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Retrospective on the Breton Woods System.

On October 3-6, the NBER commemorated the 20th anniversary of the end of the postwar fixed exchange rate system with "A Retrospective on the Bretton Woods System," held in New Hampshire at the site of the original conference. Some of the original attendees participated in this event. Research Associates Michael D. Bordo, Rutgers University, and Barry J. Eichengreen, University of California, Berkeley, organized the program:

Michael D. Bordo, "The Bretton Woods International

Monetary System: An Historical Overview"

Discussants: Rudiger Dornbusch, NBER and MIT,

and Richard Cooper, Harvard University

Alberto Giovannini, NBER and Columbia University,

"Bretton Woods and Its Precursors: Rules versus

Discretion in the History of International Monetary


Discussants: Anna J. Schwartz, NBER, and Charles

Wyplosz, European Institute of Business


G. John Ikenberry, Princeton University, "The

Political Origins of Bretton Woods"

Discussants: John Odell, University of Southern

California, and Leslie S. Pressnell, London School

of Economics

Maurice Obstfeld, NBER and University of California,

Berkeley, "The Adjustment Process"

Discussants: Robert Z. Aliber, University of Chicago,

and Vittorio U. Grilli, NBER and Yale University

Sebastian Edwards, NBER and University of

California, Los Angeles, and Julio A. Santaella, University

of California, Los Angeles, "The Bretton Woods

System, the IMF, and Some Devaluation

Controversies in the Developing Countries"

Discussants: Stanley Fischer, NBER and MIT, and

Albert Fishlow, University of California, Berkeley

Panel Session I: "Perspectives of the Policymakers"

Chair: Michael L. Mussa, IMF and NBER

Panelists: Edward Bernstein, Brookings Institution;

W. Max Corden, Johns Hopkins University; Robert

Solomon, Brookings Institution; and Robert Triffin,

Universite Catholique de Louvain

Hans Genberg and Alexander Swoboda, Graduate

Institute of International Studies, Geneva, "The

Provision of Liquidity in the Bretton Woods System"

Discussants: Stanley Black, University of North

Carolina, and John Williamson, Institute for

International Economics

Kathryn M. Dominguez, NBER and Harvard

University, "The Role of International Organizations in

the Bretton Woods System"

Discussants: Alberto Alesina, NBER and Harvard

University, and William H. Branson, NBER and

Princeton University

Alan C. Stockman, NBER and University of Rochester,

"Some Issues in International Transmission under

Bretton Woods"

Discussants: Toru Iwami, University of Tokyo, and

Bennett T. McCallum, NBER and Carnegie-Mellon


Peter M. Garber, NBER and Brown University, "The

Collapse of the Bretton Woods Fixed Exchange

Rate System"

Discussants: Willem H. Buiter, NBER and Yale

University, and Dale W. Henderson, Georgetown


Richard C. Marston, NBER and University of

Pennsylvania, "Interest Differentials under Fixed and

Flexible Exchange Rates: The Effects of Capital

Controls and Exchange Risk"

Discussants: Paul R. Krugman, NBER and MIT, and

Allan Meltzer, Carnegie-Mellon University

Susan M. Collins, NBER and Harvard University, and

Francesco Giavazzi, NBER and Universita Bocconi,

"Attitudes Towards Inflation and the Viability of

Fixed Exchange Rates: Evidence from the EMS"

Discussants: Michele Fratianni, Indiana University,

and Niels Thygesen, University of Copenhagen

Panel Session II: "Implications for International

Monetary Reform"

Chair: Barry J. Eichengreen

Panelists: C. Fred Bergsten, Institute for

International Economics; Stanley Fischer; Ronald I.

McKinnon, Stanford University; and Robert Mundell,

Columbia University

Bordo presents an overview of the Bretton Woods experience, analyzing its performance relative to other international monetary regimes, its origins, its operation, its problems, and its demise. Comparing the macroeconomic performance of Bretton Woods with preceding and subsequent monetary regimes reveals that, in its full convertibility phase from 1959-71, the Bretton Woods system was the most stable regime in the past century. Its stability reflected the stable financial policies of the United States as the center of the system, at least until the mid-1960s. The system, however, was short-lived because of fatal flaws in its design and the failure of the United States to maintain price stability after 1965.

