72 International Organization balance-of-payments deficit by issuing more IOUs,which other countries would add to their reserves,whereas other countries would be sharply limited by the amount of reserves they had available. This contention,which has adherents in the United States as well as abroad,is interesting for its implicit acceptance of a regime of fixed exchange rates,or alternatively its implicit assumption that a depreciation of the currency of a country pursuing expansionist economic or high-spending foreign policies would be unacceptable to the public and would compel retrenchment of those policies.The latter assumption is exceedingly doubtful,at least as applied to the United States. Indeed,the improvement in international competitiveness resulting from devalua- tion of the dollar is more likely to be welcomed in our still mercantilistic world, and was indeed even hailed as a victory when the Nixon administration achieved a devaluation in late 1971.And the assumption of fixed exchange rates is of course unwarranted in today's world. It is arguable that far from gaining greater room for maneuver for its policies, the United States in the 1960s was,if anything,inhibited in its policies by the reserve currency role of the dollar,for the government ruled out devaluation as an acceptable measure (partly on grounds that because of the reserve currency role of the dollar,an effective devaluation could not be achieved,since other countries would simply devalue their currencies as well)and instead took a number of steps to protect the dollar that actually ran against its domestic economic or foreign policy aims.This was true of such measures as maintaining relatively high interest rates during the 1960-61 recession,reducing and tying foreign aid,and restricting outflows of capital from the United States.This much can be conceded to the point,however:the reserve currency country can never find itself in the financially desperate straits that other countries can,with no alternative but to cut expendi- tures abroad quickly and drastically;it always has automatic access to short-term credit. A more subtle distributional effect arises under a reserve currency regime, with possibly powerful effects inside the reserve currency country as well as inside other countries.With foreign acquisitions of the dollar,the United States could run a larger balance-of-payments deficit(measured in conventional terms)than would otherwise be the case.Or to put the same point a different way,the dollar could command more units of foreign currency than would otherwise be the case.By the standards of any alternative regime,the dollar would be overvalued and other currencies would be undervalued.Overvaluation of the dollar means that American exports are less competitive (and imports more competitive)than they would otherwise be,and this in turn implies that factors of production heavily engaged in the foreign trade sector would experience a smaller demand for their services than 6 As James Tobin,writing in 1964,put it:"if the financial ship has weathered the storm [of the dollar crisis],it has done so only by jettisoning much of the valuable cargo it was supposed to deliver."See his "Europe and the Dollar,"Review of Economics and Statistics 46 (May 1964):123. This content downloaded from 211.80.95.69 on Mon,24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions
72 International Organization balance-of-payments deficit by issuing more IOUs, which other countries would add to their reserves, whereas other countries would be sharply limited by the amount of reserves they had available. This contention, which has adherents in the United States as well as abroad, is interesting for its implicit acceptance of a regime of fixed exchange rates, or alternatively its implicit assumption that a depreciation of the currency of a country pursuing expansionist economic or high-spending foreign policies would be unacceptable to the public and would compel retrenchment of those policies. The latter assumption is exceedingly doubtful, at least as applied to the United States. Indeed, the improvement in international competitiveness resulting from devaluation of the dollar is more likely to be welcomed in our still mercantilistic world, and was indeed even hailed as a victory when the Nixon administration achieved a devaluation in late 1971. And the assumption of fixed exchange rates is of course unwarranted in today's world. It is arguable that far from gaining greater room for maneuver for its policies, the United States in the 1960s was, if anything, inhibited in its policies by the reserve currency role of the dollar, for the government ruled out devaluation as an acceptable measure (partly on grounds that because of the reserve currency role of the dollar, an effective devaluation could not be achieved, since other countries would simply devalue their currencies as well) and instead took a number of steps to protect the dollar that actually ran against its domestic economic or foreign policy aims. This was true of such measures as maintaining relatively high interest rates during the 1960-61 recession, reducing and tying foreign aid, and restricting outflows of capital from the United States.6 This much can be conceded to the point, however: the reserve currency country can never find itself in the financially desperate straits that other countries can, with no alternative but to cut expenditures abroad quickly and drastically; it always has automatic access to short-term credit. A more subtle distributional effect arises under a reserve currency regime, with possibly powerful effects inside the reserve currency country as well as inside other countries. With foreign acquisitions of the dollar, the United States could run a larger balance-of-payments deficit (measured in conventional terms) than would otherwise be the case. Or to put the same point a different way, the dollar could command more units of foreign currency than would otherwise be the case. By the standards of any alternative regime, the dollar would be overvalued and other currencies would be undervalued. Overvaluation of the dollar means that American exports are less competitive (and imports more competitive) than they would otherwise be, and this in turn implies that factors of production heavily engaged in the foreign trade sector would experience a smaller demand for their services than 6As James Tobin, writing in 1964, put it: "if the financial ship has weathered the storm [of the dollar crisis], it has done so only by jettisoning much of the valuable cargo it was supposed to deliver." See his "Europe and the Dollar," Review of Economics and Statistics 46 (May 1964): 123. This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions
