The Breakup of the Dollar-Exchange System

The international monetary crisis, associated with the seventies, began much earlier. The devaluation of sterling in 1967 is a convenient date from which to trace its derivation. Prior to that date the world monetary system operated with two key currencies, the pound and dollar — the latter the more important because of its increasing liquidity role and its link with gold. During the sixties certain basic weaknesses in the Bretton Woods system revealed themselves: the difficulty of adjusting balances of payments under a system of virtually fixed exchange rates, the problem of providing a world stock of international liquidity appropriate to fixed exchange rates and, most destabilising of all, the problem of preserving international confidence in key currencies when the economies of the key currency countries themselves were in difficulties and when large amounts of international money were free to move from centre to centre in an international capital market. These problems were countered, as we have seen,1 by extending the world liquidity base, first by the GAB arrangements of the IMF and in 1969 by the Agreement to set up the Special Drawing Rights (SDRs) scheme for the systematic creation and issue by the IMF of a new international reserve unit.