The Dollar and the International Monetary System

By Arthur F. Burns

Summary

Arthur F. Burns delivers a sober diagnosis of the dollar’s slide in foreign exchange markets between September 1977 and late 1978, framing the question as one of consequence not only for Americans but for every economy that holds dollar-denominated assets or trades in dollar-priced commodities. He organises the address around four questions: how the dollar has actually performed against the currencies of the ten major industrial countries since the move to floating rates in 1973; why it depreciated so sharply in the recent two-year period; what prospects exist for improvement; and how a more stable international monetary system might be built in the years immediately ahead. The originating venue is the American Enterprise Institute; the Forum of Free Enterprise reproduces the lecture for an Indian readership.

On causes, Burns refuses any single-factor account. Central banks bought more than $40 billion in defence of the dollar from early 1977, yet failed to arrest the underlying decline; interest-rate differentials that had moved in America’s favour failed to attract private capital; and the trade balance deteriorated to a $31 billion deficit in 1977. Above all, accelerating American inflation — rising from 5 per cent in 1976 to over 9 per cent by September 1978 — combined with rhetoric from Washington implying that a weaker dollar would help exports propelled the outflow of capital and confirmed pessimistic market expectations. He argues that depreciation overshot what relative price trends alone would justify, that the doctrine of competitive depreciation has lost favour within the US government, and that protectionist temptation, if indulged, would compound damage on a worldwide scale.

On remedies, Burns assigns the United States primary responsibility for monetary stability but insists the burden is shared. President Carter’s December 1977 dollar-defence measures, sharper discount-rate action by the Federal Reserve, gold sales by the Treasury, energy conservation legislation, and a tax bill that breaks with granting reductions only to low-income groups together signal a political turn toward fiscal conservatism and disenchantment with inflation. Surplus countries — particularly Germany, Japan, and the OPEC cartel — must also conduct themselves responsibly, resisting the urge either to suppress appreciation of their own currencies or to inflict further oil-price shocks. The structural answer Burns advances is a strengthened International Monetary Fund: under its amended Articles of Agreement the Fund now has firm surveillance authority over exchange-rate policies, and national governments must support its prestige, accept its conditions without preferential treatment, and treat it as the institutional vehicle for advancing a rule of law in international monetary affairs.

The booklet closes with the standard Forum disclaimer that the views are not necessarily those of the Forum, an epigraph from Eugene Black on private enterprise as an affirmative good, and the dateline 12 October 1979 over an M. R. Pai imprint.

Key points

• Frames the dollar’s decline since September 1977 as a problem for the entire international economy, not only for the United States, because the dollar is the invoicing currency of international trade, the principal currency of international capital markets, and the dominant reserve asset for central banks.

• Documents large dollar fluctuations under floating rates since 1973, with the dollar losing about one-fourth against the Deutsche mark and about two-fifths against the yen and Swiss franc between early 1977 and late October 1978.

• Refuses monocausal explanations: more than $40 billion of central-bank intervention since early 1977, higher US short-term interest rates, and a rapidly deteriorating trade balance (a $31 billion deficit in 1977) failed to halt the slide because accelerating US inflation and Washington rhetoric favouring depreciation undermined confidence.

• Rejects the conventional doctrine that a depreciating currency benefits a country’s foreign trade, calling it a dangerous guide for the country whose currency is the centrepiece of the international monetary system.

• Catalogues the Carter administration’s December 1977 turn: vigorous swap arrangements, repeated discount-rate increases to the highest level in Federal Reserve history, Treasury gold sales, energy legislation, an export-promotion programme, and a wage-and-price moderation policy.

• Reads the 1978 tax revolt and the new mood of fiscal conservatism as a political shift favouring capital investment, productivity, and inflation control — though noting that the budget deficit and money-supply growth remain powerful inflationary forces.

• Argues that surplus countries (Germany, Japan, the OPEC cartel) share responsibility, must not resist underlying appreciation of their currencies, and must avoid new oil-price shocks to the international economy.

• Advances a strengthened IMF — with new surveillance authority over exchange-rate policies and stern conditions on its lending — as the institutional vehicle for a rule of law in international monetary affairs, urging that national governments give it strong support and expect no preferential treatment.

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