from: http://www.aci.net/kalliste/bretton_woods.htm Click Here: <A HREF="http://www.aci.net/kalliste/bretton_woods.htm">The Rise and Fall of Betton Woods, by J. Orlin …</A> ----- [Taken from Chapter 1, International Financial Markets, 3rd edition, by J. Orlin Grabbe, © 1996 Prentice-Hall, Inc., a Simon & Schuster Company, Englewood Cliffs, New Jersey. ISBN 0-13-206988-1.] THE RISE AND FALL OF BRETTON WOODS by J. Orlin Grabbe ------------------------------------------------------------------------ Killing is all right, and you could attack religion with some impunity, but you were threatening something dearer than life to many people . . . —Letter from Franklin Delano Roosevelt to John Steinbeck, rejecting the author's proposal to counterfeit German currency (Bloom, 1988) [Nixon] had no strong interest in international economic affairs, as shown by an incident recorded on the Watergate tapes where Haldeman comes in and wants to tell him about the Italian lira. His response was "(expletive deleted) the Italian lira!" —Hendrik Houthakker, member of Nixon's Council of Economic Advisors ------------------------------------------------------------------------ The end of the Second World War can be taken as year zero for the current system of international finance. There wasn't much in the way of foreign exchange or international bond trading in 1945 and another decade would pass before eurocurrency markets were created. The depression of the 1930s, followed by the war, had vastly diminished commercial trade, the international exchange of currencies, and cross-border lending and borrowing. Left were only memories of what the system had once been, along with competing visions of what could and should be resurrected from the rubble. Revival, it was generally agreed, entailed new institutions and political agreements. Certainly not much thought was given to the enormous progress in information technology and telecommunications that had come about during the war and would later have a profound impact on international financial practice. Reconstruction of the postwar financial system began with the Bretton Woods agreement that emerged from the International Monetary and Financial Conference of the United and Associated Nations in July 1944 at Bretton Woods, New Hampshire. Bretton Woods is a tiny ski village in the White Mountains whose notable features are the world's longest cog railway and the mammoth Mount Washington Resort Hotel--which, situated at the foot of the Presidential range, is an ideal setting for a conference. The 1944 agreement, setting out the major parameters of the postwar system, represented an unusual degree of advance planning. The establishment of a beachhead on Normandy by Allied forces under General Dwight Eisenhower had taken place only the month before, and even the outcome of the war with Germany could not yet be predicted with total certainty. But there was a deep-rooted reason for the timing of the Bretton Woods debate about postwar finances. Many at the conference were convinced that, by making advance preparations for the peace, they could avoid the mistakes associated with the aftermath of the Great War of 1914-1919. They had concluded that the primary reason they were at war3/4 once again with Germany3/4 was that, although the Allies had won the earlier war, they had mismanaged the peace. This mismanagement, they felt, had resulted from the squabbling among the great powers, who had yielded to the political sentiments of the moment and had shown a lack of foresight in the economic provisions of the peace negotiations of 1919. Bretton Woods was part of an attempt to avoid a repetition of the same mistakes when the war with Hitler was over. American and British rivalry was another factor that underlay the early planning. Although forty-four nations signed the Bretton Woods agreement, it was primarily the United States and Great Britain who negotiated the terms, each intent on persuading everyone else to adopt its particular vision of postwar monetary arrangements. The two principal individuals involved in the negotiations were Harry Dexter White, representing the United States, and John Maynard Keynes, representing Great Britain. The chain of events leading to Bretton Woods had started in 1940. German propaganda broadcasts were describing a "New Order," the National Socialist vision of how the world would be organized financially and economically in the future, under German leadership. Such propaganda can be effective in two senses. By being first to propose a plan you get people thinking your way: you structure the debate. Second, such a plan implied Germany was so sure of winning the war that it could get on with planning the next stage. Such confidence invited neutral third parties to join a winning team. In November 1940, the British Ministry of Information asked John Maynard Keynes, the noted British economist, to prepare counterpropaganda broadcasts, which required Keynes to give some thought to financial organization after the war. Aside from the propaganda needs of the moment (Winston Churchill said that "in wartime, truth is so precious that she should always be attended by a bodyguard of lies"), both Keynes and British government officials were determined that, whatever plans were made, they could not afford to repeat the miscalculations associated with the Treaty of Versailles that had ended World War I. In fact, Keynes had first become famous in 1919 with his international bestseller The Economic Consequences of the Peace. The official representative of the British Empire to the Supreme Economic Council that set out the terms of German reparations, Keynes had resigned in protest and had written a book explaining why. He had argued that the primary policy objective of