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You will recall that we distinguish regimes from one another on the basis of their formal or de facto rules and norms governing the behavior of major actors. When shifts in rules and norms are very sharp, regime periods can be distinguished without difficulty; but sometimes changes are gradual or sequential, and then the choice of periods inevitably becomes somewhat arbitrary. This is particularly the case when, as in the 1920s, a series of countries joins a par value system sequentially, rather than as a result of general agreement, or when, as in the early 1930s, countries sequentially leave such a system. In such cases we have defined the regime periods in terms of the behavior of the key currency countries—Great Britain until 1931 and the United States thereafter. Following this convention, we have divided the fifty-six years from 1920 to 1976 into seven periods, as shown in Table 4.2. For each period we have indicated whether an international regime existed, and the action at the period’s beginning that is considered to have brought the new regime into being or destroyed the old one.

The following pages briefly describe the rules and norms characterizing each period; the degree to which they were adhered to; and the reasons for our choices of beginning and end-points for these regimes. The dates we selected are

not necessarily self-evident, and any such periodization does some violence to the flow of history. This review, although not a comprehensive description of political or economic processes in this issue area over these fifty-five years, much less an explanation of regime change, will give readers unfamiliar with the history of international monetary affairs a general description of developments, and therefore facilitate the analysis of political processes and regime change that follows.

TABLE 4.2 International Regimes in the Monetary Policy Issue Area, 1920–75 Period Years Regime situation Action at beginning of period I 1920–25 Nonregime: floating rates,

currency depreciation.

III 1931–45 Nonregime: floating rates, currency depreciation, system, but with ad hoc modifications allowed;

VI 1971–75 Nonregime: no stable set of rules, despite

VII 1976– International regime: based on flexible exchange rates and

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During World War I gold exports from Great Britain virtually ceased.

Although the international gold standard was never formally renounced during this period, it lapsed in effect. The pound and dollar were pegged together at

$4.77, about 2 percent below par.¹⁸British citizens were encouraged to sell their foreign securities to provide foreign exchange for the war effort. By 1919, it was clear that Britain had been seriously weakened economically by the war, and that at least for the time being, no return to the 1914 parity of $4.86, with free movements of international capital, was possible. Thus, in March 1919, the gold-dollar peg lapsed, and from early 1920 through 1924, “the rate fluctuated almost completely free from official intervention.”¹⁹The pound reached a low in early 1920 of $3.18, and remained below $4.00 until about the end of 1921, rising to approximately the prewar parity by the end of 1924, in expectation of return to a par value system.

Rates for continental currencies, which were also floating, showed greater volatility and less strength than the pound. After rising from 6.25 to 9.23 American cents from April 1920 to April 1922, the French franc declined rather steadily, reaching a low point of 2.05 cents in July 1926, before being stabilized de facto at the end of that year at 3.92 cents—about one-fifth of prewar parity.²⁰ Under the impact of German inflation, the mark fell from about two cents in 1920 to virtually nothing by 1923.²¹Many observers took these results as evidence of the dangers inherent in floating exchange rates. The League of Nations study con-ducted by Ragnar Nurkse and published in 1944 argued that although short-term capital movements were at first equilibrating in this period, in expectation of returns to prewar parities, as Continental exchange rates continued to fall, dise-quilibrating speculations set in: increases in interest rates, or exchange deprecia-tion, rather than attracting funds, increased speculation against the currency, as each depreciation provided evidence for the imminence or at least eventuality of another.²²Thus speculators’ psychology, in this view, became a factor in govern-mental decisions.²³

The situation from 1920 to 1925 was not considered desirable by any major government involved. The Cunliffe Committee’s description of the prewar gold standard was regarded, at the Genoa Conference of 1922, not only as an accurate description of previous reality but as a desirable state of affairs to which the world should return as quickly as feasible, although with some modifications to reduce the deflationary effect of such a change. The major powers at Genoa agreed to establish a gold exchange standard, in which currencies would be exchanged at fixed parities, but in which most countries would be encouraged to hold part of their reserves in liquid claims on the international gold centers.²⁴The gold exchange standard was designed to economize on gold; although it was seen as a major innovation, it in fact merely legitimized and extended a practice that was becoming increasingly widespread before 1914.²⁵ Central banks, which should be “free from political pressure,” were to cooperate closely, in order to maintain currencies at par as well as to prevent “undue fluctuations in the purchasing power of gold.”²⁶

