Bretton Woods Revisited

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On July 22, 1944, as allied troops were racing across Normandy to liberate Paris, representatives of 44 nations meeting at the Mount Washington resort in Bretton Woods, New Hampshire, created a financial and monetary system for the postwar era. It had taken three weeks of exhausting diplomacy. At the closing banquet, the assembled delegates rose and sang “For He’s a Jolly Good Fellow.” The fellow in question was John Maynard Keynes, leader of the British delegation and intellectual inspiration of the Bretton Woods design.

Lord Keynes, the world’s most celebrated economist, was playing a tricky dual role. He had proposed a radical new monetary system to free the world from the deflationary pressures that had caused and prolonged the Great Depression. Bretton Woods, he hoped, would be the international anchor for the suite of domestic measures that came to be known as Keynesian—the use of public spending to cure depression and the regulation of financial markets to prevent downturns caused by failed private financial speculation.

Keynes was also hoping to restore Britain’s prewar position as a leading industrial and financial power. His two roles overlapped, but far from perfectly. The Americans shared the British desire to restore world growth, but not to preserve Britain’s empire or its protectionist system of preferential trade deals for nations that settled their accounts in pounds sterling.

Writing to a colleague after the conference ended, Keynes professed to be pleased. He wrote that in the new International Monetary Fund, “we have in truth got both in substance and in phrasing all that we could reasonably hope for.” The new World Bank, Keynes declared, offered “grand possibilities. … The Americans are virtually pledging themselves to quite gigantic untied loans for reconstruction and development.”

Yet in many respects, Bretton Woods was a rout for Keynes and the British. America today is often described as the sole surviving superpower, but in 1944 U.S. supremacy was towering. Germany and Japan were on the verge of ruin. Britain had gone massively into debt to prosecute the war, sacrificing more than a quarter of its national wealth. The Russians had lost tens of millions of soldiers and civilians. America was unscathed, its casualties were modest by comparison, it held most of the world’s financial reserves, and its industrial plant was mightier than ever.

Though Keynes inspired Bretton Woods, the Americans won the day. As leverage, Keynes had only his own brilliance and a fast-fading appeal to Anglo-American wartime solidarity. In most matters, a rival design by Keynes’s American counterpart, Harry Dexter White, prevailed. White, a left-wing New Dealer serving as No. 2 man at the Treasury, shared Keynes’s basic views on money. But the White plan provided a far more modest fund and bank. Instead of the generous extension of wartime lend-lease aid that Keynes was promoting, the British had to settle for an American loan, to be repaid with interest.

The Bretton Woods system was hailed as a vast improvement over both the rigid gold standard of pre-1914 and the monetary anarchy of the interwar period. For a quarter-century, Bretton Woods undergirded a rare period of steady growth, full employment, and financial stability. But in many respects, the vaunted role of the World Bank, the International Monetary Fund, and the Bretton Woods rules specifying fixed exchange rates was a convenient mirage. The system’s true anchor was the United States—the U.S. dollar as de facto global currency; the U.S. economy as the residual consumer market for other nations’ exports; and U.S. recovery aid in the form of the Marshall Plan, which dwarfed the outlays of the World Bank.

In the early 1970s, the Bretton Woods system came crashing down when domestic inflation forced the United States to devalue its own currency and cease playing the hegemonic role. Monetary instability and slower growth followed. By the 1980s, laissez-faire was enjoying renewed prestige.

The Bretton Woods conference was held seven decades ago, but the enduring concerns that Keynes and White sought to address in 1944 are still with us, with no solution in sight. One need only read today’s headlines reporting a prolonged slump following a financial collapse; failed austerity policies in Europe; speculative attacks on Asian currencies creating bubbles followed by crashes; and worries about the future of the dollar. The ills of the interwar period have recurred in different form. So it is an opportune moment to revisit Bretton Woods and to consider whether the aspiration of a true international money system was ever realistic, economically or politically, and to inquire, in the spirit of the architects of Bretton Woods, what a superior system might look like today.


The story of the Bretton Woods meetings and related monetary debates is well-worked territory. It has been explored extensively in the technical economics literature, in political histories of the postwar period, and in biographies and accounts of Keynes and White, most notably in Robert Skidelsky’s magisterial three-volume work on Keynes. So why another book titled The Battle of Bretton Woods?

Benn Steil, director of international economics at the Council on Foreign Relations and editor of the scholarly journal International Finance, is far from a fan of Keynes. (An earlier book he co-authored, Money, Markets, and Sovereignty, a free-market polemic festooned with arcane scholarly digressions, won the Friedrich Hayek book prize.) As a narrator, Steil is deft, but as a researcher he relies heavily on other standard histories; reading him against Skidelsky and earlier works, one senses Steil using Skidelsky and others as a road map, reverse-engineering the footnotes, and adding his own ideological spin.

