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ABSTRACT
This paper reviews the operation of the Bretton Woods international monetary system 50 years after the United States closed the Gold Window linking the dollar to gold in August 1971. It argues that Bretton Woods operated as successfully as it did owing to three special circumstances: low international capital mobility, tight financial regulation, and the dominant economic and financial position of the United States and the dollar. There can be no more straightforward an explanation for why nothing like Bretton Woods will be restored in the foreseeable future.
Acknowledgements
This article was prepared for a mini-symposium in the Review of Political Economy. I thank Wanjun Zhao for excellent assistance, Louis-Philippe Rochon for the invitation, and two anonymous referees for their suggestions.
Disclosure Statement
No potential conflict of interest was reported by the authors.
Notes
1 See Gowa (Citation1983) and Garten (Citation2021) on the accompanying history. Some will argue that the final demise of Bretton Woods came instead in early 1973, with abandonment of the new exchange rate parities negotiated at the Smithsonian Conference in late 1971, but no matter.
2 Following Williamson (Citation1977).
3 In contrast, the classical gold standard was a ‘spontaneous order’ arising out of a concatenation of individual national decisions (Gallarotti Citation1995; Meissner Citation2003; Bordo and Redish Citation2013). Although there was an element of planning in the design of the interwar gold standard, notably at the Brussels Conference in 1920 and Genoa Conference in 1922, this focused on the composition of the reserve backing of currencies largely to the exclusion of other matters. Harris (Citation2021) makes the case for the 1936 Tripartite Agreement as a negotiated system and a significant forerunner to Bretton Woods, but even at its height, that agreement involved only a handful of countries.
4 The moment was not entirely unipolar, since there was also the Soviet Union with which to contend. In 1944, when the Bretton Woods Agreement was negotiated, an iron curtain had not yet descended over Europe. While a Soviet delegation was present at Bretton Woods, the Soviet bloc of countries did not figure in the operation of the Bretton Woods System. Instead, the Soviet Union itself chose not to join the IMF and precluded the membership of other members of the Eastern Bloc.
5 Recall that the Single Market was expressly designed to address Europe’s problem of overregulation, or ‘Eurosclerosis’ as it was known. On the Single Market as a response to Eurosclerosis (and other explanations), see Moravcsik (Citation1991).
6 Central banks in fact held more sterling than dollars in the immediate post-World War II period, but these balances were neither liquid nor, in most cases, convertible. Avaro (Citation2020) evocatively refers to sterling as a ‘zombie international currency.’
7 Private parties might still purchase gold on the commercial market in London, where the price could and did vary. But if the market price rose significantly above $35, governments might find it irresistible to purchase gold from the U.S. Treasury at the official price and sell it in London at that higher market price. Hence preservation of Bretton Woods’ ‘golden anchor’ required steps to prevent the market price from diverging from the official U.S. parity. This was one of the problems that the Gold Pool was designed to address.
8 For those who might doubt these linkages between finance and geopolitics, France’s withdrawal from both NATO’s integrated command structure in 1966 and then from the Gold Pool in 1967 is proof by counterexample.
9 This provision applied to devaluations of 10 per cent or more.
10 The dominance of the United States and the dollar also led to what Triffin (Citation1965) called ‘a curious breed of international monetary cooperation’ in which other central banks reluctantly but willingly continued to accept and hold dollars despite doubts about the durability of the $35 gold peg, since liquidating those balances opened the door to an uncertain future, given the absence of a Plan B.
11 Triffin was a hedgehog rather than a fox: he kept warning of the same problem for the next 20 years.
12 Others were also involved in that decision of course. For a brief history of the SDR see Williamson (Citation2009).
13 An extended version of the rule added the value of any current account deficit to be financed in that period.
14 See Eichengreen (Citation1993) for my bipolar moment.
15 The fixed category in the figure includes countries with no legal tender, de facto hard pegs and pre-announced narrow bands of equal to ±2 per cent or less. Crawling pegs include de facto and de jure crawling pegs and de facto narrow bands. Managed floating refers to bands of up to ±5 per cent and to countries that actively intervene to affect the level or volatility of the exchange rate. Free floating includes countries outside these narrow bands, excluding those experiencing currency crashes and high inflation. The excluded category is freely falling currencies and countries with parallel exchange rates but no parallel rate data.
16 In turn, this helps to explain why the demand for reserves remained so robust.
17 Thus, Sufi and Taylor (Citation2021) compare the prevalence of recessions accompanied by crises under the classical gold standard, interwar gold standard and post-Bretton Woods non-system, showing that the prevalence of such crises and recessions since 1973, while not as high as under these earlier regimes, comes close.
18 Inflation-targeting regimes are not randomly distributed, of course. Taylor and I acknowledge this point and use instrumental variables, such as the strength of political institutions in the country concerned, to adjust for it.
19 How does inflation targeting fit into the Eichengreen (Citation2019) version of the trilemma whereby Democratic polities, which create pressure for discretionary central bank policies, combine with capital mobility to make the maintenance of pegged exchange rates politically impossible. The question is why they don’t also make inflation targeting impossible? One answer is that inflation targeting regimes leave room for a degree of monetary discretion — a degree adequate to meet domestic political imperatives — while also anchoring expectations.
20 More precisely, the advanced-country swaps had never expired; the Fed reactivated those extended to emerging markets.
21 Thus, Tucker (Citation2021) attributes the Fed’s failure to extend a currency swap arrangement to India in 2008 to the U.S. central bank’s failure to recognize that India was a rising geopolitical power.
22 The IMF has repeatedly sought to encourage wider commercial use of the SDR, albeit without success. See for example IMF (Citation2018).
23 Thus, the designers of Libra (now known as Diem) subsequently reengineered the unit as a dollar-linked stablecoin, eventually to be supplemented by additional stablecoins linked to other national currencies.
24 The same observations undermine proposals (e.g. Levy Yeyati Citation2020) for centralizing the provision of central bank swap lines at the IMF — for giving the Fund the power to decide when they are disbursed and to whom.
25 All of three trends have lost momentum since roughly 2009. Thus, some measures of cross-border capital flows — those emphasizing interbank flows — show actually regression since that period. V-Dem (Citation2019) documents stagnation in the number of countries and share of the world’s population living under democratic governments. But none of this changes the point that capital flow are larger or that democratic politics are more prevalent than they were in 1971.