Forex: The International Finance
In reality, of course, the U.S. economy is closely linked to that of the rest of the world. In 1972, for example, our exports of goods and services amounted to $74 billion, while our imports came to $78 billion.
Although each of these totals amounted to less than 7 percent of the U.S. GNP, imported consumer goods are a significant element in our high standard of living, while both imported raw materials and export markets for our products are of major importance to some of our industries.
Moreover, since most of our trading partners are less self-sufficient and more dependent on foreign trade than we are, our trade is more important to the rest of the world than it is to us. In addition to our trade relations, our financial markets are closely linked to the financial borrowing and lending activities.
As a result of these trade and financial ties, our prosperity is affected by economic developments occurring in other countries and by policies followed by other governments. And the converse is true, perhaps in even greater degree; since trade with the United States is a major importance to many other countries, economic developments here and the policies we follow will often have a major impact on the prosperity the rest of the world.
The way in which economic impulses are transmitted from one country to another and the nature of the resulting interdependence that exists among countries depends to a considerable extent on the structure of the international monetary system--- that is, the complex web of rules and arrangements governing financial relations among countries.
From early 1947 until the beginning of 1973, world trade was based on a financial system which had its origins in the Bretton Woods Conference of 1944, at which the International Monetary Fund was established. This system bore some resemblance to the so-called gold exchange standard that was developed in the 1920s, under which participating countries held their reserves partly in gold and partly in national currencies--- such as the dollar and sterling--- which were themselves freely convertible into gold.
The gold exchange standard proved to be unstable, and under pressures of the Great Depression in the early 1930s, it broke down completely as a result of speculative movements of funds induced by fears of currency devaluation. The result was nearly a decade of international monetary chaos which helped to spread depression throughout the world and brought a drastic decline in world trade.
The Bretton Woods system contained features designed to prevent a repetition of the international finance disaster of the 1930s, and the strength of the system is most clearly reflected in the vigorous growth and prosperity of the world economy and the rapid expansion of international trade that occurred during the quarter century following its establishment.
While this work is only in its preliminary stages, so that it is impossible to say precisely how the new system will differ from the old, there is a good deal of opinion it will be basically a fixed-rate system, although there undoubtedly will be somewhat more scope for exchange rate flexibility than there was under the former plan.