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I feel no nostalgia for the Bretton Woods economy, despite the good results it delivered in the three decades after World War II. To sustain the Bretton Woods system required not only high but ever increasing levels of domestic and international financial regulation. Through the 1960s, Presidents Kennedy, Johnson and Nixon added rule after rule intended to keep US trade in balance, to prevent dollars from accumulating overseas, and to deter foreign governments from presenting dollars in demand for gold. Under the classical gold standard of 1873-1934, the United States would have accepted a domestic recession (even a depression) in order to quash domestic demand, balance trade, and end the outflow of dollars. But that was just not going to happen in the modern world, not in the US, not anywhere and everybody knew it. The Bretton Woods substituted financial controls for the old painful remedies, but by the late 1960s, the controls were becoming even more painful than the alternative: allowing currencies freely to trade against each other. The modern currency float has its problems. There is no magical monetary cure, monetary policy is a policy area almost uniquely crowded with trade-offs and lesser evils. If you want a classical gold standard, you get chronic deflation punctuated by depressions, as the US did between 1873 and 1934. If you want a regime of managed currencies tethered to gold, you get regulations and controls, as the US got from 1934 through 1971. If you let the currency float, you get chronic inflation punctuated by bubbles, the American lot since 1971. System 1 is incompatible with democracy, because voters wont accept the pain inherent in a gold standard. System 2 is incompatible with the free market economics I favor. That leaves me with System 3 as the worst option except for all the others.
