------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (June 2007)

Filippo Cesarano, _Monetary Theory and Bretton Woods: The 
Construction of an International Monetary Order_. Cambridge: 
Cambridge University Press, 2006. xiii + 248 pp. $80 (hardback), 
ISBN: 0-521-86759-2.

Reviewed for EH.NET by John H. Wood, Department of Economics, Wake 
Forest University.


This is a timely thought-provoking account by a central banker (the 
head of the Historical Research Office of the Bank of Italy) of the 
long and often uncertain transition from the classical gold standard 
to the unprecedented fiat monetary system prevailing at the end of 
the twentieth century. The suspensions of national currencies from 
gold forced by the economic and social disruptions of World War I and 
the Great Depression shattered the old system - forever, it seems to 
us now - but governments did not give up on a return until after the 
final breakdown of the Bretton Woods arrangements in the early 1970s. 
The 1936 Tripartite Agreement between Britain, France, and the United 
States was an attempt to work back to the gold standard, as 
conditions permitted, through exchange controls, negotiated fixed 
rates, and mutual assistance. The more rigid Bretton Woods System 
that was agreed upon at the end of World War II sought a quick return 
to gold (or rather a gold-exchange standard based on the U.S. 
dollar), with fixed exchange rates and free trade and exchange, but 
never came into play because of its several contradictions. The 
author's relative emphases on the Tripartite Agreement and Bretton 
Woods are the reverse of mine, but the primary historical point is 
the same: they were among the several schemes for returning to the 
monetary system of 1914.

Many economists of the 1920s and 1930s wanted it both ways: the gold 
standard with a managed currency, which after World War II became 
expansionist Keynesian policies domestically with fixed exchange 
rates externally. This proved impossible without severe and 
eventually unacceptable controls, and the combination of inflation 
and unemployment, together with the actual and intellectual collapses 
of the Phillips Curve, compelled governments to focus their monetary 
attention on price stability.

The author describes the present system as one of competitive monies 
in an international context similar to Benjamin Klein's ("The 
Competitive Supply of Money," _Journal of Money, Credit and Banking_, 
1974). The purpose of the book as stated at the beginning is to show 
that "monetary theory [has] been crucial in determining the evolution 
of [monetary] systems" (p. ix), although the connection is often 
unclear. His examples indicate that theory has more often followed 
than influenced events. He states that the Bretton Woods monetary 
order "was unique to monetary history," in being designed by experts 
"from scratch" (pp. 133, 188), but also sees it as a "vain attempt to 
revive ??? commodity money" (p. 189). He reasonably follows much of the 
literature in using "Bretton Woods" as a convenient label for a 
period rather than as a system in actual operation.

He might have followed up the implications of his description of the 
new system by pointing out that with "inflation targeting" we have 
returned to commodity money. A dollar, pound, or Euro is convertible 
into a basket of goods. Of course inflation targeting is subject to 
the government's discretion, but that was also true of the gold 
standard. The new system is also like the old in rejecting the 
managed-money theories that prevailed during much of the transition, 
and delayed it.

One can argue over the book's interpretations of the causes of the 
evolution of the monetary system and its defining characteristics, 
but I recommend it as an efficient account of the relevant theories 
and policies during the transition from the classical gold standard.


Recent works by John H. Wood are "Independent Central Banks: New and 
Old," _Cato Journal_, Fall 2006, _A History of Central Banking in 
Great Britain and the United States_ (Cambridge University Press, 
2005), and _Ideas, Interests, and Macroeconomic Policies in the 
United States_, in process.

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