The Revived Bretton Woods System,
Liquidity Creation, and
Asset Price Bubbles
Harris Dellas and George S. Tavlas
In this article, we argue that the present constellation of exchange
rate arrangements among the major currencies has led to the cre-
ation of excessive global liquidity, which has contributed to asset
price bubbles. Although the exchange rates of many of the major
currencies—including the U.S. dollar, the euro, the yen, and the
pound sterling—float against each other, the currencies of many
Asian emerging market economies and oil-exporting economies are
pegged to the dollar. Dooley, Folkerts-Landau, and Garber (2004a)
labeled this system “Bretton Woods II” (BWII).
Bretton Woods regime (BWI) lasted for about a quarter of a century.
Dooley, Folkerts-Landau, and Garber (DFG) argue that the present
regime, despite its large global imbalances, will also be sustainable.
We have a different view. In what follows, we argue that the orig-
inal Bretton Woods system comprised two fundamentally different
variants. The first variant lasted from the inception of the system in
1947 until around 1969. The second variant had a much shorter life
span, lasting from about 1970 until the collapse of the system in 1973.
, Vol. 31, No. 3 (Fall 2011). Copyright © Cato Institute. All rights
Harris Dellas is Professor of Economics at the University of Bern, where he is
Director of the Institute of Economics, and a Research Fellow of the Center of
Economic Policy Research. George S. Tavlas is Director General of the Bank of
Greece and Alternate to the Governor of the Bank of Greece on the European
Central Bank’s Governing Council. The views expressed are those of the authors and
should not be interpreted as those of their respective institutions.
See also Dooley, Folkerts-Landau, and Garber (2003, 2004b, 2005, 2006, 2009).