as part of a surveillance exercise. Parity discussions were impossible for reasons of national prestige; the British rejected the use of monetary policy or a discussion of it; and their policies were constrained by domestic priorities (full employment) and international commitments (the sterling balances). As a result, there was not much to talk about usefully at an international level.

The failure of Britain to adjust before 1967 also gave an indication of the extent to which the practice of surveillance was handicapped by the absence of a common intellectual framework to guide responses to major economic problems or an agreement on policy choices. In the critical months of 1967 and 1968 participants complained that WP-3 meetings were both “ineffectual” and “rather dull.”¹² Without a shared understanding of the functioning of the economy, surveillance can easily degenerate into a rehearsal of cases based solely on perceptions of national interest. WP-3 members regularly expressed their disappointment with the inadequacy of British attempts at adjustment, and pressed the IMF to urge Britain to act more effectively.

In the British case, the locus classicus on monetary policy was the Radcliffe Commission report of 1959. Again and again this document insisted on the unimportance of monetary policy. “Monetary action works upon total demand by altering the liquidity position of financial institutions and of firms and people desiring to spend on real resources; the supply of money itself is not the critical factor.… When all has been said on the possibility of monetary action and of its likely efficacy, our conclusion is that monetary measures cannot alone be relied upon to keep in nice balance an economy subject to major strains from both without and within.… The importance attached to the use of fiscal measures, particularly the Budget balance, has been one of the fundamental innovations of the post-war period.”¹³

The reason the Radcliffe view appealed to so many practical men was that it seemed perfectly to justify the Bank of England’s traditional concern with supporting the gilt market (that is, the market for government bonds) by holding interest rates low, at the expense of other policy objectives. A strategy of this kind clearly prevented the formulation of any sort of independent monetary policy. But its pursuit was crucial to maintaining the relationship between the financial authorities, the City of London, and the world of politics.¹⁴ As a result, money was consigned to an unimportant place in policy discussions.¹⁵ Here existed a fundamental difference with the Dutch or German view of appropriate instruments and objectives of economic management.

A further source of British resistance to international surveillance of its economic policy lay in the strength of the political commitment to hold unemployment at historically very low rates. In this regard, the United Kingdom represented only an extreme version of a generally shared approach in the 1960s. In the 1950s, British unemployment had fluctuated around 1.5 percent, and in the 1960s governments tried to keep this sensitive figure at even lower levels. The major constraint on expansive fiscal policy lay in the effect on the balance of payments. After brief expansions, the appearance of deficits required fiscal restraint. The resulting policy was usually characterized as “stop-go.”

Finally, the British position was intrinsically weak because of the overhang of sterling balances. In explaining the British opposition to the use of monetary measurements in policymaking, the Bank of England constantly used as its major argument the role of sterling as a reserve currency, which made it impossible to forecast the level of foreign-owned balances in London.¹⁶ In fact, holdings by central banks of sterling balances, which could be converted at any time into other currencies or gold, appeared to remain relatively constant in the first half of the 1960s. They amounted to £2,642 million at the end of 1958, £3,048 million at the end of 1964, and £2,982 million at the end of 1967.¹⁷ But a liquidation remained a constant threat. Fear of this eventuality led the United Kingdom to press many newly independent African states to accept a currency board that would issue local currency against sterling reserves rather than set up independent central banks (though for the new states, currency boards might also have an attraction as a relatively cheap way of obtaining liquidity and stabilizing the currency). The largest holders of sterling balances in the mid-1960s were involved in some mixture of political and economic dependence on the United Kingdom. Malaysia required military support in the conduct of a civil war. Hong Kong was incapable of surviving without British protection. Australia was the beneficiary of major British investment flows, as well as retaining a few of the constitutional characteristics of a member of some loose British imperial system. The Republic of Ireland was dependent on Britain for three fourths of its trade and in practice had little choice except to remain inside the sterling area. Kuwait was in part tied through its reliance on British military support, but above all wanted to build up an external source of savings as a way of dealing with its powerful neighbors and compensating through monetary strength for its military weakness.

There was always an uncertainty about how long the balances would be maintained: whether there would not be a powerful temptation to follow the postwar route of an India or an Argentina and liquidate sterling assets. It appeared inevitable that a devaluation, or even the possibility of devaluation, would prompt the liquidation of balances. Devaluation, it was usually argued, would provide no help in balance of payments adjustment because it would be inevitably followed by increased nervousness and thus a further and possibly complete liquidation. The constant threat of balance of payments problems, and the associated risks to sterling balances, required constant alteration of the fine-tuning fiscal pedal. The commentator Fred Hirsch rightly wrote of: “British financial officials who for ten years from 1955 had in effect compromised most of their own power to run the economy other than by pressing down on domestic expansion whenever the pound sterling had come under pressure.”¹⁸ He thought that the only solution lay in the transfer of the burden of sterling’s reserve function to an international institution such as the IMF.

The instability caused by the sterling balance overhang and the danger of liquidation in fact lay behind each of the major British crises of the second half of the 1960s. The year 1964 had been an election year, with a rapid growth of bank credit and an economic expansion engineered by the Conservative government in the hope of increasing its popularity. Balance of payments pressure required the negotiation in June and July of a $1 billion IMF stand-by arrangement. The outcome of the election was a narrow victory for the Labour Party, but it became clear that a new election would be desirable in order to obtain a working parliamentary majority.

