by Halm
[Front Matter and Preface]: This segment contains the title page, copyright information, and preface for 'Approaches to Greater Flexibility of Exchange Rates'. It details the origins of the Bürgenstock and Oyster Bay conferences (1969), which brought together academic economists and financial practitioners to discuss limited exchange-rate flexibility. The preface summarizes the consensus reached by the majority of participants in favor of widening exchange-rate bands and allowing for gradual parity adjustments. [Table of Contents]: A comprehensive table of contents listing the seven parts of the book, including introductory statements, arguments for and against flexibility, practical implementation proposals, and case studies on various countries like Canada, Germany, and Japan. [Part I: Introduction and Summaries of Opening Papers]: This section introduces the first seven papers of the volume. It highlights Fritz Machlup's work on clarifying semantic ambiguities in exchange-rate discussions, Robert Roosa's defense of limited flexibility as a primary system rather than a compromise, and Stephen Marris's argument for regular international scrutiny of exchange-rate policies. [Toward Limited Flexibility of Exchange Rates: Introduction and The Case for Fixed Rates]: George N. Halm critiques the 'adjustable-peg' system, arguing it is a poor compromise that leads to crises of confidence and quantitative restrictions. He examines the traditional arguments for fixed exchange rates—specifically the promotion of monetary discipline—but suggests that these arguments fail when convertibility is maintained through exchange controls or when parities are eventually adjusted abruptly. [The Case for Freely Flexible Exchange Rates and the Band Proposal]: Halm presents the theoretical case for flexible exchange rates as a market-based solution to external imbalance. He then introduces the 'band proposal' (widened margins around parity) as a practical compromise. He explains how a wider band allows market signals to function while maintaining a fixed reference point, and how it can induce equilibrating private speculation to finance temporary deficits. [Band Proposal and Capital Movements]: This segment analyzes the relationship between exchange-rate flexibility and capital flows. Halm distinguishes between 'non-dilemma' cases (where internal and external needs align) and 'dilemma' cases (e.g., unemployment paired with a payments deficit). He argues that a wider band helps prevent disequilibrating capital flows by allowing exchange-rate movements to offset interest-rate differentials, thus providing more autonomy for domestic monetary policy. [The Gliding Parity and the Movable Band]: Halm explores the 'gliding parity' or 'crawling peg' concept, where parities change by very small, frequent increments to correct fundamental disequilibria without triggering massive speculation. He compares modern proposals by Meade and Williamson to the original Keynes Plan of 1943. The segment concludes by discussing the 'movable band'—a combination of the widened band and gliding parity—as a robust mechanism for international adjustment. [Movable Band and the Role of the Reserve Currency]: This section addresses the unique position of the U.S. dollar as a reserve and intervention currency. Halm explains the asymmetry of the system: while other currencies can fluctuate within the full width of a band against each other, the dollar's movement is limited to half that width. He argues that gold convertibility at $35/ounce can still be maintained under a gliding parity if interest rates on dollar balances compensate for small depreciations. [Conference Topics and Proposed Outlines]: The final segment of this chunk provides structured lists of topics for further study and a proposed outline for conference papers. It covers the technical parameters of bands and crawls (X and Y values), the impact on the forward exchange market, the role of the dollar, and the potential development of currency areas. It also includes the 'Marsh Proposal' regarding fixed reserves. [The Outlook for the Present Monetary System: On Terms, Concepts, Theories, and Strategies]: Fritz Machlup provides a comprehensive semantic and theoretical framework for discussing exchange rate flexibility. He distinguishes between various terms such as pegs, parities, and intervention rates, while categorizing systems into jumping, gliding, or no parities. Machlup explores the mechanics of the 'crawling peg' and 'wider band' proposals, discussing the implications of asymmetrical bands and the criteria for identifying currency overvaluation or undervaluation. He concludes by addressing the dilemma of advocacy, arguing that even limited flexibility is preferable to the rigidities of the present system, provided it is implemented with a clear understanding of its limitations. [Machlup's Analysis of Disequilibrating Changes and Policy Recommendations]: Machlup analyzes the types of disequilibrating changes that necessitate exchange rate adjustments, such as discrepancies in inflation rates and shifts in international capital flows. He advocates for a 'gliding widened band'—specifically a glide of 2% per year with a 5% total band width—as a realistic compromise to improve international monetary stability. [Currency Parities in the Second Decade of Convertibility]: Robert V. Roosa examines the transition of the international monetary system into a phase where established parities must be more frequently adjusted. He critiques the 'needs-of-trade' doctrine and the idea of leaving exchange rates entirely to market forces, arguing that exchange rates, like the money supply, require independent determination. Roosa reviews recent rigidities in the German mark and French franc and evaluates proposals like the 'wider band' and 'dynamic peg'. He emphasizes that while new techniques are useful, the primary requirement is a change in governmental will to make ad hoc parity adjustments more respectable and less dramatic. [Comments on Mr. Roosa’s Paper]: George N. Halm offers a rebuttal to Roosa's comparison between floating exchange rates and the 'needs-of-trade' doctrine. Halm argues that Roosa's analogy is flawed because exchange rates are prices that should not be fixed, especially when national monetary policies are uncoordinated. He suggests that fixing rates while maintaining convertibility is politically untenable and likely leads to quantitative restrictions. [The United States and Greater Flexibility of Exchange Rates]: C. Fred Bergsten analyzes the impact of exchange rate flexibility on the United States and the dollar's role as the system's pivot. He addresses concerns that flexibility might lead to dollar overvaluation or a loss of confidence in dollar balances. Bergsten argues that the US would actually benefit from a reduction in the current system's bias toward devaluations against the dollar. He explores various implementation options, including maintaining gold convertibility or moving to a Reserve Settlement Account, and concludes that greater flexibility would improve the international adjustment process without necessarily undermining the dollar's status as a transactions and reserve currency. [Conclusion: The United States and Exchange-Rate Flexibility]: Concludes the analysis on why the United States should favor greater exchange-rate flexibility. It argues that such a system would reduce the 'quadruple bias' against the dollar and provide better adjustment mechanisms for payments disequilibrium. The author suggests that while a symmetrical system is ideal, even an asymmetrical one allowing only upside flexibility would benefit the U.S. and other major countries by providing additional policy instruments. [Decision-Making on Exchange Rates]: Stephen N. Marris examines the obstacles to rational decision-making within the 'large-change-or-not-at-all' exchange rate system. He argues that the current system forces governments to delay parity changes until they become traumatic political and economic events, leading to a paralysis of decision-making. Marris advocates for a system of limited flexibility (small, frequent changes) which would depoliticize adjustments, reduce the need for secrecy, and allow for better international consultation. He addresses criticisms regarding speculative flows and the potential loss of anti-inflationary discipline, suggesting that small changes are easier to manage through interest-rate differentials and are less likely to trigger massive speculative attacks than delayed large devaluations. [Part II: The Case for Greater Flexibility of Exchange Rates - Introduction and Summaries]: An introductory overview of the essays in Part II of the volume. It summarizes arguments from various economists: Harry Johnson on floating rates for domestic objectives; Gottfried Haberler on the signal value of exchange rates; George Halm on the incompatibility of fixed parities with market economies; Marius Holtrop on the asymmetry of adjustment; Herbert Giersch on neutralizing policy changes; David Grove on the wider band and investment; and John Watts on the business perspective of monetary reform. [The Case for Flexible Exchange Rates, 1969]: Opening of Harry G. Johnson's essay on the case for flexible exchange rates in 1969. [Introduction to Flexible Exchange Rates]: Harry G. Johnson defines flexible exchange rates as market-determined prices for foreign exchange, distinguishing them from the IMF's 'adjustable peg' system. He argues that flexibility is essential for preserving national policy autonomy and international trade freedom, noting that opposition often stems from the vested interests of central bankers and 'practical' men accustomed to the fixed-rate status quo. [The Case for and Against Fixed