Samuel I. Katz
A widespread pessimism about the drift in international financial affairs prevailed in early 1977. There were two principal grounds for a growing uneasiness about monetary trends. First, efforts over the previous ten years by U.S. and European officials to agree on ways to introduce highly structured reforms into the international monetary system had ended in failure. Second, in 1976 the leading Western industrial countries were becoming economically polarized into two blocs: a group of "weak" countries with high domestic inflation, large balance-of- payments (BOP) deficits, and depreciating currencies; and a group of "strong" countries with much lower inflation, a tendency toward continuing BOP surpluses, and appreciating currencies.
The earlier efforts at world monetary reform had visualized sweeping changes in both global and European regional monetary arrangements. The negotiators of global reform had in mind a broad- based modernization of the original Bretton Woods system: greater exchange-rate flexibility than before through a regime of "stable but adjustable parities"; more symmetrical adjustment constraints than before both between surplus and deficit and between reserve and nonreserve currency countries; and international control over global liquidity through the creation by the International Monetary Fund (IMF) of special drawing rights (SDRs). Perhaps it was inevitable that major differences would arise between U.S. and European officials on key elements of proposals in each of these areas. In any case, there was a deadlock in the negotiations that was broken only when major disturbances in the world economy--especially the 1972-1974 global inflation and the abrupt rise in oil prices in late 1973--swept away the par-value exchange regime and forced reluctant national authorities to accept widespread floating among the major industrial currencies.
The goal of negotiations among European officials had been even more carefully formulated than the global monetary goals: to proceed step by step toward European monetary union on the basis of an agreed timetable, extending to 1980, which had been accepted in 1970 as part