For the next three years, Britain continued to avoid devaluation because of the willingness of the United States to support sterling: partly because of a feeling of solidarity between reserve currencies and partly because of the United Kingdom’s importance to the U.S. conception of its foreign policy. At the highest level of government to government dealings, foreign policy, troop stationing, and reserve currencies all entered into a complex calculation of national interest. An appreciation of the similarity between the international roles of the dollar and sterling led to the argument that the British currency represented the outer perimeter defense of the dollar. The escalation of war in Viet Nam after 1965 made the United States more desperate for European allies and eager to work the “special relationship.” After April 1966, when France withdrew from the military organization of the North Atlantic Treaty Organization (NATO), the American search for European support became more pressing.

In the second half of 1964, the balance on the British current account became highly negative. Nevertheless, one day after the election results were announced, the new government made a firm decision not to devalue, and after this the topic of devaluation was only referred to by politicians as “the unmentionable.” The belief was that socialism would come to be associated in the popular mind with depreciation of the currency. “The Conservatives,” the new Labour Chancellor of the Exchequer later said, “would have crucified us.” And, in addition, one of Prime Minister Harold Wilson’s economic advisers had persuaded him that “‘socialist’ policies could cure the balance of payments problem in quite a short time.”¹⁹ The logic imposed by the vulnerability of sterling balances had prevailed, dressed up as socialist policy.

Instead, the government tried to deal with the trade balance by the imposition of an import surcharge and to impose monetary restraint by a sharp increase in November 1964 in central bank interest (bank rate). An IMF team in London, joined on the new government’s budget day (November 11) by the Managing Director and prepared to accept the news of a British devaluation, was surprised when the government ruled out the possibility. The fundamental goal of the November bank rate operation was to accompany a major foreign borrowing operation. The Bank of England raised a $3,000 million credit from foreign central banks. As Hirsch commented: “In twenty-four hours the central bankers created more international liquidity with fewer questions asked than the most expansionist Triffinite would ever suggest for the IMF.”²⁰ In addition, in December a new stand-by arrangement with the IMF was approved so that an emergency facility would be at hand before the calling of new elections.

The domestic strain was dealt with partially by moving into a rather gentle “stop” phase of the fiscal stop-go cycle, and partly by the introduction of an incomes policy, which was endorsed by both the OECD and the IMF. In July 1965, after a new burst of heavy losses of reserves, British local authority and central government investment were cut back. In September, the United Kingdom concluded an additional rescue package with the G-10.

The new elections in March 1966, which gave the Labour Party a solid parliamentary majority, had been preceded by a freeze of advances by the commercial (“clearing”) banks. In July, when statistics showing a renewed large current account deficit were released, another sterling crisis broke out with a $1.1 billion drain on British reserves, and the Bank of England required further support from the Federal Reserve.²¹ The British government pressed for a wage freeze negotiated with the labor unions as a sign that the British government was serious in its effort to correct the balance of payments. But, in practice, by the beginning of 1967, Britain had started a new expansion phase with a rapid reduction of the bank rate—an operation apparently conducted in the belief that since 1968 was an election year in the United States, there would be a substantial American reflation and an easing of rates.

In January 1967, the IMF’s Managing Director, Pierre-Paul Schweitzer, again visited London, offered Fund assistance, and once more cautiously discussed the problem of devaluation. If a devaluation were carried out and the amount of devaluation were either insufficient of excessive, he said, the result would be to trigger large capital movements.²² For the present the situation did not seem acute; and international early warnings fell on deaf British ears.

In the late summer of 1967 as a renewed drain set in, Wilson blamed the unfavorable British payments development on chance and unforeseen circumstances: the disruption to international trade caused by the closure of the Suez Canal in June as a result of the Arab-Israeli war, and dock strikes that began to strangle British overseas trade in September, and which had allegedly affected imports more than exports.²³ On November 3, 1967, the Governor of the Bank of England told the IMF that the British authorities could no longer tie themselves to the six-month nondevaluation pledge that they had given earlier in the summer. On the same day, Wilson told one minister, “Of course my mind is open on that … It’s Jim [Callaghan, the Chancellor of the Exchequer] who has a closed mind on devaluation.”²⁴ The next day, Callaghan called Wilson to say that there was a threat to the sterling parity;²⁵ but a major new international package might still prevent the realization of the “unmentionable.” On November 7, U.S. Treasury Secretary Henry Fowler, who was completely committed to supporting the sterling parity, still sounded relatively optimistic about the British position. For the Americans, the attack on one reserve center appeared to be a dangerous anticipation of the vulnerability of the other. “The sterling situation was not hopeless and was worth another effort to provide support in the prospect that the factors which in recent months have reversed the sterling position would yield to more favorable forces.”²⁶ France was also worried about the implications of a sterling crisis for the stability of the French franc. Callaghan still thought that a more thoroughgoing domestic adjustment coupled with some form of international assistance would be enough. He scandalized Labour Members of Parliament on November 7 by stating in the House of Commons that the postwar policy of keeping very low levels of unemployment had been misguided. “We must have a somewhat larger margin of unused capacity than we used to try to keep. That is the truth of the matter.” On the next day, he told Wilson that he still wanted to keep to the old sterling parity, but that there was a serious chance that Britain might be forced off.²⁷