Giovannini questions whether there are predictable cycles in exchange rate regimes. He evaluates a theory of the evolution of international monetary regimes, and finds that some awareness of the importance of credible rules appears to have influenced policymakers during the classical gold standard and the return to gold in the interwar years. By contrast, the IMF Articles of Agreement seem to avoid any explicit reference to rules that might prevent individual countries' inflationary policies.

Although British and U.S. officials held markedly different views during the initial negotiations for a postwar economic order, they were able to reach watershed trade and monetary agreements that set the terms for the reestablishment of an open world economy. Ikenberry attempts to explain how this settlement was reached at Bretton Woods in 1944. He argues that agreement was fostered by a community of British and American economists and policy specialists who embraced a set of policy ideas inspired by Keynesianism, and who played a critical role in defining government conceptions of postwar interests, shaping the negotiating agenda (for example, shifting the focus of negotiations from trade issues, which were highly contentious, to monetary issues, about which there was an emerging "middle ground" created by Keynesian ideas), and building coalitions in support of the postwar settlement.

According to Obstfeld, two key economic frictions impeded balance-of-payments adjustment by deficit countries during the Bretton Woods system: limited wage-price flexibility and, for much of the period, limited recourse to international credit both by individuals and by most governments. Countries with surpluses, naturally under less pressure to adjust, were able to slow the upward adjustment of their own price levels by sterilizing reserve inflows over long periods. International credit markets evolved over time. Given other rigidities, however, imperfect government credibility with respect to exchange rates and payments barriers ensured that this evolution would undermine rather than support government attempts to adjust while maintaining fixed exchange rates. As national asset markets became more integrated after the return to convertibility in December 1958, government ministers were forced to forswear realignment ever more vigorously. These promises often were not believed, and because they were not believed, often could not be kept.

Devaluations traditionally have been traumatic episodes for developing countries. In fact, throughout the Bretton Woods system, the less developed countries vehemently opposed devaluation. Edwards and Santaella analyze the economic and political circumstances surrounding 37 major devaluations in the developing countries between 1954 and 1971, distinguishing between those that were undertaken in conjunction with IMF programs and those implemented independently. They find that these devaluations generally were the result of "fundamental disequilibria," and that countries that approached the IMF were facing deeper crises than those that did not. Additionally, countries with more unstable political systems had a higher probability of approaching the IMF. With few exceptions, the results show that these devaluation programs were successful, with the degree of success depending heavily on accompanying macroeconomic policies.

In the first panel session, Bernstein, the first research director of the IMF and an active participant in the American delegation to the July 1944 Bretton Woods Conference, reflected on the problems the IMF faced in getting started. Corden, a student of the international monetary system and advisor to the IMF, discussed the postwar concern with full employment and its effects on the design and operation of the Bretton Woods system. Solomon, a senior official in the Federal Reserve System during the heyday of Bretton Woods, reflected on the pressures in the system that led to its demise. Triffin, who in 1959 accurately diagnosed fatal flaws in the operation of Bretton Woods, presented a new insight on how the seigniorage collected by the United States under the dollar standard was used to finance its fiscal deficits.

Genberg and Swoboda concentrate on the provision of international liquidity in its most frequent definition: international reserves plus the value of unconditional borrowing rights. The major source of growth of international reserves in the height of the Bretton Woods regime (1959-71) is endogenously generated foreign exchange holdings, not exogenous sources such as gold or special drawing rights. The breakdown of Bretton Woods is attributed to unwillingness to live up to the consequences and logic of the gold reserve system as it actually functioned. Inadequacy in the supply or composition of international reserves and disequilibrium dollar exchange rates are more symptoms than causes of the breakdown.

The participants at the Bretton Woods Conference created three international organizations that were intended to facilitate economic cooperation among member countries. The Bretton Woods organizations provided member countries with three types of commitment mechanisms: rules of cooperation, financial resources to enable countries to adhere to the rules, and centralized information on each others' commitment to the rules. Dominguez believes that the historical record suggests that only the latter information mechanism was used effectively by the organizations.

