The Borrower of Last Resort: International Adjustment and Liquidity in a Historical Perspective

The stability of the international monetary system hinges on a dominant country acting as an international lender of last resort, injecting liquidity by recycling surpluses to countries facing balance of payments problems. The efficacy of this mechanism does not depend on the dominant country retaining a “creditor” status. Rather it has depended historically, on the dominant country’s ability to continue to borrow, in the face of growing external deficits without undermining the status of its currency as international money. A pivotal role is played by the institutional mechanisms that allow the dominant country to borrow from surplus countries on one hand and lead to increasing fragility in peripheral debtor countries on the other. The paper argues that such triangular adjustment patterns underlay both the gold standard period where Britain was a net creditor and the present “floating dollar regime” where the United States is a net debtor.