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    Block - Caps 1-2

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    José Lima

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    FRED L. BLOCK The Origins of International Economic Disorder A Study of United States International Monetary Policy from World War II to the Present UNIVERSITY OF CALIFORNIA PRESS Berkeley * Los Angeles * London CONTENTS ONE, Introduction INTERNATIONAL ECONOMIC ORDER, TWO. The Decline of the Ninetoenth-Century Gald Standard THREE, Bretton Woods and the British Loan FOUR. The Morshall Plan ond Rearmament FIVE, Toward European Concertiity [PART IL: THE UNMAKING OF AN INTERNATIONAL ECONOMIC ONDER SIX. The Roots of the US. Deficit SEVEN. Managing the U.S. Defict EIGHT. The International Monetary Onler in Criss c1ossany minuoerarny INDEX, on Py a Been 139 10) 168 25 PREFACE “The common attitude foward sterational monetary matters odie ithe old joke tat only two people realy understaed the \orkings ofthe gakd standard and they disigeee This perspective ot only inascarate but anaehrenistic ina word where intentional canomie reaites increasingly sping om our dal lives, The reaity is that there are i ntemational eenomies numberof highly tech ‘al ssvesof great complet, as inany ares ofspeciliaed krowedge owerer ene does nt need to undentaad these arate deta to ewsloy an adequte nderstanding ofthe base workings ofthe inter: atonal monetary sete ‘Much of the blame for convincing people that iternatinal retary ies ore hopeewly complor rests with the dcpline ef ‘comomits, Eemumnitshave geseralrdossbed international monet fry anangements a pately echnkal eapeliats to masz certain follective gos. Yet suite obvious today tht any sete interne ‘oral econeme arangements memsthat some collective (oat lhses) get more goods thin others. The protestations of the “ccnonbts have served both to obscure these inequabties and oJ tify them as natural aed inevitable. To prove that an existing set of social initetios is natura and incetable, the economists have bees forced to develop a setof arguments that ave chin obscuration and hkisation. Iti tis set of arguments that has persuaded se many ‘ope that these matters are beyond thei intellectual rap. ‘When it reid tha! itemational monetary arangerenis sre svi creations thal tend torelet and maintain the dstbation of power among nations and social lates, many of he afi comple tie disappear and the luce become comprehensible to the non specilss But the fat that we continge to repeat, in reference ¥0 Itersathoat monetary arrangements, the now alma hackneyed social tnt that a spec sot estitation my be structured In very diferent ways testimony tothe damage tht hus been done by diving soca science Inowledge te ferent disipines, The relative backwardness of our understanding fateratenal monetary ie se aa et the sel fr a emiicpinary nlc ap Brash Bet tne tooeter the Naw stneate ates of se, eqramies sociology, and history. Its hoped thatthe provers ok inalessomecontbution tthe advancement of eit smproech 2s sit she efforts to write contemporary history. 1 have excoun ‘ero a steal urevennes i arable ours. For the earlerpencls ‘uric varety of sources are avalable, and {hive atompned eo “of as maay of them as possible. Idd nat, hewever make tea archival matrhls becaug the time-consuming aatur of sch aang {oIME hae ered me toubandon the projet afanalycing bond the wee, ud the fil ofthe post-World War 1! monetary ender Fer the eine Tartt Peto the soures on pelig- naling are aten quite hanen The consequence that thea Speculative a it moves cower to the have been posible withot thea {1am expecially patel to David Matea and Lamy Hirscihomn. Dart Motz, es charmanof my dhscrtton committee preg port, a wll scoala. intellectud stilton was the ‘lke to. chink Hebert Tiffin and. Charles ‘we ofthe wats of ternational ecorome—iyr the ‘oreringa nuaber ef questions about policy decree Inston to add hit their answers participation inthis projec. Lam grate mse ‘oie North American Cngress on Latin Amerie fr seg ee MeCiugh nd Ann Ror paterty in aertognl ia, Sler r sent ted lly pel vrs df, ond Joona Pcl pod ‘Diced tae, neiaen yew oho 1 a il, bi pei vay ag