On November 11, 1967 the IMF talked with U.S. officials about arranging a $1.4 billion stand-by arrangement (200 percent of the U.K. quota) if it was requested by the United Kingdom. Britain believed that a total assistance of $3 billion, including a stand-by arrangement of 266 percent of quota, would be required for the defense of sterling to be successful. The American Deputy Managing Director of the IMF supported a last ditch stand to maintain the parity. But the IMF’s Managing Director and staff came to the conclusion that the Fund should not provide the substantial sum required, and that they should encourage Britain to use the opportunity provided by the immediate crisis to achieve the long-overdue parity change. On November 13, at a meeting at the BIS in Basle the Governor of the Bank of England told other central bankers of the IMF’s decision. The IMF now began to fear that the United Kingdom was still opposed to devaluation, and that the United States and European members might force the Fund into a stand-by arrangement without an adequate program because they believed that a U.K. devaluation might be followed in France. Schweitzer on November 15 insisted that “a fully adequate program would be needed. He realized that just adding more deflation was not the answer.” He made it clear that there existed little alternative to a sterling devaluation.

In fact, while these debates were taking place in Basle and Washington, the politicians in London had already reached a decision. On November 15, 1967 British ministers agreed to a devaluation of 14.3 percent, to $2.40, to be announced over the weekend, on November 18. This was formally agreed the next day in the cabinet, and the British Executive Director in the IMF told the Managing Director that while no decision had yet been taken, he wanted to inquire about a $1.4 billion stand-by arrangement to accompany and support a sterling devaluation. On November 17, 1967 the IMF received an official British request for a stand-by arrangement, and on Saturday, November 18, the devaluation decision was announced.

In the wake of the devaluation, the G-10, the OECD, the BIS, and the IMF were all involved in discussing the terms for assistance to the United Kingdom. In the negotiations with the IMF on November 21 and 22, Britain refused any notion of overall credit ceilings and said that the idea of a standby arrangement might even have to be abandoned. The British government was only prepared to accept an annual test on its fiscal position (it promised to hold the borrowing requirement to £1,000 million) and the British balance of payments (it believed the new measures would lead to an annual improvement of £500 million).²⁸ In announcing the program in the House of Commons, Callaghan’s successor as Chancellor, Roy Jenkins, stated rather misleadingly: “In spite of misleading reports to the contrary, the Fund has not attached conditions to this credit.”²⁹ But the statement did reflect the mildness of the conditionality, a lenience that infuriated other countries (particularly low-income countries) that had needed to draw from the Fund. The subsequent debate within the Fund Executive Board eventually led to a formulation of a more systematic and evenhanded approach to conditionality.

The British position remained precarious for some time after the November 1967 devaluation and the IMF stand-by arrangement. The immediate effect was to damage the trade balance as devaluation increased the costs of imports even though the volume might be expected to fall as a result of the price effects (an effect described as the J-curve: the adjustment of trade patterns to the new relative cost structure would take some time). In addition to the J-curve deterioration, to everyone’s surprise, the volume of British imports actually increased in the year after devaluation, despite a slowdown of economic growth. In the second half of 1968, as the trade gap widened further, Britain took additional action to restrict imports. Sterling area members again tried to run down their balances. A panic in the gold market in March 1968 also affected the pound. The year after devaluation appeared to vindicate the old argument of the antidevaluers, that a parity alteration would only increase the nervousness of central bank holders of sterling, who would have been humiliated by the loss of value of their reserves. But this time the problem was solved through international action. In September 1968 the United Kingdom reached agreement with the BIS and a group of industrial countries for a $2 billion credit agreement. It enabled the U.K. government to provide a dollar guarantee for sterling holdings above 10 percent of a country’s total reserves. Since sterling as a reserve asset became in consequence equivalent to the dollar, but offered interest rate advantages, sterling balances increased in the five-year period of the so-called Basle agreement.³⁰

The longer-run effect of the 1967 crisis included a significant improvement in the British balance of payments (estimated at an annual £1,000 million), largely because of a rise of exports.³¹ The 1967 experience also had an effect on perceptions of the role of monetary policy in U.K. economic decision making, and in creating a common understanding of external linkages, which provided the only possible lasting basis for effective surveillance. It marked the beginning of the undoing of the Radcliffe doctrine. In October 1968, the IMF’s Economic Counsellor, J.J. Polak, conducted a seminar in London with officials from the Bank of England and the Treasury. The major concept deloyed was domestic credit expansion—DCE (see pages 141–42): a way of presenting the notion that monetary targets affected both the external balance and inflation to a group of nonbelievers raised on the doctrines of the Radcliffe report. It was a rather acrimonious meeting, in which the Bank’s analysts appeared to reject the IMF’s view of monetary policy. But DCE began to appear in British policy discussions. In April 1969 in the budget presentation, the Chancellor spoke of monetary policy as providing essential support to fiscal policy.³² At a follow-up monetary seminar in Washington in April 1970, there was a wide measure of consensus and the DCE target appeared as relatively uncontentious.

