THE INTERNATIONAL ADJUSTMENT PROCESS: AN OUTLINE Prepared by the Staff of the Commission on I. THE INTERNATIONAL MONETARY SYSTEM AND THE ADJUSTMENT I. THE INTERNATIONAL MONETARY SYSTEM AND THE ADJUSTMENT PROCESS UNDER FIXED EXCHANGE RATES The Bretton Woods system is based on the principle that exchange rates for currencies should remain stable over time and that if temporary payments imbalances arise between countries these should be financed through transfers of reserve assets (mainly gold and foreign exchange) and borrowing from the International Monetary Fund as well as bilaterally. This system is designed to provide a firm and reliable basis for international trade and financial transactions. The principal mechanism for adjusting payments imbalance is domestic fiscal and monetary policies which aim at reducing the cause of imbalance, e.g. tight money in order to reduce inflation which is causing high imports and capital outflows. In addition, various international agreements including the GATT condone the use of temporary controls on trade and capital movements for balance-of-payments purposes. Under the articles of the International Monetary Fund (the principal agreement under which the Bretton-Woods system operates) countries are allowed to change their exchange rates in cases of "fundamental disequilibrium”. Countries have generally been reluctant to change their exchange rates except after long delays which have resulted in international financial crisis. II. THE SPECIAL POSITION OF THE UNITED STATES The United States plays a central role in the Bretton-Woods system, since the dollar is the world's principal reserve currency and other |