the Allies should be the stabilization of central Europe, not the imposition of unpayable reparations on Germany. Europe was in a dangerously chaotic political condition following the collapse of the Austro-Hungarian Empire, he had said, and the terms of the Versailles treaty would aggravate the situation and play into the hands of extreme elements. In warfare, the spoils traditionally go to the victor. The modern interpretation of this principle meant that the loser in the war reimbursed the victor for costs associated with conducting the war. This reimbursement was referred to as reparations. Germany had exacted reparations from France after the Franco-Prussian War of 1870-1871, for example. And in Article 231 of the Treaty of Versailles (signed on June 28, 1919) Germany and its allies were named the aggressors in the recent war and were held responsible for all loss and damage suffered by the Allies. But it seemed obvious, at least to Keynes, that the degree of international interdependence had now increased to the point that it was no longer necessarily in one's own self-interest to demand from the loser payment in gold and goods. He sounded the ominous warning that the "Carthaginian peace is not practically right or possible. . . . You cannot restore Central Europe to 1870 without setting up such strains in the European structure and letting loose human and spiritual forces as . . . will overwhelm not only you and your 'guarantees,' but your institutions and the existing order of your society." Whether for the reasons Keynes set out or for others, events did not follow the course anticipated by most members of the Versailles Peace Conference in 1919, and by 1940 officials in both the British and the U.S. treasuries viewed Versailles as an administrative disaster. The treaty had been followed in Germany by the hyperinflation of 1920-1923 that had effectively undermined the power of the German middle class, with its moderating political influence, by destroying the real value of middle-class savings--which had been generally kept in the form of financial assets. The extent of the inflation can be seen in the exchange value of the mark, which was about 14 per U.S. dollar at the end of the war in 1919. When the inflation ended on November 20, 1923, the exchange rate was 4 trillion marks per U.S. dollar. (That same day the president of the Reichsbank--the German central bank--died of a heart attack, raising an interesting question of cause and effect.) Hitler's famous Munich beer-hall putsch occurred in November 1923, at the height of the inflation, and later the National Socialists were able effectively to exploit popular resentment over the terms of the treaty. Oswald Spengler, no admirer of Hitler, expressed the common view when he wrote: The war of 1914, however, was fought by England, not on France's behalf nor on Belgium's, but for the sake of the 'week-end,' to dispose of Germany, if possible, for good, as an economic rival. In 1916 there set in, side by side with the military war, a systematic economic war, to be carried on when the other came inevitably to an end . . . The Treaty of Versailles was not intended to create a state of peace but to organize the relation of forces in such a way that this aim could at any time be secured by fresh demands and measures. Hence the handing over of the colonies and the merchant fleet, the seizure of bank bonds, property, and patents in all countries, the severence of industrial areas like Upper Silesia and the Saar valley, the inauguration of the Republic--by which it was expected (and correctly) that industry would be underminded by the power assumed by trade unions--and finally the reparations, which England, at least, intended not as war idemnification but as a permanent burden on German industry until it should collapse (Spengler, 1934), In 1941, Keynes was sent to Washington as a representative of Churchill and the Chancellor of the Exchequer to settle the terms of Lend-Lease aid that Britain would receive from the United States. As part of the conditions for receiving the ultimate $30 billion in aid, the British were pressured to commit themselves to postwar arrangements as foreseen by the United States. While not in much of a bargaining position, the British did press for their objectives. They did not want to surrender the reserve currency status of the pound sterling. They took it for granted (as did the United States) that exchange rates should be fixed. In this context, they assumed that Britain would have a persistent tendency to import more from the United States than it exported to the United States and thought that this factor, combined with the British goal of full employment, would require various types of import restrictions, barter arrangements, and capital controls. Keynes, in fact, approved of the methods practiced by Hjalmar Schacht--the German "financial wizard" who had brought about the termination of the German hyperinflation and later served as Hitler's economic minister--which involved economic units directly bartering (trading) one type of good for another without the use of currency. On the U.S. side, Secretary of the Treasury Henry Morgenthau gave Harry Dexter White the task, in December 1941, of thinking about future international money arrangements. White's views were already on record in an earlier study he had done in 1934 for Jacob Viner at the Treasury. It had stressed the need for fixed exchange rates, international cooperation, and settlement in gold as the basis for the international financial system. White's report to Morgenthau, making similar proposals, formed the basis for the Bretton Woods agreement. The White report also proposed an Inter-Allied (later a United Nations) Stabilization Fund to stabilize