U.S.-European Monetary Relations

By Samuel I. Katz; American Enterprise Institute for Public Policy Research, Georgetown University | Go to book overview

THE EVOLVING
EXCHANGE-RATE MECHANISM
AND ITS CONTROL

Thomas D. Willett

The Bretton Woods system was based on the premise that exchange rates were a matter of international as well as national concern.1 The international economic disasters of the interwar period had clearly demonstrated the dangers of treating trade and balance-of-payments measures as purely unilateral national concerns. On the other hand, the major countries were anxious also to preserve freedom to pursue their newly found interest in active domestic macroeconomic policies. They were mindful of the costly economic consequences of Churchill's decision to subject the domestic British economy to the dictates of a particular exchange-rate goal.2 Thus they were unsympathetic to the idea of giving international authorities exclusive control over the de-

____________________
Note: This paper represents the author's personal views and not necessarily those of the U.S. Treasury.
1
For example, in his testimony before the House of Lords on May 23, 1944, John Maynard Keynes described the Bretton Woods proposals as setting up "an international institution with substantial rights and duties to preserve orderly arrangements in matters such as exchange rates which are two-ended and affect both parties alike, which can also serve as a place of regular discussion between responsible authorities to find ways to escape those many unforeseeable dangers which the future holds."

Of course, in academic writings the concept that exchange rates are a matter of international concern goes back much further. An interesting example is found in Palgrave Dictionary of Political Economy: "It will thus be seen that every country, by altering its mint regulations, has power to alter the metallic standard of value pro tanto in every other country using a metallic standard; and from this point of view the contention of those who desire to make currency arrangements a matter of international agreement may be accepted."

I am indebted to Edward M. Bernstein for calling both these quotations to my attention.

2
Keynes, of course, was a leading advocate of this view. See his book The Economic Consequences of Mr. Churchill ( London: L. and V. Woolf, 1925). The essay, "The Economic Consequences of Mr. Churchill," was published in his Essays in Persuasion ( London: Macmillan, 1931), pp. 244-70. For a recent review and references to the literature on the interwar periods, see Gottfried Haberler, The World Economy, Money, and the Great Depression, 1919-1939 ( Washington, D.C.: American Enterprise Institute, 1976).

-245-

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