236 Hegemonic Stability Theories of the International Monetary System
reserves. Prudence dictated that foreign governments diversify their reserve positions
out of dollars.
The role of U.S. hegemony in the provision of liquidity during this second
decade has been much debated. The growth of liquidity reflected both supply and
demand pressures: both demands by other countries for additional reserves, which
translated into balance-of-payments surpluses, and the capacity of the United States
to consume more than it produced by running balance-of-payments deficits financed
by the willingness of other countries to accumulate dollar reserves. The United
States was criticized sharply, mainly by the French, for exporting inflation and
for financing purchases of foreign companies and pursuit of the Vietnam War
through the balance of payments. Although these complaints cannot be dismissed,
it is incorrect to conclude that the dollar’s singular position in the Bretton Woods
system permitted the United States to run whatever balance-of-payments deficit it
wished. Moreover, it is difficult to envisage an alternative scenario in which the
U.S. balance of payments was zero but the world was not starved of liquidity.
Owing to the sheer size of the American economy, new claims on the United
States continued to exceed vastly the contribution of new claims on any other
nation. Moreover, U.S. economic, military, and diplomatic influence did much to
encourage if not compel other countries to maintain their holdings of dollar claims.
Thus U.S. dominance of international markets played a critical role in resolving
the liquidity crisis of the 1960s.
The distinguishing feature of Bretton Woods is not that other countries continued
to hold dollar reserves in the face of exchange rate uncertainty and economic
growth abroad, for neither development has deterred them from holding dollars
under the flexible exchange rate regime of the 1970s and 1980s. Rather, it is that
they continued to hold dollar reserves in the face of a one-way bet resulting from
dollar convertibility at a fixed price when the dollar price of gold seemed poised
to rise. In part, the importance of American foreign investments and the size of
the U.S. market for European exports caused other countries to hesitate before
cashing in their chips. Yet foreign governments also saw dollar convertibility as
essential to the defense of the gold-dollar system and viewed the fixed exchange
rates of that system as an international public good worthy of defense. Not until
1965 did the French government decide to convert into gold some $300 million
of its dollar holdings and subsequently to step up its monthly gold purchases
from the United States. But when pressure on U.S. gold reserves mounted following
the 1967 devaluation of sterling, other countries, including France, sold gold instead
of capitalizing on the one-way bet. They joined the United States in the formation
of a gold pool whose purpose was to sell a sufficient quantity of gold to defend
the official price. Between sterling’s devaluation in 1967 and closure of the gold
market on March 15, 1968, the pool sold $3 billion of gold, of which U.S. sales
were $2.2 billion. France purchased no gold in 1967 or 1968, presumably due in
part to foreign pressure. U.S. leverage undoubtedly contributed to their decisions.
But a plausible interpretation of these events is that foreign governments, rather
than simply being coerced into support of the dollar by U.S. economic power,
were willing to take limited steps to defend the international public good of a
fixed exchange rate system defined in terms of the dollar price of gold.