An Overview of the World Crisis and International Trade

Abstract

An Overview of the World Crisis and International Trade

The subject of this study is the grounds for the worldwide crisis and their repercussions on international trade. Central importance is assigned to the question of how it was possible for inflation and underemployment to coincide - and that in a world which, through giving up fixed exchange rates, is meanwhile capable of protecting itself against inflationary influence from abroad. In the introduction, it is first made clear that the gold exchange standard, too, and the related system of fixed exchange rates, exerted no compulsion to preserve stability, but merely demanded a certain degree of uniformity of inflation rates. But even a system of floating exchange rates is no safeguard against inflationary disturbances, if the floating is predominantly of the “dirty” type. An additional facet is the tendency of central banks to behave in a system of freely fluctuation exchange rates in the same way as when fixed exchange rates prevail, since their attention is focused primarily on exchange rate changes relative to their neighbouring countries. The chief source of world inflation was the fact that the United States failed to finance the Vietnam war by tax increases. With exchange rates fixed, the overproduction of dollars necessarily had to spread over the whole world. This inflationary effect was ameliorated only by the substantial devaluation of the dollar. The European countries, however, did not take full advantage for stabilization policy of the latitude they were given by the measures of August 1971. The possibility of overcoming world inflation is derived above all from the changed attitude of the American administration to inflation and from the circumstance that this will exert a damping effect on other countries. The study concludes with thoughts on the influence of the oil crisis on inflation. It is shown that this influence would have been limited, if this problem had been tackled with the knowledge from cartel theory and practice. It was not until the attempt was made to combat the consequences of oil price increases with subsidies that its price-raising influence was strengthened.