Bretton Woods: a Closer Look

In the recently published The Bretton Woods Transcripts, editors Kurt Schuler and Andrew Rosenberg provide readers with a front-row seat at the conference which defined the postwar international monetary system.

The editors, who are affiliated with the Center for Financial Stability, compiled and released the previously unpublished transcripts to provide a fresh perspective on this historic conference. This is an invaluable primary source.

Upon its original publication in eBook form last year, the New York Times prominently featured the first publication of the extant transcripts of the famous Bretton Woods monetary conference that redefined the U.S. dollar for decades. Now, finally, it is available in book form.

Is this not ancient history? The inclusion of a monetary commission plank in the 2012 Republican convention platform received much attention from the national, and even world, media, certainly enough to make one wonder how monetary policy was politically sidelined for 40 years. What kept the gold standard out of the mainstream? Now that monetary reform now is surging back into marquee attention, it is time to delve more deeply into monetary history -- of which the Bretton Woods conference was a signal event.

It was at Bretton Woods that the dollar obtained its status as the world's official world reserve currency. The relevant clause of the agreement establishing the International Monetary Fund was Article IV, "Par Values of Currencies," Section 1: "Expression of par values (a) The par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944." As a result of this agreement, the dollar was, de jure, considered to be "as good as gold." Central banks could use dollars as an official reserve asset instead of the metal itself.

Though confusingly similar in name, the gold-exchange standard is not synonymous with the classical gold standard. The transcripts reveal the confusion between the two monetary systems, which were defined at Bretton Woods in response to a question from India's delegate. For example:

India: Before this Commission makes its decision on fixing the date [for payment of initial quotas], I think it is high time that the USA delegation give us a definition of gold and gold convertible exchange [gold is supposed to be paid in for 25% of quota]. We have discussed this proposal and the several other proposals. Those words "gold" and "convertible exchange" are subject to definition, and I don't know if the U.S. delegation is now prepared to give us a definition of gold and convertible exchange as used in this provision.

Chairman: Delegation from India has requested a definition of gold and convertible exchange as used in this provision.

United States: Mr. Chairman, it might be possible to give a definition of gold convertible exchange which would be satisfactory to everyone here, but it would involve a long discussion. On the practical side, there seems to be no difference of opinion, and it is possible for the monetary authorities of other countries to purchase gold freely in the United States for dollars. There are a number of other currencies which can be used to purchase dollars without restriction, and these dollars in turn [can be] used to purchase gold. The definition of gold convertible currency might include such currencies, but the practical importance of holdings of the countries represented here is so small that it has been felt it would be easier for this purpose to regard the United States dollar as what was intended when we speak of gold convertible exchange.

Under the classical gold standard, currencies are defined as a fixed weight of gold. Central banks (or other issuers) are required by "the rules of the game" to maintain sufficient physical gold reserves to ensure redemption of their currency. The classical gold standard essentially acts as a thermostat, sending a clear signal to the monetary authorities as to the amount of currency desired by the market. It acts in a similar way as a thermostat which signals a HVAC system to keep a building's temperature at equilibrium.

This "thermostat" effective permits the monetary authorities to curtail surplus money and undesired liquidity balances -- or avert shortages. Lewis Lehrman, one of the Commissioners of the Reagan Gold Commission of 1981, addresses the mechanics in his recent success d'estime The True Gold Standard.

Under the Bretton Woods gold-exchange standard, unlike the classical gold standard, the dollar was defined as an asset "as good as gold." Banks of issue could choose to hold either gold or dollars as a reserve asset. Problems arose because the dollars, rather than being returned for gold reserves, became what the eminent French economist Jacques Rueff called a "boomerang currency."

This permitted what Rueff called "deficits without tears." Given the de jure equality of dollars and gold, many central banks preferred to hold interest-earning dollar-denominated assets rather than noninterest-earning gold. The political dynamics inherent in this process led to the slow degradation of the dollar's value.

The chickens of Bretton Woods came home to roost on August 15th, 1971. President Nixon announced that America no longer would honor its commitment to deliver gold for dollars held by international central banks. That action ended the Bretton Woods system. During his televised address, Nixon promised "your dollar will be worth just as much tomorrow as it is today."

Notwithstanding Mr. Nixon's assurances, a dollar today has less than 20% of its 1971 purchasing power. The dollar's value consistently erodes. Middle class income stagnated, and income inequality skyrocketed. While Bretton Woods worked splendidly for a while, the inherent, slow-motion instability of this system -- protested by some leading classical liberal economists of the era such as Jacques Rueff and Robet Triffin -- seems, according to these transcripts, not to have directly been addressed at Bretton Woods. Schuler and Roserberg have done both historians and policy makers a signal service with this meticulously-edited edition.

Jon Decker is the Executive Editor at