Bretton Woods and its Precursors: Rules versus Discretion in the History of International Monetary Regimes

In recent years the theory of rules and discretion in monetary policy has fascinated academic economists and policy-makers alike. This paper asks whether it can be applied to an understanding of the history of the world monetary system, by focusing on the establishment and the operation of the Bretton Woods regime, and comparing it with its predecessors, in particular the classical gold standard. The paper first discusses the underpinnings, and some of the problems, of a theory of the evolution of the international monetary regime based on alternating rules and discretion. It then assesses the ability of such theories to explain the historical record, first reviewing the rules that characterized the classical gold standard and the motivations to return to gold in the inter-war period. It evaluates the UK and US plan for world monetary reform published in 1943 and the IMF Articles of Agreement. Finally, the paper analyses the data on interest rates and exchange rates during the classical gold standard and the Bretton Woods period to assess the stabilizing properties of the two exchange rate regimes.