At the founding of the Bretton Woods international monetary system in 1944, the world’s dominant creditor nation, the U.S., set out to revive a fixed exchange-rate system by offering a war-torn, debt-ridden world a new deal in monetary relations, one to be supported by concessionary dollar loans from a new International Monetary Fund.
Today, Germany is trying to resuscitate the periphery of the crisis-stricken euro area in much the same way, and it is worth looking back at the formation of Bretton Woods for clues as to how this will play out.
Before entering negotiations with the 43 other national delegations at Bretton Woods, the architect of the conference, Harry Dexter White of the U.S. Treasury Department, gave the American delegates a warning: Other nations believed the U.S. would soon put “pressure on the monetary systems of the rest of the world” by “cornering a larger proportion of the world markets and will be in a position to develop what we call an export surplus.” In response, the other countries would want the IMF to prod the U.S. “to adopt a policy which will put less pressure on their exchange and enable them to sell more goods here.”
The U.S. wouldn’t tolerate such interference. “We have been perfectly adamant on that point,” White said. “We have taken the position of absolutely no on that.”
John Maynard Keynes, the head of the British delegation, and other representatives of debtor nations wanted “to charge us interest, as a lender,” White continued. But the U.S. position was “the opposite of that,” he said, “we want to charge them.”
The reason, White explained, was that the IMF was “designed for a special purpose, and that purpose is to prevent competitive depreciation of currencies.” Fixed exchange rates should therefore be at the center of the postwar monetary architecture, to stop countries devaluing their way out of trade deficits. The IMF should only lend money for short periods to countries that had difficulty financing deficits.
Why was the U.S. in a position to impose such a system? Because it controlled almost 80 percent of the world’s monetary gold stock at the time. Gold in Fort Knox, White explained, was “why we dominate practically the financial world, because we have the where-with-all to buy any currency we want. If only England was in that position, or any of the other countries, it would be a very different story.”
But the very strength of the U.S. position led American opponents of the conference to question its purpose. “The average American doesn’t need to be told that most of the world’s monetary gold is buried safely away in Kentucky,” wrote the Christian Science Monitor. “When experts from other lands come to talk about money and loans and trade and repayments it gives the uninitiated the uncomfortable feeling that there may be thieves in the pantry.”
Such views failed to recognize that the rest of the world had a viable, if unpalatable, fallback option. Keynes “pointed out that Great Britain might be forced to resort to some very unacceptable means of pushing her foreign trade, should the monetary plan be rejected,” the Washington Post reported. “A return to the barter system was, he said, the only alternative in sight, and it might have to be tried as a ‘last expedient.’ That is a possibility that the United States certainly does not wish to see realized.” The British “may be ‘broke’ (since they lack the wherewithal to meet their external obligations), but they are not without facilities for pushing their goods into foreign markets.”
Germany had been operating this way for years, compelling foreign holders of marks to redeem them for German goods. The U.K. could do the same, making the pound convertible into whatever wares Britain chose to make available. As the political columnist Walter Lippmann wrote, if other countries were dissatisfied with the terms the U.S. offered “they have an alternative to the system of general international trading which this country desires. The alternative is government controlled trading on a bilateral or barter basis. It is not a good alternative, and the world will be a poorer and more troubled place if it is adopted.” But the U.S. had to be conscious that such an alternative existed.
Lippmann was prescient. Although the U.S. succeeded in pushing through its creditor-friendly monetary and financial policies at Bretton Woods, it couldn’t actually get them off the ground after the war. It was only the 1948 Marshall Plan, which substituted American grants-in-aid for IMF loans, that managed to revive the war-ravaged debtor nations of Europe and create the foundation for a new international trading system.
Today, Germany is persisting with the same creditor-centric plan for reviving the euro area -- new loans to finance old loans while the debtors cut spending and wages to accommodate fixed exchange rates. Lippmann, if he were alive, would no doubt warn that the seemingly endless austerity being imposed on southern Europe will ultimately lead to a political backlash that will make it unsustainable. Germany will soon have to choose: a Marshall Plan for the south, or an economic and political breakdown of the euro zone.
(Benn Steil is director of international economics at the Council on Foreign Relations and author of “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.”)
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