exchange rates and remove exchange controls and an Inter-Allied (later United Nations) Bank to provide capital for economic reconstruction. These two proposals came to fruition as the present-day International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank). The views of other U.S. officials were also important in setting the tone of the Bretton Woods negotiations. Secretary of State Cordell Hull believed that the fundamental causes of the two world wars lay in economic discrimination and trade warfare. Specifically he had in mind the trade and exchange controls (bilateral arrangements) of Nazi Germany and the imperial preference system practiced by Britain (by which members or former members of the British Empire were accorded special trade status). An internal State Department paper in 1939 had even proposed a trade agreement with Germany as a way to avoid war. Overall, the Americans wanted a postwar system in which trade could expand. William Clayton, the assistant secretary of state for economic affairs, said: "We need markets--big markets--around the world in which to buy and sell." The free trade concerns would finally lead in 1947 to the General Agreement on Trade and Tariffs (GATT), by which member nations would generally agree to accord no special trade status to any one member that was not accorded to all. The concern over exchange controls was incorporated in the articles of agreement of the International Monetary Fund. Members were pledged to work for the removal of all such controls. In the State Department the view prevailed that the United States should remove itself from its historical isolation and play a leading role in a new world order in which it was thought power politics would be absent. According to Harry Dexter White, "it was expected that the early post-war world would witness a degree of unity and good-will in international political relationships among the victorious allies [including Russia] never before reached in peace-time. It was expected that the world would move rapidly . . . toward 'One World.' . . . No influential person, as far as I can remember, expressed the expectation or the fear that international relations would worsen during those years." International institutions like the International Monetary Fund and the World Bank, with willing U.S. participation, were a step in the direction of this one, united world. Finally, a strong anti-banking perspective led Secretary of the Treasury Morgenthau to throw his support to the new international financial institutions. At the Bretton Woods conference he predicted that the establishm ent of the IMF and the World Bank would "drive the usurious money lenders from the temple of international finance." Morgenthau's view contrasted with U.S. private-sector sentiment, which was not greatly exercised over usurious moneylenders but rather saw the proposed institutions as a covert scheme to subsidize debtor nations. The main points of the postwar system evolving from the Bretton Woods agreement that are important for our purposes can be summarized as follows: 1. A new institution, The International Monetary Fund (IMF), would be established in Washington, D.C. Its purpose would be to lend foreign exchange to any member whose supply of foreign exchange had become scarce. This lending would not be automatic, but would be conditional on the member's pursuit of economic policies consistent with the other points of the agreement, a determination that would be made by the IMF. 2. The U.S. dollar (and, de facto, the British pound) would be designated as reserve currencies, and other nations would maintain their foreign exchange reserves principally in the form of dollars or pounds. 3. Each Fund member would establish a par value for its currency, and maintain the exchange rate for its currency within 1 percent of par value. In practice, since the principal reserve currency would be the U.S. dollar, this meant that other countries would peg their currencies to the U.S. dollar, and--once convertibility was restored--would buy and sell U.S. dollars to keep market exchange rates within the 1 percent band around par value. The United States, meanwhile, separately agreed to buy gold from or sell gold to foreign official monetary authorities at $35 per ounce in settlement of international financial transactions. The U.S. dollar was thus pegged to gold, and any other currency pegged to the dollar was indirectly pegged to gold at a price determined by its par value. 4. A Fund member could change its par value only with Fund approval and only if the country's balance of payments was in "fundamental disequilibrium." The meaning of fundamental disequilibrium was left unspecified, but everyone understood that par value changes were not to be used as a matter of course to adjust economic imbalances. 5. After a postwar transition period, currencies were to become convertible. That meant, to anyone who was not a lawyer, currencies could be freely bought and sold for other foreign currencies. Restrictions were to be removed, and hopefully eliminated. So, in order to keep market exchange rates within 1 percent of par value, central banks and exchange authorities would have to build up a stock of dollar reserves with which to intervene in the foreign exchange market. 