wis rectal wasly ean hors of daly Me Fr whe dels fr wnt she satan thd preset expres the extent of my te wd appre ABBREVIATIONS, nis cx ECA esc BEC ETA BPC EPU ERP FRUS can ion wr 110 MLE NACIMEP NATO NSC. oEcD ee ovec. sen spre weu Dink fr fterntioal Setemens Cempoat Resene Unt Ecmnomie CopertonAminitrtion Esropean Cals tcl Comminiy Europea Defoe Cannon Evropen Rewari Comminty Europea Free Trade Arca Eton Foltal Conmaaly Esopens Foments Uren Eopen Recovery Prag Deptt ae Fvgn Reton of he Unted Stats Comer Arangenmt oboe ever ecto Told Te scat uk br ecard Develpment raat Pome oy sweatin ret Eon Tx Interaatnal Monet Fund Interaatonal Trade Oration Mutter Pre atom Adviory Counc on Interatinal Monty ad Pani Pay Noth Adare Treaty Ornation onal Sent Crs Oren fo Emre Conpiratn a Development “ * Orpen fr Fungo Eomonle Copertion Orpen ef utrdean Eaporing Centon Deputnet of Gamer, rey of Care Bate ‘Special Drawing Rights a Waters Cuopean Un xi ONE. Introduction The Brettn Woods taternstlenal monetary onder tow Hie i rey ‘whl the word's ance nissters and th deputies meet meessany tocreatearebraved international monetay order, Yet their deter tions diag on year after year without tle reselts Even Mf an fapeement on paper isfinaly achieved, there are grounds for profound “Ketiiim tht a new set of rules would suceed fa restoring a able {ternational monetary onder, The purpose ofthis sadly is toillaminate the sbstacles tothe contemporary eft a atenstinal monetary ‘reform by enanining the ae and allo the Bretton Woods system, But {he history of Breton Wns that 1 will ecount ders fc most sccoent of international monetcy Wtow fo that it not pinay Covered with the tchnial aopests of international ecmemie ar- Tangent vor wit the eveation of ternational ergnizatins: My tieest sin examising bstorkaly the ways in which specific intern tional moretary artangements bith reflec aad iafuence the distribu tion of pltiealecenamie power among the najor capitals cunt In short, ny intent to se international monetary history th tte the relationship between the Unied States and Western Europe {nthe period siace Worl Wer I. “The international manetary system is simply the sum f all ofthe devkes hy which ations organize ther intematonal ecenomie rela- tone The mare of thew devices can he understood by lokingat the ‘horetcl range oaltemaivn salable to any patil nation. The ‘rll dimension in organizing «nation ternational transactions i the role he market i determining the Mews of economic rexouces ‘cross the nla Doundasin, Nations that lbw the marketto pay «| ‘major role canbe termed “open,” whale dove that alow marke foees Title or ao roe in determining International trasctions can be termed “closed There isa cootinuum between pure closedes nd ‘re openness on whichallnitions ca be lcted, sie all wats use ‘Some combisationofcortrals and sueketresdom, A country’s ecaton 1 mcr ee dlosedness of the economy. aimee eee eae ee ee seen em tueemtaer a cts have an ntorestin malting the openness largest possible market. If their awn economy begins techie itll of i ic Mely tat other counts ‘Ta etatate ad these capitis wl lose foreign markets and invest= Tne oppontunitie, Pauly, the epennes of an economy provides 4 Inns to exinbat the demand of the working last fr higher wagee Ih fer esoonatean social veers. Draratie wage nerasn 0 uh Cat reforms came bidanceotpayment diftetis becuse of a Ininshedtrtemationa competitiveness and dhe wabraval of xpi from the esonomy by etzens ara forever. Usa, this Kia of balince-of payments esis, the theeat one, suifiteat dscou- ae or reverse ay such radia ations. In short, th evident need 0 pratest the balance of payments in an open ecencmy serves to rela fore the expat late revistance to cefas that might damage #3 “The drawbacks forthe caitalists of both an open and a cbosed ‘economy erate one of the central pmblens for contempsrary ‘opin, Phe mone pn an economy, the pester the Hkelihood that pain jurtments wl be necwaary, and these paafl ajostents Crete ark of ftense sesh conflict. The more cowed am econony. the eater the iksihood tha the prerogatives and interests ofthe ‘aptalis class wil be leapared, To sme degree, national socetioe wwerkont their opin plas on the epenidonedcontinuvin depending tm particular national cones, However, ths feeder i at times tcteumseribed by the existence of ries of iteration econemle be hhvior. During certain Mistrial peios, the intemtiona) monetary stem is goneraed by a defisite set ef Fles and procedures. Mere ‘ists in these period ax intemational monetary erder.