------------ EH.NET BOOK REVIEW -------------- 
Published by EH.NET (August 2004) 
 
Robert Leeson, _Ideology and the International Economy: The Decline  
and Fall of Bretton Woods_. New York: Palgrave MacMillan, 2003. xii +  
242 pp. $70.00 (cloth), ISBN: 1-4039-0370-0. 
 
Reviewed for EH.NET by Peter B. Kenen, Department of Economics,  
Princeton University. 
 
 
Robert Leeson is Associate Professor in Economics at Murdoch  
University in Australia and has written extensively on the history of  
economic thought and policy in the twentieth century. Here, he  
explores the influence of economic ideas on the collapse of the  
Bretton Woods System in the early 1970s. Readers should be warned,  
however, that his book is not mainly about the collapse of the  
Bretton Woods System. It is mainly about the influence of Milton  
Friedman, direct and indirect, on the policy debates of the early  
1970s -- debates about wage and price controls and the conduct of  
monetary policy, as well as the reform of the international monetary  
system -- and it does not provide a full account of the events and  
decisions that led to the collapse of the Bretton Woods System. 
 
Leeson does not apologize for failing to review those events and  
decisions. His study, he writes, "does not attempt to replace but  
rather to supplement the orthodox chronology and analysis" (Leeson,  
p. 15). But readers who are not already familiar with the "orthodox"  
analysis may have trouble judging the influence of ideology on the  
drama played out from August 15, 1971, when Richard Nixon announced  
his New Economic Policy (NEP) and closed the gold window, to March 1,  
1973, when European central banks withdrew from the foreign-exchange  
markets and let their currencies float against the dollar. 
 
Parts I and II of Leeson's book describe the intellectual environment  
of the 1950s and early 1960s. There was, he writes, strong  
intellectual support for three policy objectives -- full employment,  
free trade, and fixed exchange rates -- but growing awareness of the  
ways in which they would come into conflict. It was Friedman, he  
says, who "raised the standard of revolt" against the labor standard  
underlying the Keynesian case for full-employment policies, as well  
as the Bretton Woods standard of fixed exchange rates (Leeson, pp.  
21, 22). For Friedman and his colleagues at the University of  
Chicago, notably Harry Johnson, the IMF was "an integral part of the  
post-war planning system which sought to override market forces"  
(Leeson, p. 31). Leeson then traces the emergence of an academic  
consensus favoring exchange-rate flexibility. 
 
Unfortunately, Leeson's account of the process producing that  
consensus attaches too little importance to a distinction that played  
a large role in the academic debates of the period and in official  
discussions as well. He demonstrates clearly that academics became  
increasingly critical of the official commitment to rigidly fixed  
exchange rates. He cites, for example, the widespread academic  
criticism of the 1966 report on the balance-of-payments adjustment  
prepared by Working Party 3 of the OECD -- a report that made no  
mention of exchange-rate changes when listing the ways to deal with  
balance-of-payments problems. Yet many economists who came to favor  
more frequent recourse to exchange-rate changes did not yet favor  
freely floating rates. (I say that with some confidence, having  
attended most of the conferences described by Leeson in Chapters 7-8,  
as well as many meetings of the Bellagio Group, in which academics  
and officials exchanged views informally on the reform of the  
monetary system; see also James, 1996, p. 213). 
 
Parts III and IV of Leeson's book turn to the policy process in an  
effort to show how Friedman's views and personal involvement in the  
policy process helped to bring down the Bretton Woods System and thus  
led to the adoption of floating exchange rates. Some of the  
"orthodox" accounts of the period also mention Friedman, as "an  
occasional adviser to Republican presidential candidates" (Volcker  
and Gyohten, 1992, p. 46), but Leeson's detailed account shows that  
Friedman was far more active than that. Leeson also stresses the  
close relationship between Friedman and George Shultz, who had been  
his colleague at Chicago and held key policy positions in the Nixon  
administration. Yet Leeson's account does not explain why Shultz, who  
shared Friedman's strong preference for floating exchange rates,  
presented a U.S. plan for reform of the monetary system that  
emphasized the need for exchange-rate changes and the use of a  
reserve indicator to signal the need for them but fell short of  
proposing the substitution of freely floating rates. For an  
explanation, we must turn to Paul Volcker: 
 
I knew from experience that Shultz had no hesitation in expressing  
monetarist views forcefully during policy debates within the  
administration. But ... I found that when he assumed full  
responsibility for a problem, what came to the fore was the side of  
his background that marked him as a conciliator and consensus  
builder, rather than an ideologue. Time and again, he would work with  
almost inhuman patience to bring a group into agreement upon a  
decision that all could support, submerging his own preferences  
(Volcker and Gyohten, p. 118). 
 
The need for compromise, within and between governments, attracts too  
little of Leeson's attention. He treats the collapse of the Bretton  
Woods System as a process driven strongly by ideology, not by the  
asymmetries of the system itself nor by market forces. 
 
There were, in fact, two asymmetries built into the Bretton Woods  
System. The Europeans wanted to rectify one of them -- the one that  
Charles de Gaulle had described as the "exorbitant privilege"  
conferred on the United States by the reserve-currency role of the  
dollar; the United States was the only country able to finance a  
balance-of-payments deficit in its own currency and thus enjoyed more  
policy autonomy than other countries. The Americans wanted to rectify  
a different asymmetry -- the one resulting from the fact that dollar  
exchange rates were set by foreign governments, depriving the United  
States of any direct control over the foreign-currency value of the  
dollar and thus giving it an interest in greater exchange-rate  
flexibility, rule-based or market-based, as a way to achieve more  
symmetrical balance-of-payments adjustment. 
 
Furthermore, the final collapse of the Bretton Woods System reflected  
the power of money, not the power of ideas. It occurred in March  
1973, when the continental Europeans were forced to choose between  
massive intervention in foreign-exchange market and letting their  
currencies float against the dollar. The currency crisis posing that  
choice resulted in part from an attempt by the United States to  
engineer a second devaluation of the dollar -- an attempt that was  
not designed to provoke a crisis but rather to forestall one. 
 
Leeson has tried to cram two books into one -- a book about the role  
of Milton Friedman and the Chicago School, and a book about the  
collapse of the Bretton Woods System. As a result, he dwells at  
length on issues that had little bearing on the collapse of that  
system -- the debates about wage and price controls and the conduct  
of U.S. monetary policy under Arthur Burns -- while saying too little  
about the events and structural defects that undermined the Bretton  
Woods System. 
 
References: 
 
Harold James (1996), _International Monetary Cooperation since  
Bretton Woods_ (Oxford University Press). 
 
Paul A. Volcker and Toyoo Gyohten (1992), _Changing Fortunes: The  
World's Money and the Threat to American Leadership_ (Times Books). 
 
 
Peter B. Kenen, Walker Professor of Economics and International  
Finance Emeritus, Princeton University, is the author of a dozen  
books including _The International Financial Architecture: What's  
New? What's Missing?_ (Institute for International Economics, 2001). 
 
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