, , , , , , , , , , , , ,

My Note –

The lambda calculus entry belonged to another document. My apologies.




Financial Stability Board

Press release

Press enquiries:
Basel +41 76 350 8430


Ref no: 05/2010
22 January 2010

FSB – Financial Stability Forum – Financial Stability Board 2010


FSB welcomes US proposals for reducing moral hazard risks

The proposals announced by the US yesterday are amongst the range of options and approaches under consideration by the Financial Stability Board (FSB) in its work to address the moral hazard risks posed by too-big-to-fail (TBTF) institutions.

This work, which began last fall, will result in recommendations to G20 Leaders in October 2010. The FSB will publish and interim report on this work shortly after the June G20 Summit.

Several other options for addressing the TBTF problem are being considered by the FSB. These include: targeted capital, leverage, and liquidity requirements; improved supervisory approaches;  simplification of firm structures; strengthened national and cross-border resolution frameworks; and changes to financial infrastructure that reduce contagion risks.

A mix of approaches will be necessary to address the TBTF (too big to fail) problem, given the different types of institutions and national and cross-border contexts involved. At the same time, these approaches must preserve an integrated financial services market and not create regulatory arbitrage through an uneven playing field.

Work on the individual options is being carried out by the FSB’s Standing Committee on Supervisory and Regulatory Cooperation and by its Working Group on Cross-border Crisis Management, the Basel Committee on Banking Supervision, the Committee on Payment and Settlement Systems, and by IOSCO.

Notes to editors –

The FSB has been established to coordinate at the international level the work of national financial authorities and international standard setting bodies (SSBs) and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. It brings together national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.

The FSB is chaired by Mario Draghi, Governor of the Bank of Italy. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

For further information on the FSB, visit

(Found Here)



International Organization of Securities Commissions


26/01/10 IOSCO publishes Quarterly Update – January 2010

22/01/10 IOSCO Completes Global Framework to Fight against Cross-Border Market Abuse

08/01/10 Joint Forum Release of Review of the Differentiated Nature and Scope of Financial Regulation

11/01/10 Joint Forum (IOSCO, BCBS and IAIS) publishes Report on Review of the Differentiated Nature and Scope of Financial Regulation – Key Issues and Recommendations


Monitoring Board of the International Accounting Standards Committee Foundation

At the meeting of the Trustees of the International Accounting Standards Committee Foundation IASCF) in New Delhi, India, on 15 and 16 January 2009 the decision was made to enhance the organisation’s public accountability by establishing a link to a Monitoring Board of public authorities.

The members of the Monitoring Board are, at this moment, the Emerging Markets and Technical Committees of the International Organization of Securities Commissions (IOSCO), Financial Services Agency of Japan (JFSA), and US Securities and Exchange Commission (SEC). The Basel Committee on Banking Supervision participates in the Monitoring Board as an observer. Through the Monitoring Board, securities regulators that allow or require the use of IFRS in their jurisdictions will be able to more effectively carry out their mandates regarding investor protection, market integrity, and capital formation.

The Monitoring Board’s main responsibilities are to ensure that the Trustees continue to discharge their duties as defined by the IASC Foundation Constitution, as well as approving the appointment or reappointment of Trustees. It is envisaged that the Monitoring Board will meet the Trustees at least once a year, or more often if appropriate.





April 2009

International Accounting Standards Committee Foundation
London Address
First Floor, 30 Cannon Street, London EC4M 6XH, United Kingdom
Telephone: +44 (0)20 7246-6410, Fax: +44 (0)20 7246-6411
Email: iasb@iasb.org
Web: www.iasb.org

9 April 2009

The Honourable Hans Hoogervorst
Vice Chairman, Technical Committee
C/Oquendo 12
28006 Madrid

Dear Hans

The Trustees greatly appreciated the opportunity to meet with you and the other members of the Monitoring Board last week. We look forward to meeting again with the Monitoring Board on 8 July in Amsterdam. I am writing to you, as Chairman of the Monitoring Board, to describe the IASC Foundation/IASB’s response to the G20 recommendations that were issued the day following our meeting in London and to the recent decisions taken by the US Financial Accounting Standards Board (FASB).

The Trustees and the IASB are committed to taking action on each of the items recommended by the G20 by the end of 2009, the target date suggested by the G20, in order to ensure globally consistent and appropriate responses to the crisis. I am attaching a matrix that describes how the IASC Foundation Trustees or the IASB is responding to each of the G20 points.

The g20 called on the IASB and the FASB ‘to reduce the complexity of accounting standards for financial instruments’. This is consistent with our discussions of last week, where both the Monitoring Board and Trustees supported the IASB’s desire to prioritise the comprehensive project rather than making further piecemeal adjustments. This project should result in a proposal being published within six months. This comprehensive view will include the issue of loan-loss provisioning, an issue highlighted by the G20.

You are also aware that at the time of our meeting the FASB was still deliberating on proposed amendments on fair value measurement and impairment of debt securities. On 2 April, the FASB reached tentative conclusions and plans to publish a final document. Clearly the FASB’s decisions raise questions in the minds of some regarding ‘level playing fields’. The IASB understands the strong desire, voiced by many, for consistency between IFRSs and US GAAP on areas related to the financial crisis. EU Finance Ministers emphasised this point in a statement on 4 April.

Initial reports regarding new or additional divergences between IFRSs and US GAAP being created by these FASB Staff Positions (FSPs) appear to be overstated. FASB’s objectives and approach on the application of fair value when a market is not active are broadly similar to those in IFRSs. Meanwhile, the concept of other-than-temporary impairments in US GAAP does not exist in IFRSs. Because IFRSs and US GAAP have multiple and different impairment models that relate to different financial asset types in different ways, efforts to align IFRS and US GAAP impairment models could entail significant and complex change.

Recognising the urgency of the current situation, the IASB has agreed to decide at its 20 – 24 April meeting as to whether, in the light of FASB’s actions, further guidance on the application of fair value in inactive markets and impairment of debt securities is needed in IFRSs. In doing so, the IASB will take into account comments received from a shortened 30-day consultation process and input received from the Financial Crisis Advisory Group and the Standards Advisory Council. We have issued a press release covering the IASB’s response to the FSPs and attach a copy for your information.

The IASB, my fellow Trustees and I understand the unprecedented circumstances facing economic markets and policymakers. We are committed to acting in an urgent and responsible manner. Broad international adoption of IFRSs, combined with the actions described above, means that the IASB is working urgently to ensure a globally consistent response on financial reporting issues. The Trustees believe that the steps being undertaken by the IASB are appropriate. We look forward to the Monitoring Board’s continued support for the IASB’s efforts and the organisation’s independence.

Yours sincerely

Gerrit Zalm
Chairman of the Trustees


The Honourable Guillermo Larrain, IOSCO Emerging Markets Committee
The Honourable Charles McCreevy, Commissioner, European Commission
The Honourable Takafumi Sato, Commissioner, Japan Financial Services Agency
The Honourable Mary Schapiro, Chairman, US Securities and Exchange Commission
The Honourable A H E M Wellink, Chairman, Basel Committee on Banking Supervision


(The International Accounting Standards Committee Foundation is a not-for-profit corporation under the General Corporation Law of the State of Delaware, United States of America), Registered Office: 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, USA



International Organization of Securities Commissions


In the U.S., generally accepted accounting principles, commonly abbreviated as US GAAP or simply GAAP, are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privately-held companies, non-profit organizations, and governments. Generally GAAP includes local applicable Accounting Framework, related accounting law, rules and Accounting Standard.

Similar to many other countries practicing under the common law system, the United States government does not directly set accounting standards, in the belief that the private sector has better knowledge and resources. US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly-traded companies. Currently, the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit entities. For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which operates under a set of assumptions, principles, and constraints, different from those of standard private-sector GAAP. Financial reporting in federal government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB).

The US GAAP provisions differ somewhat from International Financial Reporting Standards, though former SEC Chairman Chris Cox set out a timetable for all U.S. companies to drop GAAP by 2016, with the largest companies switching to IFRS as early as 2009.[1]



Financial Accounting Standards Board Website (FASB) — United States



International Financial Reporting Standards (IFRS) are Standards,[1] Interpretations and the Framework[2][3] adopted by the International Accounting Standards Board (IASB).

Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the new standards IFRS.


AICPA | www.IFRS.com – International Financial Reporting Standards

Developed by the American Institute of CPAs, IFRS.com provides comprehensive resources for accounting professionals, auditors, financial managers and other




The Joint Forum has released its report, Review of the Differentiated Nature and Scope of Financial Regulation – Key Issues and Recommendations. This review was requested by the G20 through the Financial Stability Board. The report analyses key issues arising from the differentiated nature of financial regulation in the international banking, securities, and insurance sectors.

It also addresses gaps arising from the scope of regulation as it relates to different financial activities, with a particular focus on certain unregulated or lightly regulated entities or activities. The objectives of the review were to identify potential areas where systemic risks may not be fully captured in the current regulatory framework and to make recommendations on needed improvements to strengthen regulation of the financial system.

(Expanded – Press Release- found here – )


Press release

Press enquiries: +41 61 280 8188
8 January 2010
Joint Forum release of Review of the Differentiated Nature and Scope of Financial Regulation



Plot Outline:
This group is your chance to get behind the scenes of Richard Quest’s new business show on CNN International QUEST MEANS BUSINESS (Monday to Friday – 7pm BST/8p CET). Get a preview of what we are planning, talk with those of us involved with the show, and let us know what you think about the result.

QUEST MEANS BUSINESS is the definitive word on how we earn and spend our money. Monday to Friday, host Richard Quest, will preside over a cast of experts and correspondents to deliver unrivalled facts, figures and analysis from the business world – a nightly wealth check. It is the Program of Record on which chief executives come to justify results and the handling of their company.

The show will destroy the myth that business is boring, bridging the gap between hard economics and entertaining television. The ethos is inspiration, exploring the power of money and celebrating the entrepreneurial spirit.

Richard Quest’s new business show on CNN International Quest Means Business: Monday to Friday, 1900 BST. This group is THE place on Facebook to get a look behind the scenes of the show – find out what is planned, and talk with the staff.

CNN International

«CNN Homepage
* » Quest Means Business

January 29, 2010
Lost luggage and spilt sewage behind scenes at Davos
Posted: 1935 GMT

[ . . . ]

I’m not sure exactly how much rethinking, redesigning and rebuilding was done at Davos this year, but I would certainly endorse its value as a spectacle.

Posted by: CNN Digital Producer, Paul Armstrong
Filed under: Davos

January 28, 2010
Davos day two
Posted: 1846 GMT

Davos, Switzerland (CNN) – Day two of the World Economic Forum in Davos and the issues being talked about in the hallways are truly global. The number one talking point remains the need for new regulation and the new definition of capitalism. Bankers continue their fight against harsh new regulations – Bob Diamond told CNN, “I think it’s really important that the U.S. tries to integrate as closely as they can with the G-20 initiatives, particularly around capital, around leverage and around liquidity.” While John Mack of Morgan Stanley bemoaned the fact there wasn’t a proper forum for government and banks to come together to sort out a solution.


Ms. Nooyi did have one caution to offer – she reminded me that some of the issues had been on the Davos agenda over many years. It was time to deal with them and move on. Quite.

Tune in to CNN International each evening at 1900 GMT (or your local time) to watch Richard Quest on ‘Quest Means Business’.

For more information on Davos please visit www.cnn.com/davos

Filed under: Business • Davos

And the runners are off…
Posted: 1156 GMT

Davos, Switzerland (CNN) – The runners are off… Davos has begun. The agenda is clear: how to do things differently in the future, especially when it comes to the banks.

The discussion has been galvanized by U.S. President Barack Obama’s proposals to split the big Wall Street firms and ban proprietary trading. Stephen Green, chairman of HSBC, told me reform of the banks is needed but cautions against doing it in haste. And he doesn’t like Obama’s proposals for banning prop trading by banks, which he says is unworkable.

[ . . . ]

Tune in to CNN International each evening at 1900 GMT (or your local time) to watch Richard Quest on ‘Quest Means Business’.

For more information on Davos please visit http://www.cnn.com/davos

Posted by: Richard Quest
Filed under: Business • Davos

January 26, 2010
Rebuild, Redesign, Rethink
Posted: 1527 GMT

Davos, Switzerland (CNN) – The fire is out. It is time to build the new house. That is the underlying theme of Davos 2010, or more elegantly expressed in Davosian-speak as Rebuild, Redesign and Rethink. The founder of Davos Klaus Schwab defines these three Rs as rethinking values, redesigning financial systems and rebuilding institutions.

Of course this is much easier said than done. Last year few sat around and hesitated over preventing financial Armageddon. Now there are plenty of arguments about what should come next. Lots of these different agendas will be up for debate at the World Economic Forum.

Klaus Schwab admitted in his interview with me, “everybody will try to push his own interests.” I guess there is nothing wrong with that. However, to build something that will withstand the next financial hurricane, it is essential that it has strength and depth. Everyone needs to guard against weak plans simply because they are acceptable to all. That is not rebuilding, redesigning and rethinking; it is a recipe for ruin.

Tune in to CNN International each evening at 1900 GMT (or your local time) to watch Richard Quest on ‘Quest Means Business’.

For more information on Davos please visit www.cnn.com/davos

Posted by: Richard Quest
Filed under: Business • Davos

The UK Q4 GDP figures announced this morning were a shocker. However, the British economy scraped its way from recession in Q4 by its dirty finger nails. The median forecast of a 0.4 percent gain in GDP by the majority of renowned economists were rubbished and the official figure of 0.1 percent increase is a massive set back.

I wondered why Lord Mandelson was so guarded about the recovery, reiterating that it was so brittle. The services sector underperformed. It expanded by just 0.1 percent and not the 0.5 or 0.6 percent rise suggested by the business surveys.

With household incomes under pressure, credit in short supply and a major fiscal squeeze looming, the path to a full recovery is going to be a long and tortuous.

( . . . )

Going forward, this recovery may well be achieved with high unemployment. Last month’s retail sales rise of 0.3 percent was disappointing. Going forward we’re all skint with taxation likely to increase and with less disposable income finding its way to the shopping malls.  Retail is so important!


Posted by: David Buik, Market Analyst with BGC Partners
Filed under: Banking • Business

Quest Means Business is the definitive word on how we earn and spend our money. Monday to Friday, 1900 London, 2000 CET, 0300 HK, host Richard Quest presides over a cast of experts and correspondents to deliver unrivaled facts, figures and analysis from the business world.

JobQuest introduces you to real people looking for jobs. Follow their progress on the road to recovery every Tuesday on Quest Means Business.
If you are searching for work and would like to take part in JobQuest, e-mail quest@cnn.com

Jargon buster gives clear and concise definititions of baffling terms often used in business.
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Recent Posts

* Lost luggage and spilt sewage behind scenes at Davos
* Davos day two
* And the runners are off…
* Social media changing world – at what cost?
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* Davos for beginners
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* Celebrating our first year …
* Are you going to Davos?






number10, Downing Street, UK – official video clip site
Number10.gov.uk logo
The official site of the Prime Minister’s Office

Thursday 28 January 2010
Afghanistan Conference – PM’s opening remarks

London Conference family photograph; PA copyrightThe Prime Minister has delivered his opening remarks to the Afghanistan Conference in London on 28 January 2010.
Read the transcript

Overall international aid to Afghanistan in the last financial year was $6.3 billion – making up 45% of Afghan GDP.

International and Afghan forces are weakening the insurgency, applying pressure to its leadership.




“Welcome to the Tea Party” – ad on CNN – Check what they were saying and when


My Note –

On Quest Means Business today, there was a man being interviewed at Davos who was described as responsible for purchasing more ads and media buying than anyone in the world – who was that guy? He said that none of the countries which he named off one after another, were aware of nor expecting the announcement by President Obama about banks not being allowed to continue engaging in proprietary trading and hedge funds. However, that man given airtime on the CNN show, Quest means business lied to all of us and had international coverage without challenge in order to do it.

It just so happened that I had been looking up some of these things for another project that I was doing. When that man was saying that none of these countries’ leaders knew anything about what President Obama was suggesting about stopping banks from gambling with their depositors’ money by socking them into internal hedge funds and proprietary trading – I knew there was no way it could be being accurately portrayed.

So, here are some of the things that were sitting in front of me on my computer when that man was getting to tell the world that the changes being made by Washington in banking reform had caught every world leader off-guard . . .

I found this –
FSB welcomes US proposals for reducing moral hazard risks

The proposals announced by the US yesterday are amongst the range of options and approaches under consideration by the Financial Stability Board (FSB) in its work to address the moral hazard risks posed by too-big-to-fail (TBTF) institutions.

This work, which began last fall, will result in recommendations to G20 Leaders in October 2010. The FSB will publish and interim report on this work shortly after the June G20 Summit.

Several other options for addressing the TBTF problem are being considered by the FSB. These include: targeted capital, leverage, and liquidity requirements; improved supervisory approaches;  simplification of firm structures; strengthened national and cross-border resolution frameworks; and changes to financial infrastructure that reduce contagion risks.
Ref no: 05/2010
22 January 2010

(and this – )

International Organization of Securities Commissions




The Joint Forum has released its report, Review of the Differentiated Nature and Scope of Financial Regulation – Key Issues and Recommendations. This review was requested by the G20 through the Financial Stability Board. The report analyses key issues arising from the differentiated nature of financial regulation in the international banking, securities, and insurance sectors. It also addresses gaps arising from the scope of regulation as it relates to different financial activities, with a particular focus on certain unregulated or lightly regulated entities or activities. The objectives of the review were to identify potential areas where systemic risks may not be fully captured in the current regulatory framework and to make recommendations on needed improvements to strengthen regulation of the financial system.

(Expanded – Press Release- found here – )

(and this – )
The IASB, my fellow Trustees and I understand the unprecedented circumstances facing economic markets and policymakers. We are committed to acting in an urgent and responsible manner. Broad international adoption of IFRSs, combined with the actions described above, means that the IASB is working urgently to ensure a globally consistent response on financial reporting issues. The Trustees believe that the steps being undertaken by the IASB are appropriate. We look forward to the Monitoring Board’s continued support for the IASB’s efforts and the organisation’s independence.

(April 2009 quote from a letter by )

Gerrit Zalm
Chairman of the Trustees

( and the above pdf of his comments has a chart included which shows what was asked by the G20 members and what is being done to resolve the economic regulations and accounting disparities)

The suggestion that banks should not be investing their capital into internal hedge funds and engaging in proprietary trading has been one of the few suggestions that will ensure their failures do not create systemic risk. This suggested policy solution is one of the few upon which durn near every country agrees. No one was taken by surprise by the announcement of it being put into place at the first of this year. That man lied and you gave him an international forum in which to do it such that it looks like CNN fully supported the truth of what he said.

– It just isn’t right . . .

– cricketdiane, 01-30-10






Opening Remarks – World Economic Forum – Davos, Switzerland

President Sarkozy calls for a “new Bretton Woods”

In his opening address at the World Economic Forum Annual Meeting, President Nicolas Sarkozy of France said that it will not be possible to emerge from the global economic crisis and protect against future crises if the economic imbalances that are at the root of the problem are not addressed. “Countries with trade surpluses must consume more and improve the living standards and social protection of their citizens,” he remarked. “Countries with deficits must make an effort to consume a little less and repay their debts.” The world’s currency regime is central to the issue, Sarkozy argued. Exchange rate instability and the under-valuation of certain currencies lead to unfair trade and competition, he said.


Check against delivery 1/7


40th World Economic Forum
Davos – Wednesday, January 27, 2010

Ladies and Gentlemen, Heads of State and Government,

Ladies and Gentlemen,

May I begin by thanking Professor Schwab and all the organisational staff for inviting me to give the opening address to this 40th Annual Meeting of the World Economic Forum.

Ladies and Gentlemen, let me make things perfectly clear: as a political leader, I have not come here to teach, but to learn together from the lessons the of the crisis. We are all responsible for the crisis. And we are all responsible for the world we are going to leave to our children.

We all know what would have occurred, without State intervention to maintain confidence and support industry: total collapse. Not to draw the conclusion that we must, therefore, change our ways would be, quite simply, irresponsible.

This crisis is not just a global crisis.

It is not a crisis in globalisation

This crisis is a crisis of globalisation.

It is our vision of the world which, at a given moment, revealed its failings.
That is what we must correct.

There can be no prosperity without an efficient financial system, without the free circulation of goods and services, without situational revenues being called into question by competition.

But finance, free trade and competition are only means, not ends. From the moment we accepted the idea that the market was always right and that no other opposing factors need be taken into account, globalisation skidded out of control.

Let us look at the root of the problem: it was the imbalances in the world economy which fed the growth of global finance. Financial deregulation was introduced in order to be able to service the deficit of those who were consuming too much with the surplus of those who were not consuming enough. The perpetuation and accrual of these imbalances was both the driving force and the consequence of financial globalisation. In just the same way, the instability of financial markets was both the driving force and the consequence of the growth in financial trading.

Globalisation first took the form of globalisation of savings. It gave rise to a world in which everything was given to financial capital and almost nothing to labour, in which the entrepreneur gave way to the speculator, in which those who lived on unearned income left the workers far behind, in which the use of leverage, to an unreasonably disproportionate extent, created a form of capitalism in which taking risks with other people’s money was the norm, allowing quick and easy profits but all too often without creating either prosperity or jobs.

One of the most striking characteristics of this type of economy is that, within it, the present was all that mattered and the future counted for nothing. The steady depreciation of the future could be inferred from the exorbitant demand for high yields in the present. Those yields, inflated by leverage and speculation, were the discount rate applied to future revenues: the higher they rose, the lower the value of the future fell.

The same depreciation of the future could be seen in accounting practices which valued assets at the prices set by a marketplace fluctuating constantly to keep up with the ups and downs in share values. When the markets were on a high, balance sheets were reassessed, and the very same artificially boosted figures would feed a new high. When confidence fell, the balance sheets would suffer as a result and bring share prices down.

During the financial crisis we saw, up close, the damage done by that kind of accounting, when the collapse of the markets led to a collapse in the banks’ capital reserves and further tightened the credit crunch.

Our entire system of representation had been falsified: the economic value of a company does not change from one second to another, nor every minute, nor every hour… To gain a clear idea of just how absurd that kind of accounting can be, we need only think of the fact that, in a market value system, a company in trouble can report a profit simply because its diminished credit rating has reduced the market value of its debts

Our entire system of statistical assessment had been distorted, too.

In the statistics, we noted the increase in revenues.

In life, we saw a widening inequality gap.

In the statistics the standard of living was rising, but meanwhile the number of those feeling ever more keenly the hardships of life was also constantly increasing.

Let us read through the report from the Commission led by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi on the measurement of economic performance and social progress: to ask ourselves questions about how we measure these things is to ask ourselves what our goals are.

Such reflections must not be the exclusive province of experts and statisticians. We have to leave behind the culture of experts who talk only among themselves, each in their own field.

We have to learn to think things through together, to discuss together problems which, whatever their technical specifics, are the concern of all.

We will not be able to change our set ways if we do not change the way we measure and represent things, our criteria. That is not an issue only for the experts. It concerns us all.

We will continue to make our economy run risks greater than it can bear, to encourage speculation and to sacrifice our long-term future, if we do not change the regulation of our banking system and the rules for accounting and prudential oversight. That is not an issue only for the experts. It concerns us

We will never put an end to hunger, poverty and misery in the world if we do not succeed in stabilising the prices of raw materials, which at present are completely erratic. That is not an issueonly for the experts. It concerns us all.
We will not save the future of our planet if we do not pay the true price of scarcity. That is not an issue only for the experts. It concerns us all.

We will not reconcile our citizens to globalisation and to capitalism, if we are not capable of offsetting market forces with counterbalances and corrective measures. That, too, concerns us all.

By discarding all our responsibilities in the marketplace, we have created an economy which has ended up running counter to the values on which it was nominally based, and to its own objectives. By over-mutualising ownership and risk, we have diluted responsibility.

By placing free trade above all else we have weakened Democracy, because citizens expect from Democracy that it should protect them.

By prioritising short-term logic, we have paved the way for our entry into a time of scarcity. We have exhausted non-renewable resources, devastated the environment, caused global warming. Sustainable development cannot be achieved if profits up front and dividends for shareholders are our sole criteria. Through excessive deregulation, we have let dumping and unfair competition set in. We have let globalisation be based on external growth, with everybody trying to grow by taking the businesses, the jobs, the market shares of others, instead of by working harder, investing more, increasing productivity and capacity for innovation.

The globalisation we had dreamed of at the outset was of the kind where, instead of taking from others by means of monetary, social, fiscal or ecological dumping, each of us would found development on social progress, increased purchasing power, reduced inequality, improved standards of living, health and education…

Whether the venue is the ILO, the IMF, the World Bank, the FAO or the G20, at bottom we are always talking about the selfsame thing, seen from different points of view: how can we return the economy to the service of mankind? How can we act to ensure that the economy no longer appears as an end
itself, but as a means to an end? How can we move towards globalisation in which the development of each will assist the development of others? How can we build a more cooperative, less conflictual form of globalisation?

