Other Reserve Assets
Edward M. Bernstein
The international monetary system is far different from that established at Bretton Woods. The main reason is that the United States has not performed the stabilizing role that is the function of a reserve center. The deterioration in the U.S. payments position and the inflation in the United States made it impossible to maintain a stable foreign exchange value for the dollar. The inability of the United States to adjust its balance of payments, in spite of two devaluations, compelled an abandonment of the par value system and the introduction of a regime of floating exchange rates. The recent experience with floating rates has not been satisfactory, and it would be desirable to modify the present regime in a way that would help to stabilize the dollar. That can be done only if the United States accepts greater responsibility for the foreign exchange value of the dollar, not merely through intervention but in its fiscal and monetary policies.
The decline of the dollar occurred gradually over an extended period. From 1951 to 1957, the United States had a large surplus on goods and services that was just about balanced by U.S. economic grants and government credits. Private capital outflow was small, except in 1956-1957, and foreign capital inflow was minimal. The deficit on an official reserve basis was about $4.5 billion (U.S. billion), although the concept is not meaningful during the period that the United States was giving Marshall Plan aid. The situation changed in the following twelve years. The current account was in surplus by about $33 billion, including reinvested earnings of direct investment enterprises. In the meantime, U.S. private foreign investments increased enormously in spite of restraints intended to hold down capital outflow and attempts to finance more of the investment with funds raised abroad. Foreign capital inflow,