Using the fundamental trilemma of international finance as a broad organizing principle, this book discusses the evolution of monetary and exchange-rate policies over the twentieth century. We start with the classical gold standard, during which US monetary authorities maintained fixed exchange rates at the loss of a domestically orientated monetary policy, and progress through the interwar gold-exchange standard, the creation of the Exchange Stabilization Fund, and the Bretton Woods era to today’s fiat standard, in which US monetary authorities embrace a domestically focused monetary policyan ... More

Using the fundamental trilemma of international finance as a broad organizing principle, this book discusses the evolution of monetary and exchange-rate policies over the twentieth century. We start with the classical gold standard, during which US monetary authorities maintained fixed exchange rates at the loss of a domestically orientated monetary policy, and progress through the interwar gold-exchange standard, the creation of the Exchange Stabilization Fund, and the Bretton Woods era to today’s fiat standard, in which US monetary authorities embrace a domestically focused monetary policyand floating exchange rates. Throughout, we portray US exchange-market operations as attempts to obtain an additional policy instrument with which to systematically affect exchange rates while focusing traditional monetary policy instruments on inflation and unemployment objectives. We conclude that while foreign-exchange operations can sometimes affect exchange rates, they fail in the broader context of providing an additional independent instrument. In fact, US intervention operations ended when the FOMC came to view them as actually interfering with US monetary policy. Our approach relies mainly on a historical narrative guided by some heretofore untapped sources, including a unique data set consisting of all US foreign-exchange transactions since 1962. We also offer an empirical analysis of sterilized US interventions since 1973. Wediscuss theoretical and institutional aspects of US intervention, the development ofUS swap lines,and the Treasury-Federal Reserve warehousing controversy.