Persistence in a changing world: Gold backing and monetary policy autonomy under Bretton Woods

Abstract

The Bretton Woods system is often described as freeing national monetary policies from the gold‐reserve constraints of the gold standard. Breaking the ‘gold fetters’ was essential to the embedded liberalism and economic interventionism of the post‐war era. Yet gold retained a crucial role: monetary authorities backed currency with gold reserves, both de facto and de jure, frequently maintaining gold cover ratios comparable to those of the gold standard. How, then, could gold backing coexist with autonomous domestic macroeconomic policy? This article shows that the combination of two phenomena provides an answer: credit growth and currency growth became increasingly decoupled after 1945, and central banks shifted their emphasis from money toward credit. This created substantial scope to stimulate domestic economic activity through credit expansion without being constrained by the link between gold and currency in circulation. Econometric analysis for 38 countries indicates that gold reserves remained strongly correlated with currency, but not with bank credit. Changes in credit markets and central bank instruments therefore allowed gold backing to persist largely as a symbolic tie, without constraining domestic policy. Gold, however, exerted pressure on US policy and shaped international monetary relations. These findings show that institutional persistence does not guarantee similar economic effects.