240 Hegemonic Stability Theories of the International Monetary System
growth in such a way as to progressively reduce the economic power and, by
implication, the stabilizing capacity of the hegemon.
The hypothesis that the Bretton Woods system was dynamically unstable was
mooted by Robert Triffin as early as 1947. Triffin focused on what he saw as
inevitable changes in the composition of reserves, arguing that the system’s viability
hinged on the willingness of foreign governments to accumulate dollars, which
depended in turn on confidence in the maintenance of dollar convertibility. Although
gold dominated the dollar as a source of international liquidity (in 1958 the value
of gold reserves was four times the value of dollar reserves when all countries
were considered, two times when the United States was excluded), dollars were
the main source of liquidity on the margin. Yet the willingness of foreign
governments to accumulate dollars at the required pace and hence the stability of
the gold-dollar system were predicated on America’s commitment and capacity
to maintain the convertibility of dollars into gold at $35 an ounce. The threat to
its ability to do so was that, under a system in which reserves could take the form
of either dollars or gold (a scarce natural resource whose supply was insufficiently
elastic to keep pace with the demand for liquidity), the share of dollars in total
reserves could only increase. An ever-growing volume of foreign dollar liabilities
was based on a fixed or even shrinking U.S. gold reserve. Thus the very structure
of Bretton Woods—specifically, the monetary role for gold—progressively
undermined the hegemon’s capacity to ensure the system’s smooth operation through
the provision of adequate liquidity.
Dynamic instability also could have operated through the effect of the
international monetary system on the relative rates of growth of the U.S. and
foreign economies. If the dollar was systematically overvalued for a significant
portion of the Bretton Woods era, this could have reduced the competitiveness
of U.S. exports and stimulated foreign penetration of U.S. markets. If the dollar
was overvalued due to some combination of European devaluations at the
beginning of the 1950s, subsequent devaluations by developing countries, and
the inability of the United States to respond to competitive difficulties by altering
its exchange rate, how might this have depressed the relative rate of growth of
the U.S. economy, leading to hegemonic decline? One can think of two arguments:
one that proceeds along Heckscher-Ohlin lines, another that draws on dynamic
theories of international trade.
The Heckscher-Ohlin hypothesis builds on the observation that the United States
was relatively abundant in human and physical capital. Since, under Heckscher-
Ohlin assumptions, U.S. exports were capital intensive, any measure that depressed
exports would have reduced its rate of return. Reducing the rate of return would
have discouraged investment, depressing the rate of economic growth and
accelerating the U.S. economy’s relative decline.
The dynamic trade theory hypothesis builds on the existence of learning curves
in the production of traded goods. If production costs fall with cumulative output
and the benefits of learning are external to the firm but internal to domestic industry,
then exchange rate overvaluation, by depressing the competitiveness of exports,
will inhibit their production and reduce the benefits of learning. If overvaluation
is sufficiently large and persistent, it will shift comparative advantage in production