Policy independence attenuated the international transmission of inflation under Bretton Woods. According to Stockman, the evidence suggests that central banks had and used the ability to conduct independent monetary policies, even as they pegged exchange rates. Changes in international inflation differentials were roughly one-quarter to one-half the size of changes in money-growth differentials a few quarters earlier.

The collapse of Bretton Woods encompasses the events involved in the sequential withdrawal of convertibility of currencies into gold and the end of the unified fixed exchange rate regime from 1968 through 1973. Garber reviews the principal events and institutional changes that preceded the collapse, and then uses the theory of speculative attacks on fixed exchange rates to explain the various points of view among policymakers in the debates of the 1960s. The collapse of the gold leg of Bretton Woods was an inevitable result of the generally inflationist proclivity of the postwar system, he finds. The collapse of the fixed exchange rate leg of the system resulted from the United States's launching of an inflationary regime unacceptable to other countries in the system.

Marston considers evidence on interest differentials under the Bretton Woods system of fixed exchange rates and under the flexible rate system that succeeded it. In Britain, Germany, and the United States, capital controls resulted in large differentials between national interest rates covered for exchange risk. The capital controls and resulting differentials distorted many cross-border investment and borrowing decisions. Marston compares these covered interest differentials with uncovered interest differentials in the Eurocurrency markets, which are free of capital controls. In both fixed and flexible periods, average uncovered differentials between Eurodollar interest rates and four other Eurocurrency rates in most cases are close to zero. Therefore, these average uncovered interest differentials, which can be attributed to exchange risk premiums and forecast errors, are much smaller than average covered interest differentials between national markets caused by capital controls.

Collins and Giavazzi provide new evidence that the recent popularity of fixed exchange rates in Europe results from a convergence in attitudes toward inflation. They use household survey data to look for shifts in attitudes toward inflation and unemployment in eight European countries during 1974-90. They find, first, that concern about inflation relative to unemployment appears to have increased significantly in both Italy and France during the sample period. Second, the United Kingdom experienced an increase in concern about inflation in the late 1980s. Perhaps this shift in attitudes was a factor in Britain's recent decision to join the exchange rate mechanism. Finally, there is a shift in the opposite direction for households in Germany: during the mid-1980s, they appear to have become less concerned about inflation. Interestingly, some of the small countries that stayed with Germany in the Snake--that is, Belgium, the Netherlands, and Denmark--show a similar shift. This provides a possible explanation of why Germany might be willing to stay in an exchange regime that requires it to accept a higher inflation rate.

In the second panel session, several speakers reflected on the lessons that could be learned from the Bretton Woods experience for the future design of the international monetary system. Bergsten made the case for a system of target exchange rate zones between the United States, Japan, and the European Monetary System. Fischer argued for a more active role by the IMF in restoring the economic health of Eastern Europe, in contrast to its performance in Western Europe in the immediate postwar period. McKinnon extolled the virtues of the fixed exchange rate dollar standard under Bretton Woods and argued for a return to such a system with the major countries pledging to stabilize a common international price index. Mundell reflected on the problems of the gold dollar system under Bretton Woods and alternative proposals for reform. He made a plea for a world currency and a world central bank.

Also attending the conference were: John M. Berry, Washington Post; Pamela Bradley, International Monetary Fund; Geoffrey Carliner, NBER; Martin Feldstein, NBER and Harvard University; June Flanders, Tel Aviv University; Jeffrey A. Frankel, NBER and University of California, Berkeley; Ikuo Hirata, Japan Economic Journal; Seamus O'Cleireacain, Ford Foundation; and Michael Prowse, Financial Times.

An NBER volume containing these proceedings may be published by the University of Chicago Press. Its availability would be announced in a future issue of the NBER Reporter.

PHOTO : Left to right: Robert Triffin, Robert Solomon, Michael L. Mussa, Edward Bernstein, and W. Max Corden.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Dec 22, 1991
Previous Article:International aspects of taxation.
Next Article:Unemployment and wage determination.

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