Dumb Networks and Smart Capital

Wriston, Walter B.


Globalization in the Foreign-Exchange Market


A similar globalization has taken place in the foreign-exchange market. When I started at Citibank, our head trader estimated that the total turnover in the New York market was about $50 million a day. If the Federal Reserve wanted to influence the dollar rate, its trading desk could call Citibank or Morgans and place an order for $10 million, which was large enough to move the market. Today with the foreign exchange market at about a trillion dollars a day, central bank intervention can only result in expensive failure, as there is not enough money in any central bank to influence the exchange rate on anything but a momentary basis.

The markets that existed under the old Bretton Woods agreements were certainly not based on primitive concepts, but sometimes we use words like "fixed exchange rates" just as if that condition existed for more than what in historical terms constituted momentary pauses between devaluations. The pervasive inflation in many countries and the constant devaluations caused the eminent economist Yogi Berra to remark, "A nickel ain't worth a dime anymore." Today's floating rate system has reduced these pauses between changes in currency values essentially to zero. It is worthwhile to remember that in that so-called stable Bretton Woods environment there were hundreds of currency devaluations, great and small, which affected almost every currency in the world. Major currencies were not exempt; indeed, they led the way. For example, the devaluation of the British pound on September 19-20 in 1949, triggered devaluations by 15 nations ranging from Austria to India and South Africa. In November 1967, the British again devalued their currency by about 14 percent. In March the following year, the central banks of the world created a two-tier market for gold: one price for official transactions and one for private transactions. In August 1969, it was France's turn and the franc was devalued by about 11 percent. The next September Germany allowed the D-Mark to float and in October revalued it by 9 percent.

The reason to recite this very cursory list of revaluations and devaluations is to suggest that what is often remembered as stable exchange rates in the days of Bretton Woods were stable only in relation to floating rates and then only in some parts of the world. There were collars on rates that limited both upside and downside mouvements, but when economies diverged pressures became too great and the collars were adjusted time and again. Since so much scholarly work on this subject is oriented toward Europe, many forget that in Latin America there were constant revaluations almost too numerous to count.