6. The Fund would get gold and currencies to lend through "subscription." That is, countries would have to make a payment (subscription) of gold and currency to the IMF in order to become a member. Subscription quotas were assigned according to a member's size and resources. Payment of the quota normally was 25 percent in gold and 75 percent in the member's own currency. Those with bigger quotas had to pay more but also got more voting rights regarding Fund decisions. FIXING THE PRICE OF FOREIGN EXCHANGE AND GOLD The Bretton Woods agreement committed member countries to peg exchange rates3/4 or rather to keep them within a plus or minus 1 percent margin around a declared par value. What does it mean to fix the price (the exchange value) of something? If no trading other than with official authorities is allowed (as where a currency is "inconvertible"), then fixing the price is easy. The central bank or exchange authority simply says the price is S, say S = 4 German marks per 1 U.S. dollar, and no one can say differently. If you want to trade German marks for dollars, you have to deal with the central bank, and you have to trade at central bank prices. The central bank may in fact even refuse to trade with you, but it can still claim that the exchange rate is fixed. If, however, free trade is allowed, fixing the price requires a great deal more. The price can be fixed only by altering either the supply of or the demand for the asset. For example, if you wanted to fix the price of gold at $35 per ounce, you could only do so by being willing and able to supply unlimited amounts of gold to the market to drive the price back down to $35 per ounce whenever there would otherwise be excess demand at that price, or to purchase unlimited amounts of gold from the market to drive the price back up to $35 per ounce whenever there would otherwise be excess supply at that price. In order to peg the price of gold you would thus need two things: a large stock of gold to supply to the market whenever there is a tendency for the market price of gold to go up, and a large stock of dollars with which to purchase gold whenever there is a tendency for the market price of gold to go down. The same is true if the central bank wants to peg the exchange value of the domestic currency with respect to a foreign currency. If the German central bank wants to peg the exchange rate at DM4 = U.S.$1, it has to have a stock of deutschemarks and a stock of dollars. The deutschemarks are no problem--the central bank can always create more of them at will. But dollars are a problem to the German central bank. If there is excess demand for dollars, perhaps because at the pegged exchange rate dollars are too cheap (the central bank is selling them for DM4 when it should be selling them for, say, DM5), the central bank may run out of dollars and will no longer be able to maintain the peg. Dollars in this case are the German central bank's reserves, so we may summarize by saying: If the central bank or exchange authority sets an exchange rate that undervalues foreign currency--that is, overvalues domestic currency--the central bank will lose reserves. Conversely, if the pegged rate overvalues foreign currency, the central bank will gain reserves. If a central bank is losing reserves, there is an excess demand for foreign currency (an excess supply of domestic currency) at the rate at which the central bank is pegging. In this case, the country is said to be running a bal ance of payments deficit. If a central bank (or exchange authority) is gaining reserves, there is an excess supply of foreign currency (an excess demand for domestic currency) at the rate at which the central bank is pegging. In the second case, the country is said to be running a balance of payments surplus . We will explore the concept of balance of payments in Chapter 21. It should be obvious from the preceding paragraph, however, that if the central bank is not pegging or otherwise making any attempt to influence the market value of its currency, it will not have either a surplus or a deficit on the balance of payments except as an accounting artifice. This qualification is used because creative accountants can always jerry-rig a "deficit" or a "surplus" by calculating the balance in an arbitrary way. Such engineered deficits or surpluses may have no importance, however, except as political entertainment. As an additional part of the Bretton Woods agreement, the United States committed itself to trade gold with foreign officials at a fixed price of $35 per ounce. In a sense, this was a commitment to peg the market price of gold, because if the private market price of gold differed from the official price--if, for example, the private market price were $37 per ounce--a foreign central bank would have an incentive to buy from the United States at $35 per ounce and sell on the private market at $37 per ounce. So the U.S. commitment meant that the United States needed, in principle, a large stock of gold to sell whenever the private market price rose above $35. Gold the United States had aplenty: by war's end in 1945 the United States had about 60 percent of the total world stock. The U.S. commitment to peg the price of gold had other implications. Suppose that gold would always at any time trade for the same amount of other real goods--wheat, steel, bananas. In such a situation, the price of gold would by synonymous with purchasing power. You could always trade an ounce of gold for a predetermined bundle of other commodities. The U.S. commitment to buy and sell gold for $35 per ounce would then mean that the purchasing power of the dollar would have to be maintained at a constant level; there could be no inflation in the United States. In addition, if other countries did not alter the par value of their currencies in terms of the U.S. dollar, their currencies would also have fixed purchasing power, and there could be no inflation in these countries either. It will, of course, not work exactly that way in practice. The relative price of gold in terms of wheat, steel, and bananas will change over time depending on relative supply and demand in each of those commodity markets. Thus, the price of gold will at best only roughly approximate purchasing