World Money without an Anchor

Abstract

In practice, the Bretton Woods regime illustrated the advantages of having an international standard with stable exchange rates — and some of the possible disadvantages. The regime depended on highly specific conditions and was in any case flawed from the outset. However, one design fault, the lack of a global currency, was filled initially by the US dollar, which was as good as gold (which is why this period is often called ‘an anchored dollar standard’). The price of gold at $35 an ounce served as the lynchpin of the system and a residual link between the world of fiat currencies and the historical attachment of currencies to precious metals. Whether it actually constrained US policy is debatable, but it provided continuity and a background presence, as the gold price had remained unchanged since 1934. Gold was still keeping an eye on the dollar. Economic performance was good — especially by comparison with the inter-war period. A number of positive developments — successful currency reform in Germany, agreement on international rules governing trade, the Marshall Plan and rapid economic growth — paved the way for the resumption of convertibility on current account by the main European countries, which took place in 1958–59. Through the pegged rate system, all countries benefited from access to the US market and that of the dollar area. The IMF had a clear role as policeman of the system and of the rules that countries had agreed to live by. The US remained committed to the international order it had done so much to create.

This chapter discusses how the Bretton Woods monetary standard established itself in pratice, why it collapsed and the dangerous era of monetary nationalism and experimentation that succeeded it.