The Battle of Bretton Woods

At the end of the Second World War, many thought that a lasting peace would be possible only if we learned to manage the world economy. The fact that the worst war in history had followed shortly on the heels of the worst economic crisis seemed to confirm that international political crisis and economic instability went hand in hand. In the 1940s, this was a relatively new way of thinking about interstate relations. Negotiations for the peace settlement after the First World War had largely skirted economic questions in favour of political and legal ones – settling territorial borders, for example, or the rights of national minorities. When Keynes criticised the peacemakers in 1919 for ignoring Europe’s economic troubles, and for thinking of money only in terms of booty for the victors, he was ahead of his time: ‘It is an extraordinary fact that the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse the interest of the Four,’ Keynes wrote in The Economic Consequences of the Peace, referring to the quartet of national leaders who shaped the Treaty of Versailles. Their indifference wasn’t much of a surprise: national leaders at the time had little direct experience in managing economic affairs beyond their own borders. The worldwide commercial system that had sprung up in the decades before the war had been facilitated largely through the efforts of private business and finance; the gold standard set the rules of exchange, but states mostly stayed out of the way, except when lowering trade barriers or enforcing contracts. When things went badly, they didn’t try to intervene. (...)

When the Anglo-American conversation shifted away from trade and towards the seemingly technical issues of currency and finance, progress towards a deal proceeded more smoothly. In August 1941, Keynes, now adviser to the chancellor and leading postwar economic planning, returned from negotiations over Lend-Lease in Washington to draft plans for a new international monetary regime. Over the course of several meetings from the summer of 1942, Keynes and his American counterpart, the economist and US Treasury official Harry Dexter White, traded blows over how to rewrite the monetary rules of the international economy. They made curious sparring partners: Keynes, the world-famous economist and public intellectual, pitted against White, an obscure technocrat and late-blooming academic born to working-class Jewish immigrants from Lithuania and plucked by the US Treasury from his post at a small Wisconsin university. Neither seemed to enjoy the company of the other: Keynes was disdainful of what he saw as the inferior intellect and gruff manners of the ‘aesthetically oppressive’ White, whose ‘harsh rasping voice’ proved a particular annoyance. Keynes, meanwhile, was the archetype of the haughty English lord; as White remarked to the British economist Lionel Robbins, ‘your Baron Keynes sure pees perfume.’

Squabbles aside, the two men ended up largely in agreement about the basic aims of the new international monetary system: to stabilise exchange rates; facilitate international financial co-operation; prohibit competitive currency depreciations and arbitrary alterations of currency values; and restrict the international flow of capital to prevent the short-term, speculative investments widely believed to have destabilised the interwar monetary system. They also agreed on the need to establish a new international institution to provide financial assistance to states experiencing exchange imbalances and to enforce rules about currency values (what would become the International Monetary Fund), and another to provide capital for postwar reconstruction (the future World Bank). A closely managed and regulated international financial system would replace the unco-ordinated and competitive system of the interwar years. And with currencies stabilised – so they hoped – world trade could be resumed. (...)

One of the most innovative aspects of the Anglo-American deal was the fact that it prioritised the need for full employment and social insurance policies at the national level over thoroughgoing international economic integration. To this extent, it was more Keynesian than not – and it represented a dramatic departure from older assumptions about the way the world’s financial system should function. Under the gold standard, which had facilitated a period of financial and commercial globalisation in the late 19th and early 20th centuries, governments had possessed few means of responding to an economic downturn beyond cutting spending and raising interest rates in the hope that prices and wages would drop so low that the economy would right itself. Populations simply had to ride out periods of deflation and mass unemployment, as the state couldn’t do much to help them: pursuing expansionary fiscal or monetary measures (what states tend to do today) would jeopardise the convertibility of the state’s currency into gold. For these reasons, the gold standard was well suited to a 19th-century world in which there were few organised workers’ parties and labour unions, but not so well suited to a messy world of mass democracy. The Keynesian revolution in economic governance gave the state a set of powerful new tools for responding to domestic economic distress – but they wouldn’t work as long as the gold standard called the shots. (...)

American dominance over the system was guaranteed by another crucial fact: in 1944, the US dollar was the only currency available widely enough to facilitate international exchange under the new ‘gold exchange standard’. This was intended to be a modified version of the gold standard which, in practice, would allow states to adjust their currency values against the dollar as they saw fit (depending on whether they prioritised economic growth, for example, or controlling inflation), with the value of the dollar convertible into gold at a fixed rate of $35 an ounce. What this meant was that, after the end of the war, the US dollar would effectively become the world’s currency of reserve – which it remains to this day (although it’s no longer pegged to gold). This arrangement would give the US the privilege of being indebted to the world ‘free of charge’, as Charles de Gaulle later put it, but would work only as long as the US saw maintaining gold convertibility as working in its national interest. Harry Dexter White apparently hadn’t envisaged a scenario in which it wouldn’t, but this eventually happened in the 1970s, when deficits from financing the Vietnam War piled so high that the US began to face a run on its gold reserves. In 1971, Richard Nixon removed the dollar’s peg to gold – effectively bringing Bretton Woods to an end – rather than raising interest rates to staunch the outflow of gold, which would probably have caused a recession (with an election on the horizon). Before this, the track record of the gold exchange standard had been pretty good: the years of its operation had seen stable exchange rates, unprecedented global economic growth, the rebirth of world trade and relatively low unemployment. This period also saw the emergence of many different models of the welfare state – in Europe, the United States and Japan – just as the economists behind Bretton Woods had intended.

by Jamie Martin, LRB |  Read more:

Image: uncredited