Business review; Balance of payments crisis

From the national educational radio network here is a Business Review ASSOCIATE PROFESSOR ROSS Wilhelm of the University of Michigan Graduate School of Business Administration presents his views and comments of business and economic activity in recent years Britain the United States and France of experience periodic balance of payments crazies about once a payments crisis arises when the value of a nation's currency in the international money markets threatens to fall below the official rate of exchange for the currency pound for instance officially exchanges for two dollars and forty cents and the franc has an official value of 20 cents. During a balance of payments crisis the value of the pound franc or dollar will threaten to fall to a level significantly below the official exchange rate. When this occurs the nation with the assistance of the other leading industrial nations because into the international currency markets and buys up sufficient amounts of its own currency so as to restore the value of the currency to the official exchange ratio. The nation buys up its own currency and the international money markets by selling any gold they own or any foreign

currencies it may hold for its own currency. With increasing frequency in recent years the British have had to rush to the money markets to buy up their own money to preserve the official exchange rate. The French and Americans have had to do the same thing with francs and dollars and we have not seen the last of the International Monetary crises for the underlying conditions are right for another one within the foreseeable future. The reason why Great Britain France and the United States have had to face periodic balance of payments problems is because their own currencies are overvalued in terms of their official exchange rate when compared with the German mark. The official exchange rates for the pound the franc the mark and the dollar were established many years ago. The exchange rate if it's not subject to periodic attacks if it is not to be subject of periodic attacks and cause periodic balance of payments crises must reflect the relative purchasing power of the currency in the various nations. For example the official exchange rate between the dollar in the West German markets four to a dollar that is each mark

is officially claimed to be worth 25 cents a piece. If the official exchange rate is to be meaningfully useful a mark must in West Germany unable one to buy roughly the same quantity of products which he could buy in the United States for a quarter or one should be able to buy roughly the same quantity of products in France for five francs as he could buy in West Germany for four marks. There one should be able to buy for a little more than two shillings the same quantity of goods in Great Britain as he can buy in West Germany for a mark. Now the basic reason why the United States Britain and France have had a balance of payments crises has been because you can buy more for a mark in West Germany than you can purchase for the corresponding amounts of the other currencies in their respective countries. In other words the pound the franc and the dollar are overvalued. Well the market is undervalued. The reason the official exchange rates no longer reflect the official purchase the actual purchasing power of the world's currencies is because the official exchange rates were established many years ago

and since then prices for goods have risen at different rates in the various countries and France Britain and the United States. The prices of products have risen much more than they have in West Germany. As a consequence the franc pound and the dollar don't buy as much today as they used to. While the market still buys approximately the same amount. So the obvious answer to the problem is to alter the official exchange rates so that they do reflect the actual purchasing power of the various currencies. Allow the market for instance to exchange for 28 cents instead of for a quarter. However nations of the world are never quite as stupid as they are when they're considering their official exchange rates. For some for a variety of silly reasons the exchange rates become entangled with national honor and patriotism and ridiculous promises about the value of the currency and as a consequence politicians hold on to outdated exchange rates with a tenacity that only can be achieved when they're being patriotic instead of being sensible. It's clear that the balance of payments

crises are still with us and will continue to be a problem. Prices are still rising in Great Britain France and the United States faster than West Germany. That's West Germany as a better place to find bargains than are the other nations. The value of West Germany has a place to buy things as shown clearly by the fact that the West Germans continue to export more things to the rest of the world than they import from the rest of the world. And recent statistics indicate that despite the recent actions by the West German government overcome this problem the surplus of exports over imports remains high and as long as such surpluses exist the other nations of the world will continue to have balance of payments crisis that was Associate Professor Ross Wilhelm of the University of Michigan Graduate School of Business Administration. With his views and comments on business and economic activity Business Review is recorded by the University of Michigan broadcasting services. This is the national educational radio network.