Let us be clear about this: we’re not asking ourselves what we will replace capitalism with, but whatkind of capitalism we want.

The crisis we are experiencing is not a crisis of capitalism. It is a crisis of the denaturing of capitalism – a crisis linked to loss of the values and references that have always been the foundation of capitalism.

Capitalism has always been inseparable from a system of values, a conception of civilisation, an idea of mankind.

Purely financial capitalism is a distortion, and we have seen the risks it involves for the world economy. But anti-capitalism is a dead end that is even worse.

We can only save capitalism by rebuilding it, by restoring its moral dimension. I know that this expression will call forth many questions.

What do we need, in the end, if it is not rules, principles, a governance that reflects shared values, a common morality? We cannot govern the world of the 21st century with the rules and principles of the 20th century. We cannot govern globalisation while relegating half of Humanity to the sidelines, without India, Africa or Latin America.

We cannot look at the post-crisis world in the same way as the world before the crisis.

Each of us must hold the conviction that the world of tomorrow cannot be the same as the world of yesterday.

There are indecent behaviours that will no longer be tolerated by public opinion in any country in the world.

There are excessive profits that will no longer be accepted because they are without common measure to the capacity to create wealth and jobs.

There are remuneration packages that will no longer be tolerated because they bear no relationship to merit. That those who create jobs and wealth may earn a lot of money is not shocking. But that those who contribute to destroying jobs and wealth also earn a lot of money is morally indefensible.
In the future, there will be a much greater demand for income to better reflect social utility and merit.

There will a much greater demand for justice.

There will be a much greater demand for protection.

And no-one can escape this. Either we change of our own accord, or change will be imposed on us by economic, social and political crises.

Either we are capable of responding to the demand for protection, justice and fairness through cooperation, regulation and governance, or we will have isolation and protectionism.

The G20 foreshadows the planetary governance of the 21st century. It symbolises the return of politics whose legitimacy was denied by unregulated globalisation.

In just one year, we have seen a genuine revolution in mentalities. For the first time in history, the Heads of State and government of the world’s 20 largest economic powers decided together on the measures that must be taken to combat a world crisis. They committed themselves, together, to
adopting common rules that will radically change the way the world economy operates.

Without the G20, trust could not have been restored.

Without the G20, we would have had the triumph of  every man for himself.

Without the G20, it would not have been possible to envisage regulating bonuses, closing down tax havens and changing the rules of accounting and prudential standards.

These decisions will not solve every problem, but just one year ago, would anyone have thought they were possible?

Now, however, they must be implemented

I would like to seize the opportunity to say this: the signs of recovery that seem to herald the end of the global recession should not encourage us to be less daring; rather, we must be even bolder. If we do nothing to change world governance, nothing to regulate the economy, if we do not reform our
systems of social protection, pensions, education and research, if we do not clean up our public finances, if we do not stringently prosecute the war against tax fraud, if we do not invest to prepare for the future, this recovery will be only a respite. The same causes will produce the same effects. Look at
the new bubbles that are already starting to form. Here, we cannot be certain that the States will still have the means to guarantee trust.

And how can we hope that people will continue to trust the word of States if the commitments made are not kept? If the absolutely crucial debate on accounting standards gets bogged down, if the private agencies to which we have delegated regulatory power deliberately flout the mandate given them by Heads of State and government, and we let them get away with it, what will be left of the credibility of the G20 and the prospect of world governance?

If competition is skewed by prudential rules that remain very different from one country to another, from one continent to another, whereas we had decided to implement the opposite; if we cannot coordinate our efforts, if we cannot even come to an understanding around a common definition of
capital when we had promised to do so – how can we be surprised that so many players consider it normal to return to the habits they had before the crisis?

How can we conceive that in a competitive world, we can insist that European banks have three times more capital to cover the risks of their market activities, without demanding the same of American or Asian banks?

How can we accept the obligation for banks to retain in their balance sheets a portion of their securitised loans if this obligation is not included in the regulation of G20 member countries, given that the principle was adopted by unanimous agreement?

If we devise standards that do not draw the lessons of the crisis and that lead long-term investors to scale down their equity portfolios, then we must not be surprised that market prices become even more unstable and that a large number of companies find themselves even more threatened by speculative

Failing to do what we decided would be an economic error, a political error, a moral error. Giving in to unilateralism, to  every man for himself , would also be an economic, political and moral error.

We must build our common future on the gains of multilateralism, on the gains of the G20, on the gains of Copenhagen.

Basically, we all know very well what we have to do together.

We must do away with a system without rules that drags everyone down and replace it with rules that draw everyone up.

But what is the point of agreeing on the rules if they are not applied?

This doesn’t mean having the same labour legislation everywhere.

It doesn’t mean imposing on poor countries the same standards as the rich countries. But how can we accept that some 50 Member States of the ILO have not yet ratified the eight conventions defining the fundamental rights of labour? And how can we ensure these conventions are respected?

In Copenhagen, quantified commitments on climate change were made by all the big countries. How can we ensure these commitments are respected without a World Environment Organisation to monitor their implementation? How can we not see that the possibility of adopting a carbon tax at borders against environmental dumping would, without any doubt, constitute a strong incentive to respect the common rule?

The crucial advance would be to put environment law, labour law and health law on the same footing as the law of trade. This revolution in world regulation would imply that specialised institutions can intervene in international – and notably commercial – disputes through prejudicial questions to be decided before an action can be brought. As I said before the General Meeting of the ILO in June last
year: the international community cannot continue to be schizophrenic by disowning at the WTO or the IMF what it decided at the ILO or the WHO, what it proclaimed in Copenhagen. Establishment of such prejudicial jurisdiction would put an end to this schizophrenia.

But how can we conceive of implementing these social and environmental standards without helping the poor countries to achieve the capacity to respect them?

How can we demand such a huge effort from them, given their many difficulties, if we do not support them in their efforts?

The question of innovative financing is central. We cannot avoid the debate on a tax on speculation. Whether we wish to restrain the frenzy of the financial markets, finance development aid or bring the poor countries into the fight against climate change, it all comes back to taxing financial transactions. Taxing the exorbitant profits of finance to combat poverty: who cannot see how such a decision – even if I am well aware of the complexity of implementing it – would contribute to putting us on the path of a moralisation of financial capitalism? I support without reservation the commitment of Gordon Brown, who was one of the first to defend this idea.

The other question we can no longer avoid is that of the role banks must play in the economy. The banker’s job is not to speculate, it is to analyse credit risk, assess the capacity of borrowers to repay their loans and finance growth of the economy. If financial capitalism went so wrong, it was, first and foremost, because many banks were no longer doing their job. Why take the risk of lending to entrepreneurs when it is so easy to earn money by speculating on the markets? Why lend only to those who can repay the loan when it is so easy to shift the risks off the balance sheet? President Obama is right when he says that banks must be dissuaded from engaging in proprietary speculation or financing speculative funds. But this debate cannot be confined to a single country, whatever its weight in global finance. This debate must be settled within the G20.

But I also wanted to say that it will not be possible to emerge from the crisis and protect ourselves against future crises, if we perpetuate the imbalances that are the root of the problem. Countries with trade surpluses must consume more and improve the living standards and social protection of their citizens. Countries with deficits must make an effort to consume a little less and repay their debts. Currency is central to these imbalances. It is the principal instrument of the policies that perpetuate them. We cannot put finance and the economy back in order if we allow the disorder of currencies to persist. Exchange rate instability and the under-valuation of certain currencies militate against fair trade and honest competition. Employment and purchasing power constitute the adjustment variablefor correcting monetary manipulations. The prosperity of the post-war era owed a great deal to Bretton Woods, to its rules and its institutions.

Today, we need a new Bretton Woods. We cannot have, on the one hand, a multipolar world and, on the other, a single benchmark currency across the globe. We cannot, on the one hand, preach free trade and, on the other, tolerate monetary dumping. France, which will chair the G8 and the G20 in 2011, will place the reform of the international monetary system on the agenda. Until then, we must manage, prudently, the adoption of measures to support activity and the withdrawal of the surplus liquidities injected during the crisis. We must take care to prevent too abrupt a tightening that would result in a global collapse.

So, what remains to be done is to bring into being a new growth model, invent a new linkage between public action and private initiative, invest massively in the technologies of the future that will drive the digital revolution and the ecological revolution. We must now invent the State, the company and the city of the 21st century.
A few years ago, people were predicting the end of nations, the advent of nomadism. But in the crisis, even the most globalised companies and the most global banks rediscovered that they had a nationality.

A few years ago, people were announcing the decline of organisations, the end of companies. We wanted to apply to companies the principles of portfolio management. We are rediscovering the fact that they are, first and foremost, human communities and living organisations. A few years ago, people were predicting that the city would spread, break up, and with it social
cohesion, human relations and community relations. We are rediscovering the need for community, for urban cohesion.

Basically, it looked as if citizenship would dissolve in the global market. But it has found new springsin the ordeal of the crisis. In the world of tomorrow, we must again reckon with citizens.

Citizen is not a separate category, it is each one of us. The company head, the shareholder, the employee, the trade unionist, the non-profit activist, the policy maker – they are all citizens who have responsibilities towards others, towards their country, towards future generations, towards the planet. Yes, in the world of tomorrow, we must again reckon with citizens, with the demands of morality, the demands of responsibility, the demands of dignity for citizens. We must see this not as yet another problem, but as part of the solution; not as an additional difficulty, but as something healthy and
virtuous, that may, perhaps, allow us to feel happier with what we are, happier with what we accomplish.



Bretton Woods system
From Wikipedia, the free encyclopedia

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.

Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. Then, on August 15, 1971 the United States unilaterally terminated convertibility of the dollar to gold. This action created the situation whereby the United States dollar became the sole backing of currencies and a reserve currency for the member states. In the face of increasing financial strain, the system collapsed in 1971.

* 1 Origins
o 1.1 Great Depression
+ 1.1.1 The idea of economic security
+ 1.1.2 Rise of governmental intervention
+ 1.1.3 Atlantic Charter
+ 1.1.4 Wartime devastation of Europe and East Asia
* 2 Design
o 2.1 Informal
+ 2.1.1 Previous regimes
+ 2.1.2 Fixed exchange rates
o 2.2 Formal regimes
+ 2.2.1 International Monetary Fund
# Designing the IMF
# Subscriptions and quotas
# Financing trade deficits
# Changing the par value
# IMF operations
+ 2.2.2 International Bank for Reconstruction and Development
* 3 Readjustment
o 3.1 Dollar shortages and the Marshall Plan
o 3.2 Cold War
* 4 Late Bretton Woods System
o 4.1 U.S. balance of payments crisis
o 4.2 Structural changes underpinning the decline of international monetary management
+ 4.2.1 Return to convertibility
+ 4.2.2 Growth of international currency markets
+ 4.2.3 Decline
# U.S. monetary influence
# Dollar
o 4.3 Paralysis of international monetary management
+ 4.3.1 Floating-rate Bretton Woods system 1968–1972
+ 4.3.2 Nixon Shock
+ 4.3.3 Smithsonian Agreement
* 5 Bretton Woods II
* 6 Academic legacy
* 7 Pegged rates
o 7.1 Japanese yen
o 7.2 Deutsche Mark
o 7.3 Pound sterling
o 7.4 French franc
o 7.5 Italian lira
o 7.6 Spanish peseta
o 7.7 Dutch gulden
o 7.8 Belgian franc
o 7.9 Greek drachma
o 7.10 Swiss franc
o 7.11 Danish krone
o 7.12 Finnish markka
* 8 See also
* 9 Notes
* 10 References
* 11 Further reading
* 12 External links


The political basis for the Bretton Woods system was in the confluence of several key conditions: the shared experiences of the Great Depression, the concentration of power in a small number of states (further enhanced by the exclusion of a number of important nations because of the war), and the presence of a dominant power willing and able to assume a leadership role in global monetary affairs.
Great Depression

A high level of agreement among the powerful on the goals and means of international economic management facilitated the decisions reached by the Bretton Woods Conference. Its foundation was based on a shared belief in capitalism. Although the developed countries’ governments differed in the type of capitalism they preferred for their national economies (France, for example, preferred greater planning and state intervention, whereas the United States favored relatively limited state intervention), all relied primarily on market mechanisms and on private ownership.

Thus, it is their similarities rather than their differences that appear most striking. All the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons.

The experience of the Great Depression was fresh on the minds of public officials. The planners at Bretton Woods hoped to avoid a repeat of the debacle of the 1930s, when intransigent American insistence as a creditor nation on the repayment of Allied war debts, combined with an inclination to isolationism, led to a breakdown of the international financial system and a worldwide economic depression.[1] The  beggar thy neighbor  policies of 1930s governments—using currency devaluations to increase the competitiveness of a country’s export products to reduce balance of payments deficits—worsened national deflationary spirals, which resulted in plummeting national incomes, shrinking demand, mass unemployment, and an overall decline in world trade. Trade in the 1930s became largely restricted to currency blocs (groups of nations that use an equivalent currency, such as the  Sterling Area  of the British Empire). These blocs retarded the international flow of capital and foreign investment opportunities. Although this strategy tended to increase government revenues in the short run, it dramatically worsened the situation in the medium and longer run.

Thus, for the international economy, planners at Bretton Woods all favored a regulated system, one that relied on a regulated market with tight controls on the value of currencies. Although they disagreed on the specific implementation of this system, all agreed on the need for tight controls.

The idea of economic security

Cordell Hull

Also based on experience of inter-war years, U.S. planners developed a concept of economic security—that a liberal international economic system would enhance the possibilities of postwar peace. One of those who saw such a security link was Cordell Hull, the United States Secretary of State from 1933 to 1944.[Notes 1] 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) [2] 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, itself provoked by German, French, and American protectionist policies. Hull argued

[U]nhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war…if we could get a freer flow of trade…freer in the sense of fewer discriminations and obstructions…so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.

Rise of governmental intervention

The developed countries also agreed that the liberal international economic system required governmental intervention. In the aftermath of the Great Depression, public management of the economy had emerged as a primary activity of governments in the developed states. Employment, stability, and growth were now important subjects of public policy. In turn, the role of government in the national economy had become associated with the assumption by the state of the responsibility for assuring of its citizens a degree of economic well-being. The welfare state grew out of the Great Depression, which created a popular demand for governmental intervention in the economy, and out of the theoretical contributions of the Keynesian school of economics, which asserted the need for governmental intervention to maintain an adequate level of employment.

However, increased government intervention in domestic economy brought with it isolationist sentiment that had a profoundly negative effect on international economics. The priority of national goals, independent national action in the interwar period, and the failure to perceive that those national goals could not be realized without some form of international collaboration—which resulted in “beggar-thy-neighbor” policies such as high tariffs, competitive devaluations that contributed to the breakdown of the gold-based international monetary system, domestic political instability, and international war. The lesson learned was, as the principal architect of the Bretton Woods system New Dealer Harry Dexter White put it:

the absence of a high degree of economic collaboration among the leading nations will…inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale.
—[Notes 2]

To ensure economic stability and political peace, states agreed to cooperate to closely regulate the production of their individual currencies to maintain fixed exchange rates between countries with the aim of more easily facilitating international trade. This was the foundation of the U.S. vision of postwar world free trade, which also involved lowering tariffs and among other things maintaining a balance of trade via fixed exchange rates that would be favorable to the capitalist system.

Thus, the more developed market economies agreed with the U.S. vision of post-war international economic management, which was to be designed to create and maintain an effective international monetary system and foster the reduction of barriers to trade and capital flows. In a sense, the new international monetary system was in fact a return to a system similar to the pre-war gold standard, only using US dollars as the world’s new reserve currency until the world’s gold supply could be reallocated via international trade. Thus, the new system would be devoid (initially) of governments meddling with their currency supply as they had during the years of economic turmoil preceding WWII. Instead, governments would closely police the production of their currencies and ensure that they would not artificially manipulate their price levels. If anything, Bretton Woods was in fact a return to a time devoid of increased governmental intervention in economies and currency systems.
Atlantic Charter
Roosevelt and Churchill during their secret meeting of August 9 – 12, 1941, in Newfoundland that resulted in the Atlantic Charter, which the U.S. and Britain officially announced two days later.

The Atlantic Charter, drafted during U.S. President Franklin D. Roosevelt’s August 1941 meeting with British Prime Minister Winston Churchill on a ship in the North Atlantic, was the most notable precursor to the Bretton Woods Conference. Like Woodrow Wilson before him, whose  Fourteen Points  had outlined U.S. aims in the aftermath of the First World War, Roosevelt set forth a range of ambitious goals for the postwar world even before the U.S. had entered the Second World War. The Atlantic Charter affirmed the right of all nations to equal access to trade and raw materials. Moreover, the charter called for freedom of the seas (a principal U.S. foreign policy aim since France and Britain had first threatened U.S. shipping in the 1790s), the disarmament of aggressors, and the  establishment of a wider and permanent system of general security.

As the war drew to a close, the Bretton Woods conference was the culmination of some two and a half years of planning for postwar reconstruction by the Treasuries of the U.S. and the UK. U.S. representatives studied with their British counterparts the reconstitution of what had been lacking between the two world wars: a system of international payments that would allow trade to be conducted without fear of sudden currency depreciation or wild fluctuations in exchange rates—ailments that had nearly paralyzed world capitalism during the Great Depression.

Without a strong European market for U.S. goods and services, most policymakers believed, the U.S. economy would be unable to sustain the prosperity it had achieved during the war. In addition, U.S. unions had only grudgingly accepted government-imposed restraints on their demand during the war, but they were willing to wait no longer, particularly as inflation cut into the existing wage scales with painful force. (By the end of 1945, there had already been major strikes in the automobile, electrical, and steel industries.)

In early 1945 Bernard Baruch described the spirit of Bretton Woods as: if we can  stop subsidization of labor and sweated competition in the export markets,  as well as prevent rebuilding of war machines,  oh boy, oh boy, what long term prosperity we will have. [4] The United States [c]ould therefore use its position of influence to reopen and control the [rules of the] world economy, so as to give unhindered access to all nations’ markets and materials.
Wartime devastation of Europe and East Asia

Besides that, U.S. allies—economically exhausted by the war—accepted this leadership. They needed U.S. assistance to rebuild their domestic production and to finance their international trade; indeed, they needed it to survive.

Before the war, the French and the British were realizing that they could no longer compete with U.S. industry in an open marketplace. During the 1930s, the British had created their own economic bloc to shut out U.S. goods. Churchill did not believe that he could surrender that protection after the war, so he watered down the Atlantic Charter’s  free access  clause before agreeing to it.

Yet, the U.S. officials were determined to open their access to the British empire. The combined value of British and U.S. trade was well over half of all the world’s trade in goods. For the U.S. to open global markets, it first had to split the British (trade) empire. While Britain had economically dominated the 19th century, the U.S. officials intended the second half of the 20th to be under U.S. hegemony[Notes 3]

According to one commentator,

One of the reasons Bretton Woods worked was that the US was clearly the most powerful country at the table and so ultimately was able to impose its will on the others, including an often-dismayed Britain. At the time, one senior official at the Bank of England described the deal reached at Bretton Woods as “the greatest blow to Britain next to the war”, largely because it underlined the way in which financial power had moved from the UK to the US.
—Business Spectator[5]

A devastated Britain had little choice. Two world wars had destroyed the country’s principal industries that paid for the importation of half the nation’s food and nearly all its raw materials except coal. The British had no choice but to ask for aid. Not until the United States signed an agreement on December 6, 1945 to grant Britain aid of $4.4 billion did the British Parliament ratify the Bretton Woods Agreements (which occurred later in December 1945).[6]

For nearly two centuries, French and U.S. interests had clashed in both the Old World and the New World. During the war, French mistrust of the United States was embodied by General Charles de Gaulle, president of the French provisional government. De Gaulle bitterly fought U.S. officials as he tried to maintain his country’s colonies and diplomatic freedom of action. In turn, U.S. officials saw de Gaulle as a political extremist.

But in 1945 de Gaulle—at that point the leading voice of French nationalism—was forced to grudgingly ask the U.S. for a billion-dollar loan. Most of the request was granted; in return France promised to curtail government subsidies and currency manipulation that had given its exporters advantages in the world market.

On a far more profound level, as the Bretton Woods conference was convening, the greater part of the Third World remained politically and economically subordinate. Linked to the developed countries of the West economically and politically—formally and informally—these states had little choice but to acquiesce in the international economic system established for them. In the East, Soviet hegemony in Eastern Europe provided the foundation for a separate international economic system.

Free trade relied on the free convertibility of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade.

The liberal economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard, but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency.
Previous regimes

In the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk of trading with other countries.

Imbalances in international trade were theoretically rectified automatically by the gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend. This decrease in the amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this period was the British pound. Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War.

The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the nineteenth century. Gold production was not even sufficient to meet the demands of growing international trade and investment. And a sizeable share of the world’s known gold reserves were located in the Soviet Union, which would later emerge as a Cold War rival to the United States and Western Europe.

The only currency strong enough to meet the rising demands for international liquidity was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.
Fixed exchange rates

The Bretton Woods system sought to secure the advantages of the gold standard without its disadvantages. Thus, a compromise was sought between the polar alternatives of either freely floating or irrevocably fixed rates—an arrangement that might gain the advantages of both without suffering the disadvantages of either while retaining the right to revise currency values on occasion as circumstances warranted.

The rules of Bretton Woods, set forth in the articles of agreement of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), provided for a system of fixed exchange rates. The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade.

What emerged was the  pegged rate  currency regime. Members were required to establish a parity of their national currencies in terms of gold (a  peg ) and to maintain exchange rates within plus or minus 1% of parity (a  band ) by intervening in their foreign exchange markets (that is, buying or selling foreign money).

In theory the reserve currency would be the bancor, suggested by John Maynard Keynes; however, the United States objected and their request was granted, making the  reserve currency  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 plus or minus 1% of parity. Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system. (Rogue Nation, 2003, Clyde Prestowitz)

Meanwhile, to bolster faith in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $35 per ounce of gold. At this rate, foreign governments and central banks were able to exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, in which all currencies were defined in relation to the dollar, itself convertible into gold, and above all,  as good as gold . The U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. As the world’s key currency, most international transactions were denominated in US dollars.

The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.

Member countries could only change their par value with IMF approval, which was contingent on IMF determination that its balance of payments was in a  fundamental disequilibrium .
Formal regimes

The Bretton Woods Conference led to the establishment of the IMF and the IBRD (now the World Bank), which still remain powerful forces in the world economy.

As mentioned, a major point of common ground at the Conference was the goal to avoid a recurrence of the closed markets and economic warfare that had characterized the 1930s. Thus, negotiators at Bretton Woods also agreed that there was a need for an institutional forum for international cooperation on monetary matters. Already in 1944 the British economist John Maynard Keynes emphasized  the importance of rule-based regimes to stabilize business expectations —something he accepted in the Bretton Woods system of fixed exchange rates. Currency troubles in the interwar years, it was felt, had been greatly exacerbated by the absence of any established procedure or machinery for intergovernmental consultation.

As a result of the establishment of agreed upon structures and rules of international economic interaction, conflict over economic issues was minimized, and the significance of the economic aspect of international relations seemed to recede.
International Monetary Fund
Main article: International Monetary Fund

Officially established on December 27, 1945, when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management. The Fund commenced its financial operations on March 1, 1947. IMF approval was necessary for any change in exchange rates in excess of 10%. It advised countries on policies affecting the monetary system.
Designing the IMF

The big question at the Bretton Woods conference with respect to the institution that would emerge as the IMF was the issue of future access to international liquidity and whether that source should be akin to a world central bank able to create new reserves at will or a more limited borrowing mechanism.
John Maynard Keynes (right) and Harry Dexter White at the inaugural meeting of the International Monetary Fund’s Board of Governors in Savannah, Georgia, U.S., March 8, 1946

Although attended by 44 nations, discussions at the conference were dominated by two rival plans developed by the United States and Britain. As the chief international economist at the U.S. Treasury in 1942–44, Harry Dexter White drafted the U.S. blueprint for international access to liquidity, which competed with the plan drafted for the British Treasury by Keynes. Overall, White’s scheme tended to favor incentives designed to create price stability within the world’s economies, while Keynes’ wanted a system that encouraged economic growth.

At the time, gaps between the White and Keynes plans seemed enormous. Outlining the difficulty of creating a system that every nation could accept in his speech at the closing plenary session of the Bretton Woods conference on July 22, 1944, Keynes stated:

We, the delegates of this Conference, Mr. President, have been trying to accomplish something very difficult to accomplish.[…] It has been our task to find a common measure, a common standard, a common rule acceptable to each and not irksome to any.
—[Notes 4]

Keynes’ proposals would have established a world reserve currency (which he thought might be called  bancor ) administered by a central bank vested with the possibility of creating money and with the authority to take actions on a much larger scale (understandable considering deflationary problems in Britain at the time).

In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary.

But the United States, as a likely creditor nation, and eager to take on the role of the world’s economic powerhouse, balked at Keynes’ plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country.

