World debt crisis: postwar perspective

For a turbulent decade, international monetary affairs have operated within what Richard N. Cooper dubs a ''nonsystem.'' Yet, the Harvard economist says, ''It has served the world economy rather well.''

Moreover, if Federal Reserve governor Henry Wallich is right, that nonsystem is likely to be around for a while. Before the 1983 economic summit in Williamsburg, Va., French President Francois Mitterrand suggested a major conference to draft a new international monetary system. The basic idea was to bring more order into this nonsystem. But his proposal has not gone anywhere.

''I would not pack my suitcase,'' said Mr. Wallich, a member of the Federal Reserve Board, who follows international monetary affairs most closely.

Beryl W. Sprinkel, Treasury undersecretary for monetary affairs, won't rule out such a conference. But he notes it took ''many years'' to organize the conference at Bretton Woods, N.H., which established the postwar international monetary system. He sees no prospect for a conference ''at present.''

Economists and officials sometimes have something of a nostalgic feeling for the system, created 40 years ago this month when the top financial officials of 44 nations met at Bretton Woods.

Echoing Professor Cooper, Frank E. Morris, president of the Federal Reserve Bank of Boston, has noted that the Bretton Woods system also ''served the world very well for a quarter of a century.''

That system broke down between 1971 and 1973. The fixed-exchange-rate system, with most currencies pegged to the United States dollar (and the dollar pegged to gold at $35 an ounce), was replaced by a mixture of ''floating'' exchange rates - where the demand for and supply of a currency determine its prices - and fixed or semifixed exchange rates. The European Community nations, for example, have semifixed exchange rates among themselves but float against the dollar. The Canadian dollar floats against the US dollar, but the Bank of Canada frequently intervenes in the foreign-exchange market when it doesn't like what the market is doing to the Canadian dollar. And many developing countries fix the value of their currencies against the US dollar, though often with frequent or even regular devaluations.

So the postwar world has experienced both a system and a nonsystem that at least work.

John Williamson, an economist with the Institute for International Economics, comments, ''I haven't been quite so impressed by either of them.''

Mr. Cooper, who was top economist in the State Department in the Carter administration, says: ''The present set of monetary arrangements, while not in any immediate danger of collapse from their intrinsic features - as distinguished from some external, unforeseen event - is not stable in the long run. It is not a durable system. It must evolve into something else. It must be 'reformed.' ''

Reform of the international monetary system, involving so many countries with varying interests and so many individual opinions, does not happen overnight, however. The creation of special drawing rights (SDRs), a sort of international currency for national finance ministries and central banks, took at least four years of study and negotiations before approval by the International Monetary Fund at its annual meeting in Rio de Janeiro in September 1967.

I covered that meeting for the Monitor and wrote about how its passage seemed so routine that many of the central bankers and finance ministers didn't notice it. Erik Brofos, governor of the Bank of Norway, intoned: ''Hearing no dissent, I declare the resolutions approved.'' There was only mild applause for this greatest monetary reform since 1944.

At that time there were great ambitions for the SDR. It was thought that to a large extent it would replace the US dollar as a reserve asset. It would give mankind a way to control its monetary environment. The world would not depend on the flukes of gold discoveries or the uncertainties of US international payments deficits to obtain the monetary reserves that enable a nation to weather an imbalance in its balance of payments without having to adjust its domestic economy too rapidly.

But so far it hasn't worked out as hoped. The US buried itself deeper in the Vietnam war and the ''War on Poverty.'' Lyndon Johnson, then President, refused to ask for the tax increases necessary to finance these activities properly. There were large budget deficits (by the standards of those days), and the Federal Reserve System created a lot of money.

In fact, the world was flooded with dollars. An initial increase in SDRs was created in 1968, but there was no real need for them.

Under the fixed-exchange-rate system of Bretton Woods, other nations could either pile up unwanted surplus dollars in their reserves, revalue their currencies upward, or persuade the US to devalue the dollar. Each alternative had both political and economic consequences. The resulting international hassle reached a climax in August 1981 when the US officially announced it would no longer exchange gold for surplus dollars held by other nations. Several months of negotiations produced the Smithsonian agreement on a new set of parities involving revaluations of the West German mark and some other currencies and devaluation of the dollar in terms of gold.

I remember slipping away from the waiting press in the Smithsonian Aeronautics Museum to make a phone call to my office. When I tried to return, to my chagrin the Secret Service kept me out. Then-President Richard Nixon had arrived to make the announcement of this next phase in the breakdown of the Bretton Woods system.

It fell apart further two years later when massive capital movements out of the dollar and into marks prompted West Germany to float its currency. OPEC's quadrupling of oil prices later in 1973, high world inflation, and subsequent ''shocks'' to the system have meant there has been no serious consideration of a return to fixed exchange rates between the US dollar and its major trading partners. The nonsystem has prevailed.

In effect, within the greater economic uncertainties of the past decade, a choice of an exchange-rate system - floating, semifixed, or fixed - has given the governments of individual nations a greater freedom to conduct domestic economic policies of their own selection. For the idealist with aspirations for greater internationalism, this may be retrogressive. To the governments involved , the flexibility has been a matter of pragmatism.

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