Growth and Stability: 1961–1971

Abstract

The world economy was doing well in the 1960s. Several central banks had become more independent and kept inflation low without hurting economic growth. Strains in the international monetary system were becoming the main challenge. Although central banks are not responsible for exchange rate stability as under the gold standard, they were involved in the discussions on shaping a new system to replace the Bretton Woods system of fixed but adjustable rates. Still constrained by the requirement to avoid devaluation, they lacked the freedom to direct their monetary policy predominantly toward domestic conditions. The United States, the only country able to finance its balance of payments deficits with its own currency, mostly shrugged off foreign complaints about its policies. European central banks exerted pressure by converting their dollar surpluses into gold, resulting in a large mismatch of the remaining American gold stock and its liabilities. In Britain, developments were unfavorable, forcing it to ask for large IMF credits which required the Bank of England to slow down domestic credit in the economy.