Although compromise was reached on some points, because of the overwhelming economic and military power of the United States, the participants at Bretton Woods largely agreed on White’s plan.
Subscriptions and quotas

What emerged largely reflected U.S. preferences: a system of subscriptions and quotas embedded in the IMF, which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country as opposed to a world central bank capable of creating money. The Fund was charged with managing various nations’ trade deficits so that they would not produce currency devaluations that would trigger a decline in imports.

The IMF is provided with a fund, composed of contributions of member countries in gold and their own currencies. The original quotas were to total $8.8 billion. When joining the IMF, members are assigned  quotas  reflecting their relative economic power, and, it is as a sort of credit deposit, were obliged to pay a  subscription of an amount commensurate to the quota. The subscription is to be paid 25% in gold or currency convertible into gold (effectively the dollar, which was the only currency then still directly gold convertible for central banks) and 75% in the member’s own currency.

Quota subscriptions are to form the largest source of money at the IMF’s disposal. The IMF set out to use this money to grant loans to member countries with financial difficulties. Each member is then entitled to withdraw 25% of its quota immediately in case of payment problems. If this sum should be insufficient, each nation in the system is also able to request loans for foreign currency.

Financing trade deficits

In the event of a deficit in the current account, Fund members, when short of reserves, would be able to borrow foreign currency in amounts determined by the size of its quota. In other words, the higher the country’s contribution was, the higher the sum of money it could borrow from the IMF.

Members were required to pay back debts within a period of 18 months to five years. In turn, the IMF embarked on setting up rules and procedures to keep a country from going too deeply into debt year after year. The Fund would exercise  surveillance  over other economies for the U.S. Treasury in return for its loans to prop up national currencies.

IMF loans were not comparable to loans issued by a conventional credit institution. Instead, they were effectively a chance to purchase a foreign currency with gold or the member’s national currency.

The U.S.-backed IMF plan sought to end restrictions on the transfer of goods and services from one country to another, eliminate currency blocs, and lift currency exchange controls.

The IMF was designed to advance credits to countries with balance of payments deficits. Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates. This flexibility meant a member state would not have to induce a depression to cut its national income down to such a low level that its imports would finally fall within its means. Thus, countries were to be spared the need to resort to the classical medicine of deflating themselves into drastic unemployment when faced with chronic balance of payments deficits. Before the Second World War, European nations—particularly Britain—often resorted to this.
Changing the par value

The IMF sought to provide for occasional discontinuous exchange-rate adjustments (changing a member’s par value) by international agreement. Member nations were permitted first to depreciate (or appreciate in opposite situations) their currencies by 10%. This tended to restore equilibrium in their trade by expanding their exports and contracting imports. This would be allowed only if there was a  fundamental disequilibrium . A decrease in the value of a country’s money was called a  devaluation , while an increase in the value of the country’s money was called a  revaluation .

It was envisioned that these changes in exchange rates would be quite rare. Regrettably, the notion of fundamental disequilibrium, though key to the operation of the par value system, was never spelled out in any detail—an omission that would eventually come back to haunt the regime in later years.

IMF operations

Never before had international monetary cooperation been attempted on a permanent institutional basis. Even more groundbreaking was the decision to allocate voting rights among governments, not on a one-state one-vote basis, but rather in proportion to quotas. Since the United States was contributing the most, U.S. leadership was the key. Under the system of weighted voting, the United States exerted a preponderant influence on the IMF. The United States held one-third of all IMF quotas at the outset, enough on its own to veto all changes to the IMF Charter.

In addition, the IMF was based in Washington, D.C., and staffed mainly by U.S. economists. It regularly exchanged personnel with the U.S. Treasury. When the IMF began operations in 1946, President Harry S. Truman named White as its first U.S. Executive Director. Since no Deputy Managing Director post had yet been created, White served occasionally as Acting Managing Director and generally played a highly influential role during the IMF’s first year.
International Bank for Reconstruction and Development
Main article: International Bank for Reconstruction and Development

The agreement made no provisions for international creation of reserves. New gold production was assumed to be sufficient. In the event of structural disequilibria, it was expected that there would be national solutions, for example, an adjustment in the value of the currency or an improvement by other means of a country’s competitive position. The IMF was left with few means, however, to encourage such national solutions.

It had been recognized in 1944 that the new system could only commence after a return to normalcy following the disruption of World War II. It was expected that after a brief transition period of no more than five years, the international economy would recover and the system would enter into operation.

To promote the growth of world trade and to finance the postwar reconstruction of Europe, the planners at Bretton Woods created another institution, the International Bank for Reconstruction and Development (IBRD), now the most important agency of the World Bank Group. The IBRD had an authorized capitalization of $10 billion and was expected to make loans of its own funds to underwrite private loans and to issue securities to raise new funds to make possible a speedy postwar recovery. The IBRD was to be a specialized agency of the United Nations charged with making loans for economic development purposes.
Dollar shortages and the Marshall Plan

The Bretton Wood arrangements were largely adhered to and ratified by the participating governments. It was expected that national monetary reserves, supplemented with necessary IMF credits, would finance any temporary balance of payments disequilibria. But this did not prove sufficient to get Europe out of its doldrums.

Postwar world capitalism suffered from a huge dollar shortage. The United States was running huge balance of trade surpluses, and the U.S. reserves were immense and growing. It was necessary to reverse this flow. Dollars had to leave the United States and become available for international use. In other words, the United States would have to reverse the natural economic processes and run a balance of payments deficit.

The modest credit facilities of the IMF were clearly insufficient to deal with Western Europe’s huge balance of payments deficits. The problem was further aggravated by the reaffirmation by the IMF Board of Governors in the provision in the Bretton Woods Articles of Agreement that the IMF could make loans only for current account deficits and not for capital and reconstruction purposes.

Only the United States contribution of $570 million was actually available for IBRD lending. In addition, because the only available market for IBRD bonds was the conservative Wall Street banking market, the IBRD was forced to adopt a conservative lending policy, granting loans only when repayment was assured. Given these problems, by 1947 the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system’s economic problems.[7]

The United States set up the European Recovery Program (Marshall Plan) to provide large-scale financial and economic aid for rebuilding Europe largely through grants rather than loans. This included countries belonging to the Soviet block, e.g., Poland. In a speech at Harvard University on June 5, 1947, U.S. Secretary of State George Marshall stated:

The breakdown of the business structure of Europe during the war was complete. …Europe’s requirements for the next three or four years of foreign food and other essential products… principally from the United States… are so much greater than her present ability to pay that she must have substantial help or face economic, social and political deterioration of a very grave character.
—[Notes 5]

From 1947 until 1958, the U.S. deliberately encouraged an outflow of dollars, and, from 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy. Dollars flowed out through various U.S. aid programs: the Truman Doctrine entailing aid to the pro-U.S. Greek and Turkish regimes, which were struggling to suppress communist revolution, aid to various pro-U.S. regimes in the Third World, and most important, the Marshall Plan. From 1948 to 1954 the United States provided 16 Western European countries $17 billion in grants.

To encourage long-term adjustment, the United States promoted European and Japanese trade competitiveness. Policies for economic controls on the defeated former Axis countries were scrapped. Aid to Europe and Japan was designed to rebuild productivity and export capacity. In the long run it was expected that such European and Japanese recovery would benefit the United States by widening markets for U.S. exports, and providing locations for U.S. capital expansion.

In 1956, the World Bank created the International Finance Corporation and in 1960 it created the International Development Association (IDA). Both have been controversial. Critics of the IDA argue that it was designed to head off a broader based system headed by the United Nations, and that the IDA lends without consideration for the effectiveness of the program. Critics also point out that the pressure to keep developing economies  open  has led to their having difficulties obtaining funds through ordinary channels, and a continual cycle of asset buy up by foreign investors and capital flight by locals. Defenders of the IDA pointed to its ability to make large loans for agricultural programs which aided the  Green Revolution  of the 1960s, and its functioning to stabilize and occasionally subsidize Third World governments, particularly in Latin America.

Bretton Woods, then, created a system of triangular trade: the United States would use the convertible financial system to trade at a tremendous profit with developing nations, expanding industry and acquiring raw materials. It would use this surplus to send dollars to Europe, which would then be used to rebuild their economies, and make the United States the market for their products. This would allow the other industrialized nations to purchase products from the Third World, which reinforced the American role as the guarantor of stability. When this triangle became destabilized, Bretton Woods entered a period of crisis that ultimately led to its collapse.

Cold War

In 1945, Roosevelt and Churchill prepared the postwar era by negotiating with Joseph Stalin at Yalta about respective zones of influence; this same year Germany was divided into four occupation zones (Soviet, American, British, and French).
Harry Dexter White succeeded in getting the Soviet Union to participate in the Bretton Woods conference in 1944, but his goal was frustrated when the Soviet Union would not join the IMF. In the past, the reasons why the Soviet Union chose not to subscribe to the articles by December 1945 have been the subject of speculation. But since the release of relevant Soviet archives, it is now clear that the Soviet calculation was based on the behavior of the parties that had actually expressed their assent to the Bretton Woods Agreements. The extended debates about ratification that had taken place both in the UK and the U.S. were read in Moscow as evidence of the quick disintegration of the wartime alliance.

Facing the Soviet Union, whose power had also strengthened and whose territorial influence had expanded, the U.S. assumed the role of leader of the capitalist camp. The rise of the postwar U.S. as the world’s leading industrial, monetary, and military power was rooted in the fact that the mainland U.S. was untouched by the war, in the instability of the national states in postwar Europe, and the wartime devastation of the Soviet and European economies.

Despite the economic effort imposed by such a policy, being at the center of the international market gave the U.S. unprecedented freedom of action in pursuing its foreign affairs goals. A trade surplus made it easier to keep armies abroad and to invest outside the U.S., and because other nations could not sustain foreign deployments, the U.S. had the power to decide why, when and how to intervene in global crises. The dollar continued to function as a compass to guide the health of the world economy, and exporting to the U.S. became the primary economic goal of developing or redeveloping economies. This arrangement came to be referred to as the Pax Americana, in analogy to the Pax Britannica of the late 19th century and the Pax Romana of the first. (See Globalism)

Late Bretton Woods System

U.S. balance of payments crisis

After the end of World War II, the U.S. held $26 billion in gold reserves, of an estimated total of $40 billion (approx 60%). As world trade increased rapidly through the 1950s, the size of the gold base increased by only a few percent.

In 1950, the U.S. balance of payments swung negative. The first U.S. response to the crisis was in the late 1950s when the Eisenhower administration placed import quotas on oil and other restrictions on trade outflows. More drastic measures were proposed, but not acted upon.

However, with a mounting recession that began in 1958, this response alone was not sustainable. In 1960, with Kennedy’s election, a decade-long effort to maintain the Bretton Woods System at the $35/ounce price was begun.

The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States’ dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars.

Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the $35 per ounce official price. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market.

In 1960 Robert Triffin noticed that holding dollars was more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin’s Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world’s economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.[8]

The first effort was the creation of the London Gold Pool on November 1 of 1961 between eight nations. The theory behind the pool was that spikes in the free market price of gold, set by the morning gold fix in London, could be controlled by having a pool of gold to sell on the open market, that would then be recovered when the price of gold dropped. Gold’s price spiked in response to events such as the Cuban Missile Crisis, and other smaller events, to as high as $40/ounce. The Kennedy administration drafted a radical change of the tax system to spur more production capacity and thus encourage exports. This culminated with the 1963 tax cut program, designed to maintain the $35 peg.

In 1967, there was an attack on the pound and a run on gold in the sterling area, and on November 18, 1967, the British government was forced to devalue the pound.[9] U.S. President Lyndon Baines Johnson was faced with a brutal choice, either institute protectionist measures, including travel taxes, export subsidies and slashing the budget—or accept the risk of a  run on gold  and the dollar. From Johnson’s perspective:  The world supply of gold is insufficient to make the present system workable—particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth. [10] He believed that the priorities of the United States were correct, and, although there were internal tensions in the Western alliance, that turning away from open trade would be more costly, economically and politically, than it was worth:  Our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies. [citation needed]

While West Germany agreed not to purchase gold from the U.S., and agreed to hold dollars instead, the pressure on both the dollar and the pound sterling continued. In January 1968 Johnson imposed a series of measures designed to end gold outflow, and to increase U.S. exports. This was unsuccessful, however, as in mid-March 1968 a run on gold ensued, the London Gold Pool was dissolved, and a series of meetings attempted to rescue or reform the existing system.[11] But, as long as the U.S. commitments to foreign deployment continued, particularly to Western Europe, there was little that could be done to maintain the gold peg.[citation needed][original research?]

All attempts to maintain the peg collapsed in November 1968, and a new policy program attempted to convert the Bretton Woods system into an enforcement mechanism of floating the gold peg, which would be set by either fiat policy or by a restriction to honor foreign accounts. The collapse of the gold pool and the refusal of the pool members to trade gold with private entities—on March 18, 1968 the Congress of the United States repealed the 25% requirement of gold backing of the dollar[12]—as well as the US pledge to suspend gold sales to governments that trade in the private markets,[13] led to the expansion of the private markets for international gold trade, in which the price of gold rose much higher than the official dollar price.[14] [15] The US gold reserves continued to be depleted due to the actions of some nations, notably France,[15] who continued to build up their gold reserves.

[edit] Structural changes underpinning the decline of international monetary management
[edit] Return to convertibility

In the 1960s and 70s, important structural changes eventually led to the breakdown of international monetary management. One change was the development of a high level of monetary interdependence. The stage was set for monetary interdependence by the return to convertibility of the Western European currencies at the end of 1958 and of the Japanese yen in 1964. Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence.

[edit] Growth of international currency markets

Another aspect of the internationalization of banking has been the emergence of international banking consortia. Since 1964 various banks had formed international syndicates, and by 1971 over three quarters of the world’s largest banks had become shareholders in such syndicates. Multinational banks can and do make huge international transfers of capital not only for investment purposes but also for hedging and speculating against exchange rate fluctuations.

These new forms of monetary interdependence made possible huge capital flows. During the Bretton Woods era countries were reluctant to alter exchange rates formally even in cases of structural disequilibria. Because such changes had a direct impact on certain domestic economic groups, they came to be seen as political risks for leaders. As a result official exchange rates often became unrealistic in market terms, providing a virtually risk-free temptation for speculators. They could move from a weak to a strong currency hoping to reap profits when a revaluation occurred. If, however, monetary authorities managed to avoid revaluation, they could return to other currencies with no loss. The combination of risk-free speculation with the availability of huge sums was highly destabilizing.

[edit] Decline
[edit] U.S. monetary influence

A second structural change that undermined monetary management was the decline of U.S. hegemony. The U.S. was no longer the dominant economic power it had been for more than two decades. By the mid-1960s, the E.E.C. and Japan had become international economic powers in their own right. With total reserves exceeding those of the U.S., with higher levels of growth and trade, and with per capita income approaching that of the U.S., Europe and Japan were narrowing the gap between themselves and the United States.

The shift toward a more pluralistic distribution of economic power led to increasing dissatisfaction with the privileged role of the U.S. dollar as the international currency. As in effect the world’s central banker, the U.S., through its deficit, determined the level of international liquidity. In an increasingly interdependent world, U.S. policy greatly influenced economic conditions in Europe and Japan. In addition, as long as other countries were willing to hold dollars, the U.S. could carry out massive foreign expenditures for political purposes—military activities and foreign aid—without the threat of balance-of-payments constraints.

Dissatisfaction with the political implications of the dollar system was increased by détente between the U.S. and the Soviet Union. The Soviet threat had been an important force in cementing the Western capitalist monetary system. The U.S. political and security umbrella helped make American economic domination palatable for Europe and Japan, which had been economically exhausted by the war. As gross domestic production grew in European countries, trade grew. When common security tensions lessened, this loosened the transatlantic dependence on defence concerns, and allowed latent economic tensions to surface.
[edit] Dollar

Reinforcing the relative decline in U.S. power and the dissatisfaction of Europe and Japan with the system was the continuing decline of the dollar—the foundation that had underpinned the post-1945 global trading system. The Vietnam War and the refusal of the administration of U.S. President Lyndon B. Johnson to pay for it and its Great Society programs through taxation resulted in an increased dollar outflow to pay for the military expenditures and rampant inflation, which led to the deterioration of the U.S. balance of trade position.[citation needed] In the late 1960s, the dollar was overvalued with its current trading position, while the Deutsche Mark and the yen were undervalued; and, naturally, the Germans and the Japanese had no desire to revalue and thereby make their exports more expensive, whereas the U.S. sought to maintain its international credibility by avoiding devaluation. Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.[15]

In contrast, upon the creation of Bretton Woods, with the U.S. producing half of the world’s manufactured goods and holding half its reserves, the twin burdens of international management and the Cold War were possible to meet at first. Throughout the 1950s Washington sustained a balance of payments deficit to finance loans, aid, and troops for allied regimes. But during the 1960s the costs of doing so became less tolerable. By 1970 the U.S. held under 16% of international reserves. Adjustment to these changed realities was impeded by the U.S. commitment to fixed exchange rates and by the U.S. obligation to convert dollars into gold on demand.[citation needed]

[edit] Paralysis of international monetary management
[edit] Floating-rate Bretton Woods system 1968–1972

By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. Gold outflows from the U.S. accelerated, and despite gaining assurances from Germany and other nations to hold gold, the unbalanced fiscal spending of the Johnson administration had transformed the dollar shortage of the 1940s and 1950s into a dollar glut by the 1960s. In 1967, the IMF agreed in Rio de Janeiro to replace the tranche division set up in 1946. Special Drawing Rights were set as equal to one U.S. dollar, but were not usable for transactions other than between banks and the IMF. Nations were required to accept holding Special Drawing Rights (SDRs) equal to three times their allotment, and interest would be charged, or credited, to each nation based on their SDR holding. The original interest rate was 1.5%.

The intent of the SDR system was to prevent nations from buying pegged gold and selling it at the higher free market price, and give nations a reason to hold dollars by crediting interest, at the same time setting a clear limit to the amount of dollars that could be held. The essential conflict was that the American role as military defender of the capitalist world’s economic system was recognized, but not given a specific monetary value. In effect, other nations  purchased  American defense policy by taking a loss in holding dollars. They were only willing to do this as long as they supported U.S. military policy. Because of the Vietnam War and other unpopular actions, the pro-U.S. consensus began to evaporate. The SDR agreement, in effect, monetized the value of this relationship, but did not create a market for it.

The use of SDRs as paper gold seemed to offer a way to balance the system, turning the IMF, rather than the U.S., into the world’s central banker. The U.S. tightened controls over foreign investment and currency, including mandatory investment controls in 1968. In 1970, U.S. President Richard Nixon lifted import quotas on oil in an attempt to reduce energy costs; instead, however, this exacerbated dollar flight, and created pressure from petro-dollars. Still, the U.S. continued to draw down reserves. In 1971 it had a reserve deficit of $56 billion; as well, it had depleted most of its non-gold reserves and had only 22% gold coverage of foreign reserves. In short, the dollar was tremendously overvalued with respect to gold.
[edit] Nixon Shock
Main article: Nixon Shock

By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit. The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.

In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly  closed the gold window , making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the  Nixon Shock .

The surcharge was dropped in December 1971 as part of a general revaluation of major currencies, which were henceforth allowed 2.25% devaluations from the agreed exchange rate. But even the more flexible official rates could not be defended against the speculators. By March 1976, all the major currencies were floating—in other words, exchange rates were no longer the principal method used by governments to administer monetary policy.
[edit] Smithsonian Agreement
Main article: Smithsonian Agreement

The shock of August 15 was followed by efforts under U.S. leadership to develop a new system of international monetary management. Throughout the fall of 1971, there was a series of multilateral and bilateral negotiations of the Group of Ten seeking to develop a new multilateral monetary system.

On December 17 and 18, 1971, the Group of Ten, meeting in the Smithsonian Institution in Washington, created the Smithsonian Agreement, which devalued the dollar to $38/ounce, with 2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It was criticized at the time, and was by design a  temporary  agreement. It failed to impose discipline on the U.S. government, and with no other credibility mechanism in place, the pressure against the dollar in gold continued.

This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.
[edit] Bretton Woods II
Main article: Bretton Woods II

Dooley, Folkerts-Landau and Garber have referred to the monetary system of today as Bretton Woods II. They argue that today, like 40 years ago, the international system is composed of a core issuing the dominant international currency, and a periphery. The periphery is committed to export-led growth based on the maintenance of an undervalued exchange rate. In the 1960s, the core was the United States and the periphery was Europe and Japan. This old periphery has since ‘graduated’, and the new periphery is Asia. The core remains the same, the United States. The argument is that a system of pegged currencies, in which the periphery export capital to the core that provides a financial intermediary role is both stable and desirable, although this notion is controversial.[16]

This meaning of  Bretton Woods 2  has been somewhat superseded in the wake of the Global financial crisis of 2008, as policymakers and others have called for a new international monetary system that some of them dub Bretton Woods 2. On the other side this crisis has revived the debate about Bretton Woods II.[Notes 6]

The term dollar hegemony is coined by Henry C.K. Liu to describe the hegemonic role of the US dollar in the globalized economy.
On September 26, 2008, French president, Nicolas Sarkozy, said,  we must rethink the financial system from scratch, as at Bretton Woods.”[17]

On September 24-25, 2009 US President Obama hosted the G20 in Pittsburgh at the David L. Lawrence Convention Center. A realignment of currency exchange rates was proposed. This meeting’s policy outcome could be known as the Pittsburgh Agreement of 2009, where deficit nations may devalue their currencies and surplus nations may revalue theirs upward.
[edit] Academic legacy

The collapse of the Bretton Woods system led to the study in economics of credibility as a distinct field, and to the prominence of  open  macroeconomic models, such as the Mundell-Fleming model.[citation needed]
[edit] Pegged rates

Dates shown are those on which the rate was introduced;  *  indicates floating rate supplied by IMF[18]
[edit] Japanese yen
Date     # yens = $1 US
August 1946     15
12 March 1947     50
5 July 1948     270
25 April 1949     360
20 July 1971     308
30 December 1998     115.60*
5 December 2008     92.499*

Note: GDP for 2007 is $4.272 trillion US Dollars
[edit] Deutsche Mark
Date     # marks = $1 US     Note
21 June 1948     3.33
18 September 1949     4.20
6 March 1961     4
29 October 1969     3.67
30 December 1998     1.673*     Last day of trading; converted to euro (Jan 4 1999)

Note: GDP for 2007 is $2.807 trillion US Dollars
[edit] Pound sterling
Date     # pounds = $1 US
27 December 1945     1/4.03 = 0.25
18 September 1949     1/2.8 = 0.36
17 November 1967     1/2.4 = 0.42
30 December 1998     0.598*
5 December 2008     0.681*

Note: GDP for 2007 is $2.1 trillion US Dollars
[edit] French franc
Date     # francs = $1 US     Note
27 December 1945     119.11     £1 = 480 FRF
26 January 1948     214.39     £1 = 864 FRF
18 October 1948     263.52     £1 = 1062 FRF
27 April 1949     272.21     £1 = 1097 FRF
20 September 1949     350     £1 = 980 FRF
10 August 1957     420     £1 = 1176 FRF
27 December 1958     493.71     1 FRF = 1.8 mg gold
1 January 1960     4.9371     1 new franc = 100 old francs
10 August 1968     5.48     1 new franc = 162 mg gold
31 December 1998     5.627*     Last day of trading; converted to euro (Jan 4 1999)

Note: GDP for 2007 is $2.075 trillion US Dollars
[edit] Italian lira
Date     # lire = $1 US     Note
4 January 1946     225
26 March 1946     509
7 January 1947     350
28 November 1947     575
18 September 1949     625
31 December 1998     1,654.569*     Last day of trading; converted to euro (Jan 4 1999)

Note: GDP for 2007 is $1.8 trillion US Dollars
[edit] Spanish peseta
Date     # pesetas = $1 US     Note
17 July 1959     60
20 November 1967     70     Devalued in line with sterling
31 December 1998     142.734*     Last day of trading; converted to euro (Jan 4 1999)

Note: GDP for 2007 is $1.361 trillion US Dollars
[edit] Dutch gulden
Date     # gulden = $1 US     Note
27 December 1945     2.652
20 September 1949     3.8
7 March 1961     3.62
31 December 1998     1.888*     Last day of trading; converted to euro (Jan 4 1999)

Note: GDP for 2007 is $0.645 trillion US Dollars
[edit] Belgian franc
Date     # francs = $1 US     Note
27 December 1945     43.77
1946     43.8725
21 September 1949     50
31 December 1998     34.605*     Last day of trading; converted to euro (Jan 4 1999)
Note: GDP for 2007 is $0.376 trillion US Dollars
[edit] Greek drachma
Date     # drachmae = $1 US     Note
1954     30
31 December 1998     281.821*     Last day of trading; converted to euro (Jan 4 1999)

Note: GDP for 2007 is $0.327 trillion US Dollars
[edit] Swiss franc
Date     # francs = $1 US     Note
27 December 1945     4.30521     £1 = 17.35 CHF
September 1949     4.375     £1 = 12.25 CHF
31 December 1998     1.377*     £1 = 2.289 CHF
5 December 2008     1.211*     £1 = ? CHF