Exchange Rates]: Johnson examines the analogy between fixed exchange rates and a common national currency, arguing that the analogy fails due to barriers in labor and capital mobility and the lack of a central international monetary authority. He critiques the 'discipline' argument of fixed rates, suggesting it often forces nations to accept the average inflation or deflation of their neighbors rather than rational policy, and notes that small specialized countries may still prefer pegging to major currencies. [The Case for Flexible Exchange Rates and Rebuttal of Objections]: Johnson applies the laws of demand and supply to foreign exchange, arguing that flexible rates prevent the crises associated with defending an overvalued or undervalued currency. He addresses common objections regarding uncertainty and inflation, asserting that speculation is generally stabilizing and that flexible rates provide clearer signals for domestic monetary discipline than reserve losses do under fixed rates. [Contemporary Proposals and the Floating Pound]: The author evaluates the 'wider band' and 'crawling peg' proposals as steps toward flexibility within the IMF framework, favoring the crawling peg for its ability to accommodate permanent policy divergences. He specifically advocates for a floating British pound to release the UK from 'stop-go' cycles and balance-of-payments constraints, arguing that sterling's international role no longer precludes such a move. [Comments on Mr. Johnson's Paper by George N. Halm]: George N. Halm responds to Johnson, arguing that the 'wider band' and 'crawling peg' should be viewed as complementary rather than mutually exclusive. He emphasizes the equilibrating power of a widened band to reduce the need for parity changes and suggests that the band provides necessary market guidance for the operation of a gliding peg. [The International Monetary System: Recent Developments and Discussions]: Gottfried Haberler reviews the monetary crises of the late 1960s, critiquing the shift toward trade controls ('Ersatz' measures) instead of exchange rate adjustments. He refutes arguments against flexibility, specifically addressing the 'dilemma cases' where internal and external equilibrium requirements conflict, and argues that flexible rates provide better insulation against international transmission of inflation or deflation. [Geographic Limits and the Special Position of the Dollar]: Haberler discusses the practical limits of exchange flexibility, noting that small countries will likely continue to peg to major blocs. He highlights the unique position of the U.S. dollar as a reserve currency, arguing that while the U.S. cannot easily devalue unilaterally, it can lead the shift toward flexibility by encouraging other nations to float against the dollar or, as a last resort, suspending gold convertibility. [Fixed Exchange Rates and the Market Mechanism]: George N. Halm critiques fixed exchange rates as a form of price fixing that is inconsistent with a market economy. He argues that the system creates an asymmetry where deficit countries bear the burden of adjustment while surplus countries avoid it, leading to disaligned rates and a reliance on ad hoc liquidity measures or trade restrictions rather than the price mechanism. [The Adjustment Process, Its Asymmetry, and Possible Consequences]: Marius W. Holtrop, drawing on his experience with the Nederlandsche Bank, analyzes balance-of-payments adjustment through the lens of the 'national liquidity balance'. He explains how surpluses and deficits trigger automatic income changes that should theoretically restore equilibrium, but notes that this process is often asymmetrical and hampered by domestic policy goals like full employment. [Inadequacy of Adjustment Policies and Movable Parities]: Holtrop critiques the failure of modern adjustment policies, providing data on 'excess liquidity creation' in the US and UK versus the EEC. He argues that the current system forces surplus countries to inflate to match deficit countries' policies. He expresses growing support for 'movable-parity' systems (crawling pegs) as a way to allow small, frequent adjustments that avoid the political trauma and speculative crises of large devaluations. [Entrepreneurial Risk under Flexible Exchange Rates]: Herbert Giersch argues that flexible exchange rates do not necessarily increase entrepreneurial risk compared to fixed rates. He posits that flexibility can neutralize distortions caused by divergent national cost trends and cyclical fluctuations, making domestic monetary policy more effective and reducing the need for extreme interest rate variations. [The Wider Band and Foreign Direct Investment]: David L. Grove analyzes how exchange rate systems affect long-term corporate investment. He argues that the current 'fixed' system actually increases risk by allowing massive overvaluations that lead to exchange controls and economic nationalism. In contrast, a wider band or floating system would allow for gradual adjustments, reducing the likelihood of major shocks and the need for restrictive capital controls, thereby creating a more stable environment for international business. [The Business View of Proposals for International Monetary Reform]: John H. Watts explores the practical implications of exchange rate reform for different types of businesses. He distinguishes between multinational manufacturers, who are relatively insulated by diversification and financial strength, and specialized commodity traders, for whom increased hedging costs could exceed profit margins. He concludes that while business naturally resists uncertainty, the threat of trade and investment controls under the current system is often viewed as a greater risk than moderate exchange rate fluctuations. [Conclusion: Real Effects of Moderate Reforms on International Business]: Concludes the analysis of how moderate currency fluctuations affect international business. While large multinational investors might adapt through diversification and self-insurance, smaller specialized firms like commodity traders may face significant costs as government subsidies for currency stability are reduced. The author warns of the political risk that sliding parities could stimulate inflation, which would undermine the stability required for productive international resource allocation. [Part III. The Case Against Flexible Exchange Rates: Introduction and Overview]: Introduces a series of papers arguing against flexible exchange rates. Key arguments include Oppenheimer's preference for raising the gold price, Iklé's view that past crises were caused by policy failures rather than exchange rate rigidity, and Mosconi's assertion that flexibility is incompatible with European economic integration. The section also previews technical objections from Pelli and Kuster regarding forward markets and commodity trade, alongside Richard Cooper's counter-argument that non-depreciating currencies effectively subsidize imports. [The Outlook for the Present World Monetary System]: Peter Oppenheimer analyzes the symptoms of disorder in the world monetary system, including restrictive trade measures and high interest rates in the Eurodollar market. He critiques fashionable solutions like SDRs and limited exchange rate flexibility, arguing they fail to address the underlying liquidity preference of central banks. Oppenheimer concludes that a substantial increase in the price of monetary gold is the only measure capable of providing long-term stability and allowing the United States to equilibrate its external accounts without constant deficits. [Comments on Mr. Oppenheimer's Paper: A More Optimistic View]: Thomas Willett offers a rebuttal to Oppenheimer, arguing that the international monetary system's difficulties stem from deficiencies in the adjustment mechanism rather than gold supply. He challenges the Triffin-Kenen model of reserve asset instability, suggesting that greater exchange rate flexibility could resolve the 'confidence problem' without returning to a gold-centric system. [Could the Crises of the Last Few Years Have Been Avoided by Flexible Exchange Rates?]: Max Iklé provides a historical analysis of monetary crises since 1959, covering the US deficit, German surpluses, and crises in the UK, Italy, and France. He argues that these were caused by structural issues, domestic political upheavals, or poor policy choices rather than fixed exchange rates. Iklé maintains that the current system's flexibility lies in its monetary reserves and central bank cooperation, and warns that flexible rates would destroy the confidence necessary for international trade and the Eurocurrency markets. [Notes for the Bürgenstock Conference]: Antonio Mosconi argues that flexible exchange rates are incompatible with the European Economic Community's goals, particularly fixed agricultural prices and the move toward a common currency. He defends the Bretton Woods discipline as a necessary check on national inflation and favors 'negotiated' parity changes over automatic 'mechanisms' like the crawling peg. He views the US deficit as a political problem related to its global role, which should be solved through cooperation rather than isolationist monetary devices. [Why I Am Not in Favor of Greater Flexibility of Exchange Rates]: Giuliano Pelli details the practical banking and commercial objections to widening exchange rate bands. He demonstrates how a 5% band against the dollar creates a 20% fluctuation risk for cross-rates, necessitating a massive increase in forward cover that commercial banks may be unwilling or unable to provide due to ceiling limits and political risks. He argues that the increased cost of hedging would obstruct trade and investment while contributing to global inflation. [Greater