and Central Banking
On March 2, 1973, European central banks abruptly closed their foreign exchange windows. This decision brought to a close an era that had been guided by the interstate agreement struck at Bretton Woods in 1944. Under the terms of that agreement, the United States—the only country to emerge from the war with sizable gold reserves—pegged its dollar to gold at thirty-five dollars per ounce. Each West European government, in turn, was required to fix a price for its currency in terms of gold or the U.S. dollar of weight and fineness of 1944, and then to maintain that parity through dollar purchases or sales. Because of its fixed price in terms of gold, the dollar became the de facto numéraire of the Bretton Woods system, which enabled the United States to set its own monetary policy independently. The principal burden for economic adjustment thus fell upon the other countries in the system, whose central banks consequently became less able to control their own money supplies.
With the collapse of the Bretton Woods system, however, came the promise of much greater autonomy. Many observers agreed with the economist Harry Johnson, who argued that the change to floating exchange rates was, in fact, "essential to the preservation of national autonomy and independence consistent with [the] efficient organization and development of the world economy." 1. Then-prevalent theory suggested that, under flexible exchange rates, monetary policy did not____________________