Note: GDP for 2007 is $0.303 trillion US Dollars
[edit] Danish krone
Date     # kroner = $1 US     Note
August 1945     4.8
19 September 1949     6.91     Devalued in line with sterling
21 November 1967     7.5
31 December 1998     6.392*
5 December 2008     5.882*

Note: GDP for 2007 is $0.203 trillion US Dollars
[edit] Finnish markka
Date     # markkaa = $1 US     Note
17 October 1945     136
5 July 1949     160
19 September 1949     230
15 September 1957     320
1 January 1963     3.2     1 new markka = 100 old markkaa
12 October 1967     4.2
30 December 1998     5.084*     Last day of trading; converted to euro (Jan 4 1999)

Note: GDP for 2007 is $0.188 trillion US Dollars
[edit] See also

* List of international trade topics
* Anti-globalization
* General Agreement on Tariffs and Trade
* Globalization
* Gold as an investment
* Globalization and Health

* Foreign exchange reserves
* Monetary hegemony
* Neoliberalism
* Post-war economic boom
* Triffin’s dilemma
* Washington Consensus
* World Bank

[edit] Notes

1. ^ For discussions of how liberal ideas motivated U.S. foreign economic policy after World War II, see, e.g., Kenneth Waltz, Man, the State and War (New York: Columbia University Press, 1969) and David P. Calleo and Benjamin M. Rowland, American and World Political Economy (Bloomington, Indiana: Indiana University Press, 1973).
2. ^ Quoted in Robert A. Pollard, Economic Security and the Origins of the Cold War, 1945-1950 (New York: Columbia University Press, 1985), p.8.
3. ^ discussed in: Lundestad, Geir, Empire by Invitation? The United States and Western Europe, 1945–1952, Journal of Peace Research, Vol. 23, No. 3 (Sep., 1986), pp. 263–277, Sage Publications, Ltd. http://www.jstor.org/stable/423824 and Ikenberry, G. John, A World Economy Restored: Expert Consensus and the Anglo-American Postwar Settlement, International Organization, Vol. 46, No. 1, Knowledge, Power, and International Policy Coordination (Winter, 1992), pp. 289–321, The MIT Press http://www.jstor.org/stable/2706958
4. ^ Comments by John Maynard Keynes in his speech at the closing plenary session of the Bretton Woods Conference on July 22, 1944 in Donald Moggeridge (ed.), The Collected Writings of John Maynard Keynes (London: Cambridge University Press, 1980), vol. 26, p. 101. This comment also can be found quoted online at [1]
5. ^ Comments by U.S. Secretary of State George Marshall in his June 1947 speech  Against Hunger, Poverty, Desperation and Chaos  at a Harvard University commencement ceremony. A full transcript of his speech can be read online at [2]
6. ^ For a recent publication see: Michael P. Dooley, David Folkerts-Landau, Peter M. Garber: Bretton Woods II still defines the international monetary system. National Bureau of Economic Research, February 2009. http://www.nber.org/papers/w14731

[edit] References

1. ^ Michael Hudson, Super Imperialism: The Origin and Fundamentals of U.S. World Dominance, 2nd ed. (London and Sterling, VA: Pluto Press, 2003), ch. 5.
2. ^ Dimitrova, K., Nenovsky, N., G. Pavanelli. (2007). Exchange Control in Italy and Bulgaria in the Interwar Period: History and Perspectives, ICER, Working Paper No. 40.
3. ^ Hull, Cordell (1948). The Memoirs of Cordell Hull: vol. 1. New York: Macmillan. pp. 81.
4. ^ Baruch to E. Coblentz, March 23, 1945, Papers of Bernard Baruch, Princeton University Library, Princeton, N.J quoted in Walter LaFeber, America, Russia, and the Cold War (New York, 2002), p.12.
5. ^ http://www.businessspectator.com.au/bs.nsf/Article/Why-Bretton-Wood-II-will-flop-L9VEK?OpenDocument&src=sph%5Bdead link]
6. ^ P. Skidelsky,  John Maynard Keynes , (2003), pp. 817-820
7. ^ Mason, Edward S.; Asher, Robert E. (1973). The World Bank Since Bretton Woods. Washington, D.C.: The Brookings Institution. pp. 105–107, 124–135.
8. ^ http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm
9. ^  Wilson defends ‘pound in your pocket’ . BBC News. 1967-11-19. http://news.bbc.co.uk/onthisday/hi/dates/stories/november/19/newsid_3208000/3208396.stm.
10. ^ Francis J. Gavin, Gold, Dollars, and Power – The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press (2003), ISBN 0-8078-5460-3
11. ^  Memorandum of discussion, Federal Open Market Committee . Federal Reserve. 1968-03-14. http://www.federalreserve.gov/monetarypolicy/files/fomcmod19680314.pdf.
12. ^ United States Congress, Public Law 90-269, 1968-03-18
13. ^ Speech by Darryl R. Francis, President Federal Reserve Bank of St. Louis (1968-07-12).  The Balance of Payments, The Dollar, and Gold . p. 7. http://fraser.stlouisfed.org/historicaldocs/DRF68/download/38004/Francis_19680712.pdf.
14. ^ Larry Elliott , Dan Atkinson (2008). The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future. The Bodley Head Ltd. p. 6–15, 72-81. ISBN 1847920306.
15. ^ a b c Laurence Copeland. Exchange Rates and International Finance (4th ed.). Prentice Hall. pp. 10–35. ISBN 0273-683063.
16. ^ Dooley, Folkerts-Landau, and Garber (2003): ‘An Essay on the Revived Bretton Woods System’ NBER Working Papers; for a critique, Eichengreen, Barry (2004): Global Imbalances and the Lessons of Bretton Woods NBER Working Papers
17. ^ George Parker, Tony Barber and Daniel Dombey (October 9, 2008).  Senior figures call for new Bretton Woods ahead of Bank/Fund meetings . http://www.eurodad.org/whatsnew/articles.aspx?id=2988.
18. ^ Data & Statistics supplied by the International Monetary fund web site

[edit] Further reading

* Van Dormael, A.; Bretton Woods : birth of a monetary system; London MacMillan 1978
* Michael D. Bordo and Barry Eichengreen; A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform; 1993
* Harold James; International Monetary Cooperation Since Bretton Woods; Oxford University Press, USA 1996

[edit] External links

* Donald Markwell, John Maynard Keynes and International Relations: Economic Paths to War and Peace, Oxford University Press, 2006
* The Gold Battles Within the Cold War (PDF) by Francis J. Gavin (2002)
* International Financial Stability (PDF) by Michael Dooley, PhD, David Folkerts-Landau and Peter Garber, Deutsche Bank (October 2005)
*  Bretton Woods System , prepared for the Routledge Encyclopedia of International Political Economy by Dr. B. Cohen
* Bretton Woods Agreement by Addison Wiggin, co-author of Empire of Debt
* Dollar Hegemony by Henry C.K. Liu

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the actual place –

with mountains, lodge and skiing




American Monetary Policy and the Defense of Europe, 1960-1963
Accepted for Publication in Diplomatic History
Francis J. Gavin
University of Texas at Austin
President John F. Kennedy often told his advisers that “the two things which scared him most were nuclear weapons and the payments deficit.”1

Kennedy’s sensitivity to the nuclear danger is well documented and completely understandable. But why was he so afraid of the U.S. balance of payments deficit? Why did he compare a technical problem of international monetary economics to the dangers of a nuclear war?
These two problems–one involving monetary policy, the other a question of basic American security policy–were inextricably linked in fundamental ways during the Kennedyyears. It is impossible to understand the full complexities and nuances of U.S. Cold War strategy in Europe during this pivotal period without coming to terms with the balance of payments and
gold question. Likewise, these complicated monetary issues make no sense unless they are understood within their political and security context. The whole spectrum of the Kennedy administration’s policy toward Europe–ranging from the German question to nuclear sharing policy–cannot be understood without reference to U.S. monetary policy.
Although there is no shortage of scholarship on the foreign policy and Cold War strategy of the Kennedy administration, the question of the U.S. balance of payments deficit and gold outflow has been ignored or marginalized in the historical literature. For example, the standard account of U.S. strategy and foreign policy during the Kennedy years, Michael Beschloss’s The Crisis Years, does not once mention the payments deficit or gold outflow problem.2

