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Keywords Keynesian economics, Agreements, Monetary policy
Abstract The Bretton Woods agreements set up the post-war monetary order on the basis of fixed exchange rates and autonomous national economic policy. Changes in parity were allowed in the case of fundamental disequilibrium, but this concept was not defined, promoting a lengthy but sterile debate. This paper, after reviewing the main features of the discussion, analyzes Keynes's overlooked contribution, which helps to clarify the issue at stake.
The Bretton Woods agreements laid the foundations of the international monetary system after the failures and disorders of the inter-war period. In the mid-1920s, Britain's ephemeral return to gold was accompanied by deflation and unemployment. The pound was eventually forced off the gold standard in September 1931, triggering off an irreversible crisis of the world's centuries old commodity-based monetary arrangements. As the Second World War unfolded, then, the reconstruction of the international monetary system posed an intellectual challenge. For the first time in history, a monetary order was arrived at neither through the imposition of an imperialistic power, as in the Roman-Byzantine era, nor through a historical process like the gold standard, but was designed by experts[1].
The task was not an easy one. Keen to avoid the problems of the 1930s, such as exchange controls and beggar-thy-neighbor devaluations, the architects of Bretton Woods sought to provide for both exchange rate stability and an autonomous economic policy centered on full employment. These features were reflected in the modus operandi of the system (Bordo, 1993, p. 37; Williamson, 1985, section D). In the short run, countries would use their own reserves and Fund financial facilities to cope with temporary payments imbalances. In the medium term, a correction of economic policies was required in the case of conflict between external and internal balance, while capital controls would prevent speculative attacks and create leeway for domestic policy action. Finally, a change in parity would be allowed in the case of a "fundamental disequilibrium". However, the IMIF Articles of Agreement left this notion undefined, leading to a heated debate over its precise meaning. As Mikesell (1994, p. 18) recalls in his memoir on the Bretton Woods negotiations: "Indeed, fundamental disequilibrium has never been defined in fewer than ten pages."
Much of this squabble...