ABSTRACT
When Louis XIV said 'apres moi le deluge' he made a bad forecast. The monarchy prospered through much of the threequarters of a century that followed, without the Sun King at its head. The Revolution, when it finally came, had many more direct causes than actions taken during the reign of Louis XIV. So it is with the deluge which in the early 1970s swept away the international monetary system constructed at Bretton Woods. Since more than a decade earlier there had been a chorus of warnings about impending crisis. Despite the pessimism, there were several years in which the system appeared to function well, one as late as 1969. When the eventual breakdown of the system occurred, the trigger was not one of the danger factors - in particular shortage of international reserves' - listed in the early diagnoses. 1
Rather, the immediate source of the deluge of 1971 was the coincidence of an inflationary boom in the Federal Republic and a recession in the USA. Governments in both countries decided that the benefits of saving the system were less than the costs of being deflected from tackling their most pressing domestic problems. The US authorities were unwilling to risk intensifying the recession by raising interest rates to prop up the dollar at a level which anyhow was growingly regarded as giving unfair advantage to foreign competitors, especially Japan (whose share in world markets increased by 50 per cent in the years 1968-71 ). The German authorities were intent on tightening monetary policy to cool inflation. So long as the mark-dollar rate was fixed, any attempt to raise German rates would induce massive inflows from the dollar, so impeding the switch to tight money. Thus on the morning of May 5 1971, the Deutsche
Mark was floated. That was the fall of the Bastille for the Bretton Woods system.
