The Bretton Woods Experience and ERM

Historical examination of the Bretton Woods system allows comparisons to be made with the current evolution of the EMS. In the past, three main varieties of monetary arrangements have prevailed. One variety is ‘decentralised unconstrained systems’ in which the sovereignty of each country over its monetary policy is complete (e. g. floating exchange rates arrangements). Another variety is ‘fully centralised systems’ in which monetary policy is transferred to some supranational authority. Finally, a hybrid variety is ‘decentralised but constrained systems’ (e. g. the Bretton Woods system and the EMS) where nations are usually (i) sovereign over their domestic policies, but (ii) constrained by a set of widespread rules (for instance, they need to take into account the policies of different nations). This paper attempts to provide a cost-benefit analysis of these various options. Two chief conclusions emerge. Firstly, the apparent autonomy provided} under the ‘decentralised unconstrained system’ is most likely illusory as the inherent difficulties associated with floating of the various currencies wipe out most of the advantages related to sovereignty. Secondly, ‘decentralised but unconstrained systems’ such as EMS usually induce a deflationary bias which renders these kinds of arrangements both costly as well as unsustainable. This finally indicates that the fundamental dilemma of global arrangements is that there might not be a stable regime without the construction of a supranational monetary policy institution.