Bretton Woods and Its Precursors: Rules Versus Discretion in the History of International Monetary Regimes

Abstract

Are there predictable cycles in exchange-rate regimes?Can these cycles be predicted in terms of the rules-versus-discretion theory of monetary policy?The experience of the last one hundred years provides a fascinating testing ground for this hypothesis.The classical gold standard was disrupted by World War I.After that, the majority of countries in the world returned to gold.The subsequent abandonment of gold occurred at a time of unprecedented economic and financial instability and was followed by beggar-thyneighbor trade policies and further political and economic instability.After World War 11, fixed exchange rates were reestablished.They broke down with the Viet Nam era and the oil shock but are being pursued again by European countries, both within and outside the European Community.These events seem to suggest that floating rates are temporary arrangements that are resorted to whenever large enough shocks hit the world economy but that, in the absence of shocks, countries go back to fixed rates.The rulesversus-discretion theory says that fixed exchange rates provide valuable commitments to national monetary authorities.Governments abandon these

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