The Loss of Credibility and Stability in the Bretton Woods System

  • Heinz-Peter Spahn
Chapter

Abstract

The Bretton Woods currency order exhibited a double nature:
  • 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.

  • 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

Keywords

Europe Income Tral Nash Librium 

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References

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Copyright information

© Springer-Verlag Berlin Heidelberg 2001

Authors and Affiliations

  • Heinz-Peter Spahn
    • 1
  1. 1.Lehrstuhl für Wirtschaftspolitik, Institut für VolkswirtschaftslehreUniversity of Hohenheim (520 A)StuttgartGermany

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