International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

6
International Economic Policy: The Role of Exchange Rates

EDWIN M. TRUMAN

The reallocation of resources that follows upon sharp changes in exchange rates and competitive positions is, of course, not instant or automatic. It takes time and it takes effort.

For the longer run, the outlook seems to be promising for the achievement of a sufficiently flexible international adjustment mechanism so that we need not again experience the very large and persistent international imbalances that have been so troubling during the past few years.

The above quotations are from testimony by Federal Reserve Governor Dewey Daane in May 1973. 1 The United States was struggling with an imbalance in its international payments after two devaluations of the dollar. Two months previously, the industrial countries had resorted to what was hoped would be a temporary generalized floating of their currencies in the face of frustration (at least by the markets) that the process of adjustment was so slow. At the same time, Daane held out the hope that this period of instability would be followed by a regime designed by the Committee of 20 in which the adjustment of international imbalances would be smoother and, implicitly, one in which exchange rates would be stable but adjustable, with provision for floating in particular situations. 2

Dewey Daane had it about right in May 1973: exchange rates can play a powerful role in the international adjustment process as long as they are assisted by other policies and patterns of behavior, which is a point he elaborated on in his testimony. It also was reasonable to hold out the hope of greater international monetary stability in the future without excessive reliance on changes

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