Bank of England Economists: A Gold-Exchange Standard Works Better

"Overall, the evidence is that today’s system has performed poorly ... at least compared with the Bretton Woods System," state three economists, Oliver Bush, Katie Farrant and Michelle Wright, in a paper finalized December 9th and published by the Bank of England.




In a world where there were no underlying imperfections, or frictions, market forces should lead to an IMFS [international monetary and financial system] where all three objectives are achieved simultaneously. There would be no need for any ‘rules of the game’ — market forces would automatically result in the optimal outcome for the global economy. But in reality, of course, there are frictions in today’s IMFS. And those frictions can result in externalities, which mean that one country’s actions distort the choices open to others. The result is an IMFS that is unable to achieve its three objectives and a global outcome that is sub-optimal.

Over the past century or so, the IMFS has been through a number of incarnations, which have placed different weights on these objectives. That may, in turn, reflect changing views on the relative importance of the underlying imperfections in the IMFS and the externalities that exist. The various IMFS regimes have involved different combinations of international and national frameworks. Members of the Gold Standard, for example, fixed their currencies to gold, allowed capital to flow freely across borders and tended not to use monetary policy actively. So they gave up on the internal balance objective to achieve allocative efficiency and financial stability. The Bretton Woods System (BWS) featured fixed but adjustable nominal exchange rates, constrained monetary policy independence and capital controls — effectively sacrificing the allocative efficiency objective to allow greater control over internal balance and financial stability.

In contrast, in today’s system there are almost no binding international rules; rather there exists a hybrid arrangement in which countries are free to choose whether to fix or float their exchange rate and whether to impose capital controls or not. While today’s IMFS affords countries the freedom to pursue policies to suit their domestic objectives, this flexibility has also created problems. The main externalities in today’s IMFS are most visible in the interaction between the advanced and emerging market economies (EMEs) (King (2011)). Trade has promoted development in China and other EMEs, and has benefited the rest of the world as the costs of a range of traded goods and services have been driven down. But the rise in trade has been accompanied by large changes in the global pattern of spending, which is currently reflected in sizable current account imbalances.


[T]he BWS {Bretton Woods System] performed well against a number of metrics. The period stands out as coinciding with remarkable financial stability and sustained high growth at the global level.  Moreover, the solid growth outcomes were not simply the result of post-war reconstruction efforts — growth in real per capita GDP was slightly stronger in the 1960s than it was in the 1950s.

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