Why the current Bretton Woods-like international financial system,
featuring large current account deficits in the center country, the
United States, and massive reserve accumulation by the periphery,
is not sustainable. In Global Imbalances and the Lessons of Bretton
Woods, Barry Eichengreen takes issue with the argument that today's
international financial system is largely analogous to the Bretton
Woods System of the period 1958 to 1973. Then, as now, it has been
argued, the United States ran balance of payment deficits, provided
international reserves to other countries, and acted as export
market of last resort for the rest of the world. Then, as now, the
story continues, other countries were reluctant to revalue their
currencies for fear of seeing their export-led growth slow and
suffering capital losses on their foreign reserves. Eichengreen
argues in response that the power of historical analogy lies not
just in finding parallels but in highlighting differences, and he
finds important differences in the structure of the world economy
today. Such differences, he concludes, mean that the current
constellation of exchange rates and payments imbalances is unlikely
to last as long as the original Bretton Woods System. Two of the
most salient differences are the twin deficits and low savings rate
of the United States, which do not augur well for the
sustainability of the country's international position. Such
differences, he concludes, mean that the current constellation of
exchange rates and payments imbalances is unlikely to last as long
as the original Bretton Woods System. After identifying these
differences, Eichengreen looks in detail at the Gold Pool, the
mechanism through which European central banks sought to support
the dollar in the 1960s. He shows that the Pool was fragile and
short lived, which does not bode well for collective efforts on the
part of Asian central banks to restrain reserve diversification and
support the dollar today. He studies Japan's exit from its dollar
peg in 1971, drawing lessons for China's transition to greater
exchange rate flexibility. And he considers the history of reserve
currency competition, asking if it has lessons for whether the
dollar is destined to lose its standing as preeminent international
currency to the euro or even the Chinese renminbi.
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