Implications of the Great Depression for the Development of the International Monetary System

In this paper we speculate about the evolution of the international monetary system in the last two-thirds of the twentieth century absent the Great Depression, but present the major post-Depression political and economic upheavals: World War II and the Cold War. We argue that without the Depression the gold-exchange standard of the 1920s would have persisted until the outbreak of World War II. It would have been suspended during the war and for a period of post-war reconstruction before being restored in the first-half of the 1950s. The Bretton Woods Conference would not have taken place, nor would a Bretton Woods System of pegged-but-adjustable exchange rates and restrictions on capital account convertibility have been established. Instead, an unreformed gold-exchange standard of pegged exchange rates and unlimited international capital mobility would have been restored after World War II. But this gold-exchange standard would have collapsed even earlier than was actually the case of Bretton Woods. The move towards floating exchange rates that followed would have taken place well before 1971 in our counterfactual. We construct a model of the international monetary system from 1928–71 and simulate its implications for the determination of the world price level and the durability of the hypothetical gold-exchange standard. We then examine, based on regressions for a 61-country panel, the implications for economic growth and resource allocation of allowing 1920s-style international capital mobility after World War II. Based on the implications of our model simulations and the capital controls regressions we contemplate the implications for institution building and international cooperation of the ‘no Great Depression’ scenario.