Eichengreen - From Benign Neglect to

Eichengreen - From Benign Neglect to - NBER WORKING PAPER...

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NBER WORKING PAPER SERIES FROM BENIGN NEGLECT TO MALIGNANT PREOCCUPATION: U.S. BALANCE-OF-PAYMENTS POLICY IN THE 1960S Barry Eichengreen Working Paper 7630 http://www.nber.org/papers/w7630 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2000 Prepared for the Brookings Conference on the U.S. Economy in the 1960s, and forthcoming in a volume edited by George Perry and James Tobin. For research assistance the author is grateful to Julian De Giovanni, Any Huang, Intaek Han and Chris Nekarda. Maury Obstfeld generously helped with data. George Perry, Robert Lawrence and Jeffrey Sachs provided helpful comments. The views expressed herein are those of the author and not necessarily those of the National Bureau of Economic Research. © 2000 by Barry Eichengreen. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
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From Benign Neglect to Malignant Preoccupation: U.S. Balance-of-Payments Policy in the 1960s Barry Eichengreen NBER Working Paper No. 7630 March 2000 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. Barry Eichengreen Department of Economics University of California 549 Evans Hall 3880 Berkeley, CA 94720-3880 and NBER eichengr@econ.berkeley.edu
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1 Prepared for the Brookings Conference on the U.S. Economy in the 1960s, and forthcoming in a volume edited by George Perry and James Tobin. For research assistance the author is grateful to Julian De Giovanni, Amy Huang, Intaek Han and Chris Nekarda. Maury Obstfeld generously helped with data. George Perry, Robert Lawrence and Jeffrey Sachs provided helpful comments. 2
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Eichengreen - From Benign Neglect to - NBER WORKING PAPER...

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