It was the beginning of an intellectual conversion, but not yet of a political turning. The adoption of a more serious approach to monetary policy had been a consequence of discussions with multilateral institutions, whose views had a great impact because of the need for external assistance in light of the United Kingdom’s balance of payments situation. Once, however, the pressure of circumstances eased, there was less need to take seriously advice coming from the outside—until the dramatic burst of inflation in the 1970s. That generated a greater political consensus, which could not depend on technical advice alone, that monetary policy should play an important part in the struggle against inflation.

The Problems of the Surplus Countries

One of the reasons why the United States had been prepared to make such a sustained effort to support British sterling lay in security considerations, as well as in the feeling of solidarity that linked the fortunes of two reserve centers. The relationship between the United States and Germany took on the air of a similarly symbiotic rapport in which defense and economic calculations entered on both sides. U.S. military spending in Germany constituted the major source of dollar outflows on military account to Europe. Germany realized the extent of its dependence on the American presence and was willing to make concessions when it came to the discussion of reserve holdings. The Bundesbank’s holding of dollars appeared to be an easy and innocuous way of paying for U.S. protection.

Germany tried to reduce the pace of reserve accumulation by promoting capital outflows and making inflows more difficult. In the first half of the 1960s, the gold share of German reserves rose, largely as a consequence of British gold sales to Germany during periods of strain on sterling: from $2,971 million at the end of 1960 to $4,410 million at the end of 1965. But after this, the gold reserves were deliberately reduced, while total German reserves grew: from $7,165 million at the end of 1961 to $8,153 million at the end of 1967 and $9,948 million in 1968.³³

As the German surpluses expanded in 1967, Germany needed to reassure the United States about its policy. On March 30, 1967, the President of the Bundesbank, Karl Blessing, wrote to the Chairman of the Federal Reserve Board to give a German commitment (which subsequently became known as the “Blessing letter”): “By refraining from dollar conversions into gold from the United States Treasury the Bundesbank has intended to contribute to international monetary cooperation and to avoid any disturbing effects on the foreign exchange and gold markets. You may be assured that also in the future the Bundesbank intends to continue this policy and to play its full part in contributing to international monetary cooperation.” At the same time, the Bundesbank agreed to purchase with reserve funds $500 million medium-term U.S. government securities.³⁴

At the same time as the Bundesbank was giving its pledges on reserves, WP-3 urged action to stimulate the German economy out of the recession of 1966–67 and in consequence to reduce the current account surplus. The recommendations of WP-3 in 1967 read like an endorsement of the policies of Karl Schiller, the new Economics Minister in the Great Coalition of Christian Democrats and Social Democrats, and of the pursuit of growthmanship. Germany should correct its balance of payments by means of monetary expansion, the reduction of long-term interest rates, and “fiscal flexibility.” A “normal rate of expansion” with 4 percent per annum increase in real output should be restored.³⁵

Japan had abandoned budget balancing as a primary objective several years earlier, in 1965, but nevertheless built up very large trade surpluses in the late 1960s. Adjustment appeared to be futile, and Japan openly went over to a policy of reserve accumulation a few months after the Blessing letter. In August 1967, the Japanese representative “caused a stir” in the WP-3 when he announced that Japan intended to increase its reserves “gradually” from $2,000 million to $5,000 million over the next ten years.³⁶ In fact, Japanese reserves rose from a steady figure just above $2,000 million during 1962–67 to $2,906 million at the end of 1968, $3,654 million at the end of 1969, then $4,840 million in 1970, and $15,360 million by the end of the crisis year 1971.³⁷

The international discussion of Japanese reserves became more intense after the Bank of Japan applied a restrictive monetary policy in September 1969 in order to slow down the Japanese inflation.³⁸ The result was to attract substantial inflows of short-term capital from the United States, and Japan’s reserves accumulated at an even quicker rate.

The Battle of the Franc

Japanese and German strength was the counterpart of problems elsewhere in the international monetary system. The issue of a possible French devaluation had already been one of the complicating factors in the 1967 U.K. crisis. In May 1968, student unrest followed by widespread industrial strikes threatened to bring down the French government. The President of the Republic, General de Gaulle, visited French troops stationed in Germany in what appeared to be a preparation for civil war. In the event, the labor strikes were settled by large wage rises rather than by tanks. The pressure of increased industrial costs again raised the issue of a parity change for the French franc or for the deutsche mark. In the summer of 1968, the position of the IMF was that a revaluation of the deutsche mark would not deal with the underlying problems and would only increase pressure against the weak links in the international system, the pound and the franc.³⁹

Then in August 1968 capital flight began out of France in anticipation of a devaluation. The French government responded by restricting credit in order to restrain domestic growth and abolishing exchange controls in an attempt to win the confidence of markets.

Attempts to coordinate policy internationally only promoted a new level of politicization of currency crises. In November 1968, at the insistence of the U.S. President, and on very short notice, the ministers and central bank governors of the G-10 met in Bonn. It was a meeting poorly prepared in every sense and provides an unpromising prologue to the subsequent story of international summitry as it developed from the mid-1970s. It took place in the bleak building of the Economics Ministry in Bonn, with endless champagne, beer, and canapés on offer but nothing else to eat, and in the corridors an entourage of bored officials expelled from the high-level political meetings.⁴⁰ Demonstrators outside the building held up placards with the slogan “Save the Mark.” Inside, the German hosts presented a package that had been the subject of intense political discussion within the German coalition government, with the Economics Minister, Karl Schiller, advocating an alteration of the parity but finding himself in a minority (despite the fact that exchange rate policy formally lay within his sphere of competence). As a result of the domestic political complexities, it became clear that the German negotiating position could not be modified through any international debate and that the meeting was thus fundamentally redundant.

