Chapter 7
The Death of Bretton Woods: A History Lesson1
In 1944, as the world was recovering from the effects of World War II, the heads of state from over 100 countries met in Bretton Woods to create an international monetary system that would unite the western world, insure monetary stability, and facilitate international trade. Since then the system has been plagued by dollar shortages and dollar gluts, chronic deficits and chronic surpluses, perpetual parity disequilibria, “hot money” capital flows, and currency depreciation. By 1968 a two-tier gold market was established in the midst of a gold crisis that, by 1971, culminated in the suspension of dollar convertibility together with a dollar devaluation against multilateral revaluations of most other major foreign currencies.
Bretton Woods is dead and an autopsy is called for to determine the cause of death. If meaningful international monetary reform is to follow, it is necessary to know what went wrong.
Fixed Exchange Rates, Flexible Rules
Under the rules established by the Bretton Woods agreement, the gold values of a member nation’s currency could be altered as conditions warranted. This distinguishing feature of the Bretton Woods system exposed a drastic ideological departure from the gold standard.
Under the gold standard, no natural conditions would ever warrant a change in the gold value of a nation’s currency. Under a pure gold standard, all the money in circulation would be either gold or claims to gold. Any paper ...