Flexibility of Exchange Rates: Effects on Commodities, Capital, and Money Markets]: Emil Kuster argues that wider trading margins would paralyze international money markets by making swap-rates prohibitive and reducing the supply of Eurodollars. He contends that the resulting uncertainty would force a return to barter and clearing agreements as traders seek to eliminate unpredictable risks. Kuster also notes that the 'benefits' of flexibility would be negated by the necessity of constant central bank intervention to manage the volatile futures markets. [Selected Case Studies Relating to Foreign-Exchange Problems]: Kuster presents specific case studies in the capital goods, automobile, steel, and grain industries to show how exchange rate volatility hinders trade. He highlights the difficulty of hedging long-term contracts (e.g., jet planes or heavy machinery) where futures markets do not extend far enough. In low-margin businesses like grain and steel, even small increases in hedging costs can eliminate profitability, leading industry participants to strongly favor the current fixed-rate system. [Comments on Mr. Kuster's Paper]: Richard Cooper provides an economist's critique of Kuster's practical objections. He argues that if a transaction becomes unprofitable due to an exchange rate move, it likely should not have occurred from an efficiency standpoint. Cooper asserts that fixed rates often hide distortions, such as subsidizing imports at the expense of other sectors, and that long-term exchange uncertainty exists even under the current Bretton Woods system due to the risk of large, sudden parity changes. [Part IV. Practical Proposals and Suggestions for Implementation: Introduction]: Summarizes various proposals for implementing exchange rate flexibility. These include Krause's focus on price stability/unemployment trade-offs, Roosa's asymmetrical band to counter inflationary bias, and Marsh's 'Fixed-Reserve Standard' which focuses on fixing reserve levels rather than rates. The section previews discussions on the crawling peg, interest-rate constraints, and the technical requirements for band width to accommodate parity changes. [The International Monetary Game: Objectives and Rules]: Lawrence Krause defines the fundamental objective of the international monetary system as enabling countries to achieve growth, full employment, and price stability. He critiques the current lack of an adjustment mechanism and proposes a 'self-adjusting peg' system. In this model, exchange parities would be determined by a moving average of past spot rates, allowing for small, continuous adjustments (up to 2% per year) that would reduce the need for large, politically difficult devaluations while discouraging speculation by increasing market risk. [Conclusion on Rules of the International Monetary System]: The author concludes his outline for international monetary reform, arguing that while ideal government behavior might make rule changes unnecessary, practical political realities necessitate greater flexibility. He suggests that even modest flexibility is preferable to none if fully flexible rates are politically unfeasible. [When and How Should Parities Be Changed?]: Robert V. Roosa proposes a return to the original Bretton Woods conception of modest, frequent parity changes initiated by individual countries without heavy IMF scrutiny. He suggests a five-point plan to build a bias toward currency appreciation for strong-payment countries, including wider spot rate margins above parity and specific timelines for upward and downward adjustments to combat inflationary transmission and speculative flows. [A “Realistic” Note on Threefold Limited Flexibility of Exchange Rates]: William Fellner argues for a 'threefold limited flexibility' system, focusing on currencies that tend upward against the dollar. He posits that structural factors and differential inflation rates make gradual upward revaluation necessary for a small number of strong currencies (like the German mark) to avoid forced savings and inflationary dollar accruals. He critiques gold revaluation as an inferior alternative that would cause global inflation and preserve the disruptive 'adjustable peg' system. [Asymmetrical Widening of the Bands Around Parity]: George H. Chittenden proposes an asymmetrical widening of exchange rate bands, specifically increasing the upper limit while keeping the lower limit fixed. This approach aims to address the problem of undervalued currencies and speculative capital flows by increasing the 'downside risk' for speculators and providing a tool for domestic monetary management without requiring a complete overhaul of the IMF system. [Sliding Parities: A Proposal for Presumptive Rules]: Richard N. Cooper details a 'sliding parities' system where exchange parities change weekly (0.05%) based on presumptive rules triggered by reserve movements. The system is designed to accommodate gradual shifts in demand and competitiveness while allowing for international oversight and sanctions. Cooper analyzes the impact on trade, long-term investment, and short-term capital, arguing that it offers greater national monetary autonomy than the current Bretton Woods arrangements. [The Fixed-Reserve Standard: A Proposal to "Reverse" Bretton Woods]: Donald B. Marsh proposes a 'Fixed-Reserve Standard' as a reversal of the Bretton Woods system: instead of fixing exchange rates, the system would fix national exchange reserve levels. This would force automatic external balance through exchange rate movements. Marsh critiques other limited flexibility proposals (bands, crawling pegs) as insufficient compromises, arguing that only a fixed-reserve requirement—leading either to floating rates or total monetary integration with a key currency—can eliminate disruptive speculation and recurring crises. [Conclusion: The Fixed-Reserve Standard]: Halm concludes his argument for a 'pure' Fixed-Reserve Standard, asserting that it eliminates the need for exchange controls, SDRs, and complex formulas like crawling pegs. He argues that this system provides automatic discipline and allows countries to choose between fixed rates or floating rates based on their reserve bands, ultimately protecting the international monetary order from recurring crises of confidence. [Rules for a Sliding Parity: A Proposal]: Thomas D. Willett proposes a sliding-parity system that combines discretionary and automatic elements to improve the international adjustment mechanism. He critiques the rigidity of the Bretton Woods system and evaluates various proposals, including those by Donald Marsh and Hendrik Houthakker, ultimately suggesting a compromise where parity changes are discretionary within a reserve band but mandatory if reserves fall outside that range. [Some Implications of Flexible Exchange Rates, Including Effects on Forward Markets and Transitional Problems]: C. M. Van Vlierden advocates for a widening of trading bands to ±2½ percent and discusses the transitional challenges of moving toward greater exchange rate flexibility. He argues that while initial uncertainties may exist, the system will eventually stabilize, and forward coverage costs will not significantly increase for traders. He also examines how flexible rates might influence long-term foreign investment and the Eurocurrency markets. [A Technical Note on the Width of the Band Required to Accommodate Parity Changes of Particular Size]: Harry G. Johnson records a technical point made by Marius Holtrop regarding the necessary width of exchange rate bands. To ensure smooth market operations, the band must be wide enough so that a parity adjustment does not force an immediate change in the market rate, which requires the band to be substantially wider than the permitted percentage of parity change. [Short-Term Capital Movements and the Interest-Rate Constraint Under Systems of Limited Flexibility of Exchange Rates]: Willett examines whether a crawling peg system imposes a rigid interest-rate constraint on domestic monetary policy. He argues that the constraint is often exaggerated and that a crawling peg may actually be less restrictive than the adjustable-peg system by reducing expectations of large discrete parity changes. He discusses the stock-adjustment nature of capital flows, the role of official financing, and how wider bands can reduce capital mobility sensitivity. [Part V. Exchange-Rate Flexibility and the Forward Market: Introduction]: This section introduces a series of papers focused on the relationship between exchange-rate flexibility and the forward market. It summarizes the contributions of Machlup, Watts, Sohmen, Batt, Reichers, and Cleveland, highlighting their differing views on the costs of forward cover, the capacity of dealers to meet demand, and the impact on international trade. [The Forward-Exchange Market: Misunderstandings Between Practitioners and Economists]: Fritz Machlup explores the linguistic and conceptual gap between economists and foreign-exchange practitioners regarding the forward market. He clarifies that 'cost of forward cover' to a dealer is simply the spot-forward differential, not a social or business cost. He also critiques the idea of limited dealer capacity, suggesting that perceived limits are often due to institutional rigidities or monopolistic practices rather than inherent economic constraints. [Forward Currency "Costs": A Zero Sum Game?]: John H. Watts responds to Machlup, arguing that while forward costs might be a zero-sum game in the aggregate, they cause significant real-world reallocations and discomfort for individual firms. He suggests that the perceived 'costs' lead to shifts in trade patterns that may reduce overall productivity, as players are moved from positions they play best due to