United States Payments with Foreign Countries
The position of the dollar as an international reserve currency – de iure before, but also de facto after the Smithsonian agreements and, subsequently, the fall of the Bretton Woods system and the advent of generalized exchange rate fluctuation – explains the particular interest. the evolution of the American balance of payments. The years immediately after the war, in which the productive capacity of the American economy was incomparably superior to that of almost all the other industrialized countries, to a large extent forced to face serious problems of reconstruction, were characterized by the so-called “scarcity of dollars “(dollar shortage). In the 1950s, the position of the American currency was substantially strong, although gradually competition from the main European countries and Japan, also following the exchange rate readjustment in 1949, began to be felt. However, real difficulties for the US balance of payments only began to emerge in the 1960s.
Right from the mid-1960s, the losses of monetary gold in the USA, deriving from requests for conversion of dollars by the central banks of other countries, showed a sharp increase, leading to conditions of uncertainty and tension on the private markets for the yellow metal. In October, the market price of gold rose to $ 40 an ounce, compared with $ 35 an ounce. In 1961 the gold market returned to normal conditions, also following the agreements between the central banks of the main countries which resulted in the creation of the so-called “Gold Pool”, and until 1968 there would be no recurrence of crises. The events of the 1960s, however, had a considerable psychological impact, attracting the dollar glut). Already during the recession phase of 1960-61, the measures to revive the domestic economy had thus taken into account the constraint of foreign payments. In particular, the “operation twist” (operation twist), aimed at determining, on the one hand, through transactions in securities of different maturities, a relative increase in short-term interest rates to discourage short-term capital outflows caused by the higher interest rates recorded in European markets (it should be remembered in this regard that in those years the Eurodollar market on this side of the Atlantic began to expand at a very rapid pace), and on the other hand, the relative fall in long-term rates that should have stimulated investment spending fixed. As regards the current account, a series of export promotion campaigns began, while measures were taken to reduce the currency burden resulting from stationing US military forces abroad and to link to the purchase of American assets much of the bilateral aid granted by the United States. In order to curb the persistent severe currency hemorrhage resulting from capital outflows, limits on interest rates paid on term deposits by US banks were first raised and then, in 1963, an interest equalization tax on purchases was imposed. by American residents of securities issued by borrowers located in industrialized countries.
However, the deterioration in the US foreign payments position became evident and unstoppable when the surplus of commercial and, more generally, current transactions began to contract rapidly, in the second half of the 1960s, to quickly turn negative. A preponderant role in this evolution is played by the sharp acceleration of American imports: the ratio between the annual rate of change of imports and that of the gross national product, in value, was on average equal to 0.9 between 1950 and 1964, but it doubled in the period 1965-71. The trade balance, which had represented the traditional element of strength in the American balance of payments, thus became negative in 1971 by as much as 2.3 billion dollars. Multiple explanations have been put forward for the continuing deterioration in the US current payments position. There is no doubt, for example, that the considerable strength of domestic demand and the long period of sustained cyclical expansion in the second half of the 1960s contributed to this process. More generally, the interaction of inflation from demand and costs had led to a gradual loss of competitiveness of the American economy, accentuated by the enormous, rapid development of production capacity in the main industrialized countries, which had allowed them to cover areas, even technologically advanced, market that were previously dominated by American manufacturing. The strong expansion of the
The substantially expansionary monetary and financial policy pursued in the second half of the 1960s ended up irreparably undermining the dollar’s position, despite a series of administrative measures adopted by the monetary authorities, consisting, on the one hand, of restrictions on capital outflows and, on the other, other, in measures aimed at limiting the requests for conversion into gold of assets in dollars accumulated by the main industrial countries. These measures were not sufficient to prevent the gold market crisis of March 1968, when following the strong speculative demand for gold on the market, the Pool decided to refrain from sales on the free market, thus giving rise to the double gold market and sanctioning a de facto inconvertibility of the dollar. The highly restrictive monetary policy adopted in 1969 and the consequent considerable inflow of short-term funds, particularly through the banks operating in the Euro-dollar market, and, in 1970, the recession, with the favorable cyclical rebound on the trade balance, made it possible to postpone the crisis. The situation worsened in 1971 when cyclical and monetary factors created conditions in which speculative forces could operate, accelerating conclusions now inevitable. During the first months of 1971 the central banks of the main industrialized countries intervened for very considerable sums in defense of the dollar, without however being able to stop the tide. The situation became unsustainable in May: in the first two working days of the month, the Bundesbank, alone, it had to accumulate reserves at the rate of one billion dollars a day and therefore decided to close the foreign exchange markets. The depreciation of the dollar against stronger currencies could only restore a temporary calm. At the beginning of August, the flight from the dollar resumed on a global scale and on Sunday, August 15, President Nixon announced the suspension of the convertibility of the dollar, simultaneously imposing a 10% surcharge on major imports into the United States. The generalized fluctuation in exchange rates that followed ended only with the Smithsonian agreements of December 18. On the basis of these agreements, the monetary authorities of the main countries decided on a realignment of exchange rate relations. The dollar, in particular, suffered an “effective” devaluation, that is, weighted against other currencies, equal to 9% with respect to the parities in force on May 5, while Congress was recommended to devalue it by 8% against gold. However, the US currency remained non-convertible.
The realignment of parities was intended to give new breath to the fixed exchange rate system; however, events would have shown that these hopes were unfounded. The devaluation of the dollar was too small compared to the existing imbalances; moreover, its short-term effects had perverse results on the trade balance due to the delays with which exports and imports react to a new configuration of relative prices. Finally, the domestic economic policy of the USA continued to prioritize domestic stimuli to overcome the consequences of the recession. In these conditions, already at the beginning of 1973, the tensions on the foreign exchange markets were once again unbearable. Germany, in particular, in the first seven working days of February it was again forced to intervene at the rate of 1 billion dollars a day. After a temporary closure of the foreign exchange markets, the USA announced a further 10% devaluation of the dollar on February 13th. Confidence in the fixed exchange rate system, however, had now vanished, among the public, but also in the central banks that would have had to accept the “rules of the game” imposed by the Bretton Woods system. With the reopening of the foreign exchange markets, therefore, new strong speculative pressures on the dollar were rekindled. The currency markets were closed again on 2 March to reopen only on the 19th of the same month: after a long series of discussions among the monetary policy makers of the main countries, the new exchange rate fluctuation system was accepted,
The American balance of payments naturally suffered the repercussions of the increase in the price of oil in 1974, but in 1975 the combined effects of the recession, the increased competitiveness of American goods and the interest of Arab countries to invest in the US financial market, led to a strong improvement in US foreign payments despite the dismantling of the capital outflow restriction measures, which began in 1974. The dollar strengthened, continuing in 1976, despite the renewed weakening of the current account.
However, in 1977 and 1978 the downward pressure on the American currency returned, which depreciated by 15% over the two years. The current balance which had become heavily negative, the failure to implement an incisive energy policy, the acceleration of domestic inflation caused a crisis of confidence in the dollar, which could only be stopped in November 1978, following the announcement of a series of measures designed to support the external value of the currency. The package included not only traditional monetary and, eventually, fiscal restraint measures, but also the massive mobilization of financial resources for direct intervention in the foreign exchange markets, in collaboration with the Japanese, Swiss and German monetary authorities. The announcement and benign neglect substantially followed by US authorities over the previous decade.