On taking office in March 1933, Franklin D. Roosevelt took the dollar off the gold standard. At his first press conference he was cagey about his actions, noting that the US still qualified as a gold standard country in some respects, though noting implicitly that it did not in others, and he stated further, “In other words, what you are coming to now really is a managed currency, the adequateness of which will depend on the conditions of the moment. It may expand one week and it may contract another week. That part is all off the record.” Asked if this were temporary or permanent, he replied, “It ought to be part of the permanent system [-] that is off the record – it ought to be part of the permanent system, so we don’t run into this thing again …”

Within a month or so these off-the-record comments became common understanding: the US gold standard was over. Americans had to turn in their gold in exchange for paper dollars. The dollar fell in value on international exchanges from its previously fixed value of $20.67 to an ounce of gold, and eventually, under the Gold Reserve Act of January 1934, settled legally – for the purposes of international exchange only – at $35 to an ounce.

On June 7, 1934, Harry Dexter White, then a professor at Lawrence College in Appleton, Wisconsin, received an invitation from Jacob Viner to work on the US Treasury’s “comprehensive survey of our monetary and banking legislation and institutions.” White accepted and in about three months wrote a report on monetary standards, examining the possibilities of various options and making recommendations.

White said the US faced a choice between a gold standard and a managed currency – i.e., between fixed and flexible exchange rates. A gold standard, he said, would be better for trade – stable exchange rates allowed traders to make contracts across borders with greater confidence. But, he said, any increased trade would be more than offset by the bad effects of a gold standard in an economic crisis, when capital would flee the country, obliging the government to tighten monetary policy so the dollar could remain on gold – thus making the crisis worse. Meanwhile, White said, a managed currency would give the US greater independence in its monetary policy (it wouldn’t be tied to every other country on gold) and would permit a domestic policy aimed at a stable cost of living.

You might think White could rest there having made the cast for a flexible exchange rate. But he went on: “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 is what became the “adjustable peg” – an exchange rate that was set, but could be changed in time of considerable need.

White here called this policy “the ‘international gold standard’ … the word ‘gold’ being included solely in recognition of the traditional goodwill value of the term ‘gold standard’.”

Gold would not circulate and the dollar would remain inconvertible, but it would retain a legal gold value for the purposes of international trade. All the gold that had been tendered to the US Treasury back in 1933 would remain in the US government’s possession and would go into a fund under the supervision of a special monetary board, which would buy and sell foreign exchange. This fund – some $8 billion – would be held in the Bank of International Settlements and in central banks overseas, and with their cooperation could engage in open-market operations internationally.

This huge sum at the disposal of the Board, together with the power of aiding the adjustment of international accounts through operations in the foreign as well as in the domestic market, would make possible the maintenance of pegged exchanges for long periods of time.

Suppose there were an cyclical disruption to the balance of payments – owing, say, “to variation in crop yields due to weather changes, or by changes in fashion” – in that case, the fund could cover the imbalance until it righted itself. But if some longer-term trend – a shift in population distribution, or something like that – made it so “the balance of payments should continue to remain adverse” – then the fund could not cover the imbalance indefinitely. Either the exchange rate would change, or else the domestic money supply would have to contract; this would be a choice for the US to make – but (a) it would be a choice, which it would not under the gold standard and (b) it might be postponed indefinitely owing to the existence of the fund:

with a reserve fund of many billions, and with the power to come to the aid of foreign Central banks, the necessity for choosing either course could be postponed for a longer period than would be possible were the sum of free gold small, or the powers of the monetary authority limited.… The longer the period in which action need not be taken, the greater the possibility that the situation will correct itself …

What this sounds like, then, is a proto-Bretton Woods. A case for the adjustable currency peg, to be maintained by the operations of an international monetary fund run by public officials. It wasn’t quite properly international – it was a US institution – but White was already pushing for “international cooperation” in the fund’s global operations.