The Finance Minister, Franz Josef Strauss, passionately opposed a revaluation of the deutsche mark as harmful to German export interests and the Federal Chancellor, Kurt Kiesinger, had pledged himself over and over again not to surrender the parity of the mark.⁴¹ Instead the Germans proposed a “substitute revaluation”: the introduction of a border tax of 4 percent on exports, which would have some of the effects on external trade of a revaluation. The argument was that the fall crisis of 1968 had resulted from “speculative movements” and that the politicians should ignore the temporary nervousness of the markers. Economics Minister Schiller, the nominal host of the G-10 ministers’ meeting, opened with a statement that there would be no change in the parity of the deutsche mark.⁴² Strauss was particularly unrestrained and uncooperative. He is reported to have said during the Bonn discussions: “Whether there was a majority at this conference of 7 to 3 or 9 to 1 did not impress him. Other countries would not determine what was Germany’s business. Revaluation of the deutsche mark would not resolve the problems of other countries. It was tried in 1961 and produced very little.” He also took a “French” line in vigorously attacking what he described as U.S. economic imperialism and spoke of the “political problem” represented by “the wholesale takeover of key German industries … How can the United States have such deficits in its balance of payments and yet pay such prices for European companies?”⁴³

The foreigners, on the other hand, pressed for a more systematic approach by Germany. They were frustrated at the obvious but unproductive disagreements among German cabinet ministers. U.S. Treasury Secretary Fowler claimed that the position of the deutsche mark demonstrated a “fundamental disequilibrium” in the sense of the Bretton Woods agreements, requiring a parity realignment.⁴⁴ He thought a revaluation of the deutsche mark more appropriate than a devaluation of other currencies, since he did not want to endanger the sensitive position of the United Kingdom once again. Schiller replied by asking why Fowler “preferred revaluation to devaluation,” and hinting that the answer depended on the dollar’s weakness: “supplementary international (and not national) measures will be needed in order to affect the balance of payments of certain countries.”⁴⁵ The British Chancellor of the Exchequer, Roy Jenkins, stated that “the pound should not suffer from inadequate German action … The parity for sterling was right and any change in it would be wrong”: a German revaluation of 7.5 percent would be appropriate.⁴⁶ Earlier, the British Prime Minister had told Germany’s Ambassador in London that the inflexible German stance was “irresponsible” and “intolerable.” As part of the exercise of putting pressure on Germany, the United Kingdom threatened the withdrawal of British troops from Germany if there was no action on the exchange rate.⁴⁷

All this pressure failed to shift the paralyzed domestic German political situation. When it became clear that the Germans did not want to act, the international pressure turned on France. The figure provided by the technical economists suggested that France should devalue by 15 percent, though the Americans thought a lower figure would suffice. The French position became further confused when de Gaulle phoned the French Finance Minister François-Xavier Ortoli to say that “if we need to, we shall devalue, but make them fear that we could devalue a great deal” (and thus put pressure on the United Kingdom to devalue yet again, and via the United Kingdom also influence the United States).⁴⁸ Eventually, Ortoli agreed to an isolated French devaluation of 11.1 percent, a figure suggested by Pierre-Paul Schweitzer, who was genuinely trying to make exchange rates function as an instrument of adjustment instead of as an instrument for carrying out political conflicts between the Great Powers. Ortoli added a peculiar note to his statement to the effect that since France had not been allowed to devalue by 15 percent, it might well devalue by less than the 11.1 percent, or indeed not devalue at all.⁴⁹

At the Bonn G-10 ministerial meeting (which at the time was sometimes called a summit), an international package was assembled to support the French devaluation, and details of the deal appeared in the newspapers. Only one day after the summit, however, on November 23, 1968, de Gaulle announced that France would maintain the parity of the franc.⁵⁰ Instead of devaluing, France would go through a period of austerity. The proposed deficit for 1969 would be cut by half, and it was estimated that the French current account deficit for 1969 would fall from an estimated $1.5 billion to $0.4 billion. France’s President had demonstrated the futility of the Bonn meeting. The aftermath of Bonn left politicians terrified of high-level international meetings for a substantial while. In fact, some observers recognized how unsuitable the summit process was for the task in hand. During the summit, Roy Jenkins had commented that meetings of this kind could not possibly decide a general currency realignment, a position that was endorsed by the IMF. Jenkins added that “the purpose of the present Conference would be completely defeated if it became known that a future Conference were planned in which all currencies would be open for reconsideration.”⁵¹

The seesaw between France and Germany over who should bear the responsibility of stabilizing markets continued for a year. Greater German growth or more French austerity? At the December 1968 meeting of WP-3, Emminger announced that the existence of the border taxes meant that the Bundesbank no longer had to maintain a tight monetary policy in order to check inflation. There was an “inconclusive” discussion, but no one urged Germany to do more than to stay with the rather high real growth target of 4–4.5 percent announced for 1969.⁵²