* The strutre of such an interational menctary erder tends to reflect the laluence ofthe most poveril capitalist nations. Their rnlltary superiority and contra of key econoree resourees—cepita, stared technoly. raw materia, and acess to their own lange ‘Tematic markete--makes it posible for them to exereie leversee ‘verather ations. Tis overage generally used lo createaninerna- tional order with abigh degree of openness s that opts rom the ronget cemomy wl be able to tke adeatage of opprtuntis for piofit other countries te shor, a wor erder ia which the How of feos capt determine largely by market ores wl masimize the advantages forthe eoustry wih the highest evel of technical de= ‘lopment and wih the most enterprsing and stiongest firms ‘While the most powerful ations or nation wil have the eatest {aflence in shaping the International monetary eer, they wil aso havea spedal responsi to see thatthe system werk within the ‘articular ules, Crucis thei ality obs urge nme capa to ad countries facing balance of payments deficit, hecune tenes tonal cre is ubricant forthe aljstment process. When nsoeney ca borrow abroad, it can extend the adjustment process overs noe Deol f tine to make it less severe and less pasfl. tn a, whos International ered is anavalable, tis harder for weaker courte o resst domestic pressures for a mere cased ssonony, But ifthe interests cf the mest power nation cr nations deter- mine the outlines of parca international moneiay onlen rece ‘possibilty thatthe onder wil be jepardized by shifts inthe relative ower of diferent cpitalt countries. Nats tht were relatively weak when th order wa fst extaiished can undergo a period ef ‘pid econonie advance and And thatthe existing oner fl torefet adequately thee economic power andierests. That erder might. for ‘example, place tov nuch ofa burden ofajutrent en thelate cea ‘cowmy. In suchatcas, the lat writ might atte fra rovbion of fhe arrangements, attempting to create a new and more equitable srder. Akernatwely, a major ower might find that risingcompetinn fiom other powers makes efficuk to achieve all fs national goal within the exiting rues Itmght ater touse is economic paw te force other countries to accept abenda ofthe rales The outcome of these forts to revise the erde conld he the evlaton snow iver futon monetary order tht reflect the new power alignaent while safeguarding the vital interest othe old dominaee powers oF cold be the complete breakdown of international movetary under tn the later case. economies might increasingly be organused on a loved basis tations find it necenary to protet themselves rom the post ble copie of interational tre and ow of ctl ‘THE GOLD STANDARD VS. “NATIONAL cAprrALisad” ‘Akbouph some sebolirs have triced the existence of intentional tary ordersback othe ancient world. itis the nioeteeuth-cenecy sold standard that bas been the touchstone inst stbecent thik, ‘ng sont the subject. The period from 1875 to 19L4" i's kon oF ‘mythical “golden age” of international monetary arangemonts chen all mujer mations lived within the rele ofatereatnal monetary or havior and balanceof- payments aljstiest proceeded sooty aed emi ny: hay i me mechanics ofthe ninctenthen ten hat cn ince were, bees tec nr ue pha pelle cperirer=re i _najor countries of fixed values for their eurrenecies in relation to gold. Ths ms do lol the aay fw mone ad nae Soopers ee ae eee oc epee one Ss ee ea irre en a a Tis ene ena ‘" ‘original decline in Gurtency A’sexchange rate, More ee ane See a ee eo This conte sn II rm} mechs ws breed by Saban tern Sel caitl ovements tht ped to este cine cares ‘wood credit stondling could simply increase thew hor ‘ce owing tower seer oy of cll a si reo. ning lon ty tee thats in nine Te sta tcl ae of efron tn arg hep cts nay iscourage any inflationary policies that . a the value of a curreney. While the cae