Continuity and Change in the International Monetary System: The Dollar Standard and Capital Mobility

ABSTRACT

Addressing the issue of continuity and change in the international monetary system, this article makes two points. First, the dollar standard — as defined by Keynes — did not have to wait until the end of Bretton Woods to be born. It finds its roots in the 1920s and is still with us after a century. While most commentators content themselves with the statement that the dollar officially became fiat money in 1971–3, I make the less obvious point that, in substance, the transition occurred much earlier, and document the multiple monetary and intervention techniques used to maintain the dollar standard in existence. Second, as widely recognized, the main element differentiating Bretton Woods from its successor is the demise of capital controls. I argue that stability requires that some form of control is reintroduced, particularly if the international monetary system evolves in a multipolar direction.

KEYWORDS:

• International monetary system
• Bretton Woods
• dollar standard

JEL Codes:

• F00
• F02
• F33
• N1

This article responds to:

Bretton Woods After 50

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Recall that dollar convertibility at its pre-war parity was restored in 1922 and the dollar was formally pegged to gold until 1933; on its part, the UK re-entered the gold standard in 1925, also at the pre-war parity, and left it again in September 1931. Thus, at the time of Keynes's writing, only the dollar, not the pound, was formally on the gold standard.

2 For the distinction between the pure gold standard (based on the price specie flow mechanism) and ‘its modern, “rules of the game” version’ see Triffin (1946–7, pp. 54–59). See also Bordo (1984, p. 25–26).

3 Notice however that in 1924–25 the FED eased the money supply to facilitate Britain's return to the gold standard, then it resumed its restrictive monetary stance. It loosened again briefly in 1927 (Eichengreen 1992, pp. 115, 193–194).

4 This practice was already in use before the war, but the Genoa conference encouraged it in order to alleviate the gold shortage. Paradoxically, the United States, absent from the Genoa conference, did not approve of this resolution.

5 According to Triffin himself (1978, pp. 1–2), the first formulation of his ‘dilemma’ was in his book Europe and the money muddle published in 1557. But hints to the dilemma are already in Triffin (1946–7, p. 58).

6 By supranational money I mean a means of international payment which would not also be the national currency of any individual country, that is, one that does not come into existence as the debt of the banking system of any individual country. My use of the word ‘supranational’ reproduces that suggested by Keynes (KCW, 25, p.38, point E.2).

7 In 1970 Milton Gilbert, former BIS advisor, also drew attention to the element of ‘creative finance’ in these measures: ‘The defence of the dollar did not rest primarily on balance of payments measures. The dollar was defended, rather, by a variety of imaginative tactical arrangements and measures in the financial sphere’ (quoted in Toniolo and Clement 2005, p. 375). On his part, Triffin defined these arrangements and measures as a ‘curious breed of monetary cooperation’, and characterized the golden rule on which it was based as follows: ‘Don't rock the boat in which we are all sitting’ (Triffin 1965, p. 349).

8 In 1961 the Federal Reserve Bank of New York, acting as the US Treasury's agent, was involved in preliminary moves in this direction (Pauls 1990, pp. 892–894).

9 Other measures intended to discourage capital outflows and attract capital from abroad included Operation Twist (1962) and the Interest Equalization Act (1963). Moreover, the US threatened to withdraw its military support in order to discourage European governments from presenting dollar reserves at the gold window.

10 Participating countries were Belgium, France, Italy, The Netherlands, Switzerland, West Germany, and the United Kingdom.

11 Sometimes the Pool also purchased gold, but sales prevailed.

12 The devaluation of the British pound in 1967 was the main driver of speculative attacks.

13 Increased capital mobility of course went hand in hand with deregulation of capital markets and the financialization in the US and other advanced countries. For an analysis of the costs of financialization in the US see Epstein (2018). Schenk (2020) studies the institutional foundations of financialization in the US and UK.

14 Attention should also be drawn to the investment policies that Germany pursued in different parts of Europe. Germany's FDI contributed to economic and technological development in Central European countries and to their resilience to the Great Financial Crisis. By contrast, Mediterranean countries received mainly financial inflows that contributed to their sovereign debt crises (see IMF 2013).

15 On the Keynes Plan and its potential re-equilibrating effects on the world economy see Costabile (2009).

16 Although global imbalances declined after the GFC, they did not disappear in the pre-Covid period. The Covid crisis then contributed to their further rise in 2020–21. As for the stock dimension of these imbalances, the US remains the largest debtor economy. Its net international investment position declined from −51 per cent of the country's GDP in 2019 to −67 per cent of GDP in 2020. For comparison, the corresponding figures for the Euro area and China are + 0.8 and +14.5 per cent, respectively (IMF 2021, pp. 7, 11).

17 I say this with a lot of caution as the full meaning of ‘uncertainty’ is being impressed on us by the current pandemics.