The International Monetary System

An international monetary system should provide a stable and predictable environment for international trade and investment At the very least, it should not by itself be a source of disturbances in the world economy, and it should be designed so that policy errors or unforeseen shocks are not unduly transmitted between countries.

The disintegration of the European Monetary System that we have witnessed over the last 12 months proves once more that those of us who toil at the international monetary system would do well to adopt Sisyphus as our patron saint. Even the classical gold standard, sometimes described as the most efficient international monetary system that the world has ever seen — seen retrospectively, that is, and through rose-coloured glasses — did not endure for more than about a third of a century. It died with the outbreak of World War I. Something rather different under the same name was put together in 1925: that lasted for all of the next three years before it became a caricature of itself as the “Gold Bloc”. The US, UK and France then pushed the monetary stone a short distance back up the mountain when they entered into the Tripartite Agreement. With its 24-hour exchange rate guarantee, that was at best a ghost of a monetary system. The negotiators at Bretton Woods, operating further away from constraining realities, managed (so to say) to reach the top of Mount Washington in agreeing on the Articles of the International Monetary Fund. The Fund contained all the required ingredients of John Williamson’s (1983) definition of an international monetary system: an exchange rate regime — par values; a reserve regime — understood to be gold and dollars; and at least an implied system of adjustment obligations — consisting of the need to qualify for Fund credit for the deficit countries and the scarce currency provisions for what was expected to be the solitary surplus country in the system.

The subject matter of this conference is ambitious in the sense that it deals with the future of the international monetary system and its institutions. It would be almost equally ambitious if it dealt with its past, about which a great deal more is known than of its future. Yet it is from the past that we can draw lessons and learn about the future. History is condensed into hypotheses, theories and laws that provide us with a roadmap of the future.

This topic at first seemed a straightforward assignment. It was not. First, the Central and East European countries (CEECs) have become progressively more differentiated since they discarded their old economic systems at the end of the 1980s. There were modifications of the standard centrally planned economy (CPE), but the range from Hungary to the old German Democratic Republic was fairly uniform, nowhere more so than in their international monetary affairs. Today these countries are in no respect more diverse than in their monetary and exchange rate regimes and their degree of integration into the international economy.

Macroeconomics of the past two decades is in large part the story of how a few specific shocks (the oil shock, the Reagan shock, the German shock) have been inefficiently propagated among industrialized countries.

When countries in the 19th century joined the gold standard one-by-one, they were seeking to acquire more than just stability in the values of their currencies. They were moving toward closer integration, financially and economically, with the world economy. After World War I, the system fragmented into currency blocs and trading blocs: Sterling bloc, gold bloc, Central Europe bloc, and dollar bloc.¹ The allies who met at Bretton Woodsin 1944 were determined not to repeat after World War II the fragmentation and instability that had characterized the interwar years. The ensuing period of growth in world trade and income indeed seemed to be closely associated with the common world monetary standard, the dollar standard.

The vitality of the International Monetary Fund and World Bank Group and their central roles in the world economy testify to the foresight of the founding fathers who designed them as two of the three bulwarks of the postwar international monetary system. This remains true even though neither institution operates as planned at Bretton Woods in 1944, and even though the third institution, the International Trade Organization, was stillborn — not to reappear until fifty years later, as the impending World Trade Organization.