Unlike the Bretton Woods Conference of 1944, however, the Genoa Conference of 1922 does not signal a change in the international regime for

monetary affairs. It became clear, particularly to Benjamin Strong of the Federal Reserve Bank of New York, that stabilization of the mark would have to precede reconstruction of the monetary order. Yet in late 1922, Germany defaulted on its reparations obligations; in early 1923 French and Belgian troops occupied the Ruhr; and the mark subsequently collapsed. Only after German stabiliza-tion in late 1923, supported by the Dawes loan a year later, could monetary stability return.²⁷

The significance of the Genoa Conference is that its proposals foreshadowed the system that central bankers attempted to put into effect after Britain’s return to gold in April 1925, at the prewar parity of $4.86 per pound. Authorities agree that the return to gold was a decisive event that changed the nature of the international monetary regime, ²⁸although most also agree that it was a disastrous mistake. As the historian of this decision puts it, the decision to return to gold was

“unfortunate and, despite all the emphasis on the long run, represented a triumph of short-term interests and conventional assumptions over long-term consi-derations and hard analysis.”²⁹A return to the gold standard at other than prewar parity was not seriously considered, although in retrospect it is clear that sterling was overvalued by about 10 percent at that rate. Yet “gold at any rate other than

$4.86 was unthinkable.”³⁰

Chancellor of the Exchequer Winston Churchill was uneasy about the decision, and asked some searching questions in a predecision memorandum, but

he was in a difficult situation, for intellectually he could see no alternative to a policy of drift, and politically he had to rely on support in official circles, the City, business and the country which was almost unanimous in its desire for the policy actually chosen. . . . Thus Churchill really had little alternative but to accept the advice generally offered, shortsighted though it was, and to adopt the gold standard at $4.86.³¹

The British return to gold in 1925 was influenced by international as well as domestic pressures. Britain was seen as the keystone of the system, and a British decision to return gold as a critical step in restoring international monetary stability.

Small countries such as Sweden strongly urged return; more important, the United States pressed for speedy and decisive action. As the major international creditor, and the only major country to remain on the gold standard throughout this postwar period, the United States was quite influential, despite its reluctance to make official commitments.³²

The British decisions, added to the previous German stabilization and the French actions of the following year, marked the beginning of an international regime that lasted until 1931. The regime was established by a series of unilateral actions, rather than by international conference or by systematic alignment of exchange rates on technical grounds. It was a genuine international regime, with known rules, much communication among central bankers, and a good deal of cooperation, especially between the United States and British central banks. But it was weak politically as well as economically, reflecting Britain’s diminished postwar position.

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From 1931, when Britain left the international gold standard, until the Bretton Woods Agreement of 1944 became effective at the beginning of 1946, there was no comprehensive and agreed-on set of rules or norms governing international monetary arrangements. The United States, which would have had to assume international leadership, did not do so for the first five years of the period. American officials insisted that there was no connection between war debts to the United States and reparations payments due to its former allies; “the effort to develop a cooperative approach to world economic recovery was thus soured by the continued war-debt conflict.”³³ The United States went off the gold standard effectively in April 1933, without consulting even the British and while Prime Minister Ramsey MacDonald was at sea on his way to visit President Roosevelt.³⁴ During the summer of 1933, Roosevelt virtually forced the adjournment, without significant agreements, of the London Economic Conference. To the consternation of his representatives there he opposed, in a public message, the plan of conferees to ensure exchange rate stability as “a purely artificial and temporary expedient affecting the monetary exchange of a few nations only.... The old fetishes of so-called international bankers are being replaced by efforts to plan national curren-cies with the objective of giving those currencurren-cies a continuing purchasing power.”³⁵ Although France, Belgium, Holland, and Switzerland attempted to cling to old parties in a so-called gold bloc, the domestic economic and political results were sharply adverse. Belgium devalued in 1935, followed by Holland and Switzerland;

France finally followed suit in 1936 and in 1937 let the franc float for almost a year.³⁶Fluctuations in currency values were severe. The situation at least until 1936 was one of a pure nonregime, with virtually no international cooperation.

