Policy Seminar on the Evolution of U.S. Foreign-Exchange-Market Intervention: Thesis, Theory, and Institutions

Tuesday, May 29, 2012
George Shultz Conference Room, Herbert Hoover Memorial Building


Michael Bordo, Owen Humpage, Jeremy Bulow, Andrew Crockett, Paul Gregory, Stephen Haber, Ed Lazear, Gary Roughead, John Shoven, George Shultz, Gabriel Sod-Hoffs, John Taylor, Pablo Villanueva, Ian Wright


Michael Bordo and Owen Humpage discussed their book (joint with Anna Schwartz) entitled “U.S. Foreign-Exchange-Market Operations in the Twentieth Century.”

Bordo began by discussing the foreign exchange policy and activities of the United States during the early and mid-twentieth century, in particular in the wake of World War II. He explained that under the Bretton Woods agreement, many countries pegged their currencies to the dollar and the dollar in turn was pegged to gold at $35 per ounce. The dollar was the world’s reserve currency. Bordo discussed the problems that result from a fixed exchange rate regime when countries follow policies inconsistent with maintaining the peg. He also explained that in the 1960s, as the European countries recovered from the war and their growth rates exceeded that of the U.S., that this put increasing strain on U.S. gold reserves. The drain on reserves coupled with rising U.S. inflation after 1965 led to the breakdown of the Bretton Woods system in 1971 and the emergence of an era of floating exchange rates. During the 1960s, the Fed and the Treasury used swap lines and other forms of intervention to stem the gold drain. These operations were temporarily successful but could not prevent the ultimate collapse.

Humpage then continued the discussion by analyzing U.S. foreign exchange market interventions since the advent of the floating era. Included in his comments was a discussion of informational trading in foreign exchange and how trading in accordance with or against the foreign exchange operations of the Federal Reserve has been problematic at times. Humpage also commented on approaches that had been taken by the U.S. in the late twentieth century to address the fundamental trilemma of international finance (international capital mobility, independent monetary policy that stabilizes the economy, exchange rate stability). He argued that intervention has not appeared to solve the trilemma, but has actually made it worse since intervention can damage central bank credibility. Humpage closed with a discussion of various intervention policies of the Federal Reserve since the advent of floating exchange rate policies, and argued that only in some cases and only for very short periods of time can intervention affect exchange rates.