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The legends of Bretton Woods - monetary system - Economic Myths Explained

ORBIS, Spring, 1996 by Francis J. Gavin

Did the Bretton Woods monetary system really provide for economic stability and international cooperation over the quarter century following World War II? That is certainly the conventional wisdom among statesmen, foreign-policy analysts, and academics. The institutions and rules established by the 1944 agreements have been hailed as some of the most important economic and even political accomplishments of the cold war era. As a noted historian recently wrote, "Bretton Woods is the most revered name in international monetary history, perhaps in economic history."(1)

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Assessing the performance of Bretton Woods is especially important now because of the widespread dissatisfaction with current monetary arrangements. Recent events, most notably the collapse of the Mexican peso and the steep decline of the dollar against the yen, have increased the concern for the fate of the dollar and the rules of the world monetary regime. Each unanticipated shift in exchange rates is talked about in grave tones, as if greater disaster will follow if the dollar is not stabilized and the system is not reformed. A failure to act, it is warned, could recreate the destructive conditions of the 1930s, a time marked by competitive devaluations, capital controls, and protectionism that in turn produced isolationism, autarky, and eventually war. W.L. Givens has likened the post-Bretton Woods record of dollar devaluation to a cocaine addiction and argued that "a massive deterioration of the dollar's value, particularly relative to the yen, has masked the problem of declining competitiveness and functioned as a habitual surrogate for both industrial policy and productivity improvement."(2) Diane Kunz predicted that "without a pronounced shift in Washington's policy, the decline of the dollar could resurrect the ghosts of the 1930s."(3) And a conference of internationally renowned monetary economists faulted the world's governments for failing to emulate the leadership and cooperation demonstrated by the United States and Great Britain in 1944:

In the last two decades international monetary relations have been characterized by latent instability, and more recently by severe tensions. Yet the issue of reforming the international monetary system does not appear on the agenda of the policymakers of the major countries involved.(4)

International monetary reform seems especially critical now because of the supposed primacy of economic factors over military considerations in the post-cold war world. This point is hardly debated any more. As a Clinton administration official was quoted as saying, "Everyone acknowledges that economics now plays a central role in foreign policy - that battle is over."(5) There is a widely held belief that peace can be assured only by building up international institutions and creating rules that promote global stability, cooperation, and interdependence. By this standard, current monetary arrangements seem grossly inadequate, a veritable "non-system" dominated by speculators and national authorities who pursue profit or narrow national interest at the cost of international stability. It is argued that current monetary relations are plagued by an exchange- rate volatility that wastes resources, creates acrimony, and promotes protectionism.

Many of these monetary reformers are nostalgic for the good old days of Bretton Woods. Kunz described Bretton Woods as the cornerstone of U.S. foreign economic policy, a crucial part of America's postwar domestic prosperity and ultimate success in the cold war: "Bretton Woods would have a significant bottom-line impact on the American economy."(6) The rules and institutions established at Bretton Woods, it is assumed, subordinated market speculation and national self-interest to the higher goal of international cooperation through a stable exchange-rate regime monitored and enforced by the rules of the International Monetary Fund (IMF). The authors of the plan wanted a system that would "avoid competitive devaluations among currencies; the fund would stabilize foreign-exchange rates, encourage the flow of productive capital among participating nations, help stabilize price levels, promote sound credit practices and reduce barriers to foreign trade."(7) That they succeeded - and thus laid a foundation for international growth, interdependence, and cooperation in the years following World War II - was a view oft repeated during the summer of 1994, in celebration of the fiftieth anniversary of the Bretton Woods conference.

That is why so many analysts want to re-establish a similar system. Judy Shelton, a senior research associate at the Hoover Institution, argues that international monetary reform is necessary to avoid a "global meltdown," and that reforms should be based on the successful elements of the Bretton Woods system:

The next effort to build a new world monetary order should reflect an appreciation for what has worked well in the past. It should start with the same basic framework laid out in the old Bretton Woods approach: fixed exchange rates among national currencies anchored by a government commitment to redeem in gold.(8)

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The legends of Bretton Woods - monetary system - Economic Myths Explained

ORBIS, Spring, 1996 by Francis J. Gavin

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