7/24/2019

The Lesson of Bretton Woods

"Consider the broader history of monetary and financial institutions. The gold standard (and sometimes bi-metallic) regime that marked the Western world from 1815-1914 was without precedent. In medieval times, gold, silver, copper and bills of exchange — from multiple issuers — all circulated as means of payment, and often there was no single dominant form of money. As the gold standard evolved, however, claims to gold became a global means of settling claims and easing foreign trade and investment. While the system was based on some central bank intervention, most notably from the Bank of England, it was self-regulating to a remarkable degree, and it formed the backbone of one of the West’s most successful eras of economic growth. It was not obvious that the West would arrive at such a felicitous arrangement.

Now fast forward to the current day. Currencies are fiat, the ties to gold are gone, and most exchange rates for the major currencies are freely floating, with periodic central bank intervention to manipulate exchange rates. For all the criticism it receives, this arrangement has also proved to be a viable global monetary order, and it has been accompanied by an excellent overall record for global growth."