Globalizing Capital: A History of the International Monetary System

Since the collapse of the Bretton Woods System in the early 1970s, a slow but then dramatically accelerating shift away from the earlier regime of peggedbut-adjustable exchange rates has occurred. As late as 1970 the idea of floating the exchange rate was almost unheard of except as a temporary expedient in extraordinary circumstances. But by 1990 roughly 15 percent of all countries had moved to floating rates. By 2006 this share had risen to nearly 30 percent. The movement away from pegged-but-adjustable rates was especially prominent in the advanced countries. By 2006 such intermediate arrangements had essentially disappeared, in favor of monetary unification in Europe and floating elsewhere. In emerging markets, where monetary unification was generally not an option (at least not yet), soft pegs did not disappear, but floating similarly gained ground.¹

These trends are most immediately the consequence of rising capital mobility. In the aftermath of World War II, memories of the debt crisis of the 1930s and the fact that defaulted foreign bonds had not yet been cleared away discouraged investors from looking abroad. Those who might have done so were constrained by tight controls on international capital flows. The maintenance of capital controls had been authorized by the Articles of Agreement negotiated at Bretton Woods in order to reconcile exchange rate stability with other goals: in the short run, concerted programs of postwar reconstruction; in the long run, the pursuit of full employment.

Those capital controls were integral to the Bretton Woods System of pegged but adjustable rates. By loosening the link between domestic and foreign finance, they allowed governments to alter domestic financial conditions in the pursuit of other goals without immediately destabilizing the exchange

¹The “not yet” alludes not so much to the possibility of monetary unions in other parts of the
world as to the likelihood that EU members presently classified as emerging markets will eventu-
ally adopt the euro (a process that began with Slovenia in 2007). By the time they do so, of
course, many of them will presumably have graduated to advanced-country status.

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