Choice of a monetary system 73 would otherwise be the case.The factors used relatively intensively to produce nontraded goods and services,on the other hand,would be relatively better off, assuming that conditions of full employment are maintained.For an economy as complex as the American one,it is not entirely clear which segments of society constitute these different groups.But it is a fair conjecture that an overvaluation of the dollar would penalize American farmers and the skilled workers in American manufacturing.It is no coincidence that organized labor in the United States became more protectionist during the period of growing deficits (financed by foreign "lending"to the United States through the acquisition of dollars)around 1970,and that this protectionist sentiment diminished somewhat after two devalua- tions of the dollar. By the same token,a reserve currency regime with fixed exchange rates permits other currencies to be undervalued and thus permits other countries to enjoy export-led growth.?For the same reason as that given above,those factors of production engaged relatively heavily in the foreign trade sector,both producing exports and producing goods that compete with imports,will benefit from this arrangement,while others will suffer.Little can be said in general about this,except that the owners of land from which primary products are produced in exporting countries will generally benefit from such undervaluation of their currency. Yet another distributional effect arising under a reserve currency regime involves the special status it is thought to confer upon the reserve currency country. Considerations of status leave economists somewhat baffled,since it is not clear what tangible or intangible benefits flow from it,apart from the feeling of high status itself.s But there is little doubt that the reluctance of some Britons to shed the reserve currency role of sterling arose from status considerations as well as from the business they thought sterling brought to the City of London,and President de Gaulle and his followers both coveted and resented the special status they thought the international role of the dollar conferred upon the United States. Other regimes also have distributional effects,but it is not always clear what they are.For example,inflation tends to redistribute real income away from those whose incomes do not respond fully to the rate of inflation,so that any influence of an international monetary regime on the rate of world inflation would have distributional effects,at least in the medium run.But there is no general agreement on whether a regime of fixed or of flexible rates is likely to be more conducive to inflation,or even on whether the substitution of SDRs for gold as international reserve assets will in practice be more conducive to inflation.Thus little specific can be said about these effects. 7For an explanation of how this occurs,see Richard N.Cooper,"Dollar Deficits and Postwar Economic Growth,"Review of Economics and Statistics 46 (May 1964):155-59. sBut see the discussion of status in a related context in Frank and Baird's essay in this volume. With evident resentment,de Gaulle wrote of the "monumentally overprivileged position that the world had conceded to the American currency"(Memoirs of Hope:Renewal and Endeavor [New York:Simon Shuster,1971],p.371). This content downloaded from 211.80.95.69 on Mon,24 Jun 201304:23:40 AM All use subject to JSTOR Terms and Conditions
Choice of a monetary system 73 would otherwise be the case. The factors used relatively intensively to produce nontraded goods and services, on the other hand, would be relatively better off, assuming that conditions of full employment are maintained. For an economy as complex as the American one, it is not entirely clear which segments of society constitute these different groups. But it is a fair conjecture that an overvaluation of the dollar would penalize American farmers and the skilled workers in American manufacturing. It is no coincidence that organized labor in the United States became more protectionist during the period of growing deficits (financed by foreign "lending" to the United States through the acquisition of dollars) around 1970, and that this protectionist sentiment diminished somewhat after two devaluations of the dollar. By the same token, a reserve currency regime with fixed exchange rates permits other currencies to be undervalued and thus permits other countries to enjoy export-led growth.7 For the same reason as that given above, those factors of production engaged relatively heavily in the foreign trade sector, both producing exports and producing goods that compete with imports, will benefit from this arrangement, while others will suffer. Little can be said in general about this, except that the owners of land from which primary products are produced in exporting countries will generally benefit from such undervaluation of their currency. Yet another distributional effect arising under a reserve currency regime involves the special status it is thought to confer upon the reserve currency country. Considerations of status leave economists somewhat baffled, since it is not clear what tangible or intangible benefits flow from it, apart from the feeling of high status itself.8 But there is little doubt that the reluctance of some Britons to shed the reserve currency role of sterling arose from status considerations as well as from the business they thought sterling brought to the City of London, and President de Gaulle and his followers both coveted and resented the special status they thought the international role of the dollar conferred upon the United States.9 Other regimes also have distributional effects, but it is not always clear what they are. For example, inflation tends to redistribute real income away from those whose incomes do not respond fully to the rate of inflation, so that any influence of an international monetary regime on the rate of world inflation would have distributional effects, at least in the medium run. But there is no general agreement on whether a regime of fixed or of flexible rates is likely to be more conducive to inflation, or even on whether the substitution of SDRs for gold as international reserve assets will in practice be more conducive to inflation. Thus little specific can be said about these effects. 'For an explanation of how this occurs, see Richard N. Cooper, "Dollar Deficits and Postwar Economic Growth," Review of Economics and Statistics 46 (May 1964): 155-59. 'But see the discussion of status in a related context in Frank and Baird's essay in this volume. 'With evident resentment, de Gaulle wrote of the 'monumentally overprivileged position that the world had conceded to the American currency" (Memoirs of Hope: Renewal and Endeavor [New York: Simon & Shuster, 1971], p. 371). This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions