Interaction of Economic Theory with Government Policy: Historical Case of Bretton Woods

At the end of the Second World War, economic theoreticians/policy advisors (in particular, John Maynard Keynes and Harry White) wrestled with important financial issues—about success or failure in the post-war world of economic systems. Three basic economic concepts of “exchange, trade, and capital”, were central to their thinking. And these same three concepts continue to engage the economics community. Also, after World War II, there was great hope that the economic policy reforms from the Bretton Woods conference in 1944 would “fix” world financial problems—problems about exchange, trade and capital. Keynes and White were the two policy officials, British and American, who dominated the Bretton Woods Conference. Their recommendations led to the founding of the International Monetary Fund (IMF), World Trade Commission (WTC), and World Bank (WB). By analyzing the history of Bretton Woods, we can learn about the limitations of normative economic theory in trying to structure the empirical reality of economic policy, particularly in hazardous times. We will develop graphical models of economic factors to assist in depicting the underlying the theory and policy of Bretton Woods.