Forex and Floating Rates

The United States is clearly the paramount actor in international monetary relations.

Though reduced, relatively speaking, from its postwar position of overwhelming dominance, America is still by far the world's leading national economy.

America has the largest gross national product of any country (30 percent of the world total), the greatest volume of foreign trade (one-eighth of the world total), the broadest and deepest financial markets, and the main international currency.

Much of the debate in the Committee of Twenty revolved around the notion of symmetry. But asymmetries such as these--- pervasive asymmetries that run deep in the structure of the international economy--- are not the kind to be reduced or eliminated by formal monetary reforms.

The United States may no longer be primus motor of the monetary order, but it is still primus inter pares.

Yet at the same time, the United States is also one of the world's most closed national economies, with foreign trade accounting for less than one-twelfth of America's GNP.

Despite the importance of overseas operations for many of America's largest corporations, the main orientation of the U.S. economy is still basically inward rather than outward.

These two facts combine to establish a fundamental American bias toward maintenance of policy autonomy in monetary matters.

As a leading economy, the United States naturally prizes its ability to act abroad unilaterally to promote objectives believed to be in the national interest.

As a closed economy, the United States naturally accords a lesser priority to external considerations relative to internal policy needs.

The key objective is to minimize any balance of payments constraint on the government's decision-making authority, in order to maximize the country's freedom of action in domestic and foreign affairs.

This was, of course, the great advantage of the Bretton Woods system from the U.S. point of view; there was relatively little effective discipline on U.S. policy autonomy.

The United States' manifest goal was to preserve as much a possible of the special privileges it had learned to enjoy in the years after World War II.

All of its proposals for reform after 1971 were framed with that basic vested interest in mind.

Up to that date, the United States had been arguing strongly for a totally unrestricted regime of floating exchange rates. France, on the other hand, had held out for a return of the stable but adjustable par-value objective accepted by the Committee of Twenty.

Such burdens can be avoided when the exchange rate of the home currency is free to move.

A good part of the costs and responsibilities of adjustment can then be shifted onto others--- the comparatively small size of the foreign trade sector, meanwhile, ensuring that the domestic impact of any exchange rates will be relatively muted.

A floating rate regime was perfectly consistent with America's basic interest in a nation's autonomy policy.