currency-denominated accounting rather than real factor costs. [Comments on Mr. Watts's Paper]: Machlup provides a brief rebuttal to Watts, stating that the 'losses' felt by exporters are the necessary signals of real economic adjustment. He argues that postponing these adjustments through fixed rates is more harmful than the shifts in trade patterns caused by changing forward rates. [Exchange Risks and Forward Coverage in Different Monetary Systems]: Egon Sohmen argues that flexible exchange rates actually reduce risk compared to the adjustable peg system because they eliminate the need for convertibility restrictions. He contends that well-developed forward markets, supported by covered interest arbitrage, will provide ample hedging opportunities without high risk premia, provided that currency convertibility is maintained. [The Effect on the Foreign-Exchange Market of More Flexible Rates]: W. F. J. Batt provides a practitioner's perspective on the limitations of the forward-exchange market. He warns that wider bands could increase forward risks and demand for cover beyond the capacity of banks, potentially making the cost of hedging prohibitive for commercial traders and leading to a decline in international trade and the Eurodollar market. [Comments on Mr. Batt’s Paper]: Machlup critiques Batt's assertions, clarifying that increased demand for forward cover does not automatically increase premia—it depends on whether the demand comes from buyers or sellers. He also disputes Batt's historical interpretation of the 1930s, arguing that floating rates tend to expand rather than contract the forward market by increasing the incentive to hedge. [Flexible Exchange Rates and Forward Markets]: Reichers and Cleveland analyze the impact of wider bands and floating rates on forward markets. They conclude that under normal conditions, the cost and availability of forward cover would remain stable as supply meets demand. However, they note that crisis situations would still create one-sided markets and high costs, though they believe greater flexibility might reduce the frequency of such crises by improving the adjustment process. [Conclusion: Forward Markets and Greater Flexibility]: Concludes the discussion on forward markets, arguing that while flexibility might change market size, the cost of cover remains similar to fixed regimes. It suggests that effects on forward markets are not a primary factor in deciding the desirability of exchange-rate flexibility. [Part VI. Potential Impact of Exchange-Rate Flexibility on Different Countries or Groups of Countries]: An introductory overview of several papers examining the historical and potential impact of exchange-rate flexibility on specific nations and regions. It summarizes case studies on Canada's floating rate, West Germany's potential for a gliding parity, Japan's success with fixed rates, Swiss and Scandinavian perspectives, and the debate over flexibility within the European Economic Community (EEC) and its agricultural policies. [Canada's Experience with a Floating Exchange Rate, 1950–1962]: Donald B. Marsh analyzes the Canadian experience with a floating exchange rate between 1950 and 1962. He argues that the system was highly successful and stable until it was undermined by inappropriate domestic monetary policies and government intervention in the early 1960s. The essay details the transition from wartime controls, the period of adjustment to parity, and the eventual 'decline and fall' caused by an attempt to manipulate the rate for employment goals, which led to a return to a fixed peg. [Statistical Tables: Canadian Exchange Rates and Reserves (1952–1960)]: A series of six tables providing empirical data on the Canadian exchange rate and official holdings of gold and U.S. dollars from 1952 to 1960. The tables demonstrate the relative stability of the floating rate, showing the range of fluctuations within months and years, as well as the stability of official reserves during the period. [A Floating German Mark: An Essay in Speculative Economics]: Giersch and Kasper present a counterfactual analysis of what might have occurred if West Germany had adopted a floating exchange rate with a gliding parity in 1964. They argue that such a move would have neutralized imported inflation, achieved near price stability, and avoided the severe recession of 1966-1967. The essay details the proposed medium-term appreciation rate of 2% per annum and how the exchange rate would have smoothed cyclical swings by dampening export demand during booms and stimulating it during slacks. [Japan's Twenty-Year Experience with a Fixed Rate for the Yen]: Tadashi Iino examines Japan's successful maintenance of a fixed exchange rate (360 yen to the dollar) from 1949 to 1969. He attributes this success to several factors: the initial deflationary 'Dodge Line' policy, U.S. assistance, the impact of the Korean War, disciplined fiscal and monetary management, a high national saving ratio, and rapid industrial productivity gains that kept wholesale and export prices stable despite rising consumer prices. The essay argues that for Japan, the fixed parity system was a desirable mechanism for economic rehabilitation and growth. [Conclusion: The Japanese Experience with Fixed Exchange Rates]: Halm concludes the analysis of the Japanese economy, arguing that the period from 1949 to 1969 demonstrated the successful adjustment of a domestic economy to a fixed exchange parity. He attributes this success to sound fiscal and monetary management, social discipline, and high savings rates. [The Problem of Floating Exchange Rates from the Swiss Viewpoint]: Max Iklé presents the Swiss perspective against floating exchange rates, arguing that small, export-dependent economies require stability for integration. He details the negative impacts of fluctuations on the export, transit, and insurance industries, and warns that a collapse of the Euromarket could result from abandoning fixed parities. He also discusses the legal constraints of Swiss parity and the potential formation of a 'gold bloc' if the dollar loses gold convertibility. [Balance-of-Payments and Exchange-Rate Problems in Sweden, Denmark, and Finland]: Lundberg and Lundgren analyze the diverse exchange-rate experiences of three Scandinavian countries. Sweden maintained a fixed rate with high productivity growth despite inflationary pressures; Denmark faced recurring crises due to structural inertia; and Finland utilized large, discontinuous devaluations to correct fundamental disequilibria. The authors evaluate whether greater flexibility, such as a wider band or a managed crawling peg, would have improved stabilization policies in these small, open economies. [European Integration and Greater Flexibility of Exchange Rates]: Wolfgang Kasper argues that fixed exchange rates within the EEC act as a disintegrating factor by creating competitive distortions. He advocates for stepwise parity changes or gliding parities to reconcile national differences in monetary discipline and historical experience, specifically addressing how the Common Agricultural Policy (CAP) could be adapted to a flexible system. [Requiem for European Integration: Comments on Mr. Kasper's Paper]: Antonio Mosconi critiques Kasper's view, arguing that exchange-rate rigidity is a necessary catalyst for political and monetary union in Europe. He rejects 'paleoliberalistic' market concepts, asserting that economic integration cannot survive without a centralized statutory power and that flexibility would lead to the resurgence of nationalism. [Red Herrings, Carts, and Horses: Comments on Mosconi and Kasper]: Stephen Marris attempts to reconcile the views of Kasper and Mosconi, suggesting that limited flexibility (like a crawling peg) might actually facilitate European integration. He provides a detailed analysis of how the Common Agricultural Policy's 'money illusion' fails during large parity jumps and argues that gradual adjustments would better preserve the real terms of trade for farmers. [The Agricultural Regulations of the EEC as an Obstacle to Flexibility]: Friedrich Lutz explains the technical incompatibility between the EEC's agricultural support system and exchange-rate flexibility. Using wheat as an example, he demonstrates how revaluation creates demands for farmer compensation and how wide bands distort trade channels, concluding that the current agricultural setup is fundamentally misconceived. [The Concept of Optimum Currency Areas]: Willett and Tower explore the theory of optimum currency areas, examining factors such as labor and capital mobility, economic openness, and diversification. They argue that while a single world currency is theoretically ideal, the costs of domestic adjustment often necessitate exchange-rate flexibility between distinct economic regions or blocs. [Import Border Taxes and Export-Tax Refunds Versus Exchange-Rate Changes]: Gottfried Haberler compares 'open' exchange-rate changes with 'disguised' ones like border taxes. He argues that border adjustments are an inferior, protectionist, and inefficient substitute for parity changes, citing historical examples from Keynes, Germany, and France to demonstrate their distorting effects on trade and services. [Government and the Corporation: A Fallacious Analogy]: Harry Johnson refutes Robert Roosa's analogy between corporate decision-making and government exchange-rate control. He argues that governments lack the profit tests and market accountability of corporations, suggesting that private traders are better equipped to determine appropriate exchange rates than state bureaucracies. [Contributors and Index]: List of contributors to the Bürgenstock Papers and a comprehensive index of terms, countries, and thinkers discussed throughout the volume.
