The Dollar As A Reserve Currency

Abstract

T HE dollar has passed through three main phases since the Second World War. The United States emerged from the War as the major world power, with the dominant economy and also, though not so obviously, the dominant currency. Alastair Cooke recalled in a recent ' Letter from America ' a speech made by Ramsay MacDonald to a conference in London in 1934, which contained a plea to all the Europeans to give up trying to maintain their own currencies as independent units and to link them instead either to sterling or to the dollar. Within ten years they were no longer alternatives. During the War Britain built up debts in the form of sterling balances-which are still with us, and in about the same amount, because we have been unable to pay them off; but the United States by contrast, and unusually after a major war, emerged with its economy actually enhanced. It had increased the efficiency and the pre-eminence of its industry-so much so that only now, after about thirty years of peaceful competition, is the significance of its relatively low rate of productivity growth (a fundamental criterion) becoming apparent. Also at the end of the Second World War the United States had about 60 per cent of the world's reserves, with a very strong liquid position: its reserves greatly exceeded by any measure its liabilities. However, in the late 1940s only 6 per cent of the world's reserves were held in dollars, while the percentage in sterling was much larger. In fact, the first phase, which began then, was seen as one of dollar shortage. (As this article will repeatedly show, statistics do not always clearly demonstrate the underlying facts, or the psychology, of the time.) The supremacy of the dollar was also veiled by the expression ' gold exchange system ', which was adopted to describe the Bretton Woods system. In fact the United States played the major part in designing that system, and but for the authority of Keynes probably no other country would have had a sizable voice in it. The United States expected that, because its economy would be strong, other countries would more often than not be wanting to devalue; so it chose a fixed-rate system which would limit devaluations against the dollar, and it had a very high quota in the new International Monetary Fund (IMF)-at one point over 30 per cent. In the event, the system that the United States devised did not work very