France and the Breakdown of the Bretton Woods International Monetary System

WP/94/128-EA
France and the Breakdown of the Bretton Woods International Monetary
System by Michael D. Bordo, Dominique Simard and Eugene N. White

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.