The central bankers who had previously worked closely with one another, if not always in perfect harmony or with much success, had been greatly discredited by the depression, particularly in the United States. Politicians, disenchanted with orthodox opinion, were searching, almost in the dark, for panaceas or at least for stop-gap national solutions.

As a judgment on the entire period, this description must be qualified, since the Tripartite Monetary Agreement of 1936 (between France, Britain, and the United States) was at least a symbolic step in the direction of new rules, although it provided few concrete measures for cooperation. The treasuries of the three countries—not the central banks, as would have been the case in the 1920s—

agreed to hold the exchange for twenty-four hours. In addition, “the French gained assurance that the United States and Britain would not indulge in competitive exchange depreciation,”³⁷although there was no agreement to stabilize currency values in terms of one another.

Nevertheless, the Tripartite Agreement was not much more than a faint precursor of the international cooperation evidenced at Bretton Woods, in 1944 and thereafter. Hot-money movements played havoc with exchange rates even after the agreement, particularly in 1938, the first half of which saw a speculative outflow of funds from the United States, and the second half, the reverse. Throughout the period, monetary cooperation was hindered by economic nationalism as reflected by trade barriers, German exchange controls, and a variety of bilateral clearing and

payments agreements. Governments tried to manipulate exchange rates to their advantage; indeed, freely fluctuating exchange rates were rather rare. In a period of worldwide economic collapse and political disintegration, it would have been surprising had international monetary relations been anything but chaotic.³⁸

The onset of World War II did bring changes in arrangements governing monetary affairs; in particular it brought “stricter rate pegging, tightened controls, and further displacement of ordinary commercial practices by intergovernmental arrangements.”³⁹These arrangements did not constitute an international regime with agreed-on rules and procedures. Formal agreement was reached at the Bretton Woods Conference in 1944, but was not fully implemented until more than a decade later. The post-war economic plight of Europe meant, particularly after the failure of attempted sterling convertibility in 1947, that the European Recovery Program became the center of attention. The IMF “sat patiently on the sidelines, guarding its resources,” as the Marshall Plan was used to rehabilitate Europe.⁴⁰Only in late 1958, when currency convertibility was achieved in Europe, did the recovery regime give way to full implementation of the regime agreed to at Bretton Woods in 1944.

Long and sometimes difficult negotiations begun in 1941 led to the Anglo-American Joint Statement in April 1944, which became the basis for the negotiations at Bretton Woods and the Articles of Agreement of the International Monetary Fund.

Other allied countries had been consulted during 1943 and 1944. France and Canada produced draft plans, and at Bretton Woods the United States and Britain had to con-tend with the Soviet Union (which eventually did not join either the IMF or the World Bank) as well as with several small countries. Nevertheless, although forty-four countries attended the Bretton Woods Conference (as compared to thirty-three at Genoa in 1922 and sixty-six in London in 1933), the Bretton Woods Agreement was essentially an American-British creation.⁴¹

In contrast to the practices of the 1920s, at Bretton Woods the international monetary issue area was not left primarily to central banks and private bankers;

indeed, United States Treasury Secretary Henry Morgenthau’s objective was to create international financial institutions that would be instruments of governments rather than of private financial interests. To the annoyance of the American banking community, Morgenthau saw the issue as “a question of whether the Government should control these things or a special country club of business and the Federal Reserve.”⁴² Within the United States government, the Treasury Department took the lead, although conflict with the State Department erupted from time to time between the beginning of discussions, in 1942, and the abandon-ment of plans for immediate convertibility of sterling in 1947.⁴³

