Bretton Woods and the Basis of Modern Monetary Orthodoxy: An Exegesis on the Gold Standard and the Origins of Fiat Money
On August 15, 1971, the convertibility of the US dollar into gold was suspended by presidential decree. This event marked a momentous shift from commodity money to fiat money, and spelled the demise of the Bretton Woods system of fixed exchange rates. The ensuing recalibration of the post-war monetary infrastructure not only introduced an era of unparalleled multiplicity in exchange rate regimes throughout the world, but also severed the longstanding link between legal tender and gold. “Monetary Theory and Bretton Woods” plunges readers directly into the intricate, esoteric world of central banking, in the process demonstrating that advances in monetary doctrine have continually lagged economic events and that monetary systems are not indomitably set in stone and will always remain hostage to forces propelling the global economy’s evolutionary process.

Cesarano’s study, which forms part of the long-running Cambridge series on historical perspectives on modern economics, traces, through a detailed examination of the history of monetary theory, the evolution of the international monetary architecture, from the establishment of the homeostatic gold standard to the emergence of the present floating-rate currency regime. Highlighting the critical weaknesses of the classical gold standard and other commodity-linked monetary standards that followed it, the book also explores how the hegemony of the antebellum gold standard was maintained through a system of international cooperation, and how that hegemony was broken in the face of the centrifugal forces let loose by the outbreak of the Great War. Especially noteworthy is Cesarano’s exploration of the dynamics behind the creation of the Bretton Woods monetary paradigm, and how the interplay between advances in economic theory and geopolitical and economic shocks affected the design of such a system.

Cesarano starts with an overview of the classical monetary adjustment mechanism and the properties of the gold standard, noting that the smooth operation of the gold standard prior to 1914 was due to the stability of the money stock, the credibility afforded by fixed exchange rates, and the determination of the world price level in the gold market. He then covers the international monetary system that emerged after World War 1, a system that was, with regard to the gold standard, in essence a patchwork attempt to restore the status quo ante bellum. Exploring the divergent discourses, pertaining to the implementation of new monetary arrangements, which emerged with the onset of the Great Depression, Cesarano points out the inherent conflict between the maintenance of fixed exchange rates and the independence of economic policy, and maintains that the pursuit of disparate objectives in designing a new financial architecture yielded significant inconsistencies that would prove to have repercussions regarding the sustainability of the post-war monetary system.

Throughout the monograph, Cesarano sought to establish that economic shocks pave the way for the advancement of monetary theory, and that the introduction of pure fiat money after the collapse of the Bretton Woods scheme was truly an event unprecedented in human history. (As Vaclav Smil, a professor at the University of Manitoba, observes in his article “The Next 50 Years: Fatal Discontinuities”, “history advances as much by saltations—sudden discontinuities—as it does by a gradual unfolding of long-lasting trends”.) Cesarano argues that Bretton Woods was but “the final stage in the transition from commodity money to fiat money”. He observes that the paradigm shift in monetary doctrine as signified by Bretton Woods was inherently problematic vis-à-vis the prewar gold standard; amalgamating in one system the pursuit of full-employment policies with the maintenance of a fixed exchange rate regime was fundamentally a flirtation with failure. As central bankers throughout the world interpreted the new monetary regime as a system underpinned by the US dollar’s gold convertibility, prompting them to accumulate gold as the dollar weakened in the face of mounting budget and trade deficits, it became progressively clear that the dollar’s convertibility into gold was untenable. The suspension of dollar convertibility and the ensuing abandonment of the Bretton Woods system in favor of a floating currency regime accentuate the inherent impenetrability of the problem of constructing viable monetary systems from scratch.

This well-researched study provides unexpected depth to our understanding of the fixed-floating exchange rates dichotomy, and draws attention to the idiosyncrasies of the post-war monetary paradigm which ensured that the Bretton Woods system would eventually collapse. The imprint of the post-war monetary architecture on current economic orthodoxy—that exchange rate flexibility is needed to mitigate the impact of economic shocks—is unmistakably visible in the way theory and doctrine have evolved in response to such events, and Cesarano exhorts us to view the evolution of the global monetary system as being “governed by the interaction between advancements in economic theory and major shocks”. ( )