Where he attempts to break new ground, as in his discussion of Harry Dexter White’s role as sometime spy for the Soviets, Steil’s assertions go well beyond what is factually documented. Steil writes as if he has uncovered major new insights about White’s role as an occasional purveyor of information to Soviet agents. But that story was comprehensively told, though not overstated, in Skidelsky. One juicy detail that Steil emphasizes is his contention that White sought to manipulate Roosevelt into hardening the U.S. diplomatic stance toward Japan in 1941, perhaps contributing to the Pearl Harbor attack. According to Steil, citing memoirs of a former Soviet spy, the Russians were eager to have the U.S. enter the war; White had met with a key Soviet agent and discussed the Japanese threat to the USSR just before drafting a June memo urging a harder U.S. line toward Japan. A follow-up memo in November urged an even tougher stance. But White’s memos were never shown to the president. The American line toward Japan, as Steil admits in passing, hardened via other channels. This section, like others in the book, makes its arguments partly by inference and innuendo, adding disclaimers at several points but concluding, “In any case, White’s intervention was to have great consequence in the autumn.” But there is no evidence for Steil’s claim that White influenced America’s Japan policy. For more detail on this controversy, see Eric Rauchway’s excellent essay in the Times Literary Supplement, “How the Soviets Saved Capitalism.”

Two other patterns in Steil’s writing are troubling. Steil has substantive criticisms of Keynesian economics, but his strategy is to disparage Keynes largely with potshots. “Keynes frequently compounded the problems of the bad hands he was dealt by playing them inaptly,” he writes. “An astute, dedicated career diplomat would have played off the New York bankers, who were dangling loans in return for British opposition to the U.S. Treasury’s monetary reform plans, against FDR’s moneymen.” There is no evidence whatever that such a scheme would have had a prayer of success.

In a characteristically churlish jab, Steil writes that “faced with the choice between stroking his host and turning a phrase, [Keynes] typically chose the latter.” In fact, as other works on Keynes and Bretton Woods have documented, Keynes was masterful in assembling a broad coalition of the willing for his general design, ranging from skeptics at the Bank of England, the British Treasury, and the Board of Trade to supporters in the British Cabinet and among American liberals. Keynes had his run-ins with the Americans, of course, but that was largely a function of divergent postwar national interests, not inept diplomacy.

Steil is mostly correct when he reminds us that the institutions of the Bretton Woods system played a smaller role than is often asserted. But as a critic of Keynes and latter-day champion of the gold standard, Steil seriously understates what Bretton Woods did achieve. The combination of fixed exchange rates, controls on financial speculation, and plentiful funds for reconstruction and expansion anchored a period of high growth and broadly shared prosperity, just as Keynes had hoped. Steil is wishful in his contention that a restored gold standard might have done better. He also argues that the tendency of the economy to fall into periodic self-reinforcing slumps, which produced the insights of Keynesian economics, was a unique circumstance of readily avoidable policy errors of the 1930s. But subsequent events (such as the collapse of 2008) and the work of economists such as Hyman Minsky confirm Keynes’s insight that the propensity to boom and bust is an endemic problem of capitalism.

In The Battle of Bretton Woods, Steil often is cagey and oblique about his own views, which he has stated more openly elsewhere. In an interview with NPR, he said that “given modern computer technology, we could actually have an international monetary system that was privately organized—gold banks in which we all essentially had smart cards. And we could buy our cappuccinos with a gram of gold or so rather than using a national currency.” This blanket assertion ignores the deflationary role of gold (whose monetary function is arbitrarily limited by its supply) and the need for central banks to create liquidity in crises—something that a gold standard can’t do. In this book, however, he tends to put such arguments in the mouths of others, perhaps to preserve his own credibility. Steil’s is one of a spate of recent books, such as Amity Shlaes’s The Forgotten Man (on FDR and the New Deal) and Charles Murray’s Coming Apart (on values and the white working class), in which a right-wing intellectual purports to offer a fresh interpretation of an important event or public issue, but on close examination the revisionism turns out to be well--narrated polemic.


So why read The Battle of Bretton Woods, albeit skeptically? Three reasons: Steil is a nimble storyteller. His book is also a useful reminder that Bretton Woods, often depicted mainly as an effort to reinvent the world’s monetary system, was even more importantly an exercise in realpolitik. The technical debates over the nuances of the global financial architecture were swamped by the larger struggle for postwar primacy between Britain and the U.S. Given their close wartime alliance, America’s treatment of the British was almost brutal, especially in light of the generous treatment of the defeated Germans only a few years later.

Finally, for the reader who is sympathetic to Keynes and the received wisdom about the postwar monetary system, Steil compels one to confront some hard questions.

