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From Benign Neglect to Malignant Preoccupation: U.S. Balance-of-Payments Policy in the 1960s

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Barry Eichengreen

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Abstract

U.S. balance-of-payments problems in the 1960s remain poorly understood. In this paper I argue that they had two aspects. On the one hand there was a problem of real overvaluation, evident in the erosion of the current account and reflecting the reluctance of the Fed, the Executive and Congress to subordinate domestic political and economic objectives to balance-of-payments goals. In addition there was the systemic aspect, that the main source of international liquidity for the expanding world economy was dollar balances. The role of the United States was to act as banker to the world, borrowing short and lending long. But just like a bank providing liquidity transformation services, the U.S. was vulnerable to a depositor run.' So long as foreign central banks, concerned to preserve the Bretton Woods System, stood ready to support the dollar, they provided the equivalent of deposit insurance. But unlike a classic lender of last resort, their willingness to do so was limited. When that limit was reached in 1971, the dollar -- and the Bretton Woods System -- came crashing down.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7630.

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Date of creation: Mar 2000
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Handle: RePEc:nbr:nberwo:7630

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  1. Lindert, Peter H, 1971. "The Payments Impact of Foreign Investment Controls," Journal of Finance, American Finance Association, vol. 26(5), pages 1083-1100, December. [Downloadable!] (restricted)
  2. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August. [Downloadable!] (restricted)
  3. Kenen, Peter B, 1973. "Convertibility and Consolidation: A Survey of Options for Reform," American Economic Review, American Economic Association, vol. 63(2), pages 189-98, May. [Downloadable!] (restricted)
  4. Andrew Levin & Chien-Fu Lin, 1992. "Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties," University of California at San Diego, Economics Working Paper Series 92-23, Department of Economics, UC San Diego. [Downloadable!]
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  5. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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