power. In addition, the 1 percent margins around par value for exchange rates will allow some additional variation in the gold value of other countries' currencies. Finally, in case of "fundamental disequilibrium," a country might be allowed to change its par value from time to time, which would also alter its currency's gold value. But even when we grant all these modifications, it is still safe to summarize: The Bretton Woods agreement, if adhered to, precluded sustained inflation on the part of member nations The values of other currencies were pegged to the dollar, which was pegged to gold. On the other hand, if the requirement that the dollar be pegged to gold were dropped and only the requirement that the par values of other currencies be maintained with respect to the dollar kept, a different implication would emerge. The implication, without the dollar-gold peg, would be that the United States and other countries would in the long run have to have the same rate of inflation or deflation. (For further details see Chapters 20 and 22.) THE COLD WAR, THE MARSHALL PLAN, AND EUROPEAN INTEGRATION The Bretton Woods agreement committed member nations to restore the convertibility of their currencies as soon as possible, and there was no reason free trade in foreign exchange could not have begun immediately. Without government controls or threats of punishment, a foreign exchange market would automatically emerge through the voluntary association of buyers and sellers. (Some trade in foreign exchange would take place anyway, despite controls. Such trading, defined as illegal by the government, is referred to as the black market or parallel market. Parallel markets exist whenever government exchange or other restrictions create a divergence between the market value of a currency and the government's declared official value. In recent decades, parallel markets have been widespread throughout Latin America, Eastern Europe, and certain countries of the Middle East.) Most governments at the end of the war, however, were not inclined to allow free trading in their currencies. If private citizens were allowed free access to foreign exchange, they would use it as they desired. Governments, however, wanted prior access to foreign exchange so they could spend it on what they wanted: to import food, to import materials considered essential for reconstruction, to buy military equipment, or to reward companies who politically supported the current regime. In addition, many governments had pre-conceived ideas of what exchange rates ought to be. Back in 1925, Great Britain had set the exchange rate for the pound sterling at £1 = $4.86, the pre-Great War rate, "so the pound could look the dollar in the face" (meaning that British government officials could look American government officials in the face and pretend that the world of 1925 was not different from the world of 1910.) And, in the new postwar years of the late 1940s, if free trading were allowed in its currency, a government would either have to set a par value that represented market equilibrium or find itself continuously intervening in order to maintain an artificial price. When governments got around to restoring convertibility as planned under the Bretton Woods agreement, they would need a supply of dollars with which to do exchange intervention. And that, they felt, was the key missing ingredient: Th ere was a shortage of dollar reserves with which to intervene in the exchange market. As Hendrik Houthakker, a later member of the U.S. Council of Economic Advisors, was to say: "You can't play poker unless all the participants have at least some chips." The Cold War would eventually assure European nations enough dollar chips to play the intervention game. The U.S. Congress had agreed only reluctantly to fund the American contribution to the new IMF, and there was a great deal of skepticism in the private sector concerning an increased international role for the United States. Domestic support for a traditional U.S. isolationist stance began to erode, however, as tensions between the Soviet Union and the other nations allied against Nazi Germany--the United States, Britain, and France--increased following the war. In the United States, the overriding foreign policy concern became that of stopping the spread of communism internationally. An early expression of this policy was the European Recovery Program (Marshall Plan) proposed by Secretary of State Marshall at the Harvard commencement in 1947. The idea was to supply capital to European economies to enable them to rebuild and to become capable military allies of the United States against the Soviet Union. The Organization for European Economic Cooperation (OEEC), later reorganized as the Organization for Economic Cooperation and Development (OECD), was set up to administer Marshall Plan aid. (One important Marshall Plan economist, Richard Bissell, later became the CIA Deputy Director of Operations, and the architect of the failed Bay of Pigs invasion.) The Soviet Union responded by forming an Eastern European equivalent, the Council for Mutual Economic Assistance (COMECON). The opening rounds of the Cold War arrived in connection with currency reform in occupied Germany. In 1945, the American army had brought with it to Germany occupation reichsmarks printed in the United States. The Soviets had also been given printing plates for the currency, and the millions of reichsmarks printed in Russia were used to extract, in a matter of weeks, seve ral hundred million dollars worth of goods from the American and British occupation zones. The Soviet paper was then declared unacceptable in Western zones. The payment of troops in reichsmarks was discontinued, and cigarettes became the de facto medium of exchange and