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Published online by Cambridge University Press: 22 May 2009
The major international economic institutions established after World War II, such as the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT), had the economic disintegration of the Great Depression as their historical heritage. The lessons learned from that experience were twofold: National governments can and should take an active role in achieving national economic stabilization objectives, and one state's economic policies can and often will work at cross-purposes with those of another. The role of international institutions in such circumstances is to harmonize national policies so that international conflict is avoided.
1 This essay was completed prior to the eruption of the international financial crisis during the spring of 1971. Such crises, as elaborated in other sections of this essay, are inherent in the present international monetary system. The following illustration of West German difficulties fits the current situation almost without alteration.
2 Report of the Deutsche Bundesbank, for the Year 1969(Frankfurt am Main: Deutsche Bundesbank, 04 1970), p. 1Google Scholar.
3 According to IMF rules countries must sell domestic currency for foreign currency to keep the spot exchange rate within one percent of parity. Most central banks intervene before this one percent is reached.
4 For brevity the discussion will be confined to the effects of this activity on capital-receiving countries, although capital-sending countries experience similar consequences.
5 For a discussion of direct investment see the essays by Raymond Vernon and Louis T. Wells, Jr., in this volume.
6 The United States attempts to influence purchases of foreign stocks and bonds by the interest equalization tax (IET), foreign direct investment through the mandatory Office of Foreign Direct Investment (OFDI) program, and foreign lending by banks through a so-called voluntary program administered by the Federal Reserve System. These programs have had limited success.
7 Long-term capital movements are more predictable, subject to different types of controls, and can thus be integrated more easily into domestic monetary policy.
8 In June 1969 the Federal Reserve System imposed reserve requirements on bank liabilities to foreign branches on amounts in excess of a base figure. This device limited increases in liabilities without forcing wholesale liquidations.
9 The Monetary Committee of the EEC, composed of the finance ministries of member countries, is an important factor promoting monetary cooperation within the community.
10 The BIS, with headquarters in Basel, was established in May 1930 to facilitate World War I German reparations. The bank is “owned” by the central banks of the seven founding members in Europe plus nineteen others, including the United States and Japan, which have subsequendy subscribed.
11 Krause, Lawrence B., “Recent Monetary Crises: Causes and Cures,” in Readings in Monetary, National Income and Stabilization Policy, ed. Smith, W. L. and Teigen, R. L. (rev. ed.; Homewood, Ill: Richard D. Irwin, 1970), pp. 556–570Google Scholar.
12 Opposition to widening the band has been expressed in Europe, particularly by the Commission of the European Communities, because it does not want greater monetary independence among EEC members. Changing the IMF articles, however, would not be mandatory for the members. EEC countries could retain narrow bands among themselves but permit wider fluctuations of their currencies jointly against the United States dollar and other currencies. This would not relieve the West German monetary authorities, for example, from monetary upsets occurring in other member countries, but would permit some independence from United States monetary conditions.
13 Cooper, Richard N., The Economics of Interdependence: Economic Policy in the Atlantic Community (Atlantic Policy Series) (New York: McGraw-Hill Book Co. [for the Council on Foreign Relations], 1968)Google Scholar.
