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Bretton Woods, compared to what?

The Bretton Woods Transcripts, which I edited with Andrew Rosenberg, is now available as a 700-page hardback–at, I might add, an unusually low price for such a book. Also available, for free, is a document called Questions and Answers on the Bank for Reconstruction and Development distributed at the Bretton Woods conference to explain the proposed organization now best known as the World Bank.

A post by Pete Boettke on Henry Hazlitt and Pete's accompanying working paper (which you can go to from the post) reminded me that Hazlitt was a great critic of Bretton Woods and was eventually proved right about the Bretton Woods system of pegged exchange rates. Though I respect Hazlitt, in editing the book and the "Questions and Answers" document I have come to a greater appreciation for the founders of the Bretton Woods system. The late Don Lavoie, one of my professors at George Mason University, always stressed that in economics a key question was "Compared to what?" What is the proper standard for evaluation? He particularly emphasized it in connection with comparisons between economic systems. (This was in the 1980s, before the collapse of the Soviet bloc.) Comparing real capitalism to hypothetical socialism, for instance, was faulty because it compared an imperfect but workable system with a perfect but unworkable, in the sense of never existing, system.

Looking back at the Bretton Woods conference, there are a number of possibilities to compare its consequences to. One is the pre-World War I arrangements of the gold standard, free movement of capital and people, and small government. Another is the currency controls and trade restrictions of the 1930s that arose out of the Great Depression. Still another is the war economies that existed at the time of Bretton Woods, with their extensive price controls, quotas, and other features of centralized economic planning. Compared to the pre-World War I system, Bretton Woods looks less free and less robust. (Remember that it took a world war to end the pre-World War I system, whereas no such great shock was present when the United States brought down the Bretton Woods gold standard in 1971.) Compared to the 1930s, Bretton Woods looks superior as a way of promoting harmony among national economic policies and creating space for freer trade. Compared to wartime centralized economic planning, it looks far superior, though of course it was explicitly designed as a peacetime system, not applicable in wartime.

Hazlitt was comparing Bretton Woods to the pre-World War I status quo. The delegates at Bretton Woods, on the other hand, were comparing it to the terrible experience of the previous 15 years. Hazlitt notwithstanding, a return to the pre-World War I status quo was not politically feasible in 1944, not in the United States and especially not elsewhere. I consider that under the circumstances the relevant comparison was the experience of the previous 15 years. Despite its flaws, Bretton Woods laid foundations for the increasingly liberalized trade that has marked the nearly 70 years since. It is also worth mentioning that for a few months there appeared to be the tantalizing possibility that the Bretton Woods agreements would be fully global, including the Soviet Union, all the countries occupied by Germany and, after a period of postwar rehabilitation, the Axis powers. That was worth sacrificing a little purity; it would have been as close as humanity has ever come to making real Immanuel Kant's dream of suitable arrangements to foster Perpetual Peace. The Soviet Union signed the Bretton Woods agreements but then failed to ratify them, and its satellites never joined or withdrew from the International Monetary Fund and the World Bank. Not until after the collapse of the Soviet Union would most of their successor states join. The IMF and World Bank then became fully global institutions, reflecting that the failure of socialism in the Soviet bloc had created more of an international consensus about economic policy than had existed at any time since before World War I.


  1. Bretton Woods was based upon a deception – the deception that currencies in the system were backed by gold (and it is a game to say that no one formally said that the currencies were backed by gold – that was the impression the people involved gave to the public and speaking with the intention to deceive is lying).

    The public were given to understand that the local currency (say the British Pound) was worth a certain number of American Dollars and that each Dollar (in turn) represented a specific amount of gold (a specific weight – of a specific purity of gold).

    None of these claims were true – the number of Dollars were not backed by gold (which is why an American was not allowed (from 1933 – i.e. even before Bretton Woods) to go to the Federal Reserve and claim gold for his paper Dollars – sufficient gold was not there, so claiming gold "had to be" made illegal – "had to be" made illegal if the fraud (the deception) was to continue.

    Foreign Central Banks could claim gold from the Americans – but there was an understanding that they would not so do (on a large scale), because of a second fraud.

    This was the exchange rate fraud – for example the British Pound was not really worth the number of Dollars the governments claimed it was. The exchange rate was rigged ("fixed") a fraudulent exercise (in morality if not under Legal Positivist doctrine, which holds that anything the government declares "legal" is legal – because "law" is just the whim of the state).

    The frauds did not remain constant.

    For example, the exchange rates (of various currencies) were changed from time to time – as the fraud became too blatant (too extreme) to maintain. Real exchange rates, in the end, are determined by the number of (for example) British Pounds in relation to American Dollars – for example one can not (for ever) declare that the British Pound is worth four Dollars if there are (really) two American Dollars for every British Pound in the end the real (the so called "black market") exchange rate will win out over the rigged ("fixed") exchange rate.