fw of go ad il aes tind tes market forces, governments did depart from stretlaivenare ene 44 variety of techniques to blunt the impact of pooea a forces at various times. These inter Saino oe (ts tm. Ths tren tae, het, Eenraly mote fre tien te mare esa ha aoe coca ig ges he the apni dente ne ion of import contr were tat ‘Fite importance i the gold tad imechanion pre aon. A erique of this {ustflestion formas it Justina for simian meatal pena ered nthe ne that emphasized the benefits of etensive protection {aft indastris. Homeves thatertigie generally tion of the value of an Bem eect reine teat eed ear te mde ot tetra ‘the openness of the geld standard ey ee nal epeaness remained lage snqustomed in the seed world, We noted ealer thas an open economy generally serves the Tinea of the eaptlts in resisting worting-las desman fo itm froved wages anf yc series while movement toward rT Fld ecomomy poses athieat to Un fcedom of eaialiststodione a thir wealth as hey wish Another important lemont i that the theory of the anneal gan fom the Bee ow of trade and capital [ntertationlly ha served historically to jus ad ebscure the explo Jatin of unenleveoped oentres. The theory o emmparatve advan tage as served te bide the uneqaa! exchange becween develope aid tinderdevelped countries, id the maintenance of penness to expr flows hay allowed captains in the developed countnes to dominate the most protable sectors of the underdeveloped economies. Of ‘sure, in the pst fifteen years, a pawl critique ofthe gpen work ‘cenomy fas been develope that anges that underdevelopment as ‘Sion heen perpetuate by the international division of bor aon tations? te ecent year, this crue has give sive to concrete a tions by anderdeveloped countries, such as the OPEC nations, 10 vorave their postin nthe worl economy by challenging the work Wp a the fnereational marke. Yet there was another crtigne of the bones ofan open world mi predated the current Third Worl postion, Now Tangeyforgotien, was devcloped within Wostem Europe and the US dang the Great Depression f the 185052 The efit torestore the sl tandardand an open word econony after World War hud ied torecestblsh the stability of the prewar period. Is ft, the apeaness| tftheistemationl econanty had only served to transmit Geflatnsry presses fom one ccuntry to anutber after 1959 and had acted as an ‘hstacle tonaionl recovery programs in the early 10, Ths reality Ted some anlyts to arzue tht an open work econemy in which invomational market frees dominated Was inconsistent with domestic ‘comomie welfare. The proponents ofthis heretical view argued tht the oe low of etl aerowe rational Roxndares was far more disrup- tive tha it was beweii, They also argued that while a certain Ly af nternaticaal tne mae nocenar. foreign trad chon be care filly cantroled by govemmentat asare that te Maetitions did not tntefer with donestc economic objectives. Keynos ate, “Nae tional fen,” puiblsed {tae the ortbodny of {ir epen world economy dicly, and he saygested tht: “dew, Knowledge, science, howptality, tavel—these are he things which ae tho ate een ut Sta Soe ‘ception fa “national capitalism” in which state Intenentoe cen see ‘ning woald be ine tape soit ate pee siren pr oa ee reasonably be produced st home. This é let ods be homespu eniently possible, and. above al er falc o pusue interstinal alton we ‘eithel bythe galasthat reel om eotnonns cane ‘employment and fll capt utdieation tel om continuous, sninerrped fall The salty hic arguent ces be tant be te sae nto ‘capitalism has aot been seriously tried by any of the devel 4 eps ues, eter nthe beara Ye ho eee etn od tht nao pte wad be eae ee Sat in foe seal aes na "ee tol be «ia pened a mato aon suc wot cna nt nn tl oa wn ta nth er he nl cpt soe te pone tat, afr stn the filo outcgh hehe cots The ot seep vs reed econ md nda ization, Yet even this prolern could he effectively minimized. th — “igerous goverament policy, Ifelforts were made to. re ‘omen monitor oer mons taal enn a itera and t pro vide goverament subsidies fr revearch and development ert Sectors, it shuld be posible Yo create Rental equvalents tothe imedemiingpresre of international trad isthe poli aby of sich asstem that seems