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Federal Reserve Policy and Bretton Woods

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During the Bretton Woods era, balance-of-payments developments, gold losses, and exchange rate concerns had little influence on Federal Reserve monetary policy, even after 1958 when such issues became critical. The Federal Reserve could largely disregard international considerations because the U.S. Treasury instituted a number of stop-gap devices—the gold pool, the general agreement to borrow, capital restraints, sterilized foreign-exchange operations—to shore up the dollar and Bretton Woods. These, however, gave Federal Reserve policymakers the latitude to focus on domestic objectives and shifted responsibility for international developments to the Treasury. Removing the pressure of international considerations from Federal Reserve policy decisions made it easier for the Federal Reserve to pursue the inflationary policies of the late 1960s and 1970s that ultimately destroyed Bretton Woods. In the end, the Treasury’s stop-gap devices, which were intended to support Bretton Woods, contributed to its demise.

Keywords: Bretton Woods, Federal Reserve, monetary policy, Taylor rule, U.S. Treasury.

JEL classification: F31, F33, N1.

Suggested citation: Bordo, Michael D., and Owen F. Humpage, 2014. “Federal Reserve Policy and Bretton Woods,” Federal Reserve Bank of Cleveland, Working Paper no. 14-07.

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