Would a New ‘Bretton-Woods’ Save the Global Economy?
Britain’s chancellor of the Exchequer George Osborne, center right, at the start of the G7 finance ministers and central bank governors meeting on Friday, May 10 in Aylesbury, England. The role of central banks in shoring up the global economic recovery is set to be a key point of discussion among top financial officials from the world’s seven leading economies when they gather in the UK this weekend.Photo by Alastair Grant – WPA Pool / Getty Images.
A note Paul Solman: The G7 finance ministers met in England last week and had “intense discussions,” said Reuters, about international monetary policy and currency exchange rates, a source of tension in the world economy for, oh, about 100 years now.
According to the economic history books, the one great conference that resolved that tension — for a quarter century — was “Bretton Woods,” a convocation of 44 countries in the White Mountains of New Hampshire less than a month after D-Day and the beginning of the end for the axis powers in World War II. What would the post-war world economy look like? That was the question in July of 1944. The answers were a loosely dollar-based world currency regime, the International Monetary Fund and what was to become the World Bank.
So, do we need another Bretton Woods today? Benn Steil, editor of the scholarly journal “International Finance,” has written a book that ponders this and other questions: “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.” Paul Volcker has called it “full of lessons relevant today.” Alan Greenspan said it’s “a must-read work of economic and diplomatic history” and The New York Times wrote that “it should become the gold standard on its topic.”
Critics like history professor Eric Rauchway, by contrast, take Steil to taskfor for overemphasizing Bretton Woods’ weaknesses and the Soviet connections of its chief American negotiator, Harry Dexter White.
Benn Steil: In the wake of the great financial crisis of 2008, world leaders, from French President Nicolas Sarkozy to British Prime Minister Gordon Brown, began calling for “a new Bretton Woods” to restore discipline and calm to world financial markets. The very words “Bretton Woods,” it seemed, had become shorthand for enlightened globalization. Simply invoking the name of the remote New Hampshire town, where representatives of 44 allied nations came together 65 years earlier, in the midst of the century’s second great war, was to put oneself on the side of order, stability, vision, cooperation, and peace.
But was the actual 1944 Bretton Woods conference, the most important international gathering since the Paris peace talks a quarter century earlier, really such a kumbaya moment? Could we recreate it? And if we could, would we want to?
Consider the conference itself — the men who drove it and its goals.
President Franklin Roosevelt told the assembled that their agenda marked “a vital phase” among “the arrangements which must be made between nations to ensure an orderly, harmonious world.” He hoped it would speed the war’s conclusion by sending the enemy Axis powers the message that it was America and its allies that had the compelling postwar vision.
But FDR had little interest in the actual ins and outs of international economic affairs, and it was his Treasury — led by Sec. Henry Morgenthau, but powered by his ambitious, temperamental deputy, Harry Dexter White — which scripted its details.
Morgenthau years later told President Harry Truman that his ambition at Bretton Woods had been “to move the financial center of the world from London and Wall Street to the United States Treasury and to create a new concept between the nations of international finance.” That concept was given its flesh by Harry White, and its centerpiece was to be a dollar-based international monetary system overseen by a new U.S.-dominated International Monetary Fund.
With the exception of two delegations, the Soviet and the British, the governments represented at Bretton Woods bowed to this concept with only modest grumbling because they felt they had no choice. The United States controlled nearly 80 percent of the world’s monetary gold stock at the time, and U.S. dollars were the only credible surrogate for gold. Without American monetary and financial support, barter was the only way to trade, and therefore to survive.
The Soviets, whose trade with the world was entirely state-controlled, had no practical use for the American scheme, and signed on for reasons which were transparent, but to which White was willfully blind: Stalin had hoped to get cheap American loans, that he could repudiate at his convenience, and liked the idea of the world fixing currencies to a gold-backed dollar because it would boost the value of Russia’s large gold stocks. (When the loans were not forthcoming, the Soviets refused to ratify the agreements.)
The British delegation head, the storied John Maynard Keynes, tussled with White for two years in the run-up to the conference, trying with increasing desperation to sustain some remnant of an international role for the pound sterling, which functioned as the monetary foundation of Britain’s fraying global empire.
The world’s first-ever celebrity economist, Keynes was an unlikely diplomat: he was eloquent and quick-witted, yet also irascible and condescending. But with war-torn Britain on the verge of bankruptcy, its colonies braying for London to start paying its way in dollars, Keynes emerged as London’s last-ditch financial ambassador because he had what the Americans respected: star power.
For his part, White had a longstanding obsession with Britain and its currency, having as early as 1935, nine years before Bretton Woods, begun working actively to undermine the sterling’s status by, for example, forcing China to unpeg its currency from sterling in favor of a peg to the dollar. All this was to pave the way for an international conference at which the dollar would be enthroned as the world’s unrivaled monetary standard.
Bretton Woods was ultimately part of a Faustian bargain that Britain was obliged to make with FDR’s Treasury. In return for American [Lend-Lease] (http://www.ourdocuments.gov/doc.php?flash=true&doc=71) aid to survive the war, and a transitional loan to get through the immediate post-war period, Britain was told to:
- End imperial trade preference, the arrangement by which Britain gave itself privileged access to the markets of its colonies and dominions
- Make the pound sterling fully convertible into dollars at a fixed rate by July 15, 1947 (a day that lives in infamy for the British, as it triggered a collapse of the country’s dollar reserves)
- Accept the U.S. dollar as the global unit of account. It was a brutal deal, but as British economist and Bretton Woods delegate Lionel Robbins put it at the time, “we need[ed] the cash.”
