Barry Eichengreen and Marc Flandreau
The financial globalization that followed the collapse of the Bretton Woods System opened a new chapter in the history of international monetary relations. The founding fathers of Bretton Woods-the eminent British economist John Maynard Keynes and US Treasury official Harry Dexter White prominent among them-sought to create a more perfect international monetary order conducive to financial stability and economic growth. Their system was crafted to contain destabilizing flows of 'hot money' and to allow governments to adjust policy to domestic conditions. For a few years it seemed to work. But by the 1970s international financial markets had regained the upper hand. International capital flows seemingly unprecedented in scope first undermined fixed currency pegs. Following the transition to floating exchange rates, financial markets threatened officials seeking to avail themselves of their newfound freedom with capital flight, the collapse of the currency, and inflation. When US President Bill Clinton's advisor James Carville famously remarked that if reincarnated he wanted to come back as the bond market, he was only articulating many officials' sense of helplessness when confronted by a world of global finance.
Critics of the current system contend that the generalized float now prevailing provides neither the stability needed for effective international specialization nor the flexibility required for independent action. Turbulence and volatility in international financial markets disrupt firms' production and investment decisions. Misaligned currencies confer arbitrary competitive advantages, evoking complaints from those who produce in competition with imports. The 'temporary' trade restraints adopted in