This segment contains the title page, copyright information, and preface for 'Approaches to Greater Flexibility of Exchange Rates'. It details the origins of the Bürgenstock and Oyster Bay conferences (1969), which brought together academic economists and financial practitioners to discuss limited exchange-rate flexibility. The preface summarizes the consensus reached by the majority of participants in favor of widening exchange-rate bands and allowing for gradual parity adjustments.
Read full textA comprehensive table of contents listing the seven parts of the book, including introductory statements, arguments for and against flexibility, practical implementation proposals, and case studies on various countries like Canada, Germany, and Japan.
Read full textThis section introduces the first seven papers of the volume. It highlights Fritz Machlup's work on clarifying semantic ambiguities in exchange-rate discussions, Robert Roosa's defense of limited flexibility as a primary system rather than a compromise, and Stephen Marris's argument for regular international scrutiny of exchange-rate policies.
Read full textGeorge N. Halm critiques the 'adjustable-peg' system, arguing it is a poor compromise that leads to crises of confidence and quantitative restrictions. He examines the traditional arguments for fixed exchange rates—specifically the promotion of monetary discipline—but suggests that these arguments fail when convertibility is maintained through exchange controls or when parities are eventually adjusted abruptly.
Read full textHalm presents the theoretical case for flexible exchange rates as a market-based solution to external imbalance. He then introduces the 'band proposal' (widened margins around parity) as a practical compromise. He explains how a wider band allows market signals to function while maintaining a fixed reference point, and how it can induce equilibrating private speculation to finance temporary deficits.
Read full textThis segment analyzes the relationship between exchange-rate flexibility and capital flows. Halm distinguishes between 'non-dilemma' cases (where internal and external needs align) and 'dilemma' cases (e.g., unemployment paired with a payments deficit). He argues that a wider band helps prevent disequilibrating capital flows by allowing exchange-rate movements to offset interest-rate differentials, thus providing more autonomy for domestic monetary policy.
Read full textHalm explores the 'gliding parity' or 'crawling peg' concept, where parities change by very small, frequent increments to correct fundamental disequilibria without triggering massive speculation. He compares modern proposals by Meade and Williamson to the original Keynes Plan of 1943. The segment concludes by discussing the 'movable band'—a combination of the widened band and gliding parity—as a robust mechanism for international adjustment.
Read full textThis section addresses the unique position of the U.S. dollar as a reserve and intervention currency. Halm explains the asymmetry of the system: while other currencies can fluctuate within the full width of a band against each other, the dollar's movement is limited to half that width. He argues that gold convertibility at $35/ounce can still be maintained under a gliding parity if interest rates on dollar balances compensate for small depreciations.
Read full textThe final segment of this chunk provides structured lists of topics for further study and a proposed outline for conference papers. It covers the technical parameters of bands and crawls (X and Y values), the impact on the forward exchange market, the role of the dollar, and the potential development of currency areas. It also includes the 'Marsh Proposal' regarding fixed reserves.
Read full textFritz Machlup provides a comprehensive semantic and theoretical framework for discussing exchange rate flexibility. He distinguishes between various terms such as pegs, parities, and intervention rates, while categorizing systems into jumping, gliding, or no parities. Machlup explores the mechanics of the 'crawling peg' and 'wider band' proposals, discussing the implications of asymmetrical bands and the criteria for identifying currency overvaluation or undervaluation. He concludes by addressing the dilemma of advocacy, arguing that even limited flexibility is preferable to the rigidities of the present system, provided it is implemented with a clear understanding of its limitations.
Read full textMachlup analyzes the types of disequilibrating changes that necessitate exchange rate adjustments, such as discrepancies in inflation rates and shifts in international capital flows. He advocates for a 'gliding widened band'—specifically a glide of 2% per year with a 5% total band width—as a realistic compromise to improve international monetary stability.
Read full textRobert V. Roosa examines the transition of the international monetary system into a phase where established parities must be more frequently adjusted. He critiques the 'needs-of-trade' doctrine and the idea of leaving exchange rates entirely to market forces, arguing that exchange rates, like the money supply, require independent determination. Roosa reviews recent rigidities in the German mark and French franc and evaluates proposals like the 'wider band' and 'dynamic peg'. He emphasizes that while new techniques are useful, the primary requirement is a change in governmental will to make ad hoc parity adjustments more respectable and less dramatic.
Read full textGeorge N. Halm offers a rebuttal to Roosa's comparison between floating exchange rates and the 'needs-of-trade' doctrine. Halm argues that Roosa's analogy is flawed because exchange rates are prices that should not be fixed, especially when national monetary policies are uncoordinated. He suggests that fixing rates while maintaining convertibility is politically untenable and likely leads to quantitative restrictions.
Read full textC. Fred Bergsten analyzes the impact of exchange rate flexibility on the United States and the dollar's role as the system's pivot. He addresses concerns that flexibility might lead to dollar overvaluation or a loss of confidence in dollar balances. Bergsten argues that the US would actually benefit from a reduction in the current system's bias toward devaluations against the dollar. He explores various implementation options, including maintaining gold convertibility or moving to a Reserve Settlement Account, and concludes that greater flexibility would improve the international adjustment process without necessarily undermining the dollar's status as a transactions and reserve currency.
