ABSTRACT
The basic factor inducing attempts at diversification of international dollar reserves is the large inflation differential between the United States and the three strong currency countries. International negotiations should concentrate on exchange rate management and commercial policy. Barry Eichengreen recently reminded us that early in the interwar period–not to go further back–proposals were made to improve the working of the international monetary system by policy coordination. The drive for international coordination of policies again went into high gear with the Tokyo economic summit of May 1986. The current drive for international policy coordination, including US pressure on Germany and Japan, is a replay of what happened in the late 1970s. Since the theory of the vicious circle has been accepted, for example, by the Bank for International Settlements in several of its annual reports, it is worth examining in some detail.
