Monetary Theory and Bretton Woods: The Construction of an International Monetary Order. Historical Perspectives on Modern Economics.

Historical Perspectives on Modern Economics

by Filippo Cesarano

Over the twentieth century monetary theory played a crucial role in the evolution of the international monetary system. The severe shocks and monetary gyrations of the interwar years interacted with theoretical developments that superseded the rigid rules of commodity standards and led to the full-fledged conception of monetary policy. The definitive demise of the gold standard then paved the way for monetary reconstruction. Monetary theory was a decisive factor in the design of the reform proposals, in the Bretton Woods negotiations, and in forging the new monetary order. The Bretton Woods system - successful but nevertheless short-lived - suffered from latent inconsistencies, both analytical and institutional, which fatally undermined the foundations of the postwar monetary architecture and brought about the epochal transition from commodity money to fiat money.

Genres: Economics

248 pages, ebook

First published September 1, 2006

Reviews

[May Ling]

I wanted to review Bretton Woods as it is often mentioned as the beginning of moving the world from the gold standard and the fiat system. I will probably also have to review the time period and decisions leading to the fiat monetary system quite frankly.



It is interesting to note that a paper based world-wide system has existed for less than a century. The transition came out of the desperation of the Great Depression and resulting multi-year world-wide deflation. The original intent was to create a system that was flexible and minimized potential for abuse. The gold standard forced certain types of discipline and in many ways, put a stopper on how much leverage the system could actually manifest.



The original system was designed with many assumptions that have clearly been ignored in mind. First, the idea was to keep countries growth rates at approximate parity. It was not designed for the US to engage on odd fancies of fiscal impulse, i.e. fast paced growth or massive fiscal initiatives (i.e. War). This was known to have the net result of stressing out the system.



Second, it was not designed for the type of financial instruments that current exist. It was known that new innovations might result in a need to significantly revamp the system.



Third, the role of the clearing union was essential in stabilizing the existing faulty system at the time. Given current circumstances, it is interesting to reflect on the importance of this mechanism.