In fall 1991, the NBER held a conference--"A Retrospective on the Bretton Woods International Monetary System"--at the Mount Washington Hotel in Bretton Woods, New Hampshire. The historic International Monetary Conference of July 1944, creating the Bretton Woods System of adjustable pegged exchange rates, the International Monetary Fund (IMF), and the World Bank, was held at this hotel. The motivation for the NBER conference, organized by Barry J. Eichengreen and me, was to reexamine the Bretton Woods System 20 years after Richard Nixon closed the gold window in August 1971, effectively ending the world's last experiment with pegged exchange rates.
Some scholars' and officials' dissatisfaction with the performance of the present floating exchange rate system, coupled with increased interest in restoring fixed exchange rate arrangements and buoyed by the apparent success of the European Monetary System (EMS), made the conference timely. We assembled a group of young scholars, leading academic authorities on Bretton Woods, former officials from the Bretton Woods era, and one of the participants at the original Bretton Woods conference.
One year after the NBER conference, it seems that our topic was even more timely than we had imagined. The EMS recently has undergone convulsions reminiscent of the currency crises of the Bretton Woods era. Last fall we witnessed a replay of the scenes of 25 years ago: the shunting of anxious officials from one capital to another; their vigorous statements denying that devaluation was imminent; then, after the unthinkable happened, laying the blame on other countries' policies--Germany and the United States, and of course greedy speculators. I will focus here first on the history of the Bretton Woods System: its origins, how it worked in its heyday, its problems, and its collapse. Then I will discuss the conclusions of our conference, and finally the lessons for today.
The History of Bretton Woods
The planning during World War II that led to Bretton Woods aimed to avoid the chaos of the interwar period. The perceived ills to be avoided included: 1) floating exchange rates condemned in the early 1920s as prone to destabilizing speculation; 2) the subsequent gold exchange standard marred in the early 1930s by problems of adjustment, liquidity, and confidence that enforced the international transmission of deflation; and 3) after 1933, the beggar-thy-neighbor devaluations, trade restrictions, exchange controls, and bilateralism. To avoid these ills, John Maynard Keynes, Harry Dexter White, and others made the case for an adjustable peg system. The new system was intended to combine the favorable features of the fixed exchange rate gold standard, particularly exchange rate stability, with flexible rates, that would allow monetary and fiscal independence. Both Keynes, leading the British negotiating team, and White, leading the American team at Bretton Woods, planned an adjustable peg system to be coordinated by an international monetary agency. Considerable differences between the two plans reflected the vastly different circumstances of the two powers at the end of the war: the United Kingdom with a massive outstanding external debt and her resources depleted; the United States the only major power to emerge with her productive capacity unscathed and holding the bulk of the world's gold reserves.
The Articles signed at Bretton Woods represented a compromise between the two plans and between the interests of the United States and the United Kingdom. The system that emerged defined parities in terms of gold and the dollar (the par value system) that could be altered only in the event of a fundamental disequilibrium in the balance of payments (caused, for example, by major technological shocks, changes in preferences, or events such as wars). International reserves and drawings on the IMF (special drawing rights, or SDRs) were to finance adjustment of the balance of payments in ordinary circumstances. …