On April 27, 1969, de Gaulle was defeated in a referendum that he almost certainly knew he would lose and had called as an act of political suicide. In May 1969, new flows of money from France to Germany started. Already in March, German Economics Minister Karl Schiller indicated that he might be willing to take “possible further steps”: an indication that he, unlike Strauss, was prepared to consider a German revaluation.⁵³ Such hints only increased the speculative inflows. In all, between the beginning of the troubles in May 1968 and the German elections of September 1969, the German inflow amounted to $5.8 billion.⁵⁴

For the whole of the summer, Germany did not act, paralyzed by the internal cabinet conflict between revaluers, led by Schiller, and opponents, led by Strauss, as well as by the prospect of new elections that would end a period of unstable coalition rule. Schiller derived substantial intellectual support from the reports of the independent Council of Economic Experts, which had from its beginning in 1964 pleaded for flexible exchange rates. The Bundesbank leadership, on the other hand, remained committed to fixed rates. For the moment the division of opinion could not he resolved, and the politically easiest solution appeared to be to retain the status quo. At a meeting of central bankers in Basle, Bundesbank President Karl Blessing read a message from the German Chancellor once again excluding the possibility of altering the deutsche mark rate. France had to take further deflationary measures. In July 1969 the new government froze all public investment. This did not help to calm the markets, and on August 9, 1969 France asked the IMF for its agreement to an 11 percent devaluation, which was accompanied by an IMF program and a new credit squeeze. The devaluation was also followed, as in the United Kingdom after 1967, by a “monetary seminar,” in which monetary targeting on the basis of domestic credit expansion was explained and advocated to French officials. Like their British counterparts, they began in a very skeptical mood and became convinced only after very lengthy discussions.

A few weeks after the long battle of the franc had ended, the German elections took place (September 28, 1969). On the day after the failure of the Christian Democrats to gain an overall majority, and the formation of a social democratic and liberal coalition government in which Schiller played the key role, the deutsche mark was floated. On October 24, 1969 a new parity was adopted: DM 3.66 to the dollar, an appreciation of 9.3 percent. The new government believed that the revaluation would cut the inflation that had resulted from the monetary laxity of the previous year, and that price rises for the next 12 months would be 2.5–3.5 percent rather than the 5–6 percent that would have followed from a failure to change the deutsche mark parity.⁵⁵ To more and more Germans, the fixed parity system seemed to involve the international imposition of inflation on Germany, whose historical experience had produced a profound horror of its consequences. In their view, the IMF had been ineffective in suggesting any way out of their dilemma—or even in securing French adjustment or devaluation. Many began to view the Bretton Woods construct with increasing unease.

Inflation as an International Phenomenon

The higher levels of inflation that characterized the late 1960s were explained at the time in two, rival and apparently contradictory, ways. The first explanation, which was widely believed in France and Germany (its leading theoretical exponents were Jacques Rueff and Egon Sohmen), might be labeled “international monetarism.”⁵⁶ Increased reserve creation as a result of U.S. payments deficits, which produced larger claims on the United States, provided the basis for an expansion of credit and money in other countries. However, it is hard to accept this development as a full explanation of rising worldwide inflation rates in the second half of the 1960s.

First, the U.S. deficits were initially only meeting an urgent need in other countries. Far from threatening the system, they actually allowed it to work. Moreover, the price behavior of the surplus countries, which was always used as the most striking evidence in support of the theory of international inflation, can be explained in a quite different way. A major part of the explanation of why Germany and Japan saw the international monetary system of the 1960s as more inflationary than did the Americans is to be found simply in the nature of the growth process of Europe and Japan. Japan and Germany experienced in the 1960s a development of prices quite comparable with that of the United States. The increased price of nontradables relative to tradables that was an intrinsic part of the process of catching up in an initially much poorer and less developed economy led to overall higher consumer prices.⁵⁷ The consequence of their productivity growth meant that their costs grew less quickly than U.S. costs, while their consumer price behavior seemed to reflect the impact of international inflation. Thus, they both accumulated big surplus balances in the second half of the 1960s, the counterpart of very high saving rates. The surplus countries sometimes concluded that their high rates of inflation were a consequence of external monetary developments. Only in a limited sense was this diagnosis correct, since, for the surpluses to have been avoided, Germany and Japan would have had to maintain substantially higher rates of inflation than the United States, and they were not willing to do this.

This analysis remained essentially valid until the end of the decade. In 1968 and 1969 consumer price increases were higher in France (4.6 percent and 6.1 percent, respectively), the United Kingdom (4.7 and 5.5 percent), and Japan (5.4 and 5.2 percent) than in the United States (3.9 and 4.7 percent), although the rates were lower in Italy and Germany (see Figure 7-1). Monetary authorities in these expansive states were responding to new domestic situations—the intensive labor unrest and heightened political instability—as much as they were accommodating the monetary consequences of the action of the U.S. government or of the Federal Reserve System (see Figure 7-2).

View Full Size

Consumer Price Inflation in United States, Japan, and Germany

(In percent)

Source: International Monetary Fund, International Financial Statistics.

• Download Figure
• Download figure as PowerPoint slide

View Full Size

Money Growth in United States, Japan, and Germany

(Annual change in percent)

Source: International Monetary Fund, International Financial Statistics.

• Download Figure
• Download figure as PowerPoint slide

The alternative explanation for gathering inflation therefore looks at domestic developments. By the end of the decade, there were strong internal reasons for Europeans to adopt a more expansive policy, and the U.S. dollar inflows merely provided them with an adequate reserve base on which to build expansion. The pattern of European development was changing. The results of the “golden age,” full employment and labor scarcities, began to erode the relative price stability that had also been a component of that “golden age.”

The long postwar boom in the large continental European states had been sustained by the movement of labor from low productivity agriculture into much higher productivity occupations in manufacturing and services. By the mid-1960s, the rural source of labor supply had been largely exhausted, and the continental economies reached the position the United Kingdom had been in since the beginning of the century. There were no more domestic supplies of cheap labor. The pace of productivity growth and income growth as a result slowed. At the same time, sustained full employment increased the bargaining position of labor, led to an increase in wage demands and then to an accommodating monetary policy. Given the labor bargaining environment, any other option would have produced higher levels of unemployment and would have challenged the social compromise on which the “golden age” was founded. The situation on the labor market allowed a new wave of militancy in putting forward labor’s demands.⁵⁸ Unions became much more powerful. In 1968, two thirds of the labor force in France was involved in strikes; in Germany one million workers were on strike, in Italy four million. The number of work days lost through strikes in the United Kingdom increased every year from 1965 to 1970. At this time, all European countries introduced legislation making redundancy harder, and thus further strengthening the position of labor,⁵⁹ and encouraged the inflationary wage-push momentum. Some countries, especially those with strong trade performances, saw the achievement of current account surpluses as a way of achieving high employment levels, or of exporting unemployment. If many countries had followed this line, there would have been a danger of a 1930s-style development, in which a competition between nations for current account surpluses would have forced deflation on the whole system.

In practice it did not produce this result, because of the development of international capital markets. The temptation posed by “growthmanship” for the management of the current account was exactly the opposite to that outlined above. In this case, the belief that the stimulation of demand for the sake of maintaining full employment was held to justify running a current account deficit. It many countries had adopted this view, there would have been a risk of a competition for current account deficits, which would have unsettled the then very inexperienced international capital markets. At the outset of the postwar era, in the absence of large capital movements, countries needed to maintain approximately a current account balance. However, in most countries, there was little correlation in the 1960s between private savings and investment, so that any adjustment needed to be made through fiscal policy.⁶⁰ If the economy overheated as investment moved ahead of savings, the government would (as a result of the balance of payments constraint) impose fiscal austerity. Public sector saving would thus make up for the shortfall in private saving. Limitations on capital movements therefore limited government policy in a way governments found uncomfortable (especially if elections were imminent). In the late 1960s, as increased capital movements became available, governments saw a way out of these constraints, and inflation became the order of the day.

Conflicts between different ways of understanding a problem always reflect different understandings on how it should be tackled. If the domestic and structural, labor market-related, explanation of inflation was accepted, little could be done. If, on the other hand, the monetary explanation was thought to be correct, a solution was easier. It required a barrier to the international transmission of monetary expansion.

The prevalence of inflation at accelerating rates, in combination with national differences in inflation rates as a consequence, provided a stimulus to new thoughts about the attractions of floating currencies. Might this course not offer a way of uncoupling an economy from the international inflationary dynamic? It certainly looked easier than renegotiating the pattern of industrial relations that lay at the heart of the social compromise. Currency arrangements can be quicker to fix than domestic institutional structures.

In June 1969 the German central banker Otmar Emminger had stated in a public speech:

I fear that the Federal Republic is pretty well alone with this insistence of public opinion on price stability. It seems that most other countries ate prepared to tolerate annual price increases of 3 % or even more, be it as a seemingly inevitable price for higher growth, or be it as a facile way out of social pressures in a “mass democracy.” … it may be useful to examine whether individual countries, whose price developments get out of line for an extended period in relation to the general international average … could adjust their exchange rate in an easier and more gradual way.⁶¹

There might even be a way of preserving an important element of currency stability. The most immediately attractive answer to American instability and the problem of the American reserve role lay in the building of a greater stability in Europe—the resurrection of the regionalism that had proved so successful in the case of the European Payments Union (EPU). The idea had been advocated in the mid-1960s by one of the original architects of the EPU. After de Gaulle‗s explosive February 1965 press conference, the economist Robert Triffin had written to the President in an attempt to turn the Frenchman’s remarks to positive effect. Triffin made clear his agreement with the diagnosis of the dollar’s “exorbitant privilege,” but argued that the French reform proposals could realistically be realized only in a European, and not a global context. One of the aims of the Europeans should be to construct a system of liquidity that would remove the IMF from “any necessity, or any power, of intervening in measures that affect the balance of payments between members of the European Economic Community.”⁶²

There existed in particular a specific technical problem, which might be solved through a European initiative. The Bretton Woods par value system contained a mechanism that encouraged the use of the dollar as a reserve currency. Par values were fixed relative to gold or to the dollar (Article IV, Section 1(a)), and spot exchange transactions were not to deviate more than 1 percent from parity. The signatories of the 1958 European Monetary Agreement had agreed to let their currencies vary only 0.75 percent either side of the dollar parity. Two nondollar currencies could therefore move 1.5 percent against each other (if the one were at its ceiling relative to the dollar, and the other at its floor). As a result, the permitted fluctuation margins of two European currencies were twice that of either with the dollar; and since the exchange risk of holding dollars was thus half, the dollar was a more satisfactory store of liquidity. Triffin saw this as a major inducement for foreign central banks to continue the (undesirable) financing of the U.S. payments deficit. This problem could only be tackled if European currencies agreed to narrower bands among themselves than those permitted under Bretton Woods.

The Hague summit of the European Community in December 1969, called to “relaunch Europe” once again, produced a declaration that political union was the major goal of the next stage of European unification. In order to implement economic union, which entailed monetary union, a study group of experts under the Prime Minister of Luxembourg, Pierre Werner, in October 1970 recommended the progressive adoption of a common monetary policy, with the adoption of a narrower band for Community currencies.⁶³ Creation of a monetary mechanism alone, however, was not enough. Countries should adopt policies promoting economic convergence (as provided for in Articles 104 and 105 of the Treaty of Rome). The Europeans should be obliged to engage in a closer coordination of fiscal policy. Werner provided a quite ambitious program for simultaneous monetary and fiscal adjustment.

In reality the dollar glut and its effects on international money creation did not constitute the only difficulty confronting the international monetary system. National responses to the ending of the favorable economic conditions of the “golden age” differed very widely, even in Europe. The Werner Report could be interpreted in two conflicting ways: some, mostly in Germany, believed that its implementation required increased economic convergence preceding monetary integration. Others, especially in France, saw prior monetary developments as the most effective mechanism for forcing a greater economic convergence. An objection to the French line of reasoning went as follows: had the failure of the Bretton Woods system to produce convergence simply and purely been the result of the American irresponsibility that General de Gaulle regarded as the fundamental cause of world economic instability? Or was this not too simple an explanation, and was not the American case only one example of the proclivity of states to go their own way, and for currency markets to react to national policy differences?

In practice, the recommendations of the Werner committee were submerged by the tide of international currency instability that emanated in 1970 and 1971 not from the European currencies but from the U.S. dollar. Even the regional alternative to a global reordering fell a victim of the systemic inability to solve simultaneously the double international problem of the 1960s: the international liquidity situation and the nature of domestic adjustment processes. Some blamed the international system. Some blamed the speculators. But both were doing nothing more than transmitting responses to differences in national performance: differences that were a product both of policy choices as well as deeper structural reasons.

The United States now lay at the center of the international instability, as a result of its own surge of monetary growth in 1970 and later. It had treated the prolonged sterling crisis so seriously not just because of the sentimentality of the “special relationship” with the United Kingdom, or out of common strategic interests, but for the immediately practical reason that the United Kingdom demonstrated the problems faced by a reserve country once individuals, investors, or other countries decided to liquidate part or all of their reserves. In this way the British currency came to be regarded as part of the “outer perimeter defenses” of the dollar itself. The United Kingdom had merely gone further down the road and showed the United States what might lie ahead. As a result, U.S. policymakers, if they valued economic power (which they did), and if they did not want to be held to ransom by the system, would gradually move to the conclusion that it might be better to attack the system than to work within it.

The powers given to international institutions under the Bretton Woods agreements were clearly not sufficient to prevent this type of disruption. All the IMF could do was attempt to persuade and convince. In conflicts with the interests of the system, national interests always win unless there is an argument (and someone to articulate it forcefully) that national well-being depends on the well-functioning of the system. The principle of surveillance involved the identification of systemic problems and the demonstration of the concurrence of national and systemic benefits. It was concerned with the balance of payments within the world system as a whole; and it should have given greater attention to exchange rates and their role in adjustment, and to the whole question of the appropriate structure of exchange rates.

The fudged compromise of the late 1940s formed the backdrop to the crisis of the late 1960s. With the adoption of what was in practice a key currency system, the operators of the reserve currencies (the United States and the United Kingdom) became unwilling to accept the principle of surveillance and able for long stretches to ignore its implications. When the result of ignoring persistent payments imbalances became evident, it would, as a consequence, inevitably take the form of a sudden swing in confidence and the outbreak of a crisis. Yet the system as it existed actually needed U.S. deficits in order to provide liquidity. This was one of the reasons why the reformers who drew up the SDR as the intended central reserve unit of the system had the right concept. At least in a fixed exchange system, effective surveillance is difficult to reconcile with key currencies. In a flexible system, the market would be making judgments all the time, and not just in crises, about the dollar and the pound, and the room for “exorbitant privilege” would be correspondingly greatly reduced. A move either to gold or to an artificial reserve unit would be the only way of tackling this issue in a system of stable exchange rates.

As a consequence, the surveillance of the 1960s was necessarily incomplete and imperfect. In order to have been faithful to the objectives and vision of Bretton Woods, it would have had to include a more adequate surveillance of the growth of financial markets and its implications. It would have needed to limit the international inflation resulting from the position of the dollar and from the U.S. policy mix. The latter, however, had become a tabu subject. Such imperfections could have no remedies within the existing system. Their existence undermined the fixed rate monetary regime.