The general line on the Bretton Woods system is that it originated as a result of the American desire to protect the massive gold holdings the US accumulated during the 1930s, or that it was supposed to prevent the competitive devaluations of the 1930s, or that it was the product of the war.1
Still, it looks like the basic idea actually emerged from the US going off gold in 1933 and an attempt to figure out what it should do next. In 1934, Harry Dexter White noted you could derive benefits from a fixed exchange rate (easier trade) and from a flexible exchange rate (without having to worry about the exchange rate, you’d be free to use monetary policy to fight off a downturn).
But, White said,
There remains a further possibility in monetary standards. The independence of action with regard to domestic monetary policy may be combined with the maintenance of exchanges that do not fluctuate for long periods of time, perhaps not for several years.
This sounds to me like what became known as the adjustable peg: you derive some of the benefits of fixed exchanges (that’s the peg part) while holding out the possibility of changing the exchange rate in time of need (that’s the adjustable part).
(Having written this post I find James Boughton touched on the same idea on pp. 7-8, here.)
1Of course it is possible there were no competitive devaluations in the 1930s.
The Edge of the American West 
12 comments
March 6, 2012 at 1:22 pm
rea
There is, of course, some fair amount of evidence that Harry Dexter White was a Soviet agent in the ’30s and ’40s, although not everyone accepts that as true.
March 6, 2012 at 1:55 pm
eric
I think the case that he was a spy is pretty well proven; you have to go further to prove that he was an agent. Which is to say, he seems certainly to have passed information – though, the GRU and KGB complained, pretty much what he wanted when he wanted, and not what they wanted. But not that he did things specifically to benefit the USSR.
(You’re right that not everyone accepts it.)
Anyway, though, I think there’s no evidence that his thinking on economic issues was influenced by his Soviet connections.
March 7, 2012 at 10:56 am
JW Mason
The linked piece is good. The myth that protectionism was a factor in the depression is very widespread, but it is a myth and needs to be abandoned.
The beginning of wisdom here is to make the connection, as the linked article does, between leaving the three policies of leaving the gold standard, devaluation, and trade restrictions. The conventional wisdom is that the first was good, the second was bad, and the third was very bad; but on the important dimension they are actually all equivalent. All are mechanisms for relaxing external constraints on domestic demand expansion, or equivalently (and more relevantly in the context of the 1930s), reducing interest rates without facing a capital outflow. The problem in the early 1930s was that any individual country that wished to reflate would immediately face both a worsening trade balance (as higher incomes drew in more imports) and a worsening financial balance (as lower interest rates led to gold outflows.) In this context, trade is not a zero sum game. The goal of both devaluation and trade restrictions was not to increase domestic production by reducing imports, but to increase domestic production without simultaneously increasing imports. It’s funny that many people recognize that exit form the gold standard was key to the recovery, but fail to recognize that restrictions on trade and financial flows were formally equivalent. (Indeed, countries like Germany reflated while remaining officially on gold, by imposing such restrictions.)
As for Bretton Woods, I don’t think the conventional wisdom is that it was intended to protect American gold holdings. At least, I’ve never heard that, and I’ve read quite a bit about this stuff. The idea, rather, was to reconcile the seemingly incompatible goals of (relatively) free trade, and domestic demand management. The consensus view was that (1) floating exchange rates would *not* reliably produce balanced trade flows, and frequent exchange rate changes were disruptive to trade; (2) forcing domestic demand to adjust to keep trade balanced was incompatible with the goal of full employment; and (3) producing private capital flows sufficient to offset trade imbalances would force interest rates to be set at levels incompatible with full employment, where such flows could be managed at all. Therefore, what was needed was a system of stable exchange rates plus reliable offsetting *official* financial flows, supplemented by occasional exchange rate adjustments. private financial flows would be discouraged except for long-term FDI. Skidelsky’s account in the third volume of his Keynes biography is probably the definitive source; Eric Helleiner, Fred Block, and Jane D’Arista are also very good. Do you have any substantive differences with them?
Harry White and Keynes were very smart guys!
March 7, 2012 at 11:14 am
eric
@JW Mason As for Bretton Woods, I don’t think the conventional wisdom is that it was intended to protect American gold holdings. At least, I’ve never heard that, and I’ve read quite a bit about this stuff.
Randall B. Woods’s essay in FDR’s World: “The Treasury, determined to protect the country from another depression and headed by aggressive bureaucratic imperialists, was determined to preserve America’s monopoly on the world’s supply of gold and dollars made possible by the war and to take advantage of the nation’s superiority in money and material to establish an international financial system dominated by the United States.”
March 7, 2012 at 11:24 am
JW Mason
OK. But I’m not sure what the counterfactual is, where the US would lose its monopoly. That would imply persistent US balance of payments deficits, which — while of course they did eventually come about — were the last thing anyone was worried about in 1946. I would say the concern was rather over that second piece — whether there would be a unified “international financial system dominated by the US,” or whether the need to maintain full employment would force other countries to delink from the international system.
March 7, 2012 at 11:32 am
eric
I hold no brief for the quoted position; I think it’s incorrect. I simply stated in the post that it is a held position. The point of the post was to say that White had the idea for the adjustable peg, including an institutional structure to make it work, as early as 1934 and in response to the question of how the US should reestablish its monetary standard.
March 7, 2012 at 12:21 pm
JW Mason
OK, fair enough. But I would still say that the offsetting official flows (via the IMF and IBRD, later World Bank) were the key innovation of BW. In practice, of course, the official flows that mattered in the immediate postwar were Marshal Aid and then military spending, but the point is that what made the postwar system work was not the adjustable pegs, at least in themselves, but the ability to finance trade imbalances without relying on private capital flows. I don’t think White was thinking of that in the mid 1930s, was he?
March 7, 2012 at 12:31 pm
eric
White’s 1934 paper, as I read it, envisioned an $8b fund to settle international transactions. Does that go to your point?
March 7, 2012 at 12:52 pm
JW Mason
I’m not sure. Where’s the paper?
March 7, 2012 at 1:33 pm
eric
In the HD White papers at Princeton. It was a document prepared for the Treasury Department.
March 7, 2012 at 2:54 pm
JW Mason
Oh, it’s not online? I forgot that you historians actually read stuff on paper…
March 7, 2012 at 3:04 pm
eric
… and unpublished stuff too. I’ll try to post something at more length on it in the next week or so.