Tuesday, December 4, 2012

RL - MU - The Decline and Fall of Bretton Woods

Robert Leeson

Economics Department
Murdoch University
Working Paper No. 178
November 1999
ISSN: 1440-5059
ISBN: 0-86905-722-7


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"...

Source: http://www.murdoch.edu.au/Murdoch-Business-School/_document/Working-Papers/previous/178.html

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