Bretton Woods: a 'grotesque caricature'

Modern economics is experiencing a powerful resurgence of elegant inquiry into the classical gold standard... and its not so elegant variants. 

This resurgence is increasingly obvious from the academic literature.   And it is by no means of merely academic interest. 

One of the key sources, perhaps the primary source, of resistance among policy makers to resuming classical gold convertibility is the widespread misimpression that the gold standard was responsible for the Great Depression. 


Even though as respected a figure as Ben Bernanke has stated, as quoted here, that, "The proximate cause of the world depression was a structurally flawed and poorly managed international gold standard," the myth that the gold standard is dangerous to economic growth lingers, casting a cloak of mediocrity on the thinking of too many second-rate economists. It therefore is a breakthrough that first-rate thinkers such as Prof. Lawrence H. White, of the economics department of George Mason University, as well as, as recently referenced Prof. Lawrence H. Officer, of the University of Illinois at Chicago, are bringing world class analytical skills to the fore.

As acknowledged by Prof. Bernanke, there are ways to mismanage the international gold standard.  The late, great, French savant Jacques Rueff, intellectual inspiration for, famously referred to the gold-exchange standard as a "grotesque caricature" of the gold standard.  Implied in this was a warning that adopting, at Bretton Woods, the feckless pretense that the world had resumed the gold standard was quite dangerous.

Indeed, it proved to be so.  The inevitable decay and breakdowns of the Bretton Woods caricature would be, and were, falsely attributed to the true, classical, gold standard.  However well meaning the leadership of the Bretton Woods conference, collapsing a crucial distinction caused confusion to ensue in the thinking of later policy elites.

Prof. Lawrence H. White recently said in an important working paper, Bretton Woods and International Monetary Arrangements:

Before the First World War, under an international gold standard and a largely liberal trade regime, global commerce and investment had flourished. The 1920s and ’30s, by contrast, were chaotic. Adherence to the gold standard was spotty. National governments adopted mercantilist restrictions on trade and payments, triggering retaliations.


Of Prof. White’s many astute points perhaps most important is his clarification of the key distinction between the classical gold standard and the thoroughly disordered post-war monetary system whose breakdown was indeed a major contributing factor to the Great Depression.  At pages 376-377 is an especially welcome contribution, one needed to help restore an intelligent and constructive reappraisal of the gold standard as a modern policy option:


As a result the 1920s and ’30s were not decades of a restored classical gold standard, but of international monetary chaos. Leland Yeager has described the prevailing monetary policies this way: The gold standard of the late 1920s was hardly more than a facade. It involved extreme measures to economize on gold. . . . It involved the neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance-of- payments equilibrium were largely destroyed and were not replaced by any alternative. . . . With both the price-and-income and the exchange-rate mechanisms of balance-of-payments adjustment out of operation, disequilibriums were accumulated or merely palliated, not continuously corrected.

Lawrence H. White is a professor of economics at George Mason University. Prior to position at George Mason, he was the F. A. Hayek Professor of Economic History in the Department of Economics, University of Missouri-St. Louis. He has been a visiting professor at the Queen's School of Management and Economics, Queen's University of Belfast, and a visiting scholar at the Federal Reserve Bank of Atlanta.

Professor White is the author of The Theory of Monetary Institutions (Blackwell, 1999), Free Banking in Britain (2nd ed., IEA, 1995), and Competition and Currency (NYU Press, 1989). He is the editor of several works, including The History of Gold and Silver (3 vols., Pickering and Chatto, 2000), The Crisis in American Banking (NYU Press, 1993), African Finance: Research and Reform(ICS Press, 1993), and Free Banking (3 vols., Edward Elgar, 1993). His articles on monetary theory and banking history have appeared in the American Economic Review, the Journal of Economic Literature, the Journal of Money, Credit, and Banking, and other leading professional journals.

Dr. White earned his PhD from the University of California, Los Angeles, and his AB from Harvard University.

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... Given Kwarteng’s current and, likely, future importance to the world monetary discourse it really would be invaluable were he to master the arguments of Jacques Rueff, and of Lewis Lehrman, as well as those of Triffin (who shared the same diagnosis while offering a different prescription).

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