Published by EH.NET (August 2004)

Robert Leeson, Ideology and the International Economy: The Decline and Fall of Bretton Woods. New York: Palgrave MacMillan, 2003. xii + 242 pp. $70.00 (cloth), ISBN: 1-4039-0370-0.

Reviewed for EH.NET by Peter B. Kenen, Department of Economics, Princeton University.

Robert Leeson is Associate Professor in Economics at Murdoch University in Australia and has written extensively on the history of economic thought and policy in the twentieth century. Here, he explores the influence of economic ideas on the collapse of the Bretton Woods System in the early 1970s. Readers should be warned, however, that his book is not mainly about the collapse of the Bretton Woods System. It is mainly about the influence of Milton Friedman, direct and indirect, on the policy debates of the early 1970s — debates about wage and price controls and the conduct of monetary policy, as well as the reform of the international monetary system — and it does not provide a full account of the events and decisions that led to the collapse of the Bretton Woods System.

Leeson does not apologize for failing to review those events and decisions. His study, he writes, “does not attempt to replace but rather to supplement the orthodox chronology and analysis” (Leeson, p. 15). But readers who are not already familiar with the “orthodox” analysis may have trouble judging the influence of ideology on the drama played out from August 15, 1971, when Richard Nixon announced his New Economic Policy (NEP) and closed the gold window, to March 1, 1973, when European central banks withdrew from the foreign-exchange markets and let their currencies float against the dollar.

Parts I and II of Leeson’s book describe the intellectual environment of the 1950s and early 1960s. There was, he writes, strong intellectual support for three policy objectives — full employment, free trade, and fixed exchange rates — but growing awareness of the ways in which they would come into conflict. It was Friedman, he says, who “raised the standard of revolt” against the labor standard underlying the Keynesian case for full-employment policies, as well as the Bretton Woods standard of fixed exchange rates (Leeson, pp. 21, 22). For Friedman and his colleagues at the University of Chicago, notably Harry Johnson, the IMF was “an integral part of the post-war planning system which sought to override market forces” (Leeson, p. 31). Leeson then traces the emergence of an academic consensus favoring exchange-rate flexibility.

Unfortunately, Leeson’s account of the process producing that consensus attaches too little importance to a distinction that played a large role in the academic debates of the period and in official discussions as well. He demonstrates clearly that academics became increasingly critical of the official commitment to rigidly fixed exchange rates. He cites, for example, the widespread academic criticism of the 1966 report on the balance-of-payments adjustment prepared by Working Party 3 of the OECD — a report that made no mention of exchange-rate changes when listing the ways to deal with balance-of-payments problems. Yet many economists who came to favor more frequent recourse to exchange-rate changes did not yet favor freely floating rates. (I say that with some confidence, having attended most of the conferences described by Leeson in Chapters 7-8, as well as many meetings of the Bellagio Group, in which academics and officials exchanged views informally on the reform of the monetary system; see also James, 1996, p. 213).

Parts III and IV of Leeson’s book turn to the policy process in an effort to show how Friedman’s views and personal involvement in the policy process helped to bring down the Bretton Woods System and thus led to the adoption of floating exchange rates. Some of the “orthodox” accounts of the period also mention Friedman, as “an occasional adviser to Republican presidential candidates” (Volcker and Gyohten, 1992, p. 46), but Leeson’s detailed account shows that Friedman was far more active than that. Leeson also stresses the close relationship between Friedman and George Shultz, who had been his colleague at Chicago and held key policy positions in the Nixon administration. Yet Leeson’s account does not explain why Shultz, who shared Friedman’s strong preference for floating exchange rates, presented a U.S. plan for reform of the monetary system that emphasized the need for exchange-rate changes and the use of a reserve indicator to signal the need for them but fell short of proposing the substitution of freely floating rates. For an explanation, we must turn to Paul Volcker:

I knew from experience that Shultz had no hesitation in expressing monetarist views forcefully during policy debates within the administration. But … I found that when he assumed full responsibility for a problem, what came to the fore was the side of his background that marked him as a conciliator and consensus builder, rather than an ideologue. Time and again, he would work with almost inhuman patience to bring a group into agreement upon a decision that all could support, submerging his own preferences (Volcker and Gyohten, p. 118).

The need for compromise, within and between governments, attracts too little of Leeson’s attention. He treats the collapse of the Bretton Woods System as a process driven strongly by ideology, not by the asymmetries of the system itself nor by market forces.

There were, in fact, two asymmetries built into the Bretton Woods System. The Europeans wanted to rectify one of them — the one that Charles de Gaulle had described as the “exorbitant privilege” conferred on the United States by the reserve-currency role of the dollar; the United States was the only country able to finance a balance-of-payments deficit in its own currency and thus enjoyed more policy autonomy than other countries. The Americans wanted to rectify a different asymmetry — the one resulting from the fact that dollar exchange rates were set by foreign governments, depriving the United States of any direct control over the foreign-currency value of the dollar and thus giving it an interest in greater exchange-rate flexibility, rule-based or market-based, as a way to achieve more symmetrical balance-of-payments adjustment.

Furthermore, the final collapse of the Bretton Woods System reflected the power of money, not the power of ideas. It occurred in March 1973, when the continental Europeans were forced to choose between massive intervention in foreign-exchange market and letting their currencies float against the dollar. The currency crisis posing that choice resulted in part from an attempt by the United States to engineer a second devaluation of the dollar — an attempt that was not designed to provoke a crisis but rather to forestall one.

Leeson has tried to cram two books into one — a book about the role of Milton Friedman and the Chicago School, and a book about the collapse of the Bretton Woods System. As a result, he dwells at length on issues that had little bearing on the collapse of that system — the debates about wage and price controls and the conduct of U.S. monetary policy under Arthur Burns — while saying too little about the events and structural defects that undermined the Bretton Woods System.


Harold James (1996), International Monetary Cooperation since Bretton Woods (Oxford University Press).

Paul A. Volcker and Toyoo Gyohten (1992), Changing Fortunes: The World’s Money and the Threat to American Leadership (Times Books).

Peter B. Kenen, Walker Professor of Economics and International Finance Emeritus, Princeton University, is the author of a dozen books including The International Financial Architecture: What’s New? What’s Missing? (Institute for International Economics, 2001).