Read full textConcludes the analysis on why the United States should favor greater exchange-rate flexibility. It argues that such a system would reduce the 'quadruple bias' against the dollar and provide better adjustment mechanisms for payments disequilibrium. The author suggests that while a symmetrical system is ideal, even an asymmetrical one allowing only upside flexibility would benefit the U.S. and other major countries by providing additional policy instruments.
Read full textStephen N. Marris examines the obstacles to rational decision-making within the 'large-change-or-not-at-all' exchange rate system. He argues that the current system forces governments to delay parity changes until they become traumatic political and economic events, leading to a paralysis of decision-making. Marris advocates for a system of limited flexibility (small, frequent changes) which would depoliticize adjustments, reduce the need for secrecy, and allow for better international consultation. He addresses criticisms regarding speculative flows and the potential loss of anti-inflationary discipline, suggesting that small changes are easier to manage through interest-rate differentials and are less likely to trigger massive speculative attacks than delayed large devaluations.
Read full textAn introductory overview of the essays in Part II of the volume. It summarizes arguments from various economists: Harry Johnson on floating rates for domestic objectives; Gottfried Haberler on the signal value of exchange rates; George Halm on the incompatibility of fixed parities with market economies; Marius Holtrop on the asymmetry of adjustment; Herbert Giersch on neutralizing policy changes; David Grove on the wider band and investment; and John Watts on the business perspective of monetary reform.
Read full textOpening of Harry G. Johnson's essay on the case for flexible exchange rates in 1969.
Read full textHarry G. Johnson defines flexible exchange rates as market-determined prices for foreign exchange, distinguishing them from the IMF's 'adjustable peg' system. He argues that flexibility is essential for preserving national policy autonomy and international trade freedom, noting that opposition often stems from the vested interests of central bankers and 'practical' men accustomed to the fixed-rate status quo.
Read full textJohnson examines the analogy between fixed exchange rates and a common national currency, arguing that the analogy fails due to barriers in labor and capital mobility and the lack of a central international monetary authority. He critiques the 'discipline' argument of fixed rates, suggesting it often forces nations to accept the average inflation or deflation of their neighbors rather than rational policy, and notes that small specialized countries may still prefer pegging to major currencies.
Read full textJohnson applies the laws of demand and supply to foreign exchange, arguing that flexible rates prevent the crises associated with defending an overvalued or undervalued currency. He addresses common objections regarding uncertainty and inflation, asserting that speculation is generally stabilizing and that flexible rates provide clearer signals for domestic monetary discipline than reserve losses do under fixed rates.
Read full textThe author evaluates the 'wider band' and 'crawling peg' proposals as steps toward flexibility within the IMF framework, favoring the crawling peg for its ability to accommodate permanent policy divergences. He specifically advocates for a floating British pound to release the UK from 'stop-go' cycles and balance-of-payments constraints, arguing that sterling's international role no longer precludes such a move.
Read full textGeorge N. Halm responds to Johnson, arguing that the 'wider band' and 'crawling peg' should be viewed as complementary rather than mutually exclusive. He emphasizes the equilibrating power of a widened band to reduce the need for parity changes and suggests that the band provides necessary market guidance for the operation of a gliding peg.
Read full textGottfried Haberler reviews the monetary crises of the late 1960s, critiquing the shift toward trade controls ('Ersatz' measures) instead of exchange rate adjustments. He refutes arguments against flexibility, specifically addressing the 'dilemma cases' where internal and external equilibrium requirements conflict, and argues that flexible rates provide better insulation against international transmission of inflation or deflation.
Read full textHaberler discusses the practical limits of exchange flexibility, noting that small countries will likely continue to peg to major blocs. He highlights the unique position of the U.S. dollar as a reserve currency, arguing that while the U.S. cannot easily devalue unilaterally, it can lead the shift toward flexibility by encouraging other nations to float against the dollar or, as a last resort, suspending gold convertibility.
Read full textGeorge N. Halm critiques fixed exchange rates as a form of price fixing that is inconsistent with a market economy. He argues that the system creates an asymmetry where deficit countries bear the burden of adjustment while surplus countries avoid it, leading to disaligned rates and a reliance on ad hoc liquidity measures or trade restrictions rather than the price mechanism.
Read full textMarius W. Holtrop, drawing on his experience with the Nederlandsche Bank, analyzes balance-of-payments adjustment through the lens of the 'national liquidity balance'. He explains how surpluses and deficits trigger automatic income changes that should theoretically restore equilibrium, but notes that this process is often asymmetrical and hampered by domestic policy goals like full employment.
Read full textHoltrop critiques the failure of modern adjustment policies, providing data on 'excess liquidity creation' in the US and UK versus the EEC. He argues that the current system forces surplus countries to inflate to match deficit countries' policies. He expresses growing support for 'movable-parity' systems (crawling pegs) as a way to allow small, frequent adjustments that avoid the political trauma and speculative crises of large devaluations.
Read full textHerbert Giersch argues that flexible exchange rates do not necessarily increase entrepreneurial risk compared to fixed rates. He posits that flexibility can neutralize distortions caused by divergent national cost trends and cyclical fluctuations, making domestic monetary policy more effective and reducing the need for extreme interest rate variations.
Read full textDavid L. Grove analyzes how exchange rate systems affect long-term corporate investment. He argues that the current 'fixed' system actually increases risk by allowing massive overvaluations that lead to exchange controls and economic nationalism. In contrast, a wider band or floating system would allow for gradual adjustments, reducing the likelihood of major shocks and the need for restrictive capital controls, thereby creating a more stable environment for international business.
Read full textJohn H. Watts explores the practical implications of exchange rate reform for different types of businesses. He distinguishes between multinational manufacturers, who are relatively insulated by diversification and financial strength, and specialized commodity traders, for whom increased hedging costs could exceed profit margins. He concludes that while business naturally resists uncertainty, the threat of trade and investment controls under the current system is often viewed as a greater risk than moderate exchange rate fluctuations.
Read full textConcludes the analysis of how moderate currency fluctuations affect international business. While large multinational investors might adapt through diversification and self-insurance, smaller specialized firms like commodity traders may face significant costs as government subsidies for currency stability are reduced. The author warns of the political risk that sliding parities could stimulate inflation, which would undermine the stability required for productive international resource allocation.
Read full textIntroduces a series of papers arguing against flexible exchange rates. Key arguments include Oppenheimer's preference for raising the gold price, Iklé's view that past crises were caused by policy failures rather than exchange rate rigidity, and Mosconi's assertion that flexibility is incompatible with European economic integration. The section also previews technical objections from Pelli and Kuster regarding forward markets and commodity trade, alongside Richard Cooper's counter-argument that non-depreciating currencies effectively subsidize imports.
Read full textPeter Oppenheimer analyzes the symptoms of disorder in the world monetary system, including restrictive trade measures and high interest rates in the Eurodollar market. He critiques fashionable solutions like SDRs and limited exchange rate flexibility, arguing they fail to address the underlying liquidity preference of central banks. Oppenheimer concludes that a substantial increase in the price of monetary gold is the only measure capable of providing long-term stability and allowing the United States to equilibrate its external accounts without constant deficits.
Read full textThomas Willett offers a rebuttal to Oppenheimer, arguing that the international monetary system's difficulties stem from deficiencies in the adjustment mechanism rather than gold supply. He challenges the Triffin-Kenen model of reserve asset instability, suggesting that greater exchange rate flexibility could resolve the 'confidence problem' without returning to a gold-centric system.
