There's No Such Thing as a Free Lunch

By Milton Friedman | Go to book overview

Chapter Seven International Economic Policy

The columns in this chapter present a series of reports on a sequence of events that unfolded with all the inevitability of a Greek tragedy. These events had two key origins: (1) President Franklin D. Roosevelt's action on March 6, 1933, ending the internal convertibility of dollars into gold; (2) the World War Two Bretton Woods agreement which established after the war a system of fixed exchange rates that were to be changed only by official action.

Once the United States government terminated its commitment to its own citizens to exchange gold for currency and currency for gold at a fixed rate, it was inevitable that--whether for good or ill--gold would lose its role as an effective determinant of the quantity of money and as an effective element in United States economic policy. The only question was when and by precisely what route. As things turned out, it took a little over thirty-eight years, from March 6, 1933, to August 15, 1971, and there are still vestigial remains of the earlier reign of gold in the international sphere.

Similarly, from the time Bretton Woods became effective, it was inevitable that it would break down. The Bretton Woods system gave the dollar a unique role--the United States and the United States alone had no obligation to support the price of its currency in terms of foreign currencies; the United States and the United States alone was committed to convert its currency into gold at a fixed price on demand of foreign central banks or other official agencies.1 Other countries committed themselves to keep the exchange rates of their currencies in terms of the dollar

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1
Technically, the rules were symmetrical. Any country was free to adopt the same role but only the United States did so, and it was intended and expected that this would be the case.

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