The Americans triumphed at Bretton Woods. Yet, looking back nearly 70 years later, it is clear that it was a pyrrhic victory.
There had been four pillars to White and Morgenthau’s postwar vision:
- Britain’s empire could be peaceably dismantled
- The Soviet Union could be co-opted into a permanent peacetime alliance
- Germany could be safely deindustrialized and dismembered (the so-called Morgenthau Plan)
- Short-term IMF loans would be sufficient to restart international trade. Three years after Bretton Woods, the Marshall Plan repudiated all of this.
These beliefs, it turned out, had been based on “misconceptions of the state of the world around us.” Future secretary of State Dean Acheson later reflected, “both in anticipating postwar conditions and in recognizing what they actually were when we came face to face with them … Only slowly did it dawn upon us that the whole world structure and order that we had inherited from the nineteenth century was gone and that the struggle to replace it would be directed from two bitterly opposed and ideologically irreconcilable power centers.”
By early 1947, Britain was no longer seen as a political and economic rival but as a desperate ally that needed to be saved from communism and collapse. The Soviets could not be co-opted, and needed now to be contained (in George Kennan’s famous word). West Germany had to be built into a vital bulwark against Soviet expansion — this through rehabilitation and resurrection as the industrial engine of a new integrated Western Europe (“Western Europe” being an American conception). Finally, the IMF, together with its loan-based salvation mechanism, would be mothballed in favor of massive U.S. grants-in-aid to its allies.
(Note to Angela Merkel, Germany’s iron chancellor: do you not see parallels with your handling of today’s eurozone crisis?)
Although the quarter-century period from 1945-1971 is typically referred to as “the Bretton Woods era,” the monetary regime called for in the conference agreements could not be said to have become operative until 1961, when the first nine European countries met the requirement that their currencies be convertible into dollars. By this time, however, the system was already coming under strain owing to a deteriorating U.S. balance of payments and corresponding loss of gold reserves.
“There is no likelihood,” White had insisted when urging congressional ratification of Bretton Woods in 1945. “The United States will, at any time, be faced with the difficulty of buying and selling gold at a fixed price freely.” Yet this is precisely what transpired after his system entered into normal operation in the 1960s.
On Aug. 15, 1971, President Richard Nixon made a dramatic announcement. Following on the heels of a French battleship arriving in New York to take home its gold from the New York Federal Reserve, Nixon announced the closing of the American “gold window.” Facing imminent depletion of the once-vast U.S. gold stock, Nixon would remove the foundation of the Bretton Woods international monetary system – never again would the dollar be convertible into gold.
One strange and fascinating legacy of the 1940s that lives on at the IMF today is one which no one present at Bretton Woods could ever have imagined. My archival research uncovered some remarkable new evidence that the Fund’s architect, Harry White, despite being a staunch American monetary nationalist, was a passionate believer in the success of Soviet socialist economics, and was bitterly critical of what he saw as western hypocrisy towards Soviet Russia. President Truman was certainly unaware of this when he nominated White to be the first American executive director of the IMF in 1946. He was also on the verge of nominating him to be the first head (managing director) of the Fund when he received a long memorandum from FBI director J. Edgar Hoover warning him not to. Hoover charged that White was actually a Soviet spy.
Truman did not trust Hoover, but knew he had a political problem on his hands. In order to avoid the questioning that would follow appointing another American above White at the IMF, he had his Treasury secretary, Fred Vinson, tell Keynes that, despite White being a “natural” for the Fund’s top post, the administration had decided to back an American for the top World Bank post instead. And it would not be “proper,” they had concluded with uncharacteristic fair-mindedness, “to have Americans as the heads of both bodies.”
In 1997, after exhaustively reviewing a trove of recently declassified Soviet intelligence cables from the 1940s, intercepted and decrypted by wartime U.S. military intelligence, a Senate commission headed by the late Democrat Daniel Patrick Moynihan declared that “the complicity of Alger Hiss of the State Department seems settled. As does that of Harry Dexter White of the Treasury Department.”
To this day it is a European, and not an American, who runs the IMF.
Bretton Woods was truly a fascinating saga, but it was most surely not the triumph of economic thinking and international comity it is often painted to be. An ascendant anti-colonial superpower, the United States, used its economic leverage over an insolvent allied imperial power, Great Britain, to set the terms by which the latter would cede its dwindling dominion over the rules and norms of foreign trade and finance. Britain cooperated because the overriding aim of survival seemed to dictate the course.
The monetary architecture that Harry White designed, and powered through an international gathering of dollar-starved allies, ultimately fell of its own contradictions: The United States could not simultaneously keep the world adequately supplied with dollars and sustain the large gold reserves required by its gold-convertibility commitment. The IMF, the institution through which it was launched, though, endures — however much its objectives have metamorphosed — and many hope that it can be a catalyst for a new and more enduring “Bretton Woods.”
Yet history suggests that a new cooperative monetary architecture will not emerge until the United States, the world’s largest creditor nation in the 1940s, but now the world’s largest debtor, and China, today’s dominant creditor nation, each comes to the conclusion that the consequences of muddling on, without the prospect of correcting the endemic imbalances between them, are too great. Even more daunting are the requirements for building an enduring system; monetary nationalism was the downfall of the last great effort in 1944.
Benn Steil is Director of International Economics at the Council on Foreign Relations in New York.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions