Excerpts from α speech by Edwin Stopper, President of the Directorate of the Swiss National Bank, at the Bank’s Annual Meeting on March 21 in Zurich.
“The Euro-money market has gained further importance in the monetary sphere. Its existence furthered the record expansion of the balance sheets of our big banks, and reinforced our links with what is going on in the international monetary field. This also affects the work of the central bank. The Euro-money market has grown large thanks to the Euro-dollar. If increasingly attracts the dollars that have come to hand, particularly in Europe, as a result of the U.S. balance of payments deficit. These dollars are in demand mainly because the procurement of dollars in the United States itself has become more difficult. The principal causes lie on the one hand in the fact that ‘dollar exports’ for financing abroad have been made more difficult for balance of payments reasons, and on the other hand in the tightening of money in the United States. In the course of time, however, smaller supplementary markets in some European currencies have also come into being, including a market in Swiss francs.
“Thanks to the Euro-dollar market, balance of payments surpluses and deficits are reflected to a lesser extent than formerly in an immediate increase or decrease in the official monetary reserves of the surplus or deficit countries. As long as there is confidence in the dollar and in the monetary stability of the countries taking a major part in this market, the central banks will be less directly affected by balance of payments disequilibria than in the past. Thus, from many points of view, this market may be called a ‘free market for international liquidity outside the central banks.’ Provided that it is not disturbed by an acute monetary crisis, this international market can serve as a reservoir for international liquidity. The liquidity in it will be channeled by the interest differential to where it is most needed. Consequently, there is α relatively quick turnover.
“With a given average volume it is thus possible to manage more extensive transactions for balance of payments equilibrium than would be possible with a corresponding volume in international means of payment hoarded as national monetary reserves. This feature of the Euro-dollar market funds might also be one of the reasons why in recent years the world has been suffering from a surplus rather than a shortage of international—and in most cases of national—liquidity. Thus far, the problems in the field of liquidity have been problems arising from the difference in quality of the components, rather than problems of volume. Yet it can hardly be denied that, should the Euro-dollar market funds be reabsorbed little by little by U.S. balance of payments surpluses, there will be problems of quantity as well.
“On the other hand, the existence of the Euro-dollar market may have helped to encourage the tendency to postpone effective action to counter balance of payments disequilibria. For example, without the Euro-dollar market, the world would hardly have been in a position to take up the accumulating U.S. balance of payments deficits without tensions much stronger than those that already existed anyway. In smaller countries, this market may also impair the efficacy of the national monetary policy. At least part of an increase in liquidity intended to combat a recession may be attracted by the Euro-market, and part of the liquidity skimmed off to counter inflation may be replaced from it. This accentuates the call for new central bank instruments and complementary measures in other sectors.
“When we spoke on the subject of the Euro-market two years ago, its funds were estimated at about 12 billion dollars. Today the experts are talking in terms of about 30 billion, and dollars are said to account for about 24 billion of that sum. In the reporting year, flights of money have gained prominence as a source of funds. In the past fleeing money was converted into national central bank money in the countries of refuge, where it augmented the central banks’ dollar reserves correspondingly, on a much larger scale than today. Nowadays more of it is picked up by the Euro-money market. Central banks’ support operations can therefore no longer be financed out of increases in reserves occasioned by flights of money in the same measure as formerly. To a greater extent than before, it is necessary to draw from the existing stock of reserves. Thus, the Euro-money market has been supplied at the expense of the reserves stocks of both weak-currency countries and supporting countries. Insofar as balances from support operations are recorded as monetary reserves, this means a certain lessening of the immediate availability of those reserves. Then again, for the United States this reduced the risk that the dollars made available by it for support purposes would flow into the reserves of other central banks and would thus increase the potential demand for conversion into gold.”
Excerpts from the Report of Louis Rasminsky, the Governor of the Bank of Canada, in the Bank’s 1968 Annual Report.
“There is, finally, the basic question of what kind of an international environment countries want. The Bretton Woods approach attaches weight to the pursuit of stability in international economic relationships in order to encourage the growth of economic and financial transactions between countries. This reflects the view that a stable external environment helps countries to achieve their own economic goals, and that it is therefore in their own interests to try to manage their national affairs in ways that are consistent with that stability. It is a consequence of economic interdependence that each country must rely on its trading partners to manage their affairs in ways that are not disturbing to its economic life.
“I therefore conclude that it is mainly to good national economic policies around the world that we have to look to make the international economic system work better. It is not easy to manage a modern economy in such a way that it moves toward its economic objectives without causing disturbance to other countries, but all of us must continue to try. There are hopeful indications that the efforts of recent years to encourage countries to examine their economic policies in a sufficiently wide framework are bearing fruit, and that governments and peoples are becoming increasingly prepared to take account of their international economic interdependence.”
Excerpts from an article by Otmar Emminger, Member of the Board of Governors, Deutsche Bundesbank, appearing in Zeitschrift fur das gesamte Kreditwesen, January 1, 1969.
“Is the Bretton Woods concept out of touch with reality? Does it take insufficient account of the political and social limitations inherent in modern mass democracy? On the face of it, the answer seems to be no. The Articles of Agreement of the IMF expressly provide a safety valve for failures or intolerable tensions, i.e., a change of parity in the case of a ‘fundamental disequilibrium.’ A review of the experience gained over recent years suggests, however, that this safety valve has not always worked properly, and this may not be entirely accidental.
“The adjustment of currency parities in cases of a ‘fundamental disequilibrium’ is indeed no simple affair. Sometimes the existing parity has become a matter of national prestige. It is not only defended as long as there still is a chance of maintaining it—which may provide a very useful incentive for taking stabilizing measures—but sometimes even after it has become hopelessly out of line by a fundamental disequilibrium.
“It is not the monetary system that has failed. The monetary crises of recent years originated in the failure of important countries to live up to the rules of the Bretton Woods system. Under these conditions the various crises have not only been unavoidable but they have even been necessary in order to enforce the much needed adjustment.
“However, there is not only this positive side to monetary crises, but also drawbacks and risks. The rapid succession of crises during the last 12 months has deeply shaken confidence in currency policies and in the existing pattern of parities. As a consequence we are facing the danger that even minor disturbances in balances of payments, which normally could be corrected by prudent domestic adjustment policies without drastic action, might degenerate into big speculative turmoils. Nowadays such crises of confidence are often accompanied by huge flows of foreign exchange from one country to another. This is not only due to the much bedeviled ‘speculators’ who, it is true, find plentiful resources in the Eurocurrency markets and also elsewhere. Billions of dollars can also be made to move out of official reserves during a crisis of confidence simply by changes in the terms of payment in foreign trade (’leads and lags’) and by other wholly legitimate operations for covering exchange risks.
“A system of credible fixed exchange rates is, of course, a far better basis for the liberalization and integration of the world economy than a less rigid and at the same time less stable exchange rate system. It cannot be maintained that the internal adjustment process, indispensable with a system of fixed exchange rates, has in practice proven to be unworkable. In a number of cases we have witnessed deficit countries overcoming their large external deficits very speedily; I need only recall Italy, Japan, the Netherlands, and Germany.
“… There is hardly any other way open to us but to work with all possible energy … to provide the conditions for a credible system of fixed exchange rates. This means, however, that we have to attach a much higher priority to balance of payments discipline than hitherto.”