THE INTERNATIONAL MONETARY FUND (3)

The IMF and its leading member put up a gallant but hopeless fight to make stable exchange rates work. Indeed they continued to defend the indefensible for years after it became clear that the U.S.dollar , which had been the lynch-pin of the new Bretton Woods system , was becoming progressively overvalued in the 1960s.Germany,Japan,and other countries with undervalued currencies ran chronic payments surpluses , while the U.S. was running chronic and growing payments deficits . Under the Bretton woods rules, the surplus countries had only two choices:they could appreciate currencies and thereby get rid of their undervaluation and lose their payments surpluses;or,if appreciation was politically unpopular at home because it would hurt jobs and profits in the swollen export industries,Germany and Japan had no choice but to take in U.S. dollar IOUs in ever-increasing amounts-thereby contributing to an increase in their own domestic money supplies and in their own uncomfortable rates of domestic inflation.
As will be seen,after 1971 the Bretton Woods system of pegged exchange rates broke down permanently and has been replaced by a system of managed floating-exchange rates.