Economic Internationalism

September 5, 1973

Report Outline
Upheaval in World Money Structure
Parallels to Past Currency Turmoils
Prospect of Lasting Monetary Reform
Special Focus

Upheaval in World Money Structure

Conference to Revamp Global Monetary System

The monetary crisis of 1973 has left Americans with a renewed appreciation of the fact that their economy is not a closed system; it is prey to forces far beyond Washington's ability to control. International trade and investment over the past quarter-century have so interlocked the economies of industrial nations that the actions of one affect all the others. A complicated network of banks and businesses can move fabulous amounts of money out of one domestic economy and into another, sometimes with an adverse impact on both. Devaluation of the dollar on Feb. 12, the second in 14 months, proved that the United States was no longer immune to these events, if it ever was. Most disquieting of all was the fact that the first devaluation in December 1971 did not “work.” It indicated the extent to which all governments had lost control over international flows of money—and spelled the need for still another revamping of the world money system.

Throughout the spring and well into the summer, the dollar sank in value against leading European currencies, especially the West German mark, and against the Japanese yen. By June 10 The Wall Street Journal was speaking editorially of “the bottom dropping out of the dollar in foreign exchange markets.” The dollar rebounded considerably by late summer, subject to daily fluctuations, but remained a most unstable yardstick for its assigned international role of measuring the other major currencies of the world. Western governments and their central banks struggled to keep the present global monetary system afloat until a thoroughgoing reform could be undertaken. The annual meeting of the 125-nation International Monetary Fund (IMF) in Nairobi, Kenya, Sept. 24–28, will become the forum for consideration of such a restructuring.

At best, the IMF meeting will produce only agreement on general principles for overhauling the world monetary system. Final ratification of new operational rules probably will take at least another two years. The Nairobi meeting is likely to be filled with disputes between rich and poor nations over economic aid and arguments over specific provisions of the new system. The U.S. government believes the crucial barrier to monetary reform involves rules to require nations to correct serious imbalances in their international payments. This was among matters discussed at an Aug. 30, 1973, meeting of a new Advisory Committee on the International Monetary System at the Treasury Department. The committee's members include three former Treasury Secretaries—Douglas Dillon, Henry H. Fowler and John B. Connally.

ISSUE TRACKER for Related Reports
General Agreement on Tariffs and Trade (GATT)
International Finance