The core of the regime designed at Bretton Woods was the provision that coun-tries belonging to the International Monetary Fund would set and maintain official par values for their currencies, which were to be changed only to correct a “funda-mental disequilibrium” in a country’s balance of payments, and only in consultation with the fund. Thus currency convertibility was to be ensured. Great Britain had sought greater freedom of action for individual countries, but the United States had resisted this suggestion. The IMF was to help countries maintain par values by arranging to lend them needed currencies, up to amounts determined in a complex

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scheme based on countries’ subscription quotas to the IMF. But on the insistence of the United States, members were not to have automatic access to the resources of the IMF, beyond their own subscriptions. The IMF retained discretion in judging the validity of members’ requests, and certain other limitations were imposed.

The IMF was given considerable nominal powers; but it was itself to be controlled by member countries with the largest quotas, since votes in the IMF were stipulated to be roughly proportional to quotas. The United States therefore had over 33 percent of the voting power in the IMF in 1946; Britain held almost 16 percent. These proportions fell over the years, but throughout the life of the IMF, the United States has been assured of a veto over most important IMF decisions.⁴⁴

When these arrangements were concluded, allowance was made for a transi-tional period, during which the full obligations of the regime would not apply.

Members could retain restrictions on financial transactions until three years after the IMF began to operate; then the IMF would report annually on them. After five years the members were to consult with the fund on the retention of restrictions.⁴⁵ Although the transitional period was left undefined, it was generally expected not to last long: “Until early 1947, when the Truman administration shifted course, plan-ners thought other countries would make a relatively smooth and swift transition, lasting no longer than five years, from bilateralism to convertibility.”⁴⁶

The transition actually lasted over thirteen years from the end of the war and twelve from the beginning of fund operations. In 1947 Great Britain’s efforts to resume convertibility of sterling lasted barely more than a month, at a cost of about $1 billion worth of gold and dollars. Exchange controls were then reinstated, the Marshall Plan went into effect, European currencies were devalued, and the United States accepted measures that discriminated against the dollar. The International Monetary Fund played a small role in this period.

The recovery regime that came into being during 1947 bore little resemblance to the arrangements that had been designed at Bretton Woods. Worried about what they perceived as a critical Soviet threat to Western Europe, United States leaders—

prompted by the State Department and followed somewhat more reluctantly by the Treasury—gave increasing aid and sympathy for Europe’s financial troubles.⁴⁷This support was accompanied by an impressive array of institutional innovations: bilat-eral clearing arrangements were followed by the development of the European Payments Union (EPU) and the Organization for European Economic Cooperation (OEEC). A common sense of military threat, which manifested itself most obviously in the development of the North Atlantic Treaty Organization (NATO), gave the United States an incentive to behave generously toward Europe, and the Europeans the willingness to follow the American lead. Within the framework of a political con-sensus, governments could allow the volume of transnational economic relations to expand while retaining control over them.

The success of this recovery regime was shown by movements toward currency convertibility during the 1950s, culminating in the formal adoption of convertibility by major European countries in December 1958.⁴⁸The beginning of 1959 therefore marks the start of a new international regime, the full-fledged Bretton Woods regime, which lasted until the United States suspended the convertibility of the dollar into

gold on August 15, 1971. Economically, the transition was made possible by the economic recovery of Europe and by American financial policies that had produced large payments deficits, furnishing dollars to a formerly dollar-short world. In the late 1950s and into the 1960s, world exports grew at the spectacular rate of 7 percent per year; and United States direct investment in manufacturing abroad increased dramat-ically. Politically, the transition was marked not only by the hegemony of the United

gold on August 15, 1971. Economically, the transition was made possible by the economic recovery of Europe and by American financial policies that had produced large payments deficits, furnishing dollars to a formerly dollar-short world. In the late 1950s and into the 1960s, world exports grew at the spectacular rate of 7 percent per year; and United States direct investment in manufacturing abroad increased dramat-ically. Politically, the transition was marked not only by the hegemony of the United