store of value in Germany, Lucky Strikes reaching at one point a price of $2300 a carton. Currency reform, planned under the name Operation Bird Dog, involved the replacement of the old reichsmarks with new deutschemarks (DM) printed in Washington at an exchange ratio of 1000 reichsmarks = 65 DM. The new currency would be legal tender in the Western zones, and its supply would be outside Soviet control. The Soviet Union viewed this as a part of an overall American plan to set up a separate West German government that would be ideologically opposed to the Soviets. On the day the new currency was to go into circulation in Berlin's Western zones, the Soviet military blockaded the city. With the Berlin blockade of 1948, the successful communist revolution under Mao Tse-tung in China in 1949, and the outbreak of the Korean War in 1950, the mood of the U.S. Congress and the country changed to one of support for effecting a real financial transfer from the United States to Western Europe. Initially, foreign trade was carried out in Europe through a set of clearing accounts. Under an arrangement called the European Payments Union, member countries kept track of all their payments deficits and surpluses with other member countries. The monthly net deficit or surplus of a particular country with all other member countries combined was considered a deficit or surplus of the union. At the end of each month, each country settled its net position with respect to the union in terms of U.S. dollars, gold, or credits. Credits were any amounts not settled in dollars or gold and could be accumulated only up to a specified limit. Calculation of the monthly surplus or deficit among countries took place at fixed exchange rates. Thus member countries could maintain the fiction that they were adhering to the Bretton Woods system of par values. Throughout the 1950s, European governments, who never felt they had enough dollar reserves, made frequent reference to a "dollar shortage." In one sense, there actually was not a dollar shortage, since dollars would have always been available at some exchange rate, though not necessarily at the rate countries were willing to pay. A better phrase would have been "capital shortage," since capital goods were really the issue. The demand for dollars was equivalent to a demand for imports and raw materials to rebuild the European industrial base. "Hard currencies," such as the U.S. and Canadian dollars, could be spent anywhere in the world for such goods, while (because of exchange controls and other restrictions) so-called soft currencies had to be spent in the country in which they were earned. The reduction of the European capital shortage through Marshall Plan aid made it possible for European nations to build up foreign exchange reserves. While the total amount of Marshall Plan aid constituted only about 4 percent of European gross national product (GNP), it made up about 40 percent of European receipts of hard currency. In addition to receiving aid, European countries were encouraged by the United States to liberalize trade among themselves. Official support was given to the ideas of individuals like Jean Monnet and Robert Shuman, who wanted to bring about a united Europe and to so integrate the economies of Germany and France that the two countries could never go to war again. "There will be no peace in Europe if States reestablish themselves on the basis of national sovereignty, with all that this implies by way of prestige politics and economic protectionism," Monnet had written in 1943. The European Coal and Steel Community, with Jean Monnet as its head, was formed in 1952, and in 1958, the European Economic Community (abbreviated EEC but frequently referred to as the Common Market) went into operation. The goal of the Common Market was to create a free trade area among member nations with free movement of labor and capital. It also entailed, however, the erection of common tariff barriers against the rest of the world. The political motivation for this economic organization was emphasized by a president of the EEC commission: "We are not in business at all; we are in politics." European nations were officially encouraged by the United States to expand their exports to the dollar area even while maintaining restrictions on U.S. goods, and to use part of the earnings to build up dollar exchange reserves. As a consequence, between the end of 1949 and the end of 1959, U.S. liabilities to foreign monetary authorities rose from $3.1 billion to $10.1 billion. Toward the end of the 1950s, European authorities felt they had enough dollar reserves both to allow trade in their currencies and to defend their chosen par values, and at the end of 1958, current account convertibility was restored for the major European currencies. Current account convertibility meant that foreign exchange could be freely bought and sold provided its use was associated with international trade in goods and services. But there were still restrictions that applied when the intended use of the foreign exchange was to purchase foreign financial assets or to make equity investments. (Free trade in currencies for the latter purpose is called capital account convertibility.) Current account convertibility for the Japanese yen was not restored until 1964. (Japan is discussed in Chapter 2.) Thus, almost fifteen years after the Bretton Woods agreement, foreign exchange markets were once again in operation in the Western world. ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, All My Relations. Omnia Bona Bonis, Adieu, Adios, Aloha. Amen. Roads End <A HREF="http://www.ctrl.org/">www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance—not soap-boxing—please! 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