International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

2
Exchange Rates and Balance-of-Payments Adjustment: The Post-1945 Experience

SAMUEL l. KATZ

The balance-of-payments surpluses and deficits of the 1980s have been extraordinary both in magnitude and in resistance to correction. The stubborn American, Japanese, and German imbalances in the face of efforts by officials to reduce them confirm a lack of effective ways to bring international payments into sustainable balance under contemporary conditions.

The experience of the decade demonstrates that available adjustment mechanisms have functioned no more effectively under floating than they had under the original par-value regime of the 1960s. The authorities responsible for the functioning of the international monetary system--the members of the International Monetary Fund at the global level and the officials of the key industrial countries--were not able to devise workable adjustment arrangements when exchange rates were pegged in the 1960s or when they were floating in the 1980s.

This paper will review the efforts to agree upon workable principles and to create practical surveillance procedures for managing adjustment policies in the 1960s and the 1980s. Their failure produced in 1971 the breakdown of par values and in 1985 the abandonment of "hands off" floating in favor of a regime of ad hoc "managed" floating.

Nonetheless, all international trading systems must have some means of effecting adjustments in the external position of trading countries. In the post- 1945 experience, the major trading countries have depended mainly on market- driven changes in exchange rates as the residual instrument of international adjustment, whether their currencies were pegged or floating. The reason for

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