Read full textMax Iklé provides a historical analysis of monetary crises since 1959, covering the US deficit, German surpluses, and crises in the UK, Italy, and France. He argues that these were caused by structural issues, domestic political upheavals, or poor policy choices rather than fixed exchange rates. Iklé maintains that the current system's flexibility lies in its monetary reserves and central bank cooperation, and warns that flexible rates would destroy the confidence necessary for international trade and the Eurocurrency markets.
Read full textAntonio Mosconi argues that flexible exchange rates are incompatible with the European Economic Community's goals, particularly fixed agricultural prices and the move toward a common currency. He defends the Bretton Woods discipline as a necessary check on national inflation and favors 'negotiated' parity changes over automatic 'mechanisms' like the crawling peg. He views the US deficit as a political problem related to its global role, which should be solved through cooperation rather than isolationist monetary devices.
Read full textGiuliano Pelli details the practical banking and commercial objections to widening exchange rate bands. He demonstrates how a 5% band against the dollar creates a 20% fluctuation risk for cross-rates, necessitating a massive increase in forward cover that commercial banks may be unwilling or unable to provide due to ceiling limits and political risks. He argues that the increased cost of hedging would obstruct trade and investment while contributing to global inflation.
Read full textEmil Kuster argues that wider trading margins would paralyze international money markets by making swap-rates prohibitive and reducing the supply of Eurodollars. He contends that the resulting uncertainty would force a return to barter and clearing agreements as traders seek to eliminate unpredictable risks. Kuster also notes that the 'benefits' of flexibility would be negated by the necessity of constant central bank intervention to manage the volatile futures markets.
Read full textKuster presents specific case studies in the capital goods, automobile, steel, and grain industries to show how exchange rate volatility hinders trade. He highlights the difficulty of hedging long-term contracts (e.g., jet planes or heavy machinery) where futures markets do not extend far enough. In low-margin businesses like grain and steel, even small increases in hedging costs can eliminate profitability, leading industry participants to strongly favor the current fixed-rate system.
Read full textRichard Cooper provides an economist's critique of Kuster's practical objections. He argues that if a transaction becomes unprofitable due to an exchange rate move, it likely should not have occurred from an efficiency standpoint. Cooper asserts that fixed rates often hide distortions, such as subsidizing imports at the expense of other sectors, and that long-term exchange uncertainty exists even under the current Bretton Woods system due to the risk of large, sudden parity changes.
Read full textSummarizes various proposals for implementing exchange rate flexibility. These include Krause's focus on price stability/unemployment trade-offs, Roosa's asymmetrical band to counter inflationary bias, and Marsh's 'Fixed-Reserve Standard' which focuses on fixing reserve levels rather than rates. The section previews discussions on the crawling peg, interest-rate constraints, and the technical requirements for band width to accommodate parity changes.
Read full textLawrence Krause defines the fundamental objective of the international monetary system as enabling countries to achieve growth, full employment, and price stability. He critiques the current lack of an adjustment mechanism and proposes a 'self-adjusting peg' system. In this model, exchange parities would be determined by a moving average of past spot rates, allowing for small, continuous adjustments (up to 2% per year) that would reduce the need for large, politically difficult devaluations while discouraging speculation by increasing market risk.
Read full textThe author concludes his outline for international monetary reform, arguing that while ideal government behavior might make rule changes unnecessary, practical political realities necessitate greater flexibility. He suggests that even modest flexibility is preferable to none if fully flexible rates are politically unfeasible.
Read full textRobert V. Roosa proposes a return to the original Bretton Woods conception of modest, frequent parity changes initiated by individual countries without heavy IMF scrutiny. He suggests a five-point plan to build a bias toward currency appreciation for strong-payment countries, including wider spot rate margins above parity and specific timelines for upward and downward adjustments to combat inflationary transmission and speculative flows.
Read full textWilliam Fellner argues for a 'threefold limited flexibility' system, focusing on currencies that tend upward against the dollar. He posits that structural factors and differential inflation rates make gradual upward revaluation necessary for a small number of strong currencies (like the German mark) to avoid forced savings and inflationary dollar accruals. He critiques gold revaluation as an inferior alternative that would cause global inflation and preserve the disruptive 'adjustable peg' system.
Read full textGeorge H. Chittenden proposes an asymmetrical widening of exchange rate bands, specifically increasing the upper limit while keeping the lower limit fixed. This approach aims to address the problem of undervalued currencies and speculative capital flows by increasing the 'downside risk' for speculators and providing a tool for domestic monetary management without requiring a complete overhaul of the IMF system.
Read full textRichard N. Cooper details a 'sliding parities' system where exchange parities change weekly (0.05%) based on presumptive rules triggered by reserve movements. The system is designed to accommodate gradual shifts in demand and competitiveness while allowing for international oversight and sanctions. Cooper analyzes the impact on trade, long-term investment, and short-term capital, arguing that it offers greater national monetary autonomy than the current Bretton Woods arrangements.
Read full textDonald B. Marsh proposes a 'Fixed-Reserve Standard' as a reversal of the Bretton Woods system: instead of fixing exchange rates, the system would fix national exchange reserve levels. This would force automatic external balance through exchange rate movements. Marsh critiques other limited flexibility proposals (bands, crawling pegs) as insufficient compromises, arguing that only a fixed-reserve requirement—leading either to floating rates or total monetary integration with a key currency—can eliminate disruptive speculation and recurring crises.
Read full textHalm concludes his argument for a 'pure' Fixed-Reserve Standard, asserting that it eliminates the need for exchange controls, SDRs, and complex formulas like crawling pegs. He argues that this system provides automatic discipline and allows countries to choose between fixed rates or floating rates based on their reserve bands, ultimately protecting the international monetary order from recurring crises of confidence.
Read full textThomas D. Willett proposes a sliding-parity system that combines discretionary and automatic elements to improve the international adjustment mechanism. He critiques the rigidity of the Bretton Woods system and evaluates various proposals, including those by Donald Marsh and Hendrik Houthakker, ultimately suggesting a compromise where parity changes are discretionary within a reserve band but mandatory if reserves fall outside that range.
Read full textC. M. Van Vlierden advocates for a widening of trading bands to ±2½ percent and discusses the transitional challenges of moving toward greater exchange rate flexibility. He argues that while initial uncertainties may exist, the system will eventually stabilize, and forward coverage costs will not significantly increase for traders. He also examines how flexible rates might influence long-term foreign investment and the Eurocurrency markets.
Read full textHarry G. Johnson records a technical point made by Marius Holtrop regarding the necessary width of exchange rate bands. To ensure smooth market operations, the band must be wide enough so that a parity adjustment does not force an immediate change in the market rate, which requires the band to be substantially wider than the permitted percentage of parity change.
Read full textWillett examines whether a crawling peg system imposes a rigid interest-rate constraint on domestic monetary policy. He argues that the constraint is often exaggerated and that a crawling peg may actually be less restrictive than the adjustable-peg system by reducing expectations of large discrete parity changes. He discusses the stock-adjustment nature of capital flows, the role of official financing, and how wider bands can reduce capital mobility sensitivity.
Read full textThis section introduces a series of papers focused on the relationship between exchange-rate flexibility and the forward market. It summarizes the contributions of Machlup, Watts, Sohmen, Batt, Reichers, and Cleveland, highlighting their differing views on the costs of forward cover, the capacity of dealers to meet demand, and the impact on international trade.
