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

ORBIS,  Spring, 1996  by Francis J. Gavin

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The latter is unquestionably the way to go. For all the criticism, the post-Bretton Woods period has witnessed an unparalleled explosion of international trade and financial transactions. Indeed, real per capita growth in the United States was higher during the floating exchange-rate period of 1974-1989 (2.1 percent per year) than it was during the Bretton Woods period of 1946-1970 (2.0 percent per year) or even the gold-standard period of 1881-1913 (1.8 percent per year).(22) Moreover, the recent growth has spread broadly to regions like the Pacific Rim and South America. Growth during the Bretton Woods period was concentrated in Western Europe and Japan, areas that were the largest beneficiaries of American aid and trade favoritism. The more recent growth may have much to do with the drastic reduction in exchange and capital controls that has come about during the post-Bretton Woods era. Emerging economies can now tap a vast reservoir of private capital, and they have a much greater incentive to remain credit worthy than in the past. Today, private investment dwarfs international aid programs, which were, in any case, often driven more by politics than economic logic.

Is exchange-rate volatility really the fault of the post-Bretton Woods non-system? As a recent publication pointed out, that is the equivalent of a drank driver blaming unsafe roads for his accident.(23) Since 1973, the economic policies of the United States and other developed nations have often been contradictory. In the 1980s, a mixture of loose fiscal policy and tight monetary policy created massive swings in capital flows, which produced substantial exchange-rate volatility. Happily, under the current non-system, the market is free to punish profligate and irresponsible governments. And given the performance of government financiers and central bankers during the twentieth century, is that really such a bad thing?

1 Margaret Garritsen de Vries, "Bretton Woods Fifty Years Later: A View from the International Monetary Fund," in The Bretton Woods-GATT System: Retrospect and Prospect after Fifty Years, ed. Orin Kirshner (Armonk, N.Y.: M.E. Sharpe, 1996), p. 128.

2 W.L. Givens, "Economic Cocaine: America's Exchange Rate Addiction," Foreign Affairs, July/Aug. 1995, p. 17.

3 Diane B. Kunz, "The Fall of the Dollar Order: The World the United States is Losing," Foreign Affairs, July/Aug. 1995, p. 26.

4 Peter B. Kenen, Francesco Papadia, and Fabrizio Saccomanni, eds., The International Monetary System: Proceedings of a Conference Organized by the Banca d'Italia (Cambridge: Cambridge University Press, 1994), introductory statement, p. 1.

5 Anonymous source reported as "one of Mr. Clinton's top economic advisors," quoted in David E. Sanger, "Trade's Bottom Line: Business Over Politics," New York Times, July 30, 1995.

6 Kunz, "The Fall of the Dollar Order," p. 23.

7 Judy Shelton, "How to Save the Dollar," Wall Street Journal, July 15, 1994.

8 Judy Shelton, Money Meltdown: Restoring Order to the Global Currency System (New York: Free Press, 1994), p. 289.