Those historians who have addressed U.S. monetary policy treat the issue as strictly a question of foreign economic policy, unrelated to the core power political issues of the period. Thus, William Borden characterizes Kennedy’s monetary policy as “an aggressive but ultimately futile defense of American economic hegemony.” Other historians and political scientists have
suggested that the deficit was a symbol of American decline, produced by a combination of economic malaise at home and imperial overstretch abroad. 3 This assessment, however, has been largely rejected in the professional economics literature.4 All of these accounts fail to consider how the dollar and gold problem was central to the most important security questions of the day.
Because of Kennedy’s advocacy of the so-called flexible response doctrine, it has been an article of faith among diplomatic historians that his administration sought to strengthen and enlarge the U.S. conventional commitment in Europe.5 But in fact the link between monetary and security policy led the Kennedy administration, starting in the spring of 1962, to seriously consider plans to withdraw U.S. troops from Europe. Kennedy, like Eisenhower before him, identified generous U.S. political and security policy in Europe — chiefly the decision to station six army divisions in West Germany — as the root cause of the nation’s international monetary woes. Furthermore, Kennedy was terrified that the countries that benefited most from American military protection — France and West Germany — might use their newfound monetary leverage to compel changes in U.S. political and security policies in Europe.
This struggle over the U.S. troop commitment and the nature of America’s relations with
Europe was at the heart of the “gold battles” within the Cold War. On the surface, it appeared to
be a contentious but simple dispute over burden-sharing within the Western Alliance. In fact, the
gold battle within the alliance during the early 1960s was one of the most important components
of a complex and bitter political struggle between the United States and France and West
Germany over the direction of the alliance and its Cold War strategy. While the dispute was at
heart over political and strategic matters – West German chancellor Konrad Adenauer and French
president Charles de Gaulle were deeply disturbed by Kennedy’s nuclear sharing and Berlin
policies — the field of battle was often economic and monetary. Negotiations and discussions
about payments deficits and gold holdings, which by mid-1962 included serious threats of
American troop withdrawals, often masked a deeper struggle over the leadership and direction of
the NATO alliance.
Would the president order American troops back home from Europe? This question was
the starting point for the second gold battle, namely the sharp and at times acrimonious
bureaucratic struggle within the Kennedy administration over resolving the balance of payments
deficit and gold outflow. Secretary of the Treasury Douglas Dillon and his undersecretary,
Robert Roosa, argued that troop withdrawals were necessary to avoid international monetary
chaos abroad and deflation and possibly depression at home. Surprisingly, Secretary of Defense
Robert McNamara and his lieutenant, Roswell Gilpatric, supported the Treasury Department’s
efforts to bring American troops back home.6 The State Department, led in this struggle by
Undersecretary of State George Ball, vehemently opposed even the smallest reduction in
American ground forces in Western Europe. They understood that American troops served a
political as well as a military role, and feared that a large withdrawal could undermine West
Germany’s confidence in NATO and possibly lead to an anti-American Franco-German bloc, or
worse, a nuclearized Bundeswehr. Supported by the Council of Economic Advisers, the State
Department advocated plans to reform and recast the international monetary system in the hope
that improved payments arrangements would eliminate the monetary pressure to withdraw U.S.
ground forces from Western Europe.
These gold battles offer a window into a dramatic interallied conflict in which monetary
disputes often masked a bitter political struggle over NATO strategy, the German question, and
the politics of nuclear weapons. This story also calls into question the standard historical view
that the Bretton Woods monetary system functioned smoothly and efficiently during the late
1950s and early 1960s. Most importantly, the history of the gold battles within the Cold War
forces us to reconsider the false divide that persists between the study of economic policy — and
particularly monetary policy — and foreign policy and military strategy in the historical literature
on that period. No history of this critical time in American foreign policy is complete unless the
story behind economic and security policy is woven together and presented as a whole.
Charles de Gaulle claimed that the international monetary system allowed the United
States to live beyond its means and forced the European surplus countries to finance America’s
military empire overseas. He wanted the major Western powers to negotiate a new arrangement
that was more fair and rational.7 President Kennedy also argued that the global payments system
was unfair. The unique role of the dollar left U.S. foreign policy and military strategy hostage to
the whims of European surplus countries that selfishly exploited the system to accumulate
payments surpluses. What might explain such conflicting perspectives? Why did both the
leaders of both surplus and deficit states connect monetary relations to larger security concerns?
At first glance, these questions are perplexing. The founders of the Bretton Woods
system explicitly designed the system to disentangle international monetary relations from power
politics, and the conventional wisdom among historians holds that they succeeded.8 But, in fact,
postwar monetary relations were highly politicized and required constant political intervention to
keep the system functioning smoothly.9
The most troubling design flaw was the lack of an effective, automatic mechanism to adjust and settle the payments imbalances that inevitably arose between surplus and deficit countries. Payments imbalances emerge because countries pursue different economic and monetary policies. This produces different national inflation and savings rates, changing the relative value or purchasing power of their currency. If Country A starts out with a currency equal in value to its trading partner, Country B, but has monetary policies that make its prices rise twice as fast, eventually Country A will run a balance of payments deficit with Country B.
This deficit could be settled in any number of ways. Country A could change its exchange rate to reflect the new purchasing power of its currency (i.e., devalue or let its value be determined by currency markets), arrange for Country B to finance its deficit with loans (if B was willing), or settle its deficit by transferring a mutually acceptable reserve asset, such as gold. In certain types of systems, there is no decision to be made, because adjustment happens automatically. In a pure gold standard, the exchange rates remain fixed, but gold is transferred to settle deficits.10 In a flexible or floating exchange rate system, market driven shifts in the exchange rate between countries A and B will remedy the balance of payments imbalance.11
The Bretton Woods planners rejected both systems on principle. Mindful of the competitive devaluations during the 1930s, they believed that flexible exchange rates — where the
relative value of currencies is determined by purchases and sales in an open market — were erratic, allowed destabilizing capital flows, and gave far too much control over the economy to bankers and speculators.12 To their mind, a pure gold standard was no better. Under this type of system, a state with a payments deficit lost gold, which would decrease the domestic monetary base and result in a decline in the currency’s purchasing power. Imports would fall, exports would rise, and the payments would balance. But the loss of gold and the decreased money supply also meant a fall in aggregate domestic demand, which meant deflation or even depression.13 In an era where full employment and robust social spending were promised, it was
politically inconceivable that national governments would accept a process that depressed
national income and led to unemployment in order to balance international payments.14
The Bretton Woods system was designed to produce stable exchange rates while shielding
national economies from demand shifts produced by gold flows. But from the standpoint of
monetary policy, these two goals contradicted each other. This system did not provide a way to
guarantee price stability across borders, and there was no automatic mechanism to adjust the
payments imbalances that inevitably arose.15 These structural problems guaranteed that chronic
balance of payments problems would mushroom into full-scale political problems, both
domestically and between nations. This problem first arose during the immediate postwar
period, when Western Europe ran massive payments deficits with the United States. European
governments were unwilling to allow their national exchange rates to be determined by currency
markets. Nor did they want to impose the type of deflationary policies that would have been
required to reduce imports and increase exports. Instead, the so-called dollar gap was resolved by
a series of political interventions: the Europeans imposed trade and exchange controls, undertook
a round of devaluations vis-à-vis the dollar in 1949, and received large amounts of American aid
to close their deficits.16
As the economies of Western Europe recovered and became more competitive during the
1950s, these payments deficits vis-à-vis the United States began to turn to surpluses. By
Eisenhower’s second term, the dollar gap became a glut. As these dollars were increasingly traded
in for gold, American policymakers became worried. If the balance of payments deficits
continued at the rate of $3-4 billion per year, and if most of these deficit dollars were used to
purchase American gold, the U.S. gold supply would disappear in short order.17 The normal
recourse might be devaluation. But here again the Bretton Woods system had a design flaw. The
U.S. dollar supplemented gold as a reserve, held by countries around the world to finance their
trade. If the dollar’s value were in doubt, no one would hold it as a reserve asset in their central
banks: they would sell it for a more reliable asset, like gold. But if the dollar no longer
supplemented gold as a reserve asset, then a large portion of the world’s liquidity used to finance
international trade would be destroyed. The competition for scarce gold might unleash trade and
currency wars, beggar-thy-neighbor economic policies, and competitive devaluations. This was
precisely the scenario that most economists and policymakers believed had caused and deepened
the Great Depression of the 1930s.18
The administration rejected a policy of trade and capital controls to end the deficit and
gold outflow. Instead, they began to scrutinize balance of payments cost of government
expenditures overseas, particularly troop deployment costs, an account the administration could
control without reversing the cherished goal of trade and currency liberalization. U.S. foreign
exchange expenditures in NATO Europe were roughly the size of the national deficit, a fact few
found coincidental.
President Dwight D. Eisenhower had supported troop withdrawal schemes even before
the dollar weakened.19 If the Americans made a permanent commitment to defend the
Europeans, he reasoned, the latter would have no incentive to provide for their own security.
But by 1959, Eisenhower felt that the burgeoning U.S. balance of payments deficit and gold
outflow made U.S. troop withdrawals urgent. Eisenhower told the Supreme Allied Commander,
Europe (SACEUR), General Lauris Norstad, that it was time to  put the facts of life before the
Europeans concerning the reduction of our forces.  The Europeans were  ‘making a sucker out of
Uncle Sam.  With the United States paying for the whole strategic deterrent force, all space
activities, most of NATO’s infrastructure cost, and large naval and air forces, why should it also
pay for six U.S. Army divisions, especially when these troops were threatening American
financial strength?  Our gold is flowing out and we must not weaken our basic economic
strength.  20
Eisenhower was thwarted in his efforts to implement massive troop withdrawals by the
same bureaucratic alignments that confronted Kennedy during his presidency.21 While the
Treasury Department was a strong advocate of “redeployment” schemes, the Europeanists
within the State Department successfully resisted the president’s preference for American troop
withdrawals. And he never developed an alternate monetary policy. For one thing, Eisenhower
had little understanding of how monetary policy actually worked and once suggested that
perhaps the monetary crisis could be solved if uranium could “be substituted for gold” as the
reserve metal of the international monetary system.22 The president tried to get the Western
Europeans to help offset the American deficit through military purchases and grants; but by the
time he sent a high-level State-Treasury delegation to West Germany to discuss the matter, he
was already a lame duck president with little leverage over his allies.23 Before departing, the
administration did manage to warn the alliance that the United States was determined to correct
the international payments situation, which has an importance beyond the financial field. 24
But it would be left to the Kennedy administration to find a way to make the Western European
surplus countries accept this principle that monetary and security issues were inextricably
The balance of payments question did not catch the incoming Kennedy administration by
surprise. During the campaign there had been rumors that Kennedy would pursue loose
monetary and or fiscal policies if elected, or even follow Franklin Roosevelt’s example and
devalue the dollar. Kennedy’s campaign moved quickly to squelch this speculation, and on 31
October Kennedy issued a public statement declaring his commitment to maintain the dollar price
of gold at $35 an ounce.25
Ironically, this public concern was unwarranted, as the incoming president wanted to
convince the public — and especially Wall Street and the international banking community — that
he would not pursue unrestrained fiscal and monetary programs. During their first transition
meeting, Kennedy nodded approvingly when Eisenhower warned that the United States was
carrying “far more than her share of free world defense” and would have to start bringing
American troops home from Europe.26 A transition committee on the balance of payments
advised Kennedy to appoint a secretary of the treasury who “enjoys high respect and confidence
in the international financial world” in order to restore confidence to the dollar.27 To the horror
of many New Frontiersmen, Kennedy passed over economic liberals like John Kenneth Galbraith
and Averell Harriman and chose the conservative Republican and Wall Street stalwart Douglas
Dillon to be his Secretary of the Treasury. Kennedy risked alienating his closest supporters to
demonstrate his concern for the stability of the dollar. When Senator Albert Gore, Sr., a
Tennessee Democrat (and a presumptive candidate for the Treasury position himself) told
Kennedy that selecting Dillon signaled a continuation of the stagnant policies of the Republicans,
Kennedy protested. “Albert, I got less than 50 percent of the vote. The first requirement of the
Treasury job is acceptability to the financial community.”28
As a counterweight to Dillon, the president selected the pro-growth liberal economist
Walter Heller as the chairman of the Council of Economic Advisers. Heller advocated looser
fiscal and monetary policies to spur high domestic growth, policies that would inevitably weaken
the dollar and increase the gold outflow. By putting advisers with diametrically opposed views
in the top economic policymaking spots, Kennedy guaranteed that, like FDR, he would never be
railroaded into a decision.29 Kennedy also strived to break down what he saw as the
bureaucratic morass and inertia that had plagued the Eisenhower administrations. He relied on
key White House advisers like Carl Kaysen and Walt Rostow from a pared-down National
Security Council to make sense of the conflicting opinions offered by cabinet secretaries. While
this process provided Kennedy with an array of opinions, it often prevented his advisers from
unanimously supporting a policy option. Kennedy often felt out of his league on questions of
international monetary relations, and the president often deferred making difficult choices for as
long as he could.30
During its first months, the Kennedy administration developed a three-pronged
international monetary policy that mirrored aspects of Eisenhower’s philosophy but that
differed dramatically from his predecessor’s tactics. First, those countries that gained foreign
exchange because of U.S. defense expenditures were pressured to “offset” this gain by spending
those surplus dollars on military equipment from the United States. Surplus countries were also
asked to hold “voluntarily” surplus dollars earned through U.S. defense commitments and not use
them to purchase U.S. gold. The second part of the Kennedy strategy involved constructing
elaborate, multilateral defenses against speculative attacks on the dollar or runs on the American
gold supply. Concurrently, the administration considered plans and proposals to reform and
improve the global payments system. Finally, the Kennedy administration initiated serious trade
negotiations aimed at lowering European tariffs. European support was expected for all of these
initiatives. If the Europeans — and especially the Germans — did not come forward and
cooperate, this would be taken as a sign that Europe no longer needed American protection.
Dillon’s lieutenant and undersecretary for international monetary affairs, Robert Roosa,
successfully negotiated an elaborate array of multilateral defenses for the dollar in 1961 and 1962.
Roosa constructed sophisticated currency swap arrangements and standby borrowing
arrangements that allowed deficit countries to stave off attacks on their currencies.31 Roosa’s
most important accomplishment was establishing the gold pool, a consortium of industrial
nations who intervened in the London gold markets whenever the price of the dollar seemed
threatened. Though the cooperative arrangements negotiated by Roosa were quite impressive,
they were at best temporary expedients, that did nothing to solve the basic problem: the
American balance of payments deficit. Furthermore, these arrangements depended upon the
cooperation of the two largest surplus countries, France and West Germany, to keep the dollar
The strategy of seeking “offsets” proved far more difficult and acrimonious. Kennedy
wanted to establish the principle that every dollar spent in Germany defending Europe should be
used by the Federal Republic to purchase American military equipment-hence the term “offset.”
This would serve two purposes: relieve the American payments deficit and increase the West
German Bundeswehr’s capacity to fight a conventional war. The Germans resented both of these
aims. They felt singled out, since the U.S. troops were defending all of Western Europe but the
Federal Republic was the only country offering significant relief. And the West German
leadership disliked any change in strategy that emphasized fighting the Soviets with conventional
rather than nuclear forces. The offset arrangement would also make West Germany even more
dependent upon the United States by foreclosing arms arrangements with European, and
especially French, suppliers. Finally, there was the fear that by building up West German
conventional forces, the Kennedy administration was making it possible for the United States to
withdraw its own conventional forces in the future.
These factors made the negotiations very difficult at first, and the same German
negotiating team that had rejected Eisenhower’s proposals seemed no more inclined to accept
Kennedy’s ideas.32 But the new administration rejected both the Federal Republic’s offer and its
framework for viewing the balance of payments problem. Kennedy insisted that the dollar and
gold crisis be seen as a problem for all of NATO, and not just the United States. The West
German surplus was the “mirror” image of the American deficit, and it was wrong for NATO
countries to exploit dollars acquired through U.S. expenditures defending Europe.33 The
president would not shy away from hardball tactics to make this point during his negotiations
with the Federal Republic. “As the Chancellor is interested in power it would seem to me that I
should give Mr. Brentano a sense of our disappointment with their progress.”34
The intensification of the Berlin crisis in the summer of 1961 brought a rapid
improvement in the offset negotiations, as the Americans exploited their newfound leverage
against the Germans.35 “We are approaching the strongest bargaining position since the
negotiations began. Our negotiating leverage is increased by the possibility of major deployments
to assist in the defense of Berlin and Germany.”36 A full offset agreement was reached in
October, and it included a provision to examine how to reduce the American balance of payments
costs of any crisis induced troop buildup.37 The agreement seemed to establish a link between
the American troop presence and continued, full offset of U.S. foreign exchange costs. But if this
linkage was embraced by the Kennedy administration, it was not fully accepted in West
Germany, where offset was seen as a temporary arrangement to give the Americans time to get
their monetary house in order.
This difference in views would become a great source of tension in the future. In fact,
disagreements over the nature and meaning of the offset arrangement became a symbolic
battlefield where the Federal Republic of Germany and the United States clashed over larger
issues of NATO strategy in Europe. For the Germans, the question became: Why should we
support the dollar and underwrite U.S. security policies in Europe when they are at crosspurposes
with our own foreign policy? The question for the Kennedy administration was
equally sharp: why should we continue to threaten our international monetary position if those
we are protecting refuse to help us out, and in fact, continue to exploit our monetary
vulnerability for their own gain? Monetary policy became an important inter allied lever to
influence and affect NATO’s security policies.
By early 1962, the Kennedy administration’s balance of payments strategy seemed to be
in place. The Federal Republic of Germany had signed an offset agreement, trade negotiations
had begun, and Robert Roosa had negotiated a whole series of sophisticated defenses for the U.S.
dollar and gold supply. But two problems remained. First, the deficit was still dangerously
large. Second, Kennedy’s monetary policy relied on the goodwill of the European surplus
countries. The countries with the largest surpluses were West Germany and France. And by the
spring of 1962, U.S. political relations with both these countries had deteriorated sharply. How
much sense did it make sense to base U.S. monetary policy on continued cooperation from two
allies who were increasingly hostile to Kennedy’s security policies in Europe?38
There were two, related reasons for the deep political tensions between the United States
and France and West Germany: U.S. Berlin policy and its attitude toward independent national
nuclear forces.39 On Berlin, Adenauer and de Gaulle feared that the policy developed by
Kennedy during the summer of 1961 was simultaneously too belligerent and too accommodating
towards the Soviets.40 Adenauer and de Gaulle were also angered by what they believed was
Kennedy’s revision of U.S. military strategy toward a greater reliance on conventional forces in
the event of a Soviet attack and greater centralization of nuclear decision making in the hands of
the American president.41 Both Adenauer and de Gaulle hated both aspects of a policy that
eventually involved what came to be known as the “flexible response” doctrine.42
In fact, the changes between Eisenhower and Kennedy’s security policies were nowhere
near as dramatic as the Europeans supposed.43 Both the flexible response doctrine and the
Multilateral Force had its origins in the Eisenhower administration. Many of the strategic
changes were driven by the rather unique dilemma presented by the Berlin crisis.44 Furthermore,
Kennedy was often agnostic on the question of national nuclear forces and actually considered
Robert McNamara’s remarkable suggestion that the United States aid the French nuclear program
in return for de Gaulle’s help with the U.S. balance of payments deficit.45 The policy was
rejected — largely because of its presumed effects on West Germany — but Kennedy never
completely ruled out aiding the French program if de Gaulle were willing to support NATO in a
meaningful way.46
Still, a deep and far-reaching conflict was developing between the Kennedy
administration, France and West Germany over the direction of NATO strategy by spring 1962.
And from Kennedy’s perspective, a European attack on the weakened U.S. monetary position
seemed a logical way to undermine U.S. security policies. Douglas Dillon told the president that
a Bank of France official made a statement “which could indicate possible difficulties ahead with
France. He said that it must be realized that France’s dollar holdings represented a political as
well as an economic problem.”47 A widely circulated State Department memo summarized an
article from The Statist that warned that de Gaulle was  fully prepared to play diplomatic trump
card he holds in form of substantial French holdings of dollars. In other words, if America’s
policy towards Europe clashed with French interests, de Gaulle would pressure Kennedy by
purchasing gold from the United States.” Unless France was accepted as an equal, de Gaulle
“would not hesitate to make himself felt by resorting to devices liable to cause grave
embarrassment to United States,” even at the cost of weakening free world strength. 48
This deep strain in Franco-American relations was exposed in a remarkable meeting
between President Kennedy and the French minister of state for Cultural Affairs, Andre Malraux.
The president warned Malraux that if de Gaulle preferred a Europe dominated by Germany, then
Kennedy would bring the troops home and save $1.3 billion, an amount that “would just about
meet our balance of payments deficit.” If France wanted to lead a Europe independent from the
United States, then Kennedy would “like nothing better than to leave Europe.” The United
States had no taste for empire building:
The president said that we have no sense of grandeur, and no
tradition of leadership among the nations. Our tradition is
fundamentally isolationist. Yet since World War II, we have carried
heavy burdens. In our international balance of payments we have lost
$12 billion, and the drain on our gold continues. We engaged in a
heavy military buildup, and we have supported development of the
Common Market . . . We find it difficult to understand the apparent
determination of General de Gaulle to cut across our policies in
Europe. 49
The French leader dismissed the possibility that the United States could withdraw from
Europe.50 De Gaulle accused the United States of dictating to its allies by entering into
negotiations with the Soviets over Berlin and publicly stating that France should not have an
atomic force. The Americans should stay out of European affairs except in the case of war.51
The president responded furiously: “We cannot give this kind of blank check.” The U.S. was not
going to defend Europe, weaken the dollar, and remain politically silent. If Europe were ever
organized in such a way as to leave the United States on the outside, the nation would bring its
troops back home. “We shall not hesitate to make this point to the Germans if they show signs
of accepting any idea of a Bonn-Paris axis.” 52 A Franco-American showdown appeared
imminent, and Kennedy feared that France would exploit the vulnerability of the dollar to achieve
its political ends.
In July French finance minister Giscard D’Estaing told American officials that defenses
for the dollar against a speculative attack were weak and that a cooperative effort was needed “on
a grand scale.”53 Giscard suggested that the United States could not handle a real run on the
dollar by itself, not even with the help of the International Monetary Fund (IMF). Only if those
European central banks that held large quantities of dollars cooperated with the United States
could such a run be handled. Was Giscard making a threat or offering to help? Gold purchases
had been increasing and the dollar market was weak. Alexis Johnson, a top State Department
official, warned Giscard that the administration could end the deficit quickly if it “were to
institute measures that we do not wish to undertake and which would be undesirable,” a clear
reference to troop withdrawals.54 Giscard’s hints fed into the administration’s suspicions of
French intentions, which combined with worsening gold outflow figures to stimulate a massive,
inter governmental effort to develop plans to meet a monetary crisis.
This whole question of a French attack on the dollar sparked the domestic component of
the gold battles between State/CEA and Treasury during the summer of 1962. The
administration began considering plans to overhaul American monetary policy and reform the
international monetary system that included gold guarantees, gold standstill agreements, and
raising the dollar price of gold, either in concert with others or unilaterally.55 The State
Department even prepared a draft memo for the use of the president should he want to end the
American policy of redeeming gold on demand.56 Carl Kaysen sent the president an essay
written by J. M. Keynes proposing an international payments system that dispensed with gold
altogether, a dramatic departure from the conventional approach. Kaysen wrote the president:
“The great attention paid to gold is another myth…. As you said of the Alliance for Progress,
those who oppose reform may get revolution.”57
George Ball set the terms for this new round of debate in a forceful memo to the president
entitled “A Fresh Approach to the Gold Problem.” The under secretary of state believed that
neither the Europeans, the Wall Street bankers, nor the administration’s own Treasury
Department understood that the problem was at heart about politics, not economics. As long as
the current rules were maintained, the U.S. would remain “subject to the blackmail of any
government that wants to employ its dollar reserves as political weapons against us.” Ball
recommended that the United States negotiate a “thorough-going” revision of the Bretton Woods
system, “multi-lateralizing” responsibility for the creation of liquidity. Why did Ball think the
Europeans would go along? “Central bankers may regard our expenditures to defend the Free
World as a form of sin, but the political leaders of our Western allies do not.” 58 Predictably,
Treasury found nothing “fresh” in Ball’s proposal. From Dillon’s perspective, the Ball proposal
reflected the State Department’s “reluctance to squarely tackle the more difficult but
fundamentally necessary job of obtaining a more adequate sharing of the burden of our European
How did Kennedy respond to the irreconcilable alternatives presented by the State and
Treasury Departments? As he had before, and would again in the future, Kennedy stalled.60
Instead of making a decision, he dispatched a joint State-Treasury delegation to Europe to sound
out the possibilities of a European sponsored initiative. The president wanted an agreement that
would limit foreign purchases of U.S. gold; but Kennedy insisted that it had to appear to be a
voluntary European initiative. The president feared that any evidence of U.S. pressure could
shake the confidence of financial markets and lead to a run on American gold.61 Unable to speak
openly and honestly with their European counterparts, the mission failed to elicit the hoped-for
initiative, and high-level discussions of international monetary policy were pushed well into the
background during the Cuban missile crisis and its aftermath.62
Was the French government planning an attack on the dollar? It was well known that
many high French officials believed that the international monetary system was rigged in favor of
the Americans. The famous international monetary economist and close de Gaulle adviser
Jacques Rueff had argued that the current gold exchange regime should be replaced by a pure gold
standard.63 Rueff was to influence de Gaulle’s decision to publicly attack the dollar in a famous
press conference in February 1965.64 The French foreign minister, Couve de Murville, argued
that the dollar should be devalued. But was de Gaulle considering an attack on the dollar during
the summer of 1962?65 France’s ambassador to the United States, Herve Alphand, told de Gaulle
that Kennedy was receiving all sorts of dangerous advice on monetary policy from his advisers.
Controls and a gold embargo were being considered. Alphand speculated that since Kennedy did
not understand the economics of the issue, he would do what was politically expedient, which in
the end might harm France’s interests. Kennedy wanted a secret negotiation with de Gaulle to
settle these issues on the highest political level. Alphand asked how he should respond to the
American President. De Gaulle’s answer was cryptic. Just wait, he said. There was no point in
talking to him now.66
In January 1963, Secretary of the Treasury Douglas Dillon received two urgent memos
from the president. The first concerned Dillon’s estimates for American gold losses. “I am
concerned about the figures that you sent me on the gold drain for 1963. Won’t this bring us in
January 1964 to a critically low point? What are the prospects that we could bring this under
control by 1964?” Two days later the president warned Dillon that “our present difficulties with
France may escalate. If things become severe enough it is conceivable that they will take some
action against the dollar-to indicate their power to do something if nothing else.” Kennedy
wanted a plan to deal with any French action, including options of taking “extreme steps if that
should prove necessary.” 67 Less than a week later, the president warned the National Security
Council (NSC) that “de Gaulle may be prepared to break up NATO…. the French may suddenly
decide to cash in their dollar holdings as a means of exerting economic pressure on us.”68
Why had this inter-allied tension exploded into a full-blown public dispute, only weeks
after the successful resolution of the Cuban missile crisis? Two events, de Gaulle’s press
conference on 14 January, rejecting both the U.S. offer of nuclear assistance and Great Britain’s
entry into the Common Market, and the announcement, only nine days later, of the Franco-
German treaty, combined to provoke a political crisis that shook the foundations of the Western
alliance. 69 Both events appeared to signal a Franco-German revolt against U.S. policy towards
Europe.70 Both events appeared to be an attempt to undermine and weaken American influence
on the continent. And both appeared to threaten key elements of U.S. foreign economic policy,
including trade negotiations, the American gold supply, the position of the dollar, and the
German offset arrangement. The long-feared European revolt had finally appeared, and Kennedy
wanted to be prepared should France-alone or with West Germany-move to weaken the U.S.
monetary position. “The U.S. military position is good but our financial position is
To make matters worse, the balance of payments figures for 1962 were far poorer than
had been expected. The commercial trade surplus had fallen from $3.2 billion to $2 billion. The
deficit figures would have been even poorer if not for European debt repayments of $666 million,
a source of financing that was a rapidly wasting asset, and $250 million in fifteen-sixteen month
borrowings from surplus countries. The predictions made by the cabinet Balance of Payments
Committee in October 1962, that the 1964 deficit would be “only” $1 billion, had been “overly
optimistic.” Most alarming was the loss of gold. Surplus countries “are becoming less prepared
to increase their dollar holdings, much less to increase the ratio of dollars to gold in their
reserves.” The State Department predicted that 1963 gold losses would be “fairly heavy,” and
the United States would find itself financing an increasing percentage of its deficit in gold sales in
future years. What was urgently needed was “time and protection” to allow the administration to
achieve payments equilibrium without having to resort to actions that might permanently damage
fundamental U.S. interests. 72 But how was this to be accomplished?
The president linked the continued presence of American troops in Europe to a resolution