Read full textFritz Machlup explores the linguistic and conceptual gap between economists and foreign-exchange practitioners regarding the forward market. He clarifies that 'cost of forward cover' to a dealer is simply the spot-forward differential, not a social or business cost. He also critiques the idea of limited dealer capacity, suggesting that perceived limits are often due to institutional rigidities or monopolistic practices rather than inherent economic constraints.
Read full textJohn H. Watts responds to Machlup, arguing that while forward costs might be a zero-sum game in the aggregate, they cause significant real-world reallocations and discomfort for individual firms. He suggests that the perceived 'costs' lead to shifts in trade patterns that may reduce overall productivity, as players are moved from positions they play best due to currency-denominated accounting rather than real factor costs.
Read full textMachlup provides a brief rebuttal to Watts, stating that the 'losses' felt by exporters are the necessary signals of real economic adjustment. He argues that postponing these adjustments through fixed rates is more harmful than the shifts in trade patterns caused by changing forward rates.
Read full textEgon Sohmen argues that flexible exchange rates actually reduce risk compared to the adjustable peg system because they eliminate the need for convertibility restrictions. He contends that well-developed forward markets, supported by covered interest arbitrage, will provide ample hedging opportunities without high risk premia, provided that currency convertibility is maintained.
Read full textW. F. J. Batt provides a practitioner's perspective on the limitations of the forward-exchange market. He warns that wider bands could increase forward risks and demand for cover beyond the capacity of banks, potentially making the cost of hedging prohibitive for commercial traders and leading to a decline in international trade and the Eurodollar market.
Read full textMachlup critiques Batt's assertions, clarifying that increased demand for forward cover does not automatically increase premia—it depends on whether the demand comes from buyers or sellers. He also disputes Batt's historical interpretation of the 1930s, arguing that floating rates tend to expand rather than contract the forward market by increasing the incentive to hedge.
Read full textReichers and Cleveland analyze the impact of wider bands and floating rates on forward markets. They conclude that under normal conditions, the cost and availability of forward cover would remain stable as supply meets demand. However, they note that crisis situations would still create one-sided markets and high costs, though they believe greater flexibility might reduce the frequency of such crises by improving the adjustment process.
Read full textConcludes the discussion on forward markets, arguing that while flexibility might change market size, the cost of cover remains similar to fixed regimes. It suggests that effects on forward markets are not a primary factor in deciding the desirability of exchange-rate flexibility.
Read full textAn introductory overview of several papers examining the historical and potential impact of exchange-rate flexibility on specific nations and regions. It summarizes case studies on Canada's floating rate, West Germany's potential for a gliding parity, Japan's success with fixed rates, Swiss and Scandinavian perspectives, and the debate over flexibility within the European Economic Community (EEC) and its agricultural policies.
Read full textDonald B. Marsh analyzes the Canadian experience with a floating exchange rate between 1950 and 1962. He argues that the system was highly successful and stable until it was undermined by inappropriate domestic monetary policies and government intervention in the early 1960s. The essay details the transition from wartime controls, the period of adjustment to parity, and the eventual 'decline and fall' caused by an attempt to manipulate the rate for employment goals, which led to a return to a fixed peg.
Read full textA series of six tables providing empirical data on the Canadian exchange rate and official holdings of gold and U.S. dollars from 1952 to 1960. The tables demonstrate the relative stability of the floating rate, showing the range of fluctuations within months and years, as well as the stability of official reserves during the period.
Read full textGiersch and Kasper present a counterfactual analysis of what might have occurred if West Germany had adopted a floating exchange rate with a gliding parity in 1964. They argue that such a move would have neutralized imported inflation, achieved near price stability, and avoided the severe recession of 1966-1967. The essay details the proposed medium-term appreciation rate of 2% per annum and how the exchange rate would have smoothed cyclical swings by dampening export demand during booms and stimulating it during slacks.
Read full textTadashi Iino examines Japan's successful maintenance of a fixed exchange rate (360 yen to the dollar) from 1949 to 1969. He attributes this success to several factors: the initial deflationary 'Dodge Line' policy, U.S. assistance, the impact of the Korean War, disciplined fiscal and monetary management, a high national saving ratio, and rapid industrial productivity gains that kept wholesale and export prices stable despite rising consumer prices. The essay argues that for Japan, the fixed parity system was a desirable mechanism for economic rehabilitation and growth.
Read full textHalm concludes the analysis of the Japanese economy, arguing that the period from 1949 to 1969 demonstrated the successful adjustment of a domestic economy to a fixed exchange parity. He attributes this success to sound fiscal and monetary management, social discipline, and high savings rates.
Read full textMax Iklé presents the Swiss perspective against floating exchange rates, arguing that small, export-dependent economies require stability for integration. He details the negative impacts of fluctuations on the export, transit, and insurance industries, and warns that a collapse of the Euromarket could result from abandoning fixed parities. He also discusses the legal constraints of Swiss parity and the potential formation of a 'gold bloc' if the dollar loses gold convertibility.
Read full textLundberg and Lundgren analyze the diverse exchange-rate experiences of three Scandinavian countries. Sweden maintained a fixed rate with high productivity growth despite inflationary pressures; Denmark faced recurring crises due to structural inertia; and Finland utilized large, discontinuous devaluations to correct fundamental disequilibria. The authors evaluate whether greater flexibility, such as a wider band or a managed crawling peg, would have improved stabilization policies in these small, open economies.
Read full textWolfgang Kasper argues that fixed exchange rates within the EEC act as a disintegrating factor by creating competitive distortions. He advocates for stepwise parity changes or gliding parities to reconcile national differences in monetary discipline and historical experience, specifically addressing how the Common Agricultural Policy (CAP) could be adapted to a flexible system.
Read full textAntonio Mosconi critiques Kasper's view, arguing that exchange-rate rigidity is a necessary catalyst for political and monetary union in Europe. He rejects 'paleoliberalistic' market concepts, asserting that economic integration cannot survive without a centralized statutory power and that flexibility would lead to the resurgence of nationalism.
Read full textStephen Marris attempts to reconcile the views of Kasper and Mosconi, suggesting that limited flexibility (like a crawling peg) might actually facilitate European integration. He provides a detailed analysis of how the Common Agricultural Policy's 'money illusion' fails during large parity jumps and argues that gradual adjustments would better preserve the real terms of trade for farmers.
Read full textFriedrich Lutz explains the technical incompatibility between the EEC's agricultural support system and exchange-rate flexibility. Using wheat as an example, he demonstrates how revaluation creates demands for farmer compensation and how wide bands distort trade channels, concluding that the current agricultural setup is fundamentally misconceived.
Read full textWillett and Tower explore the theory of optimum currency areas, examining factors such as labor and capital mobility, economic openness, and diversification. They argue that while a single world currency is theoretically ideal, the costs of domestic adjustment often necessitate exchange-rate flexibility between distinct economic regions or blocs.
Read full textGottfried Haberler compares 'open' exchange-rate changes with 'disguised' ones like border taxes. He argues that border adjustments are an inferior, protectionist, and inefficient substitute for parity changes, citing historical examples from Keynes, Germany, and France to demonstrate their distorting effects on trade and services.
Read full textHarry Johnson refutes Robert Roosa's analogy between corporate decision-making and government exchange-rate control. He argues that governments lack the profit tests and market accountability of corporations, suggesting that private traders are better equipped to determine appropriate exchange rates than state bureaucracies.
Read full textList of contributors to the Bürgenstock Papers and a comprehensive index of terms, countries, and thinkers discussed throughout the volume.
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