Monetary Theory and Bretton Woods: The Construction of an International Monetary Order

Published by EH.NET (June 2007)

Filippo Cesarano, Monetary Theory and Bretton Woods: The Construction of an International Monetary Order. Cambridge: Cambridge University Press, 2006. xiii + 248 pp. $80 (hardback), ISBN: 0-521-86759-2.

Reviewed for EH.NET by John H. Wood, Department of Economics, Wake Forest University.

This is a timely thought-provoking account by a central banker (the head of the Historical Research Office of the Bank of Italy) of the long and often uncertain transition from the classical gold standard to the unprecedented fiat monetary system prevailing at the end of the twentieth century. The suspensions of national currencies from gold forced by the economic and social disruptions of World War I and the Great Depression shattered the old system – forever, it seems to us now – but governments did not give up on a return until after the final breakdown of the Bretton Woods arrangements in the early 1970s. The 1936 Tripartite Agreement between Britain, France, and the United States was an attempt to work back to the gold standard, as conditions permitted, through exchange controls, negotiated fixed rates, and mutual assistance. The more rigid Bretton Woods System that was agreed upon at the end of World War II sought a quick return to gold (or rather a gold-exchange standard based on the U.S. dollar), with fixed exchange rates and free trade and exchange, but never came into play because of its several contradictions. The author’s relative emphases on the Tripartite Agreement and Bretton Woods are the reverse of mine, but the primary historical point is the same: they were among the several schemes for returning to the monetary system of 1914.

Many economists of the 1920s and 1930s wanted it both ways: the gold standard with a managed currency, which after World War II became expansionist Keynesian policies domestically with fixed exchange rates externally. This proved impossible without severe and eventually unacceptable controls, and the combination of inflation and unemployment, together with the actual and intellectual collapses of the Phillips Curve, compelled governments to focus their monetary attention on price stability.

The author describes the present system as one of competitive monies in an international context similar to Benjamin Klein’s (“The Competitive Supply of Money,” Journal of Money, Credit and Banking, 1974). The purpose of the book as stated at the beginning is to show that “monetary theory [has] been crucial in determining the evolution of [monetary] systems” (p. ix), although the connection is often unclear. His examples indicate that theory has more often followed than influenced events. He states that the Bretton Woods monetary order “was unique to monetary history,” in being designed by experts “from scratch” (pp. 133, 188), but also sees it as a “vain attempt to revive ? commodity money” (p. 189). He reasonably follows much of the literature in using “Bretton Woods” as a convenient label for a period rather than as a system in actual operation.

He might have followed up the implications of his description of the new system by pointing out that with “inflation targeting” we have returned to commodity money. A dollar, pound, or Euro is convertible into a basket of goods. Of course inflation targeting is subject to the government’s discretion, but that was also true of the gold standard. The new system is also like the old in rejecting the managed-money theories that prevailed during much of the transition, and delayed it.

One can argue over the book’s interpretations of the causes of the evolution of the monetary system and its defining characteristics, but I recommend it as an efficient account of the relevant theories and policies during the transition from the classical gold standard.

Recent works by John H. Wood are “Independent Central Banks: New and Old,” Cato Journal, Fall 2006, A History of Central Banking in Great Britain and the United States (Cambridge University Press, 2005), and Ideas, Interests, and Macroeconomic Policies in the United States, in process.