Money
Matters: An IMF Exhibit -- The Importance of Global Cooperation
|
System
in Crisis (1959-1971)
|
Part
1 of 7
|
|
|
|
| |
A
Growing Economy Needs Growing Liquidity
|
| Destruction
and Reconstruction |
Next--> |
| |
|
Increased
trade and interdependence accompanied the stunning economic growth
of the 1950s and 1960s:
-
A typical 1960s U.S. telephone required 48 imported materials
from 18 different countries.
- Foreign
trade was a matter of economic survival for some nations. In 1960,
Britain's imports and exports equaled 43% of its gross domestic
product. West Germany's equaled 45%.
|
|
The
rapid expansion of production and trade in the 1950s and 1960s required
a constantly expanding supply of monetary
reserves to increase total liquidity. Gold, the primary reserve
asset, could not be mined fast enough to meet this demand. As a
result, the U.S. dollar, and to a lesser extent, the British pound,
were used as reserve assets.
- By
the mid-1960s, a full third of the total market-economy reserves
was held in U.S. dollars and British pounds, with the remainder
in gold.
|
credits |
As
Good as Gold
|
|
How
does a national currency like the U.S. dollar become a reserve asset,
adding to the world’s total liquidity?
- The
United States runs a balance of payments deficit by spending more
money in other countries (buying their products, investing in
them, or giving them dollars) than they spend in the United States.
- The
extra dollars are held by the countries’ central banks. The
banks do not ask the United States to redeem them for gold or
another currency. As long as foreign banks accept and hold dollars
as if they were gold, the dollars act as reserves.
How
long could the world rely on the United States and the United Kingdom
to run balance of payments deficits and supply the necessary additional
liquidity? Could the United States and the United Kingdom continue
to create more dollars and pounds when their own reserves of gold
were gradually declining?
The U.S. dollar fueled the growth of the world's economy, but at
a price: inflation at home and reduced gold reserves.
|
|
"Too
little liquidity could permit a crisis to develop in which most
of the world would tend toward economic stagnation and would suffer
from declining trade."
Pierre-Paul Schweitzer
Managing Director of the IMF,
November 16, 1964
|
| |
|
| Destruction
and Reconstruction |
Next--> |
