All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

1970s: The international situation

The Setting

"I have directed [Treasury] Secretary Connally to suspend temporarily the convertibility of the dollar into gold. " _{Richard Nixon speech August 15, 1971}

"...the 'recycling of the petrodollars' put them in a position to dictate exchange rates.  those countries that received capital inflows from OPEC greater than their current account deficits with OPEC experienced upward pressure on their currencies in the foreign exchange market, while those countries receiving capital inflows less than their current account deficits experienced downward pressure on the value of their currencies. " _{R. M Williams, The Politics of Boom and Bust in Twentieth-Century America 1994}

Questions of the day

1. What was the Marshall Plan and how did it solve the balance of payments problem in post WW II?
2. Under the gold standard, what would happen if a country continued to run a trade deficit?
3. What was the Bretton Woods system and why was the US forced off the system in 1971?
4. What would you expect to see happen to the value of the dollar as a result of the Asian crisis?
5. What would you expect to happen to the dollar if Japan lowered interest rates to get their economy moving?
6. If you were to import some French wine that was selling for 25FF, what would be the dollar cost of the wine?

The outline

• Exchange rate system
  • exchange rate regime
  • reserve regime
  • adjustment obligation
• Gold standard
• Bretton Woods Agreement
• Flexible exchange rate system

Gold standard

Bretton Woods Agreement

• IMF / World Bank

• structural flaw

Flexible exchange rate

ground rules.

• the price of the dollar, what some would refer to as the value of dollar or the exchange rate, is the number of units of a foreign currency needed to buy a dollar (ex. 97 yen per dollar).
• people want to be paid in their domestic currency. 
• People will need to come to the international money market when they are involved in an international transaction.
• demand for dollars is generated every time someone anywhere in the world wants to buy US goods, services or US assets. To pay for the export of US rice to Japan in 1997 Japanese consumers needed to convert their yen into dollars to use to pay the farmers producing the rice.  These foreign buyers will need to go to the international money market and demand (buy) US dollars to pay their bills for the rice and mortgages.
• supply of dollars is generated every time someone in the US tries to buy goods, services and assets from abroad.  When Americans buy Japanese cameras they will need to convert their dollars for Japanese yen so that the workers that produced the camera can be paid in yen.  The America consumers will need to go to the international money market where they will supply US dollars to the money market. 

Exchange Rate

trilemma

• convertibility of currency
• stability of currency value
• independent monetary policy

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