Bretton Woods and its Precursors: Rules Versus Discretion in the History of International Monetary Regimes

Abstract

In recent years, the theory of rules and discretion in monetary policy has fascinated scores of academic economists and policymakers alike. This paper asks whether it can be applied to understand the history of the world monetary system, by focusing on the setup and the experience of the Bretton Woods regime, and comparing it with its predecessors, in particular the classical gold standard. The paper first discusses the underpinnings, and some of the problems, of a theory of the evolution of the international monetary regime based on alternating rules and discretion. It then assesses the ability of such theories to explain the historical record. It first reviews the rules that characterized the classical gold standard, and the motivations to return to gold in the interwar period. Then it evaluates the British and US plan for world monetary reform published in 1943, and the IMF Articles of Agreement. Finally, the paper analyzes the data on interest rates and exchange rates during the classical gold standard and the Bretton Woods period to assess the stabilizing properties of the two exchange-rate regimes.