most prob- lematc. Important sestors of the eapealst clas would likely exert tressaretoesabish a more pen system sothat they cou take avan- tase a foeign business oppertuniies aud eqin their freedom to send ‘itl abred A the sme time there would Kiely be pressure from the left for thestt'itewention nthe economy tobe expanded even futher, While those pressures might balance i the short term, they would probably become explosve over the longterm. It seems that ‘rain fll emplorment ard to maragefereigntraleoptially. here Sreuld have tobe a tay enpaneon in the pear and ste othe state Somer or her, this expansion well be peresved a threatening to verbs the already attenuated private vector. ad this cul easly ener amore intense stage between the temaives ofa return To literal eaptatsin or the elimination of the private sector: Since a ‘eura to liberal capitals would tveaten the security ofthe working ‘as tis corceable that the plial Fores 6 fv a he lini tion of the private sector woul trip, 19 sam, isaltogeter pos ‘le that national eats wold serve simply’ as a stopping point on the ma to seme type of socials.” ‘nayzing the vabiity of natinal aptals is vot simply an academic eres, Although litle wis actualy done before World War to implement national eepalism, there is good reason to believe that aftr the war there might have been substantial experiments with rational caption among the developed pial counties Init in the immediate pacar year, mont af the covntresof Western Europe sorted tothe whole range afcontal devices assoeiated with national Copii exchange contol capital contol, bibteral and state tering arangcwents The rston these conte were aot elborsted lito fallscale experiments wi matina aptalnn ws tha it boca ‘central am of United Sats foreign policy to prevent the emergence ‘of national captalt experiments ard to gle Sklespreal cooperation {in the resontion ofan open world economy. When one observer ‘wrote in 1944 “The United States i eet 8 concems leadership, ‘very nearly singe-harded, trying to reverse the whole trend of poy tnd practice of the world at age in the field of economic relations since 1914, and especially inthe dite years since 1928. he was refering precisely to the effrt to restore an open world economy aginst the powerful dit of other sountrics toward + national uti tht vould impose severe resttiony on intersted economic trations ‘The side by the United States to restore an open work comnomy aet Work War It enowuntered srtous rsste both at home and sbmad, but United Sates policy-makers ope ¢ sees of brilintpolita espedtents to outmaenver ther opponents, By the ‘te 18505, the efons to extablnh anew intematinal manetary onder that was charatxzcd by a high level of openness were crowned ith success, and te threat posed by nation eaptasm had been largely, limieated. Bat ty enderstand the American strugle to restore ay hen world ccwno, ss necessary to know what the United States ‘ex suing sunt. 1 on this isive that the Cold War his ser ‘sly stored much historeal aass of the post World War reread ‘he trdiional Cold War perspective obscures the fact tha {eth before ané afer the intesifeatan ofthe Cll War, the stragle te Prevent the emergence of national capitalism in Westors Ensue wsscentrl to US, foreign plicy Tn short, Amerian plcy alors ete more concerned about national capital in Western Europe than they Were with a posite vation by the Red Army x sccefl {ecilit revlution, OF couse, the atugale again tim expats auc the conflet with Soviet Gamera were linked. Fis, the threat ol national extalim was greatest im these coueres where the Kft Ri strongest nd twas Feared tha matiena epialise woull nny bea tration soil, Second, twas thought tha! natin ope {tlie regimes would be sulserable to polical domination "Fee lundivation”—by the Soviet Union because of their tendoney to ‘velop trae aad rendship tiesto the Soviet Union. But the pot ‘tuuns that onecersuy to place the Cal Wari the conte ofthe ‘American sto create a certain type of worl economy, Tht persestve shapes the emphasis my sty. My fei on the elation between Western Europe and the United States bor ‘tse thse ates were the toward other parts ofthe worl, partion. Br¥ toward