Working Paper No. 178
In 1975, the US Treasury Secretary informed the IMF annual
meeting that "We strongly believe that countries must be free to choose
their own exchange rate system". As flexible exchange rates were
legitimised, several leading countries began to experiment with monetary
targeting. These two revolutionary policy changes were inter-related: a
flexible exchange rate is a precondition for independent national
monetary policy. Having lost one "sacred" symbol or anchor (fixed
exchange rates), central bankers began to experiment with another. Both
these developments were the successful culmination of 'campaigns' led by
Milton Friedman during the previous quarter of a century. This essay
examines the process by which Friedman's case for flexible exchange
rates was transformed from heresy to majority academic recommendation
and from there (via two Treasury Secretaries) to become the corner stone
of the post-1973 international monetary order (or "non system"). The
primary focus of this study of political economy is on the organisation
and the dissemination of the intellectual and political forces which
undermined the Bretton Woods system.
Journal of Economic Literature Classifications: B 20; F 31.
"...Yet as the system collapsed it commanded an almost mystical confidence.
Kennedy's 1963 Message to Congress had referred to the fixed price of
gold as the "foundation stone of the free world's trade and payments
system" (Mayer 1981, 75). After the 1964 annual IMF meeting in Tokyo, a
group of officials visited an ornamental Zen Bhuddist garden in which
fifteen stones were arranged so that the viewer could never see more
than fourteen stones at any one time. Roosa (1967a, 187-8) reflected
that "It went without saying at Tokyo that the price of gold, having
been fixed at $35 per ounce, is now taken as the cornerstone of the
international monetary system ... as certain and secure as the fifteenth
stone". Friedman (1968a, 244) believed that such phrases were "ritual incantations to conceal the emptiness of thought"...