The Real Reason Bretton Woods Failed: TIE's Summer 2021 issue on the subject reads like Hamlet without the ghost.

• Author: Brenner, Reuven

This brief is in response to the Summer 2021 issue of TIE dedicated to fiftieth anniversary of abandoning the Bretton Woods agreement.

The issue started by interviewing Jeffrey Garten, author of the recent book Three Days at Camp David, which, as Garten admits, is neither a theoretical nor a policy book, but deals with the personalities involved in the decision of abandoning the fixed exchange regime. The other articles are theoretical and policy-oriented--but all of them read like Hamlet without the ghost. None address the question and the wide-ranging evidence that stable exchange rates are crucial--especially for countries not having deep capital markets, which constitute much of the world, China included, the evidence being sharp and clear that financial and political crises are the predictable outcome in their absence. That's the ghost--that stability of contracts is the basis of commercial societies and what happens in its absence--that is missing in this Summer 2021 issue.

Following World War II, the Bretton Woods system, which fixed the major currencies (the franc, the pound, the mark, and the yen) to the dollar while anchoring the U.S. dollar in gold (priced at $35 since the Roosevelt devaluation of 1934), worked well as long as the gold anchor matched a very strong U.S. economy. The market expected and required the United States to have a robust tax base--the collateral--to back its bonds, and the commitment of the parties to the agreement to expand trade and commerce "fairly."

Here is what "fairly" was supposed to mean: When Bretton Woods was negotiated, economist John Maynard Keynes worried that with fixed exchange rates there would be countries with chronic balance-of-payments problems and others with constantly rising dollar reserves. To sustain stable exchanges, the latter countries had to "commit" to expand domestically and liberalize imports. To achieve such commitment, Keynes suggested penalizing countries with prolonged trade surpluses (though he expected the United States to be that country, not Japan, China, or Germany). The International Monetary Fund, created as part of the Bretton Woods agreement (that with the shift to floating lost the rationale for its existence, but, typical of bureaucracies, perpetuated itself by becoming an unaccountable international consulting company, drawing on faddish macro-astrological models), allowed for such countries to be penalized by limiting purchases of their exports, a clause that was never enforced. It also provided for occasional, one-time devaluations once the IMF identified a "fundamental (not drawing on narrow domestic political interests) disequilibrium."

By the end of the 1950s, the United States had experienced sizable deficits, with foreign central banks accumulating large amounts of dollar reserves. With investor skepticism rising, the price of gold jumped to $40 in October 1960 (though Bretton Woods fixed it at $35). U.S. President John F Kennedy, however, understood the importance of sustaining the monetary yardstick. He announced during that year's presidential campaign that...