Summary of WP/94/128: “France and the Breakdown of the Bretton Woods International Monetary System”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

This paper examines French international monetary policy under President Charles de Gaulle. It challenges the widely held interpretation of France’s role in the breakdown of the Bretton Woods international monetary system. In this view, the demise of Bretton Woods in 1971 can be traced back to the deliberate conversion of dollars into gold by France, beginning in 1965. These actions are considered part of President de Gaulle’s broader challenge to U.S. military and economic pre-eminence in Europe. According to this perception, French policy is viewed as opportunistic and lacking in consistency, alternating between cooperation, offering unacceptable reform proposals, and assaults on the dollar. Persistent U.S. balance of payments deficits provided France with large dollar holdings whose conversion into gold would embarrass the United States and reduce its dominance.

The paper argues that French policy in fact followed well-established objectives, first articulated in the interwar period, that aimed at the creation of a symmetrical and cooperative gold exchange standard. The recommendations of the Financial Commission at the 1922 Genoa Conference, the Tripartite Agreement of 1936, and the French Plan of 1943 preceding Bretton Woods all offered projects to produce such a system. France’s economic malaise prevented it from playing an important role in the immediate post-World War II design of the international monetary system. However, once the economy was stabilized in 1958, France re-emerged as a major player in international finance. The French Government believed that the Bretton Woods system conferred an extraordinary position on the United States as the provider of a currency that was held as official central bank reserves. This position permitted the United States to finance a persistent balance of payments deficit without making significant adjustments, while threatening to export inflation to other countries. The paper contends that French policy was a response to this perceived threat and represented an effort to offer a more advantageous alternative.

According to the paper, a close study of events reveals that the French followed a careful strategy of using proposals for a return to an orthodox gold standard and dollar conversions into gold as tactics to induce the United States to cooperate in a reform of the international monetary system. The paper asserts that relations between France and the United States can be characterized as a noncooperative bargaining game with a rational threat. In this game, the equilibrium--the Bretton Woods regime--was sustained by the threat of French dollar-for-gold conversions. This equilibrium broke down following the intensification of the Vietnamese war. The war was a fiscal shock that altered the payoffs and led the United States to pursue a high rate of monetary growth, even though this implied that France’s best response would be to convert dollars into gold and consequently risk the possible collapse of the Bretton Woods system.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund