The war of 1914-18 cost Britain the strength which underlay the sterling system. The attempt to re- create it as a gold exchange system broke down under the first serious crisis in 1931.
The United States was not ready to step into the breach. For the next eight years each currency went its own way, with Britain setting up the exchange equalisation fund in the hope of keeping the pound steady by intervention. Then for eight years trade and monetary exchanges were kept under strict government control.
From 1947 the dollar, in the Bretton Woods system, took over the pre-1914 function of the pound. But this broke down in 1973, largely owing to the vast number of dollars spent on the Vietnam war. For a time there was much talk of the advantages of floating currencies, but practical experience showed the need for certainty about future prices.
The 'snake' was the first inadequate attempt to provide this. Helmut Schmidt and Valery Giscard d'Estaing then got the ERM established as an improvement. In this, the mark has fulfilled the function previously performed by the pound and dollar as 'anchor' currency. But the West German government could not be expected to renounce the opportunity of reunification when it was presented. This has involved high interest rates to check internal inflation. Germany cannot reconcile her international function as a currency base with the internal inflation to which she has committed herself. We shall be deceiving ourselves if we expect her to lower her rates substantially. It is doubtful whether the rest of the EMS can live permanently with the resulting contradictions.
But we must not suppose that, if we leave the ERM, we shall have solved the problem. We shall merely have ruled out as impracticable yet another method of achieving a world-wide stable currency. Yet without it, trade cannot flourish. It would seem to need leading by a single nation with large reserves, a growing economy and surpluses at home and abroad. Who will provide this? Germany might do it if she can bring prosperity to her new Lander, but this will take a long time. I doubt whether the governmental machine of the United States will ever give the executive the powers needed to eliminate the deficits. The answer looks like a choice between Japan (some would say China) and a relapse to free floating, with all its dangers.
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