Credit Controls as an Escape from the Trilemma. The Bretton Woods Experience

Abstract

The macroeconomic policy "trilemma" is widely used as a framework to discuss the rationale for capital controls and monetary policy autonomy under the Bretton Woods system (1944-1971). Without denying its usefulness, I highlight two facts at odds with assumptions underlying the "trilemma" argument. First, conflicts between internal and external objectives were uncommon. Second, using quantitative credit controls allowed central banks to disconnect their interest rate from the domestic monetary policy stance. They assigned the interest rate to the external side while managing domestic credit expansion with direct quantitative controls. This paper documents that such mechanism was explicitly considered by contemporary economists and central bankers as a way to escape international financial constraints. In such an environment, capital controls were used to complement credit controls. Interest rate spreads were neither a good measure of capital controls nor of central bank autonomy.