the mderdevcloped counties ertnately, this onion Jeittsetions: conse a number of rece studies hve explored ft darth the imps of dhe United Statesdsigned Intemational nonetan: order on the fortes of Thiet Weeldwatens PART I. The Making of an International Economic Order TWO. The Decline of the Nineteenth-Century Gold Standard ‘The fteritional monetaydivrdor ofthe interwar years shaped the ‘loa and strategies ef the men whe seh, dorng Workd War Io pln fora diferent postwar worl. The disorders fe 1980s and 1590s were rooted in the flr vestore the gold sland after Wek Wat 1, The efor led becuse tested aa the assumption that simply restublshing the gol! stasdard rides wouid automaticaly brig a return of the international monetary stabilty ofthe “golde age” be tween 1875 and 1914." However, the relative stability ofthat earlier fre had been based on a pariclar polsieal ant ecmomc at Beitun's dominant iterational positon aad special in organising the international monetary onder. As tht dominw began to slip, the interaational monetary order that rested on it also began 1 deline. Aor Work! War I, Grea Britain’ minted Internationa postion made it imposible Fr her te exercise fective ‘international monetry leaership, and oo ster contry was ling to sssumne Brin’ responce The Period of ttemational economic chao, and thi chant gare rise ‘tnded dicusrons of eterational monetary reform ‘THE GOLD STANDARD AND BRITAIN ‘The nnetcent-century gold standard can be understood ony in sea- ion to Bats unique role in aineteenth-ceatury world como. I ‘ra not simply that Britain proved the loxg.erm and short-term ‘itl necessary to keep thesystem going, bt thatthe spetic eval tos of the world economy in the nineteeath century was integrally related to Brian's own economic development. Ax the works strongest industrial and mereatile power. Britain used is diplomncy and milituy strength ta create word sconeny that give mast freedom to trale and investment. The golltandard mechanism 0 sured freedom of trae ara the seer of foreign investment, The 2 Decline of the Gold Standard 13 se af tertng a the ma international currency andthe pivotal ole of rich bankers wore n tar indications ofthe success of Briain in aking the entre world its trading area? ‘Because Britsin benefited the most from the openness of the sinetecnth-cntury word ecomomy, wae logical fr her to tke the {nos responablity to make the sytem woe While French and Cer. tran asters oer insite that reipents of foreign loans buy French ‘or German gods, Bit bakes oftached a0 sues comin boewuse ‘thelr contdence that, nthe Lng ee, they woul bevel, regard fess of where the nuney was spent® When Britain fice x bance > payments defi, the Bark of England simply rls the bank ate Incveasing British domestic terest rates. This drow short term capital from the rest ofthe world and sled the outflow of mew capital. I sften als slowed the pace of economic activity in Britain, resting in inerewsed unemployment But ths was a price the British tankers / were wing t pay to keep the intersatiol system working: and ‘ven the extreme depondesce of British capitals cn the health of the worl econary, thie war logical safe. The fat that Brain imported wore than she exported daring och ofthis period. while Iogear an ln aticn wth Reited natural resources. was aso important fr the Bealth of the world comomy. Tt provided ther counties wi a mean to ear sterling wile continually expanding he site ofthe wer market ‘ut Brats econonbe supremacy was both the strength and the Wweaktess of the sineteenh-century gold standard As Brits ‘ccnomie lead dimisshed withthe rise of American German com Petition, 30 to did the sturdiness ef the gld standard. The actual Inechanism continued to function wp andl the expan of World War bat sigs af istbity began ‘0 sppeat lng before that Tater atonal progress toward frer trade was dramatic inthe pried from 1 to 180, but then came ton ends country ter coustry began imposing trifle t protnet enentia industries. The rsh by the Euro pean power tedide Area the end f the ansteeth century was ‘is that Betas imperiliom of re tad" wat onthe decline. Mest ‘giant, the inenaifing economic aed pti rivalry between Brain and