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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.