Vocabulary-Chapters 4 and 5 from Helleiner's States and Re-Emergence of Global Finance: from Bretton Woods to the 1990's

Economics 344

I.

Fundamental Disequilibrium-This is a term used during negotiations of the Bretton Woods System.  One stipulation was that Britain was in favor of a flexible exchange rate while the United States wanted a pegged rate.  A compromise was reached, so that countries would peg their currency value and keep it within 1 percent of that value by appropriate monetary behavior.  If, say, a country’s current account accumulated a large deficit because of some domestic factor, war, or other factors, then that country’s currency would have changed value significantly.  This significant change was called “fundamental disequilibrium”.  If a country reached this state then they would consult the IMF to have their peg rate shifted.

Convertibility (Paragraph 1.=currency to currency capital control limits on convertibility, Paragraph 2=Gold Convertibility)-after World War II there was a consensus that embedded liberalism would allow the world economy to become more stable than before WWII.  Part of this new economic school of thought was the support of capital controls, or regulating the convertibility of domestic currency with foreign currencies.  For corporate banks in New York, limiting convertibility was not favorable.  However, at this time in economic history, having a stable currency was for any government a very important thing.  With the help of the Marshal Plan, European countries began to develop their economies again.  By the early sixties the US was back to converting dollars for other currencies to take part in investment in other countries and other foreign activities.

Since the US was in great financial position during the post-war era (3 billion dollar a year surplus), they did not have a problem with promising gold convertibility for their currency.  Unfortunately, the other countries participating in Bretton Woods negotiations and the IMF that followed, were not in stabilized economic states where gold convertibility was a possibility....