Working Paper: NBER ID: w7630
Authors: Barry Eichengreen
Abstract: U.S. balance-of-payments problems in the 1960s remain poorly understood. In this paper I argue that they had two aspects. On the one hand there was a problem of real overvaluation, evident in the erosion of the current account and reflecting the reluctance of the Fed, the Executive and Congress to subordinate domestic political and economic objectives to balance-of-payments goals. In addition there was the systemic aspect, that the main source of international liquidity for the expanding world economy was dollar balances. The role of the United States was to act as banker to the world, borrowing short and lending long. But just like a bank providing liquidity transformation services, the U.S. was vulnerable to a depositor run.' So long as foreign central banks, concerned to preserve the Bretton Woods System, stood ready to support the dollar, they provided the equivalent of deposit insurance. But unlike a classic lender of last resort, their willingness to do so was limited. When that limit was reached in 1971, the dollar -- and the Bretton Woods System -- came crashing down.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic political objectives (F52) | Reluctance to prioritize balance-of-payments goals (F32) |
| Real overvaluation of the dollar (F31) | Erosion of the current account (F32) |
| Domestic political objectives (F52) | Overvaluation of the dollar (F31) |
| Systemic role of the US dollar (F33) | Vulnerability to depositor runs (E44) |
| Dollar liquidity needs (E41) | Limitations of gold supplies (L72) |
| Internal and external policy objectives (L21) | Ineffective measures (I32) |
| Ineffective measures (I32) | Dollar crisis of 1971 (F31) |
| Overvaluation of the dollar (F31) | Loss of confidence among foreign creditors (F65) |
| Loss of confidence among foreign creditors (F65) | Run on the dollar (E49) |