Gottfried Haberler, “The International Monetary System and Proposals for International Policy Coordination” (1993; orig. 1987)

This is a single-author policy-economics chapter on the post-Bretton Woods monetary order, written amid the dollar swings and reform debates of the mid-1980s. Haberler’s main thesis is that floating exchange rates, though volatile and sometimes mistaken, remain preferable to fixed rates, target zones, or politicized “coordination.” The U.S. trade deficit, he argues, should be traced chiefly to American fiscal deficits and inadequate saving, not to foreign refusal to expand.

The chapter begins by complicating the apparently simple fact of dollar depreciation after 1985. Haberler stresses that exchange-rate indexes vary by weighting, country coverage, and inflation adjustment; policymakers therefore cannot know with precision whether the dollar has fallen “enough.” He then reconstructs the collapse of Bretton Woods as a historical necessity produced by U.S. inflation, capital controls, and speculative attacks, not by academic enthusiasm for floating.

Inflation forced floating on reluctant policy-makers.

This reversal is central to the argument. Fixed rates require countries to accept broadly similar inflation rates, but sovereign governments will not long submit to an inflation standard set abroad. Floating, for Haberler, is not a cure for all external shocks; it is a specific protection against imported monetary disorder.

Floating protects a country from purely monetary disturbances from abroad; no country can be forced to inflate its economy or to deflate it, as they have been forced under fixed exchanges.

The structure is historical and analytical: the weak dollar of the 1970s, the Volcker disinflation, the strong dollar of 1980–85, the post-Plaza decline, and the renewed fashion for policy coordination. Haberler treats the strong dollar as overdetermined: high interest rates, confidence in anti-inflation policy, Reagan-era expectations, capital inflow, and budget deficits all mattered. He concedes overshooting by 1984, but denies that the episode proves market failure. Under fixed rates, he argues, capital flows would have created destabilizing reserve movements and speculative one-way bets.

My conclusion is that we were lucky to enter the 1980s with floating exchange rates.

A key conceptual move is Haberler’s use of the asset-market or portfolio approach. Exchange rates are set in enormous stocks of internationally traded assets, so sterilized interventions matter mainly when they signal a durable policy change. This is how he reads the Plaza Agreement and Baker-era activism: not as technical correction, but as politicization of expectations. Public efforts to “talk” the dollar up or down make markets speculate about official intentions as much as fundamentals.

The chapter’s second half criticizes international policy coordination. Haberler surveys its lineage from Genoa and the BIS to the OECD, IMF surveillance, summit declarations, and Group of Seven “indicators.” He does not reject consultation or quiet diplomacy; he rejects the fantasy that governments can fine-tune growth, current accounts, fiscal policy, and exchange rates by public bargaining. U.S. pressure on Germany and Japan to expand repeats the 1970s “locomotive” idea, but would do little to reduce the American deficit unless it became inflationary.

Worldwide inflation is not a sound basis for the world economy.

For Haberler, the U.S. external deficit is the counterpart of capital inflow required to finance federal borrowing when domestic saving is insufficient. If the dollar falls or capital inflow stops without fiscal correction, interest rates rise and private investment is crowded out. The cure therefore lies at home.

This is an American responsibility, which cannot be shifted to other countries.

The relevance of the chapter lies in its disciplined separation of exchange-rate volatility, trade deficits, capital flows, and macroeconomic diplomacy. Haberler accepts that markets err, but insists that governments err more persistently because political commitments delay correction. His liberal rule is modest: preserve convertibility, avoid exchange manipulation and protectionism, use IMF/GATT-style disciplines, and keep advice quiet rather than coercive.

Free markets do a better job of setting exchange rates than governments do.