The Keynes design for Bretton Woods was an awkward blending of both nationalistic and systemic goals. But was either ever realistic? Steil says no, and he gets this part of the story about right. Keynes, who had begun writing about a postwar financial system in 1942, had an expansive vision for a global currency, which he named “bancor.” To prevent remedies to national financial crises from accumulating, he wanted debtor nations to be able to borrow money in the new currency virtually at will. He also wanted to put pressure on creditor nations to expand their economies rather than having a system that achieved balance by causing debtors to contract. Keynes’s proposed mechanism was a provision that fined chronic creditors and allowed other nations to “discriminate” (his word) against the exports of creditor nations. In the context of 1944, that could only mean the United States.

But in 1944, it was never in the cards for the United States to assent to a scheme that allowed discrimination against its exports. Nor were the Americans, who held 70 percent of the world’s gold reserves and the sole viable currency, going to embrace a global currency. The U.S. version, which prevailed, included a much smaller World Bank and IMF with voting power based on paid-in capital, guaranteeing that the U.S. and its close allies would control both institutions. Keynes’s proposal for $26 billion in new credit lines to be drawn upon at will was whittled down to a $5 billion fund, with tightly restricted access.

Once the dollar ceased being able to function as de facto global currency in the 1970s, however, the system became both shaky and deflationary, proving Keynes’s larger point. The floating exchange rates that followed the collapse of Bretton Woods were an unstable substitute for fixed ones (fixed rates denominated in gold would have been even worse). The IMF and the World Bank mutated from instruments of expansion to enforcers of austerity. The speculative foreign-capital movements that re-emerged under laissez-faire auspices in the 1980s exacerbated the system’s boom-bust tendencies. The financial collapse of 2008 provided the exclamation point. The euro, the closest equivalent to a transnational currency (managed by a weak central bank) demonstrated the perils of international money. Rather than facilitating stable growth, the euro promoted speculative investments in Southern Europe during the boom years and then demanded austerity after the crash.

Given that Keynes’s design was somewhat utopian and the Bretton Woods system reflected a unique historical moment of American supremacy that is unlikely to be repeated, what is the best available monetary arrangement today? Steil is not persuasive when he argues that a variation on the classical 19th-century gold standard or a high-tech embellishment would be an improvement over either Bretton Woods or the messy non-system that we have today. One of Steil’s provocations that deserves an answer, however, is his claim that a money supply de-linked from gold is inherently unstable. Since 1971, the dollar has not been freely convertible to gold, but the dollar, faute de mieux, remains the system’s anchor currency. Other, more reputable economists have wrestled with this dilemma, and their remedies, while more plausible than a reversion to gold, are not reassuring.

Barry Eichengreen, an eminent economic historian at the University of California, Berkeley, suggests in his 2011 book Exorbitant Privilege that we face a prolonged era of muddle through. Eichengreen’s title, from an epithet coined by President Valéry Giscard d’Estaing of France, reminds us that the United States, uniquely, gets to borrow abroad in its own currency. This exorbitant privilege serves this country but is a source of both instability and irritation to the rest of the world. America simultaneously borrows heavily from abroad and has a cheap money policy at home, which serves to export speculative capital movements to Asia and South America and allows the United States to maintain its living standards by borrowing.

Though some kind of global currency might be an improvement on the current monetary anarchy, it stands no more chance of serious diplomatic support today than it did in 1944. And the deflationary experience of the euro—a transnational currency for one continent—should give us pause. With a global currency not in the cards, Eichengreen thinks the best available option is a monetary system anchored by several currencies, with the euro, yen, and Chinese renminbi gradually joining the dollar as reserve currencies, their exchange rates jointly managed by national central bankers. We briefly had a hint of such a system in the 1980s, when feckless efforts emerged to coordinate exchange rates. The results were not tonic for growth and stability.

The problem is that nations have divergent interests, and each is tempted to game the system to its advantage. In the absence of a global government or currency, the late MIT economic historian Charles Kindleberger’s famous insight about the system’s need for a monetary “hegemon” remains apt. The system works best, Kindleberger observed, when it has a relatively benign monetary steward, as Britain was in the era of the classical (and deflationary) gold standard and the United States was in the more expansionary two decades after World War II. Nobody seems either willing or able to play that role today. Germany’s relentless export of austerity to the rest of Europe suggests a malign hegemon, and some would say U.S. policy today is only marginally better. Steil is right to warn that the current mess is likely to continue unless and until the United States and China jointly come to appreciate “the consequences of muddling on.”

Bretton Woods as a plan for global money fell far short of what Keynes hoped. But what gets lost in Steil’s revisionist retelling is the other great contribution of Bretton Woods—a system that constrained speculative capital and created a bias in favor of economic expansion, quite apart from whether the anchor currency was the dollar or Keynes’s proposed bancor. Whatever combination of reserve currencies we end up with, that second lesson of Bretton Woods needs to be rediscovered—and today we are far from it.

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