    And the American Central Bank did not just leave the number of Dollars at the level it was – on the contrary the American Central Bank increased the number of Dollars (without increasing the gold it owned) in order to (indirectly) finance government spending (and a phony "prosperity" generally).

    In the late 1960s foreign governments lost faith in the Dollar and started to demand physical gold (which, under Bretton Woods, they were legally entitled to do – this was the one fig leaf of honesty in the entire corrupt system).

    However, the American government (rather than facing up to its wild spending) choose to break the link with gold (the fig leaf of honesty) in 1971.

    1. The principles of the system became quite clear after a few years: pegged exchange rates to the dollar; only the dollar convertible into gold; only convertible into gold for foreign governments, not for domestic holders or the private sector. If people didn't understand those points they were ignorant, not deceived. Numerous textbooks and newspaper articles of the time explained the situation.

  2. Kurt,
    I'm curious to get your opinion on exactly why the classical gold standard wasn't politically feasible. Was it more of a public choice dilemma that governments ran up massive debts in the war and didn't want to forgo seignorage, or was it merely that the tide of ideas among the architects (Keynes, HD White et al) had limited the scope of institutions under debate. Was it politicians or technocrats that ultimately had the reins. What can we learn for future monetary reform?

  3. The classical gold standard wasn't politically feasible because it had so few supporters. Like free banking, it became no longer thinkable because people considered it outmoded and unworthy of serious consideration.

  4. A "pegged" or "fixed" exchange rate is a RIGGED exchange rate – the true market exchange rate is the so called "black market" rate.

    Just as (at a time of domestic price control) true prices are not "official" prices, they are so called "black market" prices.

    For example, how was unemployment reduced in the United States during World War II?

    Officially wages did not go down – not in relation official prices.

    But official prices were not real prices – real prices were "black market" prices, and against real prices wages did go down (hence the dramatic fall in unemployment).

    As for a gold (or other) "standard" – this is a open door to abuse, either the commodity (in this case gold) is the money or it is not, in the name of reason avoid a "standard".

    On "free bankers".

    Bankers (and others) should not make the mistake of confusing money and credit (they are very different things – money is a store-of-value, credit is not).

    However, (sadly) the error of confusing money and credit is a very common one – with bankers perhaps honestly believing that the ink in their ledger books (or the numbers on their computer screens) is money – it is not money.

    1. To say that "either the commodity is the money or it is not" hampers understanding of how many historical monetary systems have worked. You need the concept of the standard and that is why you will find it in all but the most cursory treatments of international monetary economics.

  5. The words that basic logic (in the old sense of "reasoning") "hampers understanding" could only be written by an intellectual (I do not use that word as complement).

    Your "understanding" leads you to fail to understand what a price is (and an exchange rate is a price) – a price is a voluntary agreement between buyer and seller based on honest information about what the good or service actually is (it is not a government edict – as with the BW system), and leads you to confuse money (which must be a store of value) with credit (which is not).

    Intellectuals believe that by rejecting the ordinary reason of the human mind you have moved "beyond" humanity – actually you have fallen below reason (not gone above it).

    I repeat – either the commodity is the money, or it is not.

    Otherwise we are dealing with fraud (not legal fraud [as they tend to make the laws], but logical fraud). Where people give-the-impression that their notes represent gold (or silver – or whatever the commodity is) when, in fact, they do NOT.

  6. "He who breaks a thing, to find out what it is, has left the path of wisdom".

    Those who break the laws of ordinary reason, in the hope of going beyond reason, fall into errors that less intelligent people would not.

    Sometimes cleverness eats itself.

    Either the commodity is the money, or it is not.

    1. Every study I know that compares monetary arrangements across countries or periods uses the concept of the standard, explicitly or implicitly. It is essential for analyzing how different monetary arrangements work and what their consequences are. I don't think that hundreds of monetary theorists and economic historians are necessarily right, but they are far more likely to be right than one commentator who has never published any work on the subject.

  7. You are using an argument-from-authority to try and deny basic logic (in this case that the commodity is either the money or it is not the money).

    You are digging yourself deeper in the hole by adding a new fallacy (the argument-from-authority) to your existing fallacy.

    1. I am using an argument from experience, mine and that of many other economists. It's like when the auto mechanic tells you your car will break down unless you replace the universal joint. You can go ahead and drive the car; you won't get far.

  8. I repeat the logical point – either the commodity is the money or it is not.

    If you do not want commodity money (preferring government fiat money – based upon legal tender laws and tax demands) O.K. – but SAY SO.

    Do not try and con people by pretending your notes represent gold (or some other commodity) when you do not actually have the gold you are giving-the-impression you have.

    1. And either an animal lives on land or it does not.
      Except that there are amphibians.
      With gold there are some amphibians, too, as I will discuss in a future post.

  9. And the "amphibians" in gold are the people who have sold 43 ounces of gold for every ounce of gold they actually have.

    And when they get demands for physical delivery – they get the government (such as the Central Banks) to bail them out.

    How is this "Free Banking"?

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