of U.S. payments difficulties. In a NSC meeting soon after de Gaulle’s press conference,
Kennedy declared that the payments deficit  must be righted at the latest by the end of 1964”
and the Europeans must be prevented from “taking actions which make our balance of payments
worse.” It was time to exploit what power the United States had to achieve its objectives. “We
cannot continue to pay for the military protection of Europe while the NATO states are not
paying for their fair share and living off the ‘fat of the land.’” It was time for the United States to
“consider very hard the narrower interests of the United States.”73 The United States no longer
had any source of financial pressure it could exert on the Europeans and had to exploit its
military power before the Europeans went nuclear. “This sanction is wasting away as the French
develop their own nuclear capability.”74
Dillon pushed Kennedy to order troop withdrawals. “He felt that if the French did attack
our financial stability we should consider ways of responding by actions in the military and
political areas.” The secretary of the treasury wondered “whether the withdrawal of U.S. troops
would be the disaster some say it would . . . especially if Europe could defend itself against a
Soviet attack.” Kennedy appeared to agree: “Congress might well conclude that we should not
help Europe if de Gaulle continues to act as he has been.” 75 When Dean Acheson suggested that
the administration guarantee the U.S. troop commitment to reassure the Europeans, the president
dismissed the idea outright. “He said that the threat of withdrawing our troops was about the
only sanction we had, and, therefore, if we made such a statement, we would give away our
bargaining power.”76
From a purely economic standpoint, redeploying American troops should have been an
uncomplicated issue. It could have been argued that after the American “victory” in the Cuban
missile crisis, the danger of a Soviet move against Berlin was small. Kennedy was now convinced
that the Soviets were not going to risk thermonuclear war to invade Europe, and he found
arguments that they would go for some sort of limited land grab in West Germany
preposterous.77 If large troop deployments abroad threatened the strength of the dollar and the
health of the global payments system, then it made perfect sense to reduce them. Kennedy could
hardly support domestic deflation, restrict American tourism abroad, and prohibit capital exports
by American banks and industries in order to finance unneeded U.S. troops in Europe.
But the issue of troop redeployments was not simply an economic concern: it went to the
heart of both the German and nuclear question. If the America redeployed, West Germany
would feel uncertain about the American commitment to defend it with its nuclear arsenal,
thereby increasing pressure to acquire its own national deterrent. If West Germany sought
nuclear weapons, the tentative European “détente” that was emerging between the United States
and the Soviet Union in 1963 would unravel.78 The president would have to choose between the
strong economic and domestic political appeal of troop withdrawals and the complicated but
indisputable strategic-political logic of a continued American troop presence.
The bureaucratic gold battle was resumed with vigor. Instead of troop withdrawals, the
State Department once again proposed high-level political negotiations within the alliance in order
to restructure the international monetary system to protect the American dollar and gold supply.
The Chairman of the Policy Planning Council, Walt Rostow, argued that the United State’s
difficulties were the product of the dollar being “a unique reserve currency which leaves us
vulnerable to sudden withdrawals.” Explicitly rejecting troop withdrawals, Rostow wanted to
“spread the burden” of maintaining a reserve currency to the surplus countries of the world79
Dillon vehemently disagreed and argued that Rostow’s plan would put the United States “in a
position similar to Brazil or Argentina, who, when they cannot pay their debts, go to their
creditors and get an agreement to stretch out the debt over a period” Dillon charged that this
represented the irresponsible views of those in State and on the CEA who wanted  this very real
problem go away without interfering with their own projects, be they extra low interest rates in
the U.S. or the maintenance of large U.S. forces in Europe.” 80
Presented with conflicting advice and uncertain what to do, Kennedy hesitated. “I know
everyone thinks I worry about this too much” he told his speechwriter, Ted Sorensen, but the
balance of payments “is like a club that de Gaulle and all the others hang over my head.” In a
crisis, Kennedy complained, they could cash in all their dollars, and then “where are we?”81 The
United States would be forced off the Continent in the most humiliating way.
Kennedy decided to go outside official bureaucratic channels and asked Dean Acheson to
study the issue as a “layman” would and recommend what policy the president should follow to
solve the balance of payments question. Kennedy told Acheson that we “had respect for people
who had diametrically opposite views, and the language that they used seemed very confusing to
him.” 82 With the help of James Tobin from the CEA, Acheson produced a bold plan. He did
not rule out a devaluation of the dollar or a suspension of the dollar-gold convertibility.83 Given
his role in promoting the monetary agreement two decades earlier, Acheson surprisingly
concluded that “the Bretton Woods arrangements have been outgrown; outdated.”84 Acheson
recommended drawing on the IMF and negotiating large, long-term loans with the Europeans to
finance anticipated deficits of $10 billion over the next five years. The former secretary of state
suggested that the whole point of his plan “was to get a period of time in which it would not be
necessary to use small expedients with troublesome side effects.”85 Given this breathing space,
the United States could get its house in order and determine whether or not the Europeans were
prepared to carry their fair share of alliance military burdens. If they were not, the United States
could make “careful plans for rearrangements of our own commitments.”86
Ball produced a similar plan for high-level political negotiations with the Europeans to
arrange a supplemental financing scheme. The under secretary suggested that the Europeans
would be attracted by the chance to “share world authority as well as world responsibility,”87 or
what Rostow called the desire to “re-emerge as big boys on the world scene.”88 This scheme for
“full Atlantic partnership” could be linked to other initiatives, including the MLF and Kennedy
round trade negotiations. The time gained with this supplementary financing could be used to
dramatically revise the international payments system. Perhaps a new, non-national medium of
exchange and liquidity could be created to supplement or replace the dollar and gold.89 Ball also
presented a proposal to restrict foreign access to American capital markets.
As they had in the past, Dillon blocked the State Department’s schemes. In a meeting
with the president, the Treasury secretary called Ball’s proposals “reckless.” Roosa told the
president that the problem faced by the United States was the same as “any other borrower-how
to keep our credit standing good.” 90 This could only be accomplished with a sound financial
policy that reduced unnecessary overseas expenditures. Roosa also dismissed Ball and
Acheson’s suggestion that the Europeans would be willing to lend such large amounts to the
In April, the president finally appeared to have made a choice. He sent a memo to the
Cabinet Committee on the Balance of Payments that rejected or postponed the State Department
approach to reform the global payments system, establish strict capital controls, and institute
gold standstill agreements and massive European loans. This left large cuts in overseas
expenditures as the only method of realizing meaningful balance of payments savings.91
“Secretary McNamara should proceed to develop recommendations . . . after consultation with
State . . . on specific actions which can be completed by end CY 1964 with the target of a gross
reduction … of between $300 – $400 million below FY 1963.”92 This could only be accomplished
through troop withdrawals. The secretary of defense had no qualms about doing this: “The only
way to improve our position was to reduce troop deployments.”93
The State Department complained that the Secretary of Defense “seems to assign almost
primordial importance to the military balance of payments aspects alone.”94 After rumors
reached Western European capitals of an impending redeployment,95 Rusk warned the Defense
Department that major troop withdrawals from Europe would “be contrary to U.S. interests”
and that balance of payments concerns did not appear to warrant such withdrawals, at least not
until all other solutions were exhausted.96 State offered a detailed report that argued major troop
withdrawals would end the administration’s efforts to “induce the Europeans to accept a broadspectrum
strategy designed to avoid . . . recourse to nuclear war.” Pulling out American troops
would play right into de Gaulle’s hands, corroborating the French president’s thesis “that Europe
cannot depend upon the U.S. to help defend it.” The pressure to create national nuclear forces
would increase. And the Soviet Union could be tempted into a more aggressive posture if the
United States withdrew large numbers of forces. “Once … as much as a full division was
removed from Europe we would begin to see some of the problems described.” These enormous
risks were hardly worth the “10 to 20 percent” reduction in the payments deficit that troop
withdrawals would bring. 97 But the president seemed to ignore the State Department’s pleas.
The State Department got wind of further, more politically damaging cuts, requested by Kennedy
himself. “G/PM has advised us that the Department of Defense program to reduce overseas
military expenditures … was considered by the president as only a beginning . . . it can be
expected that any further major reductions can only be achieved by withdrawing combat
In August and September the dollar weakened. The president demanded that his advisers
“give this problem our most urgent attention.”99 Kennedy ordered Treasury, State, and Defense
to prepare plans for direct capital controls, trade sanctions, and troop withdrawals. McNamara
returned with a plan that would return thirty thousand U.S. ground forces from Europe, in
addition to re-deploying important tactical air forces. Secretary of State Rusk protested
vigorously, repeating the arguments laid out in the State Department study of the political impact
of troop withdrawals.100 The president only agreed to $190 million in cuts (McNamara’s total
package, if accepted, would have realized $339 million). But the president also “indicated his
desire that a political base be established which would make it possible at some later stage to
reconsider the disapproved actions…”101
The Defense Department wasted no time establishing this political base. The military
planned a deployment exercise called “Big Lift” to demonstrate the United States’s ability to
airlift large numbers of combat troops to the European theater quickly and efficiently.
McNamara’s deputy, Roswell Gilpatric, noted in a widely discussed speech that by “employing
such a multi-base capability the U.S. should be able to make useful reductions in its heavy
overseas military expenditures without diminishing its effective military strength or its capacity
to apply that strength swiftly in support of its world-wide policy commitments.”102 That same
week, former President Eisenhower wrote an article for the Saturday Evening Post calling for the
return of all but one of the U.S. Army divisions in Europe. The timing of Gilpatric’s speech,
Eisenhower’s article, and operation Big Lift led the Washington Post to declare that the Pentagon
was seeking a major showdown on strategy with its NATO allies at the next conference in
State Department officials were horrified: they had lost control over U.S. policy toward
Europe. When the department warned Gilpatric that the speech would “create serious political
problems for us.”104 They were shocked when they were told that “Mr. Gilpatric would not
accept the proposed deletions.”105 It turned out that McGeorge Bundy had already signed off on
the speech, presumably with the president’s approval.106 Alexis Johnson warned Rusk that the
West German government, already nervous about the real motives of operation Big Lift, would
get all the wrong signals from this speech. Johnson demanded that “before a governmental
decision is made on the advisability, militarily and politically, of making any major force
withdrawal, a much more thorough consideration of the issue at the top level is required.”107 But
these were exactly the signals the president wanted to send to the West Germans. The Dillon-
McNamara approach seemed victorious in the domestic-political gold battle. Massive U.S. troop
withdrawals appeared imminent.
What about the international component of the gold battles? Relations with the Federal
Republic were quite strained, and by 1963 Adenauer had distanced himself from U.S. NATO
policy and fully embraced de Gaulle. One of the ways this political conflict revealed itself was in
difficulties with the offset arrangement. The Americans expected a complete offset of the foreign
exchange costs of troops stationed in West Germany as an absolute requirement for the American
presence.108 But the West German leadership did not accept this linkage. When American
representatives complained that the Federal Republic was not fulfilling its obligations under the
Strauss-Gilpatric accord, German foreign minister Gerhard Schroeder claimed that neither “the
Chancellor nor he knew the details of the problems which had arisen.”109 During the spring of
1963, Ambassador George McGhee was warned that the offset agreement faced difficulties in the
future.110 McGhee complained in July that the German military was unwilling to commit to
more than $1 billion for 1964-65, at least $300 million short of the amount needed to fully offset
the payments costs of U.S. troops. But McNamara told Kennedy that it was vital for the
administration to “get the dollars out of them.”111 Only a full offset arrangement would
accomplish that.
Kennedy put tremendous pressure on the Germans to accept the link between full and
continued offset and the maintenance of six American divisions in West Germany. Spanish
Dictator Francisco Franco told the German ambassador to Spain that the American President
claimed “the question of the American balance of payments constituted one of his greatest
concerns.” If he did not resolve the dollar and gold problem, then Kennedy would be forced to
“change his whole policy” and “dismantle the military support of Europe.”112 Bundes minister
Heinrich Krone was explicitly told that the United States would be forced to withdraw because
of its balance of payments problem.113 During a tense meeting, President Kennedy warned
Adenauer that “economic relations, including such matters as monetary policy, offset
arrangements and the Kennedy Round of trade negotiations” were “possibly even more
important to us now than nuclear matters” because the nuclear position of the West was strong
enough to deter any attack. West German cooperation was expected for all of these economic
initiatives. “Trade was important to us only because it enabled us to earn balances to carry out
our world commitments and play a world role.” 114 During a meeting with West German foreign
minister Gerhard Schroeder in September, the president warned that “the U.S. does not want to
take actions which would have an adverse impact on public opinion in Germany but does not
wish to keep spending money to maintain forces which are not of real value.”115 And McNamara
told his German counterpart, Kai-Uwe von Hassel, that  America cannot carry this burden any
longer if it couldn’t reduce this deficit.” Maintaining the troop commitment to Europe would be
impossible if the offset is not found for this…. the Americans have no choice whatsoever
What could the Federal Republic do? The American threat to withdraw troops forced the
West German government to make fundamental policy choices that would affect German security
for years. The Germans were being asked to abandon their temptation to join France and toe the
American line. But Adenauer, for one, no longer believed that the Americans were reliable allies
who could be trusted.117 In the wake of the Cuban missile crisis, the United States and the
Soviet Union appeared ready to try to negotiate an arrangement to reduce the danger of war in
Central Europe. The United States appeared willing to offer the Soviets de facto recognition of
East Germany and a promise to keep the Federal Republic of Germany non-nuclear, if the
Soviets would accept the status quo in Berlin. These concessions would undermine the
foundation of Adenauer’s foreign policy, which had been based on non-recognition of the DDR,
equality with its Western allies, and seeking reunification through a policy of strength. U.S.-
Soviet arrangements that stabilized the status quo would appear to put an official stamp of
approval on the division of Germany. And if Berlin was no longer a problem, then Kennedy held
there was no longer any military need for six U.S. divisions in West Germany. The president
believed that the deterrent affect of the United State’s strategic nuclear forces would prevent a
Soviet attack on Western Europe.118 Refusing to cooperate with U.S. economic policies
(especially its monetary policy) would be one way to express German resentment toward
Kennedy’s “détente” policy.
The Kennedy administration’s move to reach some sort of accommodation with the
Soviets in 1963 caused consternation among West Germany’s policy-making elites.119 But
Adenauer’s policy of embracing de Gaulle offered nothing more than dependence on another,
albeit much weaker, ally, one that had even more incentive to sell out West German interests to
the Soviets. In the end, there was little choice but to accept a NATO policy based on American
leadership.120 The alternatives to a strong alliance with the United States, backed by six
American divisions, were not very promising. This meant accepting many compromises that
were distasteful. The key now was to make sure that the Americans did not become so fed up
with Europe that they pulled their troops out. And this meant that U.S. monetary policy had to
be supported. There could be no more hints of monetary collaboration with the French, no more
rumors that surplus dollars would be turned in for gold, and, most importantly, the offset
arrangement had to be fulfilled and renewed. The American demands for German monetary
cooperation would have to be met.
In October Rusk traveled to West Germany. In a meeting with Defense Minister von
Hassel, Rusk stated that the administration’s policy maintaining troops in West Germany
depended on two things: NATO meeting its force goals and a continuation of the offset
arrangement. “If our gold flow is not brought under control, the question could become an issue
in next year’s elections. The continuation of Germany’s payments under the offset is vital in
this respect.”121 The new West German government understood what was at stake and with few
other options, accepted these conditions. Flanked by Rusk, the new Chancellor Ludwig Erhard
gave a major speech in Frankfurt in which he publicly acknowledged that the American payments
deficit arose from the U.S. “rendering the major portion of economic and military aid to the free
world.”122 This was an important shift for Erhard, who had previously stated that the American
payments deficit could only be reduced through basic internal adjustments in the U.S. economy.
Negotiations for a new, full offset arrangement began soon thereafter.123
The administration got what it wanted from West Germany.124 The Federal Republic had
rejected the Adenauer-DeGaulle policy, and West Germany had, among other concessions,
grudgingly accepted the link between offset and American troop deployments in Europe. The
Kennedy administration decided that it had to end any threat — at least for the time being — of
major troop withdrawals. In Frankfurt, Rusk formally promised an end to the talk of
redeployment. “We have six divisions in Germany. We intend to maintain these divisions here as
long as there is need for them — and under present circumstances there is no doubt that they will
continue to be needed.”125 The president also surprised many observers when he publicly
disavowed any intention of removing any American divisions from West Germany.126 In
December, a full offset arrangement was reached, and the settlement was announced as an
agreement of “great value to both governments” which should be “fully executed and
continued.”127 Both the international and domestic gold battles were over, at least for now.128
The troops would remain as long as the Federal Republic toed the United State’s political line
and offered full offset through military purchases.
America’s Cold War confrontation with the Soviet Union in Europe reached its most
intense and dangerous point during the Kennedy period. Kennedy tried to craft a security policy
that met the Soviet challenge with strength but left room for negotiations and respect for each
other’s interests. But the United States’s two most important continental allies, France and
West Germany, felt threatened by Kennedy’s policies and openly challenged his administration’s
cold war strategy. Concurrently, the Kennedy administration faced a grave balance of payments
crisis. These two crises –one political, the other monetary — were inextricably connected in the
minds of the participants. The administration believed that the dollar and gold problem could be
solved in one or two ways: with cooperation from the European surplus countries, namely
France and West Germany, or by reducing government expenditures abroad. Since most of these
government expenses were related to NATO expenses, this meant large withdrawals from U.S.
conventional forces in Western Europe.
These two questions — the inter allied dispute over NATO strategy and the dollar and
gold question — have traditionally been treated as separate problems. But these questions were,
in fact, two sides of the same coin. The issues surrounding NATO’s Cold War strategy and the
balance of payments question centered on the issue of the United States’s large conventional
force commitment to Western Europe. The troop commitment, in turn, was related to a host of
fundamental power political questions — Berlin policy, the German question, and the politics of
nuclear sharing. Monetary pressure became a tool for each side to signal their intentions and
bring about desired outcomes. The French and the Germans signaled their unhappiness with
Kennedy’s security policies by cashing in dollars for gold or by abrogating arrangements, like
offset, that were meant to ease the U.S. dollar and gold drain. The Kennedy administration could
express its anger at the Franco-German bloc by threatening to withdraw U.S. troops in Europe
for balance of payments purposes. American monetary policy during this period only makes
sense when seen through this power political lens. Perhaps more importantly, U.S. policy
toward the most fundamental questions of European security can only be understood if the
American fears about the balance of payments deficit and gold outflow are fully explored.
The lessons of the gold battles have a significance that goes well beyond the Kennedy
administration’s monetary and security policies and feeds into fundamental questions of
international history: namely: how do international monetary relations influence international
political stability, and vice-versa? Are certain kinds of monetary arrangements better at
preventing political tension and promoting international peace and security? Do monetary
struggles reflect deeper security conflicts?129 These questions are not just of historical
importance. These are core issues in the study of international politics. And as recent events in
Southeast Asia, Russia, and Latin America have demonstrated, the relationship among money,
power, and international security will be of even greater significance during the twenty-first
century. While economic globalization has brought growth and unprecedented economic
integration, it has also left many nations highly vulnerable to the changes in the global economy.
Nothing drives this integrative dynamic more than participation in the world monetary order.
Will this monetary chaos spill over into political tension and undermine international peace and
security? Will future rivals exploit monetary power to achieve its political ends? The urgency of
these questions makes an understanding of past international monetary battles more important
than ever.130
This paper emerged from a presentation given at the John M. Olin Institute of Strategic Studies at Harvard
University. The author would like to thank the participants in that seminar for their comments and suggestions,
particularly Andrew Erdmann, Eugene Gholz, Colin Kahl, Michael Desch, Sam Huntington, and Commander James
Stein. The author would also like to thank Michael Creswell, Harold James, Robert Kane, Walter McDougall,
Michael Parrish, Emily Rosenberg, Mary Sarotte, Thomas Schwartz, Jeremi Suri, Tom Zeiler, Hubert Zimmerman,
the two anonymous Diplomatic History reviewers, and especially Andrew Erdmann and Marc Trachtenberg for their
most helpful comments and suggestions on earlier drafts of this article.
1 See Arthur Schlesinger, A Thousand Days, John F. Kennedy in the White House (New York, 1965), 601; W. W.
Rostow, The Diffusion of Power, An Essay in Recent History (New York, 1972), 136; and memcon between
Kennedy and Adenauer, 24 June 1963, Foreign Relations of the United States (hereafter cited as FRUS) , 1961-63,
9: 1995, 170; Schlesinger also quotes Kennedy as saying “What really matters is the strength of the currency. It is
this, not the force de frappe, which makes France a factor.” George Ball claimed that Kennedy was “absolutely
obsessed with the balance of payments.” See George Ball Oral History, no. 2, AC 88-3, 29, Lyndon B. Johnson
Presidential Library. Austin, Texas.
2 Michael R. Bechloss, The Crisis Years, Kennedy and Khrushchev, 1960-1963 (New York, 1991).
3 See William S. Borden, “Defending Hegemony, American Foreign Economic Policy,” in Kennedy’s Quest for
Victory, American Foreign Policy, 1961-1963 ed. Thomas G. Paterson (New York, 1989), 83-85; David Calleo,
The Imperious Economy (Cambridge MA, 1982), 23; David Calleo, Beyond American Hegemony, The Future of the
Western Alliance (New York, 1987), 13, 44-52; Frank Costigliola, “The Pursuit of Atlantic Community, Nuclear
Arms, Dollars, and Berlin,” in Paterson, ed., 24-56; Paul Kennedy, The Rise and Fall of the Great Powers,
Economic Change and Military Conflict from 1500 to 2000 (New York, 1987), 434; Diane B. Kunz, Butter and
Guns, America’s Cold War Economic Diplomacy (New York, 1997), esp. 94-108. Despite the promising title of
her book, Kunz does not link the dollar crisis to the political crisis between the Kennedy administration and its
NATO allies. For interpretations that see Kennedy’s monetary policy as a series of “ad-hoc” expedients designed to
maintain the privileged place the dollar held in the postwar “capitalist world-system,  see Borden, 57-62, 84; David
P. Calleo and Benjamin M. Rowland, America and the World Political Economy, Atlantic Dreams and National
Realities (Bloomington, 1973), 88-89; John S. Odell, U.S. International Monetary Policy, Markets, Power, and
Ideas as a Source of Change (Princeton, 1982), 88; and Susan Strange, International Monetary Relations (London,
1976), 82, 207.
4 Again, the professional literature on international monetary economics is quite large, but for the best works see
Robert M. Stern, The Balance of Payments, Theory and Economic Policy (Chicago, 1973); Richard Cooper, The
International Monetary System, Essays in World Economics (Cambridge, MA, 1987); and Paul de Grauwe,
International Money, Post-War Trends and Theories (Oxford, 1989). For an excellent examination of the postwar
period that combines the best of historical and economic analysis see Harold James, International Monetary
Cooperation since 1945 (New York, 1997).
5 For the conventional wisdom on the Kennedy’s “flexible response” policy see John Lewis Gaddis, Strategies of
Containment, A Critical Appraisal of Postwar American National Security Policy (Oxford, 1982), 198-236; and
Jane E. Stromseth, The Origins of Flexible Response, NATO’s Debate over Strategy in the 1960s (New York,
1988). For the idea that the U.S. government was firmly committed to a NATO system based on a strong,
permanent American presence, even in the Eisenhower period see what has become the classic work on American
foreign policy during the Cold War see Gaddis, Strategies of Containment, 168. For a reinterpretation of the
flexible response doctrine, see Francis J. Gavin, “The Myth of Flexible Response: American Strategy in Europe
during the 1960s,” International History Review, Summer 2002.
6 At first glance, McNamara and the Office of the Secretary of Defense seems an odd ally for Treasury’s troop
withdrawal policies. But as will become clear, while McNamara supported a conventional buildup by Western
Europe, he also supported downsizing U.S. conventional forces in Europe. George Ball claims that McNamara was
almost as obsessed with the balance of payments problem as the president, “Because Bob was prepared to distort
any kind of policy in order to achieve some temporary alleviation to the balance of payments, which again to my
mind was a function of his preoccupation with quantification.” See George Ball Oral History, no. 2, AC 88-3, 29,
LBJ Library. For additional evidence of McNamara’s willingness to distort budgetary and security policy because
of the balance of payments Deborah Shapley, Promise and Power, The Life and Times of Robert McNamara
(Boston, 1993), 225-226.
7 de Gaulle claimed the system allowed for “l’hegemonie americaine.” See Press Conference, February 4, 1965,
from Charles de Gaulle, Discours et messages, vol. 4, “Pour l’effort, Aout 1962-Decembre 1965 (Paris, 1993; see
also Raymond Aron, Le Republique Imperiale (Paris, Calmann Levy, 1973); Jean Lacouture, de Gaulle, The Ruler,
1945-1970 (New York, 1992), p 380-82; and Georges-Henri Soutou, L’alliance incertaine, Les rapports politicostrategiques
franco-allemands, 1954-1996 (Paris, 1996), 287. For the economic theories behind de Gaulle’s beliefs
see Jacques Rueff, Le lancinant probleme des balance de paiments (Paris, 1965).
8 For two good accounts of the negotiations and results of the Bretton Woods Monetary Conference see Richard N.
Gardner, Sterling-Dollar Diplomacy, The Origins and the Prospects of Our International Economic Order, rev. ed.
(New York, 1969); and Alfred E. Eckes, Jr., A Search for Solvency, Bretton Woods and the International Monetary
System, 1941-1971 (Austin, 1975). See also the collected essays in Orin Kirshner, ed., The Bretton Woods-GATT
System, Retrospect and Prospect after Fifty Years (Armonk, NY, 1996). For an excellent, more recent account see
Harold James International Monetary Cooperation since Bretton Woods (Oxford, 1996). For a less enthusiastic
interpretation of Bretton Woods see Fred Block, The Origins of International Economic Disorder, A Study of
United States International Monetary Policy from World War II to the Present (Berkeley, 1977). The economic
ideas and philosophy of John Maynard Keynes had an enormous affect of monetary negotiations. See especially
The Collected Writings of John Maynard Keynes, vol. 25, ed. by D.E. Moggridge, Activities, Shaping the Post-
War World – Bretton Woods and Reparations (London, Macmillan); D.E. Moggridge, Maynard Keynes, An
Economist’s Biography (London, 1992); and Robert Skidelsky, John Maynard Keynes, The Economist as Savior,
1920-1937 (New York, 1992).
9 I use the term “system” loosely, as it can be debated when the Bretton Woods system actually began. de Gaulle
and Rueff essentially ignored the whole concept of Bretton Woods and argued that the flaws in the system to the
Genoa conference of 1922, where the principle that sterling and dollars could supplement gold as a reserve asset was
established, therefore creating a “gold-exchange” standard. An argument can be made that the Tripartite Agreement
between the United States, Great Britain, and France in 1937 is the key event, because the United States declared its
intention to convert dollars into gold at $35/oz. Other possible starting dates are July 1944, when the Bretton
Woods agreements were signed; 1947, the year that it became clear that sterling would not be a reserve currency and
the United States reaffirmed its commitment to redeem dollars for gold; or the end of 1958, when many Western
European governments removed the restrictions on current account convertibility for their currencies. Most scholars
accept 1958. See Francis J. Gavin, “The Legends of Bretton Woods,” O rbi s (Spring, 1996), 3-16.
10 See Barry Eichengreen, Globalizing Capital, A History of the International Monetary System (Princeton, , 1996),
7-44. Recent scholarship suggests the “classical” gold standard of the late nineteenth and early twentieth century
may not have been as “pure” as was once thought and, in fact, shared many characteristics of later gold-exchange
systems. See especially Giulo M. Gallarotti, The Anatomy of an International Monetary Regime, The Classical
Gold Standard, 1880-1914 (New York, 1995).
11 Milton Friedman, “The Case for Flexible Exchange Rates,” in Essays in Positive Economics (Chicago1953).
Economists often call the post-Bretton Woods system a “dirty float” because of widespread government intervention
in global currency markets since 1971.
12 Paul Volcker and Toyoo Gyohten, Changing Fortunes, The World’s Money and the Threat to American
Leadership (New York, 1992), 7-8.
13 In practice, gold inflows and outflows were often “sterilized” under the gold standard, which just meant that gold
was added or subtracted from the national treasuries without changing the domestic monetary base. But even with
some sterilization, the gold standard was nowhere near as stable as was once thought. See Gallarotti, The Anatomy
of an International Monetary Regime. The United States is a case in point. During the nineteenth and early
twentieth centuries, the United States ran large trade deficits and was a net importer of capital. Furthermore, a large
portion of America’s exports were made of agricultural commodities whose prices were very unstable. A sudden fall
in foreign investment (caused by, for example, a banking crisis in Europe) or a drop in agricultural prices, could
mean a deterioration in the American balance of payments, the loss of gold, domestic deflation, and a fall in prices
(particularly agricultural commodity prices). This made the whole question of America’s participation in the gold
standard a divisive domestic political issue, and was perhaps the key factor in William Jennings Bryan’s popularity
during the 1896 presidential election. It is not a coincidence that as America’s monetary position became stronger
and more stable after 1896, Bryan’s political popularity waned considerably. See Milton Friedman and Anna
Schwartz, A Monetary History of the United States, 1867-1960 (Princeton, 1963), 89-188; see also Milton
Friedman, Money Mischief: Episodes in Monetary History (New York, 1994), especially the essays “The Crime of
1873” and “William Jennings Bryan and the Cyanide Process.”
14 See especially Moggridge, Keynes, An Economist’s Biography.
15 The system did allow for IMF-approved changes in par value. But exchange rate variations were difficult because
they unsettled foreign exchange markets and it was hard to get countries to agree to shifts because they feared the
adverse effects on their terms of trade. Speculators always knew the direction of any revaluation in advance,
guaranteeing windfall profits whenever exchange rates were changed. Countries were equally reluctant to sacrifice
full employment and social policy goals for balance of payments purposes. In the end, this meant that there was no
effective means to automatically close balance of payments gaps.
16 For the best accounts of how monetary relations were structured in Western Europe during the late 1940s and
early 1950s see Michael J. Hogan, The Marshall Plan, America, Britain, and the Reconstruction of Western
Europe, 1947-1952 (Cambridge, 1987); Alan S. Milward, The Reconstruction of Western Europe, 1945-1951
(Berkeley, 1984); and Brian Tew, The Evolution of the International Monetary System, 1945-1988 (London, 1988).
17 This is a common problem with a gold exchange system. Any country that ran a payments deficit could settle it
with dollars or gold. Many Europeans naturally wondered how fair it was for the United States to settle its deficits
in dollars, its own currency. But economists now recognize that some part of this deficit was the result of the
demand for dollars for reserve purposes, meaning that countries wanted to hold dollars in their central banks for
