Abstract
The Bretton Woods currency order exhibited a double nature:
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On the one hand, a two-tier system, continuing the external constraints on monetary policy making, was established where fixed exchange rates of national currencies were set up vis-à-vis the dollar, which in turn was defined as containing some fixed amount of gold. This framework was chosen in order to evade difficulties stemming from the actual uneven distribution, and a possible overall scarcity of gold reserves, in the future.
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On the other hand, the desire to end the subordination of internal policy goals to balance-of-payments restrictions runs all the way through the negotiations and agreements of the treaty. Keynes could not get his plan accepted which was to establish an artificial world currency — the “bancor” — and to some extent abolish the budget constraint of deficit countries. Full convertibility of national currencies was not restored until 1959; and governments felt encouraged to employ restrictions on capital movements3 and sought to sterilize the monetary effects of exchange rate interventions. Moreover, in the case of “fundamental disequilibria”, each member country was allowed unilaterally to alter its exchange rate. There was no rule or norm enforcing a return to the former parity. With the traditional Restoration Rule abolished, speculation no longer acted as a stabilizing force. Finally, the U.S. gold reserve was, in a way, protected by the proviso that private agents were not allowed to demand gold at the fixed dollar price from the Federal Reserve, but only foreign official institutions, which could be deterred from doing so by means of political pressure. “The reason why the major industrial countries failed to use their disciplinary device had more to do with politics than with economics.”5
National macroeconomic autonomy is central to what the ne- gotiators wanted.
Ronald McKinnon2
The plan aims at the substitution of expansionist, in place of contractionist, pressure on world trade.
British statement on the Bretton Woods plans1
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References
Quoted from Giovannini 1993: 118, cf. Keynes 1942: 176, Kregel 1994/95.
McKinnon 1993: 13.
In 1943, Keynes expressed a widely shared opinion: “We think it entirely impracticable that individual nationals of a country should be free to move assets abroad or to invest abroad quite irrespective of whether their country had a favourable balance which made such transactions possible. […] Foreign investment of individuals that does not correspond to a favourable balance is clearly something which can only cause trouble and can do no good, in the same way as flights of capital for reasons of political fear or fluctuating ideas of where the ‘better ’olé is. All that we want to get rid of. […] We can not hope to control rates of interest at home if movements of capital moneys out of the country are unrestricted” (1943a: 212, 276, cf. Moggridge 1986, Giovannini 1993 ).
Reproduced from McKinnon 1993: 13.
De Grauwe 1996: 36, cf. 16–22, 32–39.
The system that operated […] turned out to be quite different from what the architects had in mind. […] Instead of a system of equal currencies, it evolved into a variant of the gold exchange standard — the gold-dollar system. […] Concurrently with the decline of sterling was the rise in the dollar as a key currency“ (Bordo 1993: 168).
Cf. Grubel 1969: 196–7, Cooper 1975, Eichengreen 1989.
Cooper 1975: 73.
Stadermann ( 1994: 247) reverses the predominant picture of Keynes as the “loser” of the Bretton Woods negotiations. Given the probability of an emerging overvaluation of the dollar, and the American incentive to run expansive policies, the growing trade surpluses of other countries would turn creditor-debtor relations against the U.S. Thus the Bretton Woods agreement is interpreted as a “cunning device” enabling Britain “to regain her former position in the world economy. The plan failed […] because Japan and Germany learnt to exploit the opportunities of the system better than Britain.”
Reproduced from McKinnon 1993: 16.
Bordo 1993: 178.
McKinnon 1993: 16, cf. McKinnon 1969.
Bordo 1993: 165.
McKinnon 1969: 156.
Cf. Rueff/Hirsch 1965.
The accumulation or decumulation of dollar exchange reserves by foreign central banks would not affect the American monetary base. Only foreign holdings of ‘nonmonetary’ U.S. Treasury bonds would change. Therefore, exchange interventions by foreign central banks were ’passively’ or automatically sterilized from changing the American money supply […J. Foreign money supplies were affected by exchange intervention by foreign governments, but the American money supply was not“ (McKinnon 1993: 19, cf. Balbach 1978, De Grauwe 1996: 36–7 ).
McKinnon 1969: 157.
Capie/Goodhart 1995: 151.
This is even “tougher” than a zero-inflation target, because true deflation is required after discrete price-level increases. But this rule is chosen here only to keep the model as simple as possible.
Actually these assets were mostly held with the American banking system, which in the above model is amalgamated with the private non-bank sector. The gain of interest payments of course is a poor compensation for the loss of market power of the national central bank; but, contrary to the two-country model above, any single member country of the Bretton Woods system could not expect to gain substantial influence on world monetary conditions by keeping its foreign reserves in cash.21 Data from OECD: Main Economic Indicators, Bundesbank: 50 Jahre Deutsche Mark (CD-ROM).
Minsky 1979: 103.
Data from De Grauwe 1996: 46, Bordo 1993: 174, cf. Grubel 1969: 138–9.
Cf. Triffin 1960, Kenen 1960, Balogh 1973: 73. Later in 1970, when no longer needed, Special Drawing Rights were created to perform as additional, artificial currency reserves.
The impact of U.S. interest policies on the model’s variables (table 6.3, third row) remains qualitatively unchanged.
Signs in brackets depend solely on S 0. Because of the dimensional differences in [6.12] the parameter 8 should take on very small values only.
The “first generation” model of exchange rate crises teaches that a dwindling stock of reserves is absorbed by speculators in one sweep (cf. Krugman 1979, Bordo 1993, De Grauwe 1996: 44–8).
Johnson 1972: 334.
Volcker 1978/79: 7.
Data from Minsky 1979: 112, cf. Frankel 1988.
Minsky 1979: 113.
Volcker’s attempt to put the loss of American competitiveness down to an initial misalignment in the Bretton Woods treaty is hardly convincing, because the deterioration of the U.S. current account can be explained by altering inflation differentials in the 1960s: “With the benefit of hindsight, it would seem that an erosion of the United States competitive position was implicit in the postwar arrangements. First Europe and later - with even greater momentum - Japan brought its industrial capacity and efficiency close to United States standards. It took some twenty years, but eventually the United States payment position was irreparably undermined” (1978/79: 6).
This collapse of dollar-based par values was hardly inevitable. If the U.S. Federal Reserve System had continued to anchor the common price level, and if the Americans had not asserted their legal right to adjust the dollar exchange rate as promised by the Bretton Woods Articles, the fixed dollar exchange parities could have continued indefinitely once the residual commitment to gold convertibility was terminated “ (McKinnon 1993: 26 ).
Laidler/Nobay 1976: 305.
Davidson 1999: 97, cf. Bordo 1993.
It was not ‘high living’ that wrought the change in the dollar. Rather was the deliberate exploitation of its role in the international system to defray current government expenditure abroad, to obtain resources and to accumulate high-income-bearing assets against paper obligations of steadily depreciating value. It was the result of military and corporate megalomania“ (Balogh 1973: 33, cf. Kindleberger 1967 ).
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Spahn, HP. (2001). The Loss of Credibility and Stability in the Bretton Woods System. In: From Gold to Euro. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04358-5_7
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