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The Historical Setting

  • Aerdt C. F. J. Houben
Part of the Financial and Monetary Policy Studies book series (FMPS, volume 34)

Abstract

Selecting a monetary policy strategy is an ongoing activity. Changing circumstances, adaptations in preferences, and advances in the understanding of how economies work each imply that the strategic orientation of monetary policy needs to be kept under continuous review. At the same time, given the uncertainty inherent in economic relationships and in decisions on prospective developments, as well as the importance of stabilising expectations, constancy in the monetary strategy choice runs at a premium. The adage ‘if it ain’t broke, don’t fix it’ clearly applies to the domain of monetary strategy. In this respect, the evolution of monetary policy strategies in Europe over the past quarter of a century is characterised by a degree of inertia, with changes often prompted by a financial crisis. Indeed, this evolution should be seen against the backdrop of the collapse of the international monetary system of Bretton Woods, which necessitated a fundamental adaptation of European monetary policy frameworks and prompted greater soul-searching in the monetary strategy choice.

Keywords

Exchange Rate Monetary Policy Optimal Currency Area Dollar Exchange Rate International Monetary System 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.
    The IMF’s Articles of Agreement only commit members to full convertibility on current account transactions (Article VIII), and even this commitment is open-ended (existing restrictions are grandfathered under the transitional arrangements of Article XIV). An amendment to incorporate an objective of capital account convertibility into the Articles is currently under discussion.Google Scholar
  2. 2.
    Although inflation had been lower during the classical gold standard (1881–1913) and the inter-war period (1920–38) including the short-lived restoration of gold exchange, it was most stable during the convertible period of Bretton Woods (1959–1971); see Bordo and Jonung(1997).Google Scholar
  3. 3.
    Guitián (1994) and Shigehara(1996).Google Scholar
  4. 4.
    Bordo and Schwartz (1997).Google Scholar
  5. 5.
    In an “intrepid attempt to prophesy history and to deflect its course” Triffin (1960) warned against this dynamic instability and showed that foreign countries’ dollar holdings first exceeded the value of the US monetary gold stock in 1959. He advocated a solution whereby the IMF would be reformed to provide a new medium of reserves that would meet the legitimate need for global liquidity. However, in line with Triffin’s warning, and notwithstanding the creation by the IMF of Special Drawing Rights (SDRs) as a new reserves currency, the gold coverage ratio of the US showed a more or less continuous decline until the system’s gold anchor was jettisoned in August 1971. With masterful political dexterity, President Nixon presented the US suspension of gold convertibility as a bold new initiative (see Volcker and Gyohten, 1992).Google Scholar
  6. 6.
    Solomon (1982) describes how interest rate differentials induced increasingly sizeable capital movements under the Bretton Woods system. While major speculative flows already occurred in the 1950s, these rose to formidable proportions in the late 1960s and early 1970s (pp. 32, 213-214).Google Scholar
  7. 7.
    According to this agreement concluded in April 1971, the EC currencies were to fluctuate by no more than ± 1.2 percent of each other, against an effective margin for cross parities of ± 2 percent under the Bretton Woods accord (as implied by the ± 1 percent margin for individual currencies against the US dollar). However, the EC central banks suspended their agreement before its scheduled implementation in June, as Germany and the Netherlands had temporarily allowed their currencies to float in May. For a discussion of the decisions in response to the Werner Report, see lingerer (1997, pp. 114-116).Google Scholar
  8. 8.
    Solomon (1982, pp. 179-180).Google Scholar
  9. 9.
    For elaborate expositions on the motives and design of the snake, see Kruse (1980), Oort (1979) and Szász (1999).Google Scholar
  10. 10.
    The ± 2.25 percent fluctuation band, copied from the Smithsonian agreement, was to remain a central feature of European exchange rate agreements for more than two decades. Although the two decimal point bandwidth suggests great precision and well-founded institutional motives, Oort (1979, p. 194) recalls that the decision “was taken in a rather offhand manner, without preparation of any kind and determined as an average of the US desire for even wider margins and the European wish to go less far.”Google Scholar
  11. 11.
    The Benelux arrangement lasted until 16 March 1976.Google Scholar
  12. 12.
    Kruse (1980, pp. 62-70) reviews the debate on monetarist and economist strategies of monetary integration that was conducted in the 1960s and early 1970s. France, Belgium and Luxembourg were advocates of the former, Germany, Italy and the Netherlands of the latter.Google Scholar
  13. 13.
    The first occasion on which intervention was needed to keep a currency within the snake was the defence of sterling in June 1972. However, activation of the financing mechanism failed to boost confidence in the sustainability of the exchange rate. Within a week, after concerted purchases of sterling had risen to £ 1 billion, the United Kingdom withdrew from the intervention arrangement. An elaborate description is provided in Bank of England, Quarterly Bulletin, September 1972.Google Scholar
  14. 14.
    James (1996, p. 239).Google Scholar
  15. 15.
    Bank of England, Quarterly Bulletin, September 1972, p. 326.Google Scholar
  16. 16.
    Oort (1979, p. 200) states that “Although the major targets of West German economic and monetary policy have not, as far as I know, ever been amended as a result of discussions in the snake, the timing of intended policy measures has occasionally been geared to the requirements of the snake.”Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2000

Authors and Affiliations

  • Aerdt C. F. J. Houben
    • 1
  1. 1.De Nederlandsche BankAmsterdamThe Netherlands

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