liquidity purposes, not for purchasing American goods and services. So part of the deficit was not a deficit at all,
and the actual “equilibrium” point for the U.S. balance of payments was not zero. But that was not well recognized
at the time. See Stern, The Balance of Payments, 152.
18 This was the scenario laid out by Robert Triffin in Gold and the Dollar Crisis, The Future of Convertibility
(New Haven, Yale, 1960). This book was very influential, and the “Triffin thesis” was much discussed by
economists and policymakers on both sides of the Atlantic. But as Barry Eichengreen demonstrates, the Great
Depression was worsened not by competitive devaluations but by the deflationary policies pursued in order to
maintain the gold standard. Nations that went off gold and devalued for the most part came out of the Depression
quicker and in a more robust fashion than those that stayed on the gold standard. See Eichengreen, Golden Fetters,
The Gold Standard and the Great Depression, 1919-1939 (New York1995).
19 For Eisenhower’s desire to pull American troops out once Western Europe recovered see Marc Trachtenberg,
History and Strategy (Princeton, 1991), 163-168, 185-187.
20 Memorandum of Conference with President Eisenhower, 4 November 1959, Eisenhower Library, Whitman File,
DDE Diaries. For a more complete analysis of Eisenhower’s monetary policy during the gold crisis see Francis J.
Gavin, “Defending Europe and the Dollar, The Politics of the United States Balance of Payments, 1958-1968,”
(Ph.D diss, University of Pennsylvania, 1997). Note that there was an important strategic element to the debate
over monetary policy and troop withdrawals; the State Department suspected that Eisenhower was using the balance
of payments deficit as an excuse to pull out troops for political reasons. See memorandum from the Assistant
Secretary of State for Policy Planning to Secretary of State Herter, 29 October 1959, FRUS, 1958-60, 7: 1993, 494-
496. Many State officials had been trying to move NATO policy away from such a heavy reliance on the nuclear
deterrent for several years. Assistant Secretary of State for Policy Planning Gerard Smith attacked Eisenhower’s
assumption that any conflict with the Soviet Union would automatically escalate to general war.  Almost two years
ago Foster Dulles on a number of occasions told the Secretary of Defense and the president that he believed this
principle was obsolescent and that we should be developing a new strategic concept and military posture to
implement it.  If the balance of payments and gold crisis forced a troop withdrawal, the administration should be
honest about it. “If economic factors require us to weaken American military influence abroad, I think it is most
important that we not fool ourselves by rationalizing such retraction as being warranted by the military situation.”
21 For the bureaucratic struggles between State and Treasury over the question of troop withdrawals and the dollar
and gold crisis see memcon, president, Herter, Reinhardt, Merchant and Kohler, drafted 22 October 1959, in
Whitman File, DDE Diaries, Dwight D. Eisenhower Library; and FRUS, 1958-60; 4: Washington, 1992) 129, 130,
134, 520-38, 539-42,
22 Memorandum of November 9, 1960, FRUS, 1958-60, 4: 1992, 131. Certainly, Eisenhower was shocked by how
quickly America’s monetary situation had deteriorated. Several years earlier, the administration had used its
enormous monetary power to compel the British to abandon their Suez adventure. It appeared the Europeans were
developing the same capacity to affect American policy. For an example of how the Eisenhower administration
used explicit threats of monetary coercion against the British during the Suez Crisis see Telegram from Embassy in
Washington to British Foreign Office, 2 December 1956, PREM 11/1826, XC 7840, Public Records Office, Kew,
England. See also Jonathan Kirshner, Currency and Coercion, The Political Economy of International Monetary
Power (Princeton, 1995), 63-82.
23 For the documents on the disastrous Anderson-Dillon trip to the Federal Republic of Germany see memorandum
of conference with President Eisenhower in Augusta, Georgia, 15 November 1960, in FRUS, 1958-1960, vol. IV;
Cable to Herter from Dillon, copy of cable to the president from Anderson, 23 November 1960, in UPA, DDE
Office Files, Administration-International Series, Anderson; memorandum of conference with President
Eisenhower, 28 November 1960, in FRUS, 1958-60, 4: 142-147; for a contemporary press report see Communiqué
on Anderson-Dillon talks with W. Ger leaders indirectly admits failure of mission,  New York Times, 23 November
24 Secretary Herter’s speech to the NATO Ministerial Meeting,  NATO Long-Range Planning,” 17 December 1960,
FRUS, 1958-60, 7: 679.
25 Theodore C. Sorensen, Kennedy (New York1965), 406. See also John Kenneth Galbraith’s letter to the president
from October 1960, in his Letters to Kennedy (Harvard, 1998), 29-31.
26 Richard Reeves, President Kennedy: Profile of Power (New York1993), 23.
27 “Report to the Honorable John F. Kennedy by the Task Force on the Balance of Payments,  27 December 1960,
from file AP/SD & WNA/Report to the president on the Balance of Payments, 25 February 1963, found in the
Papers of Dean Acheson, Harry S. Truman Library, Independence, Missouri.
28 Reeves, President Kennedy, 27-28.
29 A useful study on Roosevelt’s policymaking style is Robert Dallek’s Franklin D. Roosevelt and American
Foreign Policy, 1932-1945 (New York, 1995). For a discussion of how the Kennedy administration consciously
set out to create a different foreign policy making structure than Eisenhower’s see Frank A. Mayer, Adenauer and
Kennedy, A Study in German-American Relations, 1961-1963 (New York, 1996), 9. For Kennedy’s inability to
make decisions about long-term policy see George W. Ball, The Past Has Another Pattern (New York, 1982), 167-
30 The French were convinced that Kennedy had no idea of what he was doing on the balance of payments question.
See Alphand’s comments about Kennedy in Jean Lacouture, de Gaulle, The Ruler, 1945-1970 (New York, 1992), p
381 and Herve Alphand, L’etonnement d’etre (Paris, 1977), 381.
31 The swap arrangements were standby credit lines that allowed participants to draw on each other’s currencies in
order to defend their own exchange rates. The increased IMF credit was arranged through a procedure called the
General Arrangements to Borrow, which were negotiated at the end of 1961. While connected to the IMF, these
arrangements were unique in that they gave the lending countries some discretion over the size and use of the loans.
For an excellent discussion of these innovations see James International Monetary Cooperation Since Bretton
Woods, 159-165.
32 Werner Knieper, a Ministry of Defense official, told American negotiators that “a long-range FRG commitment
on military procurement in the U.S. was . . . not acceptable-not even ‘in principle’” Large-scale procurement in the
United States would alienate important French and British military suppliers and undermine the joint European
production programs the Eisenhower administration had supported. The German attitude might be different if
missile systems that could deliver nuclear weapons were included in the purchase list, but Knieper admitted that
such decisions would have to be made at a much higher level. See memcon, 4 January 1961, “Federal Republic
Procurement of Military Equipment in the U.S. to Assist in the Latter’s Balance of Payments Problems,”
Declassified Documents Collection (hereafter referred to as DDC) 1991, no. 2559. See also Dowling to State, 13
January 1961, DDC 1991, no. 1849.
33 Rusk, Memo for the president, “German Balance of Payments Proposals and Your Meeting with German
Foreign Minister von Brentano on February 17,” UPA, National Security Files, Western Europe, 1961-1963,
Germany, reel 9, 363; “Points which the president may wish to emphasize in discussion with foreign minister von
Brentano,” 16 February 1961, UPA, President’s Office Files, part 5, Countries file, Germany, reel 8, 738, 1-2;
“Draft Aide Memoire for Brentano,” 16 February 1961, UPA, President’s Office Files, Countries, Germany, 8,731.
34 Memo, Kennedy to Rusk, undated (but probably early February 1961), President’s Office Files, State, UPA, reel
35 For a detailed account of the shift in negotiations see Hubert Zimmerman, “Offset and Monetary Policy in
German-American Relations during Kennedy’s Presidency 1961-1963,” unpublished manuscript. In addition to the
offset agreement, the administration successfully pushed the FRG on several fronts connected with the balance of
payments. The Germans increased their foreign aid program considerably. They also prepaid $587 million of their
postwar debt. Trade restrictions against American poultry were liberalized. The deutschmark was revalued by 5
percent. Most importantly, the Bundesbank was persuaded to hold its reserves in dollars and not gold, a
controversial arrangement that the Federal Republic refused to formalize or publicize until 1967. See memo, Rusk
to the president, “Recent German Measures Relating to United States Balance of Payments,” 9 July 1961, FRUS,
1961-63, 9: 1995, 120-121.
36 Memo, Dillon to Kennedy, 14 September 1961, President’s Office Files, Departments and Agencies, Treasury,
89, John F. Kennedy Presidential Library, Boston, Massachusetts.
37 Walter Heller, memo for the president, “Current Status of ‘Lend-Lease’ or ‘Mutual Support’ Plan for Financing
U.S. Troop costs in Germany,” 8 September 1961, UPA, President’s Office Files, CEA, 7.
38 For evidence that the Franco-German bloc came into existence in 1962, and that its policies were meant as a
rejection of Kennedy’s Berlin and nuclear sharing policies see Hans-Peter Schwarz, Konrad Adenauer, German
Politician and Statesman in a Period of War, Revolution, and Reconstruction (Providence, 1997), especially 590
and 605.
39 For the best account of both the dispute over Berlin policy and nuclear sharing from the European side, see,
Georges-Henri Soutou, L’alliance incertaine, Les rapports politico-strategiques franco-allemands, 1954-1996
(Paris, 1996, 203-265; see also Frank A. Mayer, Adenauer and Kennedy, A Study in German-American Relations,
1961-1963 (New York, 1996), especially 43-74; Schwarz, Adenauer, 513-712. Schwarz’s account is somewhat
unbalanced: he calls Kennedy’s Berlin strategy the “appeasement” strategy and credits Adenauer for saving Berlin
(even while admitting that the German Chancellor was prepared to let Berlin fall without a war). For the American
side of the story see Marc Trachtenberg, A Constructed Peace, The Making of the European Settlement, 1945-1963
(Princeton, 1999) 251-402. Another good source is the diary entries for 1962 and 1963 in C.L. Sulzberger, The
Last of the Giants (New York, 1970).
40 The administration had ordered a military buildup and authorized direct negotiations with the Soviets. Adenauer
and de Gaulle feared that the American policy might lead to a war through miscalculation or dangerous concessions
to the Soviets that undermined West European security. Both the French and West German government went to
great lengths in the first half of 1962 to block any negotiated settlement with the Soviets over Berlin. See
Trachtenberg, A Constructed Peace, 283-351.
41 For a summary of the nuclear question from the European response to the “flexible response” strategy see
Schwarz, Adenauer, 663-665 and Soutou, L’alliance incertain, 214-229..
42 The Europeans feared that by emphasizing conventional forces, the credibility of America’s promise to use its
strategic nuclear weapons against a Soviet attack would be compromised. This would weaken deterrence. And by
demanding a monopoly over NATO’s nuclear forces, the Kennedy administration appeared to be pursuing the most
blatantly hegemonic policies vis-à-vis its allies. If the United States was the only NATO country with strategic
nuclear weapons, then Western Europe would be completely dependent on the Americans. The administration tried
to save face by offering NATO something called the Multilateral Force. MLF was a State Department proposal to
develop a seaborne nuclear force that would be manned by any NATO country that wished to participate. But as the
Kennedy administration refused to give up the American veto on the firing of the force, it was of little interest to
the French or British, although the Germans were very interested. The French called this whole concept the
“Multilateral Farce,” and there is some evidence that Kennedy himself agreed with this assessment. For evidence
that Kennedy had moved away from supporting MLF by late 1962 see McNamara’s comments, “Anglo-American
Meeting,” 20 December 1962, Prem 11/4229, PRO, England; Anglo-American meeting, 19 December 1962, FRUS,
1961-63, 13: 1994, 1097; see also the apparent willingness to trade MLF away if the Soviets offered something
meaningful see FRUS, 1961-63, vol. 7, 728 notes, 732, 735, 780-81, 790. Note that Kennedy himself called the
MLF a “facade”; see FRUS, 1961-63, 13: 1994, 499, and 173, 367, 502-503.
43 The change between Eisenhower’s policy and Kennedy’s military policy was more complicated and nuanced than
the simple move from a strategy of “massive retaliation” — the immediate and massive use of America’s nuclear
forces against the Soviets in the event of an attack — and flexible response. Eisenhower’s views on independent
nuclear forces was at times contradictory; he seemed to support the idea of a French and even a West German atomic
force, but was unwilling to risk much political capital to do anything about it. And almost every one of his top
advisers believed that by the end of the 1950s, the development of Soviet strategic forces that could hit the United
States meant that the threat of “massive retaliation” was no longer a viable policy. In fact, most aspects of the
flexible response doctrine had their origins in the Eisenhower administration. For his part, Kennedy was not, as the
Europeans generally believed, vehemently against the Europeans having independent nuclear forces, although many
of his advisers in the White House and State Department certainly were. For a reinterpretation of the origins and
real meaning of the flexible response doctrine see Gavin,  The Myth of Flexible Response: American Strategy in
Europe during the 1960s,” International History Review, Summer 2002.
44 Much of the changes in strategy had to do with the problematic question of what to do if the Soviets closed off
West Berlin. In this respect, the general thrust of Kennedy’s policy was not so much different from Eisenhower’s,
neither believed that the threat of a full-scale nuclear war would be a credible response to a Soviet move on West
Berlin. Both presidents wanted to be able to ratchet up the escalation ladder more slowly, demonstrating resolve
with each step but giving the Soviets a chance to see America’s determination and back down. Eisenhower
described the whole process as a poker game, and Kennedy simply wanted to have as many chips as possible to play
with before having to call. To successfully implement such a calibrated policy, the American president would need
strong conventional forces, and he would need complete command and control over the West’s nuclear forces. But
the important thing to remember here is that this whole strategy was designed with the unique difficulties the Berlin
crisis presented — a city within enemy territory, surrounded by Soviet forces, where Khrushchev could control the
intensity of the crisis. Absent Berlin, Kennedy, much like Eisenhower, believed that the United States could
significantly decrease its conventional forces in Europe and rely on nuclear deterrence alone. For this view see
Kennedy-Bundy-Rusk-McNamara meeting, 10 December 1962, FRUS, 1961-63, michofiche supplement, vol. 13-
15, document 27, and Kennedy-McNamara-JCS meeting, 27 December 1962, FRUS 1961-63, 8: 449, and
memorandum for the Record, “Joint Chiefs of Staff Meeting with the president, February 28th, 1963 – Force
Reductions in Europe,” 28 February 1963, FRUS, 1961-63, 13.
45 Bundy to the president, “Action on Nuclear Assistance to France,” 7 May 1962, President’s Office Files, box
116a, Kennedy Library. See also Paul Nitze, From Hiroshima to Glasnost: At the Center of Decision-A Memoir
(New York, 1989), 211.
46 See, for example, Sulzberger, The Last of the Giants, 1004-5 for evidence that the administration may have
offered France nuclear assistance if it agreed to sign the partial test ban treaty.
47 Dillon, memo for the president, 25 May 1962, National Security Files, Departments and Agencies, Treasury,
Box 289, Kennedy Library.
48 Jones to State Department, 13 June 1962, UPA, President’s Office Files, Treasury, 25.
49 Memo of Meeting between the president, Ambassador Alphand, M. Malraux, and McGeorge Bundy, 11 May
1962, FRUS, 1961-63, 13: 1994, 695-701.
50 Gavin to the State Department, 28 May 1962, FRUS, 1961-63, 13: 1994, 705-707.
51 Gavin to the State Department, 16 May 1962, ibid., 702-03.
52 President to Gavin,18 May 1962, ibid., 704.
53 Gavin to Rusk, 12 July 1962, UPA, National Security Files, W. Europe, France. See also Heller, memo to the
president, 16 July 1962, UPA, President’s Office Files, CEA, 9.
54 Memcon, “Payments Arrangements Among the Atlantic Community,” 20 July 1962, FRUS, 1961-63, 13: 1994,
733. See also Ball, memo for the president, “Visit of French Finance Minister,” 18 July 1962, UPA, National
Security Files, W. Europe, France. For direct indications of Kennedy’s willingness to withdraw American troops
from Europe – and even completely  haul out  if pushed too far by the French and West Germans – see  Visit to the
United States, 9-17 September, 1962,  DEFE 13/323, PRO. For Kennedy agreeing with Eisenhower that the
United States should reduce its conventional force presence in Europe see “Conversation between President John F.
Kennedy and Dwight D. Eisenhower,” 10 September 1962, Presidential Recordings, JFKL, transcribed by Erin
55 A gold guarantee was an American promise to overseas central banks ensuring the gold value of the dollar in the
event the U.S.devalued its currency. One of the reasons central banks did not want to hold too many dollars in
their reserves was the fear of these dollars suddenly losing their value if the American government devalued. A gold
standstill would be an agreement where central banks holding dollars agree to not purchase gold from the U.S.
Treasury for a specified period of time.
56 Memo, Coppock to Johnson, 1 August 1962, DDC 1993.
57 Memo, Kaysen to the president, 6 July 1962, FRUS, 1961-63, 9: 1995, 138.
58 Memo, Ball to the president, “A Fresh Approach to the Gold Problem,” 24 July 1962, the Papers of George W.
Ball, Box no. 15b, “Memorandum to the president on the Gold Problem,” Seeley G. Mudd Manuscript Library,
Princeton University.
59 Dillon, memo for the president, 7 August 1962, Acheson Papers, State Department and White House Adviser,
Report to the president on the Balance of Payments, 2-25-63, Harry S. Truman Presidential Library.
60 The tapes of the top meetings to discuss international monetary strategy have recently been made available. The
sharpness of the dispute between Dillon and Roosa on one hand and Ball, Kaysen, Tobin on the other comes out
quite clearly. So does Kennedy’s frustration at being unable to determine what policy to chose. For transcripts see
Tape 11, 10 August 1962, 11:20 a.m. –12:30 p.m., President’s Office Files, transcribed by Francis J. Gavin, and
Tape 14, 20 August 1962, 4:00-5:30 p.m., President’s Office Files, transcribed by Francis J. Gavin.
61 Memo, president for the secretary of the treasury, the under secretary of state, and chairman of the CEA, August
24, 1962, National Security Files, Department and Agencies, Treasury, 6/62 – 4/63/ 289, Kennedy Library.
62 The whole subject of high-level monetary negotiations during the Johnson-Leddy mission was shrouded in
mystery and innuendo. When Leddy and Johnson asked Giscard what Chancellor of Exchequer Maudling’s thoughts
were on the subject, Giscard replied that “the two were in agreement that there should be high level secret
discussions of the subject.” (memo from Dillon and Ball to the president, 12 September 1962, with attachment,
memo for Dillon and Ball from Johnson and Leddy, 10 September 1962, FRUS, 1961-63, 1961-63, 9: 1995, 146.)
Giscard did not tell Johnson and Leddy what the “subject” actually was. Was it the hoped for initiative to limit
gold takings? Giscard didn’t say, and the American representatives thought it imprudent to ask. Several days later,
British representatives asked the Americans what Giscard had said, and after being told, observed that “the whole
affair was mysterious.” The next day, French officials said the same thing  The American team decided to drop the
issue until after the IMF and World Bank meeting, because they believed that “open pressure on the French might
lead them to think that political questions could be successfully interjected.”
63 See Jacques Rueff, Le lancinant probleme des balance de paiments (Paris, Payot, 1965).
64 Press Conference, 4 February 1965, from Charles de Gaulle, Discours et messages, vol. 4: “Pour l’effort, Aout
1962-Decembre 1965” (Paris, 1993).
65 de Gaulle’s biographer, Jean Lacouture, argues that de Gaulle was interested in attacking the privileges of the
during the Kennedy period. See Lacouture, de Gaulle, The Ruler, 1945-1970 (New York, 1992), p 381.
66 Herve Alphand, L’etonnement d’etre (Paris, Fayard, 1977), 380-381.
67 Memo for the secretary of the treasury, 19 January 1963, UPA, President’s Office Files, Treasury, 25.
68 Summary record of NSC executive committee meeting, No. 38 (Part II), 25 January 1963, F RU S , 13: 1994, 488.
69 For the issues surrounding France’s rejection of Great Britain’s application to enter the Common Market and de
Gaulle’s rejection of Kennedy’s offer of nuclear assistance see Soutou, L’alliance incertaine, 230-240. In large
measure, de Gaulle was reacting to the result of the Anglo-American Nassau conference, where Kennedy offered
British prime minister Harold Macmillan the Polaris missile system to replace the Skybolt missile, which had been
cancelled. Kennedy offered de Gaulle the same weapon; but since he did not have the submarines to fire the
weapon, he considered the weapons worthless. It turns out that Kennedy was willing to discuss any aspect of the
offer, including helping de Gaulle build the submarines. Marc Trachtenberg argues that the French were genuinely
interested in this offer until George Ball essentially sabotaged Kennedy’s policy during his January meeting with de
Gaulle. See Trachtenberg, A Constructed Peace, 359-70. Kennedy commissioned Richard E. Neustadt to write an
in-house history and analysis of the events that led to the disastrous Nassau meeting and subsequent de Gaulle press
conference. See the recently declassified “Skybolt and Nassau, American Policy-Making and Anglo-American
Relations,” 15 November 1963, the Papers of Francis Bator, Johnson Library.
70 For the origins, meaning, and implications of the Franco-German Treaty see Lacouture, de Gaulle, 333-62;
Schwarz, Adenauer, 662-75; and Soutou, L’alliance incertain, 241-59.
71 Summary record of NSC executive committee meeting No. 39, 31 January 1963, FRUS, 13: 1994, 158.
72 Memo, State to Bundy, “A Proposal for Strengthening our International Financial Position,” 24 January 1963,
RG 59, SF 1963, FN 12, box 3451, U.S. National Archives, College Park, Maryland.
73 Remarks of President Kennedy to the National Security Meeting, January 22, 1963, FRUS, 13: 1994, 486.
74 Summary record of NSC executive committee meeting, No. 38 (Part II), January 25, 1963, ibid., 486-487.
75 Summary record of NSC executive committee meeting, No. 39, 31 January 1963, ibid., 159-161.
76 Summary record of NSC executive committee meeting No. 40, 5 February 1963, ibid., 178.
77 Memorandum for the record, “Joint Chiefs of Staff Meeting with the president, 28 February 1963 – Force
Strengths in Europe,” 28 February 1963, ibid., 517.
78 For the idea that U.S.-Soviet relations moved toward “détente” during 1963, which made it possible for the
superpowers to cooperate on a range of issues, from Berlin to nuclear proliferation, to the consternation of the
Germans see Frank A. Mayer, Adenauer and Kennedy, A Study in German-American Relations, 1961-63 (New
York, 1996); Vladislav Zubok and Constantine Pleshakov, Inside the Kremlin’s Cold War: From Stalin to
Khrushchev (Cambridge, MA, 1996), esp. 236-74; Hans-Peter Schwarz , Konrad Adenauer, German Politician and
Statesman in a Period of War, Revolution and Reconstruction (Providence, 1997), especially the chapter entitled
“We Are the Victims of American Détente Policy,” 687-99; Marc Trachtenberg, A Constructed Peace, The Making
of the European Settlement, 1945-1963 (Princeton, 1999), especially chapter 9. Note the following analysis of
superpower relations after the Cuban Missile Crisis from p. 271 from Zubok and Pleshakov Inside the Kremlin’s
Cold War: “By the end of the crisis, Khrushchev began to lean on the idea of joint management of the world with
the United States much more than his Communist creed and his – albeit very crude – sense of social justice
permitted …. The taming of the Cold War, fifteen years after its inception, and almost a decade after Stalin’s death,
finally happened.” As Schwarz points out Adenauer saw these developments as a threat to the Federal Republic’s
security, “Adenauer again complained bitterly about the Americans, they would deceive no-one, but they were a
people at the mercy of such changing moods  …. Adenauer’s immediate entourage was very familiar with his
obsession that the Kennedy administration … was prepared to come to an American-Soviet arrangement over Berlin
and Germany, despite the Cuba crisis. He became more and more obsessed with this idee fixe as 1963 advanced.
Every event aroused his deepest distrust …. the lowest point in relations with the United States was reached in
August 1963 during the quarrel about the GDR signing the Test Ban Treaty.” Adenauer, 666.
79 Memo, Rostow for the president, “Balance of Payments Problem,” February 4, 1963, FRUS, 1961-63, 9: 1995,
80 Memo, Dillon for the president, February 11, 1963, ibid., 163.
81 Reeves, President Kennedy, 431.
82 Transcript of oral history interview with Dean Acheson, 31, Kennedy Library.
83 “In this whole discussion I have not mentioned the possibility of a change in the rate of exchange of the dollar.
This is not because there is anything in the nature of the universe or the Constitution or good common sense to
prevent the consideration of this matter at an appropriate time …. I do not think that time is now …. I did not want
you, however, to think I thought this subject unmentionable.” Acheson to the president, cover letter for Dean
Acheson, “Recommendations Relating to United States International Payments Problem,” February 25, 1963,
President’s Office Files, 27, Special Correspondence Series, Kennedy Library.
84 Acheson oral history, Kennedy Library.
85 “Meeting between the president and Mr. Dean Acheson, February 26, 1963, 11 AM, on Balance of Payments,”
February 27, 1963, FRUS, 1961-63, 9: 1995, 46.
86 Ibid., 46.
87 George Ball, memorandum for the president, “Negotiations at Political Level for Supplementary Financing of
Balance of Payments Deficit,” pp. 2-3, George W. Ball Papers, box 15b, Seeley G. Mudd Manuscript Library,
Princeton University.
88 Rostow to Ball, “Negotiating Posture Balance of Payments,” 26 March 1963, UPA, President’s Office Files,
State, 24, 1.
89 George Ball, memorandum for the president, “Negotiations at Political Level for Supplementary Financing of
Balance of Payments Deficit,” pp. 22-25, George W. Ball Papers, box 15b, Seeley G. Mudd Manuscript Library,
Princeton University.
90 Memorandum for the Record, “Meeting with the president, April 18, 1963, 10,00 A.M. to 12 Noon – Balance of
Payments,” April 24, 1963, National Security Files, M&M, Meetings with the president, 4/63, 317, Kennedy
Library, 4-5. For Ball’s proposal to restrict the sale of foreign securities in the U.S. see George Ball, Memorandum
for the president, “The Possible Restriction of the Sale of Foreign Securities in United States Markets,” 16 April
1963, George W. Ball Papers, box 15b, Seeley G. Mudd Manuscript Library, Princeton University.
91 There is an unsigned memo, perhaps written by the Cabinet Committee on the Balance of Payments, which
rejects capital controls and “extraordinary new arrangements” to fund the deficit. Instead, it recommends that the
U.S. “cut down” and “reduce” American contributions to the common defense. Unidentified and unsigned memo,
“The Balance of Payments,” 26 April 1963, President’s Office Files, Departments and Agencies, Treasury, 4/63, 90,
Kennedy Library.
92 Memorandum from the president to the Cabinet Committee on the Balance of Payments, 20 April 1963,
President’s Office Files, Departments and Agencies, Treasury, 4/63, 90, Kennedy Library.
93 “Meeting with the president, April 18, 1963, 10,00 A.M. to 12 Noon-Balance of Payments,” 24 April 1963,
National Security Files, M&M: Meetings with the President, 4/63, 317, John F. Kennedy Presidential Library, p.
94 Kitchen to Johnson, “Present Status of Defense Balance of Payments Problems Affecting State Department’s
Interests,” 4 March 1963, RG 59, SF 1963, FN 12, box 3451, 2.
95 See, for example, Brussels to State, May 28, 1963, RG 59, SF 1963, Def 6, Box 3747, U.S. National Archives;
Paris to State, 23 May 1963, RG 59, SF 1963, Def 6, box 3747.
96 Rusk to Missions in the NATO Capitals, 18 June 1963, FRUS, 1961-63, 9: 1995, 596-97.
97 Memo, Johnson to Rusk, “Political Effect of Troop Withdrawals from Europe,” 17 May 1963, and attached
report, “The Implications for US National Interests of American Military Retrenchment in Europe,” RG 59, SF
1963, Def 6-8, box 3749.
98 Memo for the Record, “Troop Withdrawals,” 4 September 1963, RG 59, SF 1963, Def 6-8, U.S. National
Archives. See also memo, McNamara to the president, “Reduction in Department of Defense Expenditures Entering
the International Balance of Payments,” 16 July 1963, FRUS, 1961-63, 9: 1995, 73.
99 Memo for the Record, 12 September 1963, FRUS, 1961-63, 9: 1995, 87.
100 Memo, Rusk to Kennedy, “Department of Defense Proposals for further Reductions in Balance of Payments
Drain,” undated, ibid., 89-93. See also Popper to Schaetzel, “Points for Discussion with Ambassador Finletter,” 19
September 1963, RG 59, SF 1963, Def 6, box 3747.
101 Memo, “Meeting on Defense Proposals for further reductions in balance of payments drain, 19 September 1963,
4 PM,” 23 September 1963, FRUS, 1961-63, 9: 1995, 98.
102 Remarks by Roswell Gilpatric, deputy ecretary of defense, at the Annual UPI Editors and Publishers Conference,
19 October 1963, RG 59, SF 1963, Def 6-8, box 3749, p. 6.
103 John G. Norris, “Pentagon to Seek Showdown on Basic NATO Strategy,” Washington Post, 20 October 1963,
104 Johnson to Rusk, “U.S. Policy on our Public Position on Troop Withdrawals,” October 21, 1963, RG 59, SF
1963, Def 6-8, box 3749, U.S. National Archives, 1.
105 Johnson to Rusk, “U.S. Policy on our Public Position on Troop Withdrawals,” October 21, 1963, ibid., 1.
106 Memo, Bundy to Gilpatric, 18 October 1963, National Security Files, Departments and Agencies, Defense, box
274, Kennedy Library.
107 Memo, Bundy to Gilpatric, 18 October 1963, ibid., 2. See also Weiss, memorandum for the record, 24 October
1963, RG 59, SF 1963, Def 6, Box 3747.
108 Telegram, State Department to embassy in Germany, 30 July 1963, FRUS, 1961-63, 9: 184-185. See also
footnote 1, 184. See also Telegram, State Department to Embassy in Germany, 11 July 1963, FRUS, FRUS, 1961-
63, 9: 176.
109 Memo of Conversation, “Military Offset Arrangements; Developmental Assistance Activities,” 15 November
1962, ibid., p. 157.
110 Donfried, Karen Erika, The Political Economy of Alliance, Issue Linkage in the West German-American
Relationship. (Ph.D. dissertation, The Fletcher School of Law and Diplomacy, 1991), 110.
111 Kennedy Library Tape No. 102/A38, 30 July 1963 meeting, second side of cassette no. 1, right after first
excision (43,26).
112 Gesprach des Botschafters Freiherr von Welck mit Staatspasident Franco in 29 Madrid, May 1963, Akten zur
Auswartigen Politik der Bundesrepublik Deutschland (Munich, 1963) vol. I, no. 185.
113 Ibid., no. 185, footnote 9.
114 Memo of conversation, “Trade and Fiscal Policy Matters,” 24 June 1963, FRUS, 1961-63, 9: 1995, 170.
115 Memcon, “U.S. Troop Reductions in Europe,” 24 September 1963, ibid., 187.
116 Gesprach des Bundeskanzlers Adenauer mit dem amerikanischen Verteidigungsminister McNamara, 31 July
1963. Akten zur Auswartigen Politik der Bundesrepublik Deutschland, 1963, vol. II, no. 257.
117 See the sources and Adenauer quote in fn. 77.
118 Kennedy-Bundy-Rusk-McNamara Meeting, 10 December 1962, 3, FRUS 1961-63, vos. 13-15, microfiche
supplement, document 27.
119 See Schwarz, Adenauer, 688, “This was linked to a situation of considerable change in the international political
scene, which was considerably altered in the spring of 1963. Kennedy and Khrushchev drew the same conclusions
from the Cuban crisis. After they had stared into the abyss of nuclear war, they believed it advisable to turn to
détente . . . This meant, that in Europe, the Soviet Union must also be prepared not to make any more threats to
the Western allies’ encalve of Berlin. The acceptance of the GDR and the Wall were also the price of détente. U.S.
and British readiness for an agreement in arms control also had to be taken into account; this would be at the cost
of basic German positions that until then had been vigorously defended (emphasis added).
120 For a document showing the Germans analyzing and weighing all their foreign policy options, but suggesting
that the FRG had little choice but to follow the American line see “Aufzeichnung des Staatssekretars Carstens,” 16
August 1963, Akten zur Auswartigen Politik der Bundesrepublik Deutschland, vol. 2 (Munich, 11994), 306.
121 This quote is taken from Hubert Zimmerman, “Dollars, Pounds, and Transatlantic Security, Conventional
Troops and Monetary Policy in Germany’s Relations to the United States and the United Kingdom 1955-1967,”
(Ph.D. diss., European University Institute, 1997). Original document is from the Papers of George McGhee, 1988
add, box 1, memorandum on von Hassel Rusk talks, 10 October 1963.
122 Background Paper, “Germany and the U.S. Balance of Payments,” 20 December 1963, National Security Files,
Country File, Germany, box 190, LBJL, 1. See also Soutou, L’alliance incertaine, 265.
123 Brief Talking Points on Offset Agreement, 26 December 1963, National Security Files, Country File, Germany,
box 190, Johnson Library.
124 The story of the battle within the West German CDU/CSU parties over foreign policy is told in Schwarz,
Adenauer, 676-98. There were many other issues involved in Adenauer’s removal from the chancellorship in the
fall of 1963, including the infamous “Spiegal” affair. But it is clear that Ludwig Erhard understood the
implications of Adenauer’s turn toward France, a policy he reversed upon entering office. Part of this reversal
included an affirmation of the U.S. troop-offset link.
125 “Excerpt from Proposed Speech by Secretary Rusk at Frankfurt, Germany, on Sunday, 27 October 1963,” RG
59, SF 1963, Def 6-8, box 3749.
126 “President’s news conference statements on US Troop levels was widely covered in Saturday’s German press
under such headlines as, ‘Kennedy puts an end to speculation’ (Die Welt), Kennedy decides against troop
withdrawals from Germany’ (Frankfurter Allgemeine Zeitung); and ‘Troops remain in Germany’ (Deutsche Zeit
Ung). Bonn to Secretary of State, 2 November 1963, RG 59, SF 1963, Def 6-8, box 3749.
127 McNamara to the president, 19 September 1966, Papers of Francis Bator, box 21, 1. Also in National Security
Files, Trilateral Negotiations and NATO, box 50, Johnson Library.
128 The transatlantic bargain between the United States and the Federal Republic of Germany would be threatened in
1966 and 1967, until a new arrangement was negotiated during the Trilateral Talks. See Francis J. Gavin,
“Defending Europe and the Dollar, The Politics of the United States Balance of Payments, 1958-1968 (Ph.D. diss.,
University of Pennsylvania, 1997) chapter 5; and Gregory Treverton, The Dollar Drain and American Forces in
Germany (Athens, 1978).
129 There are other historical examples of the interconnectedness of monetary and security policy in international
relations. As Marc Trachtenberg and Stephen Schuker demonstrated in their studies, the Franco-German clash over
reparations after WWI — an ostensibly economic clash that on the surface seemed to be over highly technical
monetary issues — in fact masked a fundamental dispute over the shape of the balance of power in Europe after the
First World War. See Stephen Schuker, The End of French Predominance in Europe, The Financial Crisis of 1924
and the Adoption of the Dawes Plan (Chapel Hill, University of North Carolina Press, 1976); and Marc
Trachtenberg, Reparation in World Politics, France and European Economic Diplomacy, 1916-1923 (New York,
130 For example, what is the real relationship between the monetary chaos of the 1920s and 1930s, the collapse of
the international monetary system, the intensification of international political rivalry and the origins of the Second
World War in both Asia and Europe?