Germany mean that "the lose federation of independent porert that had dominated Europe since the Congress of Vian wa Feplaced by “wo hate power groupings the balance of power asa naw come to an end re was no dice ers the gl standard fn the 14 Decline of the Gold Stondard peri immeitely yroceding World War «system tht was cone tered in Britain was obvious of guestimuble appropsatenes toa worl incressingly divided into hostile allances* There abo er dence that afer 1990 the Brits bad begun to abuse the nique sale | the international monetary order. The Bish seem to have wsed er aily rn beso detested sh cna athe ar of te ‘eesti tom shih woul er ner Methane ‘raed he tit and, a oa ee int ter centcn Ti lt aa dae a deieed mts det opments resin kee trl Wheto ounces Scultcetan quanto ty sacs ak ‘Monet ad ce don te pl nao nee Simul ited oo lym al ae ‘ree bud o alls Gur hele erste Sooner ‘lar Brun dcithedie amongst igi paiement oll naa ‘THE IVTERWaR YEARS {th tsa te wy, rs were un rete th wang te tantra train ell sh nea ea ‘itn bre teu te Brasilien ‘a cok she ad plysin peer nee ah Si a em a eee saa rrr to te van veneer a Ss thawh Se weno dtu he ae ‘non fectbemetay asin preach treo pane the ange cumsaeey Sore eae siting tration womtaysyacateas a carne sou topestn bene Fenton sh mf stn vs ne sine marine ea abernah efor Reece ‘vary sve nestor acon cna dls Sod fom ew ea eee ‘cy mtn tu te eae Devil of Europe-wide las confit since the revolutions of us, Decline of the Gold Standard 15 ited exchange rates, for eurency as inthe prewar prio, were net possible. Most eutrenles wee allowed to lat—their exchange rates relative to other currencies were determined by the foregn exchange market withont a fied gold party. This experiment in Noatng ex change rates was accompanied by massive movements of Might capital and intense speculative pressure against weaker currencies? For advontes of gold sundarl restoration, the monetary chaos of the carly tention simply teafowed thei vew that Europe badly weeded the stra discipline ofthe gold stndanl and Bs exchange ‘ahs aberentnl caRopar om eset poole mold ‘Srvernmont to uke stops te halt ifation, inching to blarctng of ioverinentl budgets In addon, a munber of wieana were deve! {o buld up nitlonal uonetary reserves to levels at which the curven- ‘cfs ould be stabized in elton to gol. But since toa gol supplies appeared nsuliest to provide adequately large reserves fr al ofthe Exropesn counties, a deliberate efor sas made to subsite cur ene) reserves for gold! Au some countries did significantly increase the share of thee reeves held in the fra ef lances in foreign ‘counties, particulaly in Bras! In addition, e eres of stabization Toans were ated by consortia of private and ental aakers to pre= vide additional resaurces to support aew goé purities in a number of ounires, Even with these measoes the stabilization of Eoropean furrences in relation to gold dragged on through muh of the 120s the German ark wor dabilsd io 194, the pour in 1995, the French fame in late 1026, and others even Mor ‘Ones tablistion fs Soren eppoted peel sai pth lem cierged At what exchange rate shoul! dhe ewrency be fued? As Toagas other currencies were tll uctuatng wily, was dale 1 ccculate an exchange rate that would balance a county's accounts, ‘eturning tothe prewar rates was ununaginible or the countries of ccntineatal Europe because inflaton had reduced these currencies toa Fraction of their prewar values. But sone cureacies, partiality the ota, had remained unchanged in their gold values since before the war. This meant that severe deflation would be necessary before high- ‘inflation countries could stabilize at anew parity, or ee ther curren cies woald be wildy undervalued. There were also polite nis the amount of deflation that could be tolerated. France and Belgium, foc exanpl, cased ont extremely pina deflation bat will end up fing new partes ha lef ther eurenses cba underraled ‘The undervalaing ofthe French Ge, in particular, would sone 16 Decline of the Gold Standard te later international insabiity by creating the asian of French fi racial streng® “The Bris reaponded to the dilemma of

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