The Bretton Woods System
To suppose that there exists some smoothly functioning automatic
mechanism of adjustment which preserves equilibrium if we only
trust to methods of laissez-faire is a doctrinaire delusion which
disregards the lessons of historical experience without having
behind it the support of sound theory.
(John Maynard Keynes)
Even today, more than three decades after its demise, the Bretton Woods international monetary system remains an enigma. For some, Bretton Woods was a critical component of the postwar golden age of growth. It delivered a degree of exchange rate stability that was admirable when compared with the volatility of the preceding and subsequent periods. It dispatched payments problems, permitting the unprecedented expansion of international trade and investment that fueled the postwar boom.
Other perspectives on Bretton Woods are less rosy. Ease of adjustment, it is argued, was a consequence rather than a cause of buoyant growth. And the notion that Bretton Woods reconciled exchange rate stability with open markets was largely an illusion. Governments restricted international capital movements throughout the Bretton Woods years. Foreign investment occurred despite, not because of, the implications of Bretton Woods for international capital mobility.
The Bretton Woods System departed from the gold-exchange standard in three fundamental ways. Pegged exchange rates became adjustable, subject to specific conditions (namely, the existence of what was known as “fundamental disequilibrium”). Controls were permitted to limit international capital flows. And a new institution, the International Monetary Fund (IMF), was created to monitor national economic policies and extend balance-of-payments financing to countries at risk. These innovations addressed the major worries that policymakers inherited from the 1920s and 1930s. The adjustable peg was an instrument for eliminating balance-of-payments deficits—an alternative to