Click to access gold_battles.pdf


International Bank for Reconstruction and Development

Available in: ???????, Español, Français


The International Bank for Reconstruction and Development (IBRD) aims to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and analytical and advisory services. Established in 1944 as the original institution of the World Bank Group, IBRD is structured like a cooperative that is owned and operated for the benefit of its 186 member countries.
IBRD raises most of its funds on the world’s financial markets and has become one of the most established borrowers since issuing its first bond in 1947. The income that IBRD has generated over the years has allowed it to fund development activities and to ensure its financial strength, which enables it to borrow at low cost and offer clients good borrowing terms.

At its Annual Meeting in September 2006, the World Bank — with the encouragement of its shareholder governments — committed to make further improvements to the services it provides its members. To meet the increasingly sophisticated demands of middle-income countries, IBRD is overhauling financial and risk management products, broadening the provision of free-standing knowledge services and making it easier for clients to deal with the Bank.



Why did banks and investment brokerages ever get to work as internal hedge fund players – President and the Economy
Posted by cricketdiane under America – USA, Creating Solutions That Work, Creating Solutions for America, Creating Solutions for Real-life, Cricket D, Cricket Diane C Phillips, Cricket Diane C Sparky Phillips, Economics, Economy, International Concerns, Life In The USA – Rotterdam Club, Making It All Work Quickly, Money, New Boston Tea Party Actions, Physics of Change, Principles of Economics, Real-World, Reality-based Analysis, Solutions, Systems Analysis, US At Home – Domestic Policy, United States of America, cricket diane, cricketdiane, macro-economics | Tags: banking, banks, bonds, credit default swaps, cricketdiane, hedge funds, macroeconomics 2010, President Obama financial reform, proprietary trading, Wall Street | (edit this)
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Today – 01-21-10
President Obama is announcing financial reform guidelines including the exclusion of banks from engaging in proprietary trading and investing their own funds into internal hedge funds while having inside knowledge of auctions / trades and using taxpayer dollars to cover their losses. Also announced the intention for risk to no longer be concentrated due to consolidating many smaller and mid-sized firms into large conglomerate ones – President Obama described the intention to proceed with regulations that would no longer allow huge banking, investment, brokerage and financial institutions to become conglomerate concentrations of risk and of such size to jeopardize the entire system if they were to fail.

On CNN 11.41 – 11.44 amET
check transcript and WhiteHouse website for transcript / video clip of announcement

(34) – CNN – LIVE
President (Uncle Barack) Obama and Vice President (Uncle Joe) Biden


Paul Volcker has been talking about these things for a year – anchor’s comment


Proprietary trading
From Wikipedia, the free encyclopedia

Proprietary trading, proprietary trading desk, or “prop desk” are terms used in investment banking to describe when the firm’s traders actively trade stocks, bonds, options, commodities, derivatives or other financial instruments with its own money as opposed to its customers’ money, so as to make a profit for itself. Although investment banks are usually defined as businesses which assist other business in raising money in the capital markets (by selling stocks or bonds), in fact most are also involved in trading for their own accounts as well. They may use a variety of strategies such as index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage or macro trading, much like a hedge fund. Many reporters and analysts believe investment banks purposely leave ambiguous the amount of non proprietary trading they do versus the amount of proprietary trading they do because it is felt that proprietary trading is riskier and results in more volatile profits.

* 1 The relationships between trading and investment banking
* 2 Arbitrage
* 3 Conflicts of interest in proprietary trading
* 4 Famous trading banks and traders
* 5 References
* 6 External links

The relationships between trading and investment banking

Investment banks are defined as companies that assist other companies in raising financial capital in the capital markets, through things like the issuance of stocks and bonds. Trading has almost always been associated with investment banks however, because they are often required to make a market in the stocks and bonds they help issue.

For example, if General Store Co. sold stock with an investment bank, whoever first bought shares would possibly have a hard time selling them to other individuals if people are not familiar with the company. The investment bank agrees to buy the shares sold in order to find a buyer. This provides liquidity to the markets. The bank normally does not care about the fundamental, intrinsic value of the shares, but only that it can sell them at a slightly higher price than it could buy them. To do this, an investment bank employs traders. Over time these traders began to devise different strategies within this system to earn even more profit independent of providing client liquidity, and this is how proprietary trading was born.

The evolution of proprietary trading at investment banks has come to the point whereby banks employ multiple desks of traders devoted solely to proprietary trading with the hopes of earning added profits above that of market-making trading. These desks are often considered internal hedge funds within the investment bank, performing in isolation away from client-flow traders.

Proprietary desks routinely have the highest value at risk among other desks at the bank. Investments banks such as Goldman Sachs, Deutsche Bank, and Merrill Lynch are known to earn a significant portion of their quarterly and annual profits through proprietary trading efforts.[citation needed] Unlike other type of auctioneers, the traders in investment banks are allowed to bid shares while conducting the auction.

If you think a trader’s ability to see the incoming orders for the trade gives him a built in advantage when trading for himself, you are not wrong. It is like being in the card game in which only one of the players has the ability to see everyone else’s hand.

One of the main strategies of trading traditionally associated with investment banks is arbitrage. In the most basic sense, arbitrage is defined as taking advantage of a price discrepancy through the purchase/sale of certain combinations of securities to lock in a profit.

Many people confuse arbitrage with what is essentially a normal investment. The difference between arbitrage and a typical investment is the amount of risk: the risk in what is known as arbitrage today (to distinguish it from theoretical arbitrage, which effectively does not exist) is market neutral. From the second the trade is executed, a profit is locked in. Investment banks, which are often active in many markets around the world, constantly watch for arbitrage opportunities.

One of the more notable areas of arbitrage, called risk arbitrage, evolved in the 1980’s. When a company plans to buy another company, often the price of a share in the capital of the buyer falls (because the buyer will have to pay money to buy the other company) and the price of a share in the capital of the other company rises (because the buyer usually buys those shares at a price higher than the current price). When an investment bank believes a buyout is imminent, it often sells short the shares of the buyer (betting that the price will go down) and buys the shares of the company being acquired (betting the price will go up).
Conflicts of interest in proprietary trading

There are a number of ways in which proprietary trading can create conflicts of interest between a trader’s interests and those of its customers.[1]

Some suspect that traders engage in “front running”, buying shares in companies the traders’ customers are buying so as to profit from the price increase resulting from the customers’ purchases and thereby harming the customers’ interests.

Some suspect that investment bank salesmen (who encourage customers to buy particular securities) assist their firm’s proprietary traders by encouraging customers to buy securities performing poorly after the proprietary traders have bought them for the firm.

Lastly, because investment banks are key figures in mergers and acquisitions, a possibility exists that the traders could use prohibited inside information to engage in merger arbitrage. Investment banks are required to have a Chinese wall separating their trading and investment banking divisions, however in recent years, dating most recently back to the Enron saga, these have come under great scrutiny.

One example of an alleged conflict of interest can be found in charges brought by the Australian Securities and Investment Commission against Citigroup in 2007.[2]
[edit] Famous trading banks and traders

Famous proprietary traders have included Robert Rubin, Steven A. Cohen, Edward Lampert, and Daniel Och. Some of the investment banks most historically associated with trading was Salomon Brothers and Drexel Burnham Lambert, and currently Goldman Sachs. Nick Leeson took down Barings Bank with unauthorized proprietary positions. Another trader, Brian Hunter, brought down the hedge fund Amaranth Advisors when his massive positions in natural gas futures went bad.
[edit] References

1. ^ “Conflict of Interest Lessons From Financial Services”. 2005-02-22. http://www.complianceweek.com/article/1562/conflict-of-interest-lessons-from-financial-services. Retrieved 2009-01-13.
2. ^ “Citigroup challenges Australian commission’s conflict of interest ruling”. http://www.iht.com/articles/2007/03/23/business/citigroup.php.

[edit] External links

* http://www.cfo.com/article.cfm/3004344?f=related
* http://www.trading-lab.com/forums/introduction_proprietary_trading-t305.html

Retrieved from “http://en.wikipedia.org/wiki/Proprietary_trading”
Categories: Financial markets




BlackHat DC
Jan. 31 – Feb. 3, 2010
Arlington, VA

Register now for Black Hat DC, the largest and the most important security conference series in the world. It happens Jan. 31-Feb. 3, 2010, in Arlington, Va. Find out more and register.




The White House

Office of the Press Secretary
For Immediate Release
January 21, 2010
President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers

WASHINGTON, DC- President Obama joined Paul Volcker, former chairman of the Federal Reserve; Bill Donaldson, former chairman of the Securities and Exchange Commission; Congressman Barney Frank, House Financial Services Chairman; Senator Chris Dodd, Chairman of the Banking Committee and the President’s economic team to call for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers.

The President’s proposal would strengthen the comprehensive financial reform package that is already moving through Congress.

“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama. “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout.  It is exactly this kind of irresponsibility that makes clear reform is necessary.”

The proposal would:

1.   Limit the Scope – The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

2.   Limit the Size – The President also announced a new proposal to limit the consolidation of our financial sector.  The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

In the coming weeks, the President will continue to work closely with Chairman Dodd and others to craft a strong, comprehensive financial reform bill that puts in place common sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of “Too Big to Fail.”   Chairman Barney Frank’s financial reform legislation, which passed the House in December, laid the groundwork for this policy by authorizing regulators to restrict or prohibit large firms from engaging in excessively risky activities.

As part of the previously announced reform program, the proposals announced today will help put an end to the risky practices that contributed significantly to the financial crisis.



Next Page »



03 November 2009 IOSCO Consults on Principles to Mitigate Private Equity Conflicts Of Interest
Consultation period closes on 01 February 2010
The International Organization of Securities Commissions’ (IOSCO) Technical Committee published a Consultation Report on Private Equity Conflicts of Interest. The Report proposes a number of Principles for the effective mitigation of the potential conflicts of interest encountered in private equity firms, and the risks these conflicts pose to fund investors or the efficient functioning of the market.

29 September 2009 Joint Forum Final Release of Report on Special Purpose Entities
The Joint Forum released its paper entitled Report on Special Purpose Entities. This paper serves two broad objectives. First, it provides background on the variety of special purpose entities found across the financial sectors, the motivations of market participants to make use of these structures, and risk management issues that arise from their use. Second, it suggests policy implications and issues for consideration by market participants and the supervisory community.
14 September 2009 IOSCO Publishes Regulatory Standards for Funds of Hedge Funds
The International Organization of Securities Commissions (IOSCO) published Elements of International Regulatory Standards on Funds of Hedge Funds Related Issues Based on Best Market Practices containing standards aimed at addressing regulatory issues of investor protection which have arisen due to the increased involvement of retail investors in hedge funds through funds of hedge funds.

04 September 2009 IOSCO Issues Final Regulatory Recommendations on Securitisation and CDS Market
The International Organization of Securities Commissions’ (IOSCO) Technical Committee published Unregulated Financial Markets and Products – Final Report prepared by its Task Force on Unregulated Financial Markets and Products.

Click to access IOSCO_Quarterly_Update_January_2010.pdf


Joint Release
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
Office of Thrift Supervision

NR 2010-6
For Immediate Release
January 21, 2010

Agencies Issue Final Rule for Regulatory Capital Standards Related to Statements of Financial Accounting Standards Nos. 166 and 167

WASHINGTON — The federal banking and thrift regulatory agencies today announced the final risk-based capital rule related to the Financial Accounting Standards Board’s adoption of Statements of Financial Accounting Standards Nos. 166 and 167. These new accounting standards make substantive changes to how banking organizations account for many items, including securitized assets, that had been previously excluded from these organizations’ balance sheets.

Banking organizations affected by the new accounting standards generally will be subject to higher risk-based regulatory capital requirements. The rule better aligns risk-based capital requirements with the actual risks of certain exposures. It also provides an optional phase-in for four quarters of the impact on risk-weighted assets and tier 2 capital resulting from a banking organization’s implementation of the new accounting standards.

The final rule, issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision, will take effect 60 days after publication in the Federal Register, which is expected shortly. Banking organizations may choose to comply with the final rule as of the beginning of their first annual reporting period after November 15, 2009.

# # #

Media Contacts:
Federal Reserve     Barbara Hagenbaugh     202-452-2955
OCC     Dean DeBuck     202-874-5770
FDIC     David Barr     202-898-6992
OTS     William Ruberry     202-906-6677



My Note –

It will take a class action suit against the banking and financial institutions for this to change. Apparently the new regulations and reform promised were hindered by the blinding light of the bankers, hedge fund managers, financial executives and their powerful, well-funded lobbyists. The abilities they have to charge themselves nothing in interest or liabilities, while pecking the skin off everybody else in the population to get our nickels and dimes and dollars until no one has anything except for the financial players, is astounding. They have no reason to learn any differently than they have been playing it.

There are no safeguards to insure fair trade, fair consumer practices and a level playing field for the rest of us. And, the bankers and investment / financial institutions, including the credit card companies will continue to drive human lives, families, communities and most of the population straight into generations of poverty while they lavish gifts and the riches of kings upon themselves.

Oh, Marie,    –  Marie Antoinette,

Why did you lose your head?

– cricketdiane, 01-30-10





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Thursday 28 January 2010
Afghanistan Conference – PM’s opening remarks

London Conference family photograph; PA copyrightThe Prime Minister has delivered his opening remarks to the Afghanistan Conference in London on 28 January 2010.
Read the transcript

Let me first of all welcome you to London –

* My fellow hosts – President Karzai and Secretary General Ban
* Secretary General Rasmussen – representing NATO, the largest partner in the international coalition
* Admiral Stavridis and General McChrystal, who head the international forces: serving with such courage and distinction in Afghanistan, and soon to be over 100,000 strong
* Leaders, foreign ministers and distinguished guests
* Representing over seventy nations and international organisations – including every member of the forty-three nation strong International Security Assistance Force
* And representing also Afghanistan’s key regional and Muslim partners – with whom we are pleased to work, and whose involvement in this worldwide coalition to support peace and stability in this crucial region we especially welcome

This is a decisive time for the international operation that is helping the Afghan people secure and govern their own country. For this conference marks the beginning of the transition process – agreeing the necessary conditions under which we can begin – district by district and province by province – the process for transferring responsibility for security from international forces to Afghan forces.

2009 was a difficult year in Afghanistan – and there will be more tough times ahead.

All our forces have made great sacrifices, with hundreds of lives lost and thousands of casualties sustained; in the last year Britain alone has suffered over 100 fatalities.

But these sacrifices are not in vain – all the countries represented here recognise that this campaign is vital to our own national security, to the stability of this crucial region, and to the security of the world.

We have a clear strategy – as I and President Obama and Secretary General Rasmussen and others set out last autumn – and we are making progress.

A military surge is turning the tide against the Taleban-led insurgency, and at the same time building the capacity of the Afghan forces who are fighting alongside us.

And a civilian surge is ensuring that, as military forces clear areas of Taleban, our stabilisation experts go in immediately to work with local leaders to hold the ground that has been gained.

Britain leads the largest joint military-civilian provincial reconstruction team in Afghanistan. During 2008 we doubled the number of British civilian experts in Helmand – and Secretary Clinton has announced that America is now tripling the number of American civilian personnel deployed; and I urge other countries to follow this lead.

And to help deliver this co-ordinated military and civilian surge across the many countries involved, I welcome the appointment of Mark Sedwill – as the new senior NATO civilian representative in Kabul; and Staffan de Mistura – as the UN Secretary General’s representative in Afghanistan.

I have described our shared strategy as one of “Afghanisation” – building up Afghan institutions – the army, the police, and the Government – so that as they become stronger we can hand over to them the responsibility of tackling terrorism and extremism, and our forces can start to come home.

It will take time – but I believe the conditions set out in the plan we will sign up to today can be met sooner than many expect, and that as a result the process of handover will begin later this year.

This will not signal an end to our support for Afghanistan. I know that none of us here today wants to repeat the mistakes of past decades – when the international community abandoned Afghanistan and the region. But it will mark the beginning of a new phase, and a decisive step towards the Afghans taking control of their own security.

Last November, to support this strategy of Afghanisation, I announced an increase in British forces to 9,500 plus special forces and their support: an uplift that is part of an approach agreed across the international coalition – with America taking the lead and all countries bearing their share of the burden.

36 countries have already offered additional manpower – and I warmly welcome the most recent commitments from Chancellor Merkel: increasing the German troop numbers to 5000, and numbers of police training staff to 260 – an increase of over 50 per cent. And more than eight thousand additional NATO troops have been committed to the campaign since President Obama announced the American increase with more being announced this week.

But in return for this commitment we, as the international community, must today agree with President Karzai plans for the expansion of the Afghan army and police force – and pledge the necessary support to do so.

So we will agree that the Afghan national army will number 134,000 by October 2010 and 171,600 by October 2011.

And similarly today we will commit to supporting a police reform plan: with Afghan national police numbers reaching 109 thousand by this October, and 134 thousand by October 2011.

This will bring Afghan national security forces to 300,000 in total – a presence that is far bigger than our coalition forces.

And because we badly need more international police trainers, the UK is more than doubling the number of military mentoring teams for the Afghan police starting in April of this year.

International forces will be 135,000; Afghan security forces will be 300,000. And the balance will continue to shift towards Afghan security control.

As President Obama made clear last month, by the middle of next year we have to turn the tide in the fight against the insurgency and also in our work to support the Afghan Government in winning the trust of its people.

So today we affirm as an international community that the increase in our military efforts must be matched with governance and economic development – a political and civilian surge to match and complement the current military surge – and with the Afghan Government committed to playing its full part too.

President Karzai – as an international community we will stand united with you in your work on the five areas we agreed at the time of your election – fighting corruption, securing stronger governance, economic development, supporting an Afghan-led peace and reintegration programme, and strengthening the partnerships with Afghanistan’s neighbours. And I commend the progress you have made since then.

Today we welcome your decision to appoint an independent high office of oversight with
investigative and wide-ranging powers and an international monitoring group of experts which will provide regular reports to you, to the Afghan parliament, the Afghan people and to the international community.

I know from my many visits to Helmand that local governance is also critical. We have agreed to provide additional support to train twelve thousand sub-national civil servants in core administrative functions in support of provincial and district governorships by the end of 2011. And I am pleased to announce that in partnership with the Asia Foundation and the Afghan Independent Directorate for Local Governance – the British, American, Canadian and Belgian governments are launching a new performance-based governors’ fund – which will provide more finance for provincial governors – based on need and evidence of accountability and effectiveness.

In return for action on corruption and better governance, the international community will not just maintain its aid but also aim to increase the share which is delivered through the Afghan Government and budget to 50% in the next two years.

And under the heavily indebted poor countries initiative – the World Bank, the IMF and Afghanistan’s major creditors have this week agreed to provide up to $1.6 billion in debt relief from major creditors, taking total debt relief to $11 billion.

But, if Afghanistan is to enjoy greater stability, farmers and working people in towns and villages must have a greater stake in their economic future. So Britain is contributing over £72 million in new programmes to support agriculture and other projects to encourage growth.

And I also welcome chancellor Merkel’s decision earlier this week to double Germany’s development aid to 430 million Euros this year and for the next three years. Overall international aid to Afghanistan in the last financial year was $6.3 billion – making up 45% of Afghan GDP.

International and Afghan forces are weakening the insurgency, applying pressure to its leadership.

But a familiar element of successful conflict resolution through history is to combine this strategy of strengthening our security forces with the offer of a way forward for those prepared to renounce violence and choose to join the political process – so let me welcome today the plans from President Karzai and his Government for an Afghan-led peace and reintegration programme that offers insurgents a way back into mainstream life on the condition that they renounce violence, cut ties with al Qaeda and all other terrorist groups, respect the constitution and pursue their political goals peacefully.

As an international community responding to President Karzai’s leadership, we are today establishing an international trust fund to finance this Afghan-led peace and reintegration programme to provide an economic alternative for those who have none. But for those insurgents who refuse to accept the conditions for reintegration, we will have no choice but to pursue them militarily.
Let me conclude as we look forward to the next conference in Kabul by paying tribute to all those who have served in Afghanistan through these troubled times – not just our brave forces and the Afghan army and police but also the civilian staff – both Afghan and international – who have been doing crucial work with international agencies and non-government organisations.

And let us remember in particular those who gave their lives, making the ultimate sacrifice for the security and stability of Afghanistan and the protection of people at home.

All around the world, thousands of men and women of all religions – including thousands of the Muslim faith – have been murdered in al Qaeda attacks.

Today our message to al Qaeda is clear. And it is the same message we send to all those who pursue violent and extremist ideologies that pervert the true Islamic faith. We will defeat you. Not just on the battlefield, but in the hearts and minds of the people in Afghanistan – and in any and every country where you seek refuge.

For today, the people of the world speak as one. United and resolute we will win the fight against global terrorism; united in supporting the government of Afghanistan to deliver peace and security for its people; and united in our resolve to do what is right to support all those determined to build a more secure, more prosperous life, free of terrorism.

Tags: Afghanistan, London conference
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DowningStreet: RT @foreignoffice: Communiqué for #afghanconf just published http://ow.ly/11ohQ
Thursday, January 28, 2010 5:23:02 PM
DowningStreet: RT @foreignoffice: Ivan: among experienced politicians there’s a genuine passion and commitment to ensure #afghanconf will be a turning …
Thursday, January 28, 2010 3:09:06 PM
DowningStreet: @skinpup She was here at No10 this morning before the conf. See picture http://bit.ly/90xlMD – 2nd from right
Thursday, January 28, 2010 3:06:48 PM
DowningStreet: RT @foreignoffice: Watch the #afghanconf live or see video on demand here: http://ow.ly/11jFn
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