Academic journal article History of Economics Review

Trade Policy and International Finance in the Bretton Woods Era: A Doctrinal Perspective with Reference to Australia and New Zealand

Academic journal article History of Economics Review

Trade Policy and International Finance in the Bretton Woods Era: A Doctrinal Perspective with Reference to Australia and New Zealand

Article excerpt

Abstract: The Bretton Woods system embodied a self-imposed liquidity constraint. Trade policy was subordinated to the maintenance of official foreign reserves used to defend fixed exchange rates. In Australia and New Zealand, reserves were considered a form of national self-insurance against the instability of export receipts and the liquidity problem was often referred to as the 'foreign exchange constraint'--as if it were exogenously given rather than the result of certain policies, and it reinforced inward-looking trade policies. International financial arrangements, including severe restrictions on cross-border capital flows, delimited thought and action in connection with Australian and New Zealand trade policy.

Ideas, knowledge, art, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.

John Maynard Keynes (1933: 236; emphasis added)

[O]n the subject of post war international finance ... Whirl, in these days as in those of Aristophanes, seems to be King ... I should merely like to emphasise ... that international finance must be the handmaiden of international trade and that, when she forgot her own function and set up on her own account, she made a very sorry mess of things.

Frank D. Graham (1943: 335; emphasis added)

1 Introduction

It has been commonplace to reflect favourably on the Bretton Woods era. The Bretton Woods Agreement structured the operation of the international financial system between 1945 and 1971. It was a 'system' in the general sense that it was founded on a definite doctrine that established explicit and implicit rules between its key components; generally, these rules functioned to facilitate cross-border receipts and payments between the trading nations that signed up to the Agreement. (1) Many commentators have been effusive in their praise for the system created at Bretton Woods and for its performance over several decades. For instance, Kennit Gordon (1971: vii) described the system as 'one of the great social inventions of the twentieth century'; Roy Harrod (1972: 5) maintained that it was a 'notable landmark in human affairs'. Flarold James (2011: 302) noted that 'Bretton Woods appears as the only really successful example of multilateral design of the world's international monetary order'. In the light of recent events, the Bretton Woods era has undergone nostalgic re-examination with a view to creating a 'new ' Bretton Woods-type international financial order (for example, Stiglitz 2008). Others have seen in present international financial arrangements a new revived 'Bretton Woods II' system already in existence (Dooley et al. 2009; Hall et al. 2011). However, some major factors differentiating the present system (in 2012) from Bretton Woods (1945-71) have been well-documented by Barry Eichengreen (2007).

Running somewhat against glowing accounts of the performance of the Bretton Woods international financial architecture, our conjecture in this paper is that free trade sentiment was dampened in practice by the operation of some of the main pillars of that architecture. Free trade doctrine was put in doubt and its advocates forced to go on the defensive. Upon reviewing draft plans for the Bretton Woods Agreement, the renowned Princeton University trade and monetary theorist Frank Graham predicted (in the foregoing quotation) that international finance would not become the 'handmaiden of international trade'; it would more likely 'set up on its own account'. (2) The objective of this paper is to reflect on this view in general. We will not adhere to the traditional, artificial separation of real trade theory and policy and international monetary thought. We will concentrate on the connections between economic thought and policy concerning what was called the 'liquidity constraint' on trade and payments in the Bretton Woods era and provide some related illustrations of economic thought and policy in Australia and New Zealand during that period. …

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