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The Battle of Bretton Woods

Why it's relevant today

Yesterday I kicked off a round-table discussion organised by the CSFI of Benn Steil’s new book which carries this title. This is what I said.

Benn Steil starts this stimulating book by poking fun at those politicians and others who have, in recent years, called for “a new Bretton Woods”. They have all been disillusioned.

Indeed, to call for a new BW is to invite derision. It is easy to explain why. Those who talk about a new BW look as if they are driven by nostalgia for a golden age – the 1950s and early 1960s – a period which, as Benn says, was briefer and more fraught than is often thought – at most it lasted for about 10 years to the mid 1960s. But the reason why such calls are made so repeatedly does not just reflect a desire to recapture a lost innocence. It also reflects fear of the future – our sense of foreboding. We have a non-system. There are no agreed international rules governing exchange rates and other key dimensions of international monetary relations. We rightly fear that, in the absence of agreed rules, national policies could easily degenerate into the law of the jungle – everybody for himself, where the collective interest would be sacrificed.


It is this recurring nightmare that haunts our visions today, as it did for the architects of the so-called BW system in the 1940s. This is what makes the comparison between then and now so interesting.


So, to kick off the discussion I would like to use the story Benn tells to illustrate a few of the similarities between the world that he recreates – the world as seen though the eyes of monetary thinkers and planners of the 1940s – and our own. I will then pinpoint one big difference. (To be clear, these are themes I find in Steil’s book – but the comparison with today are my own).


Themes that resonate today

I pick out five:

1. Arguments between debtor and creditor countries. 
In one corner, you have the spokesman for the debtors – ailing Maynard Keynes,the designer of the British plan for post-war monetary cooperation and leader of the negotiations on US financial assistance to Great Britain (GB), like GB spending his last reserves in a fight for justice. In the other corner you have an implacable creditor – a foe masquerading as a friend – in the person of Harry White of the US Treasury with his rival plan (Indeed, the book might have been subtitled “The Ugly American meets Brideshead Revisited”). Keynes’s eloquence in defence of the debtors and in favour of sanctions on an unyielding creditor find an uncanny echo in the way US spokesman castigate China for its refusal to adjust. The roles have been reversed, with the spokesmen for the new surplus countries like China now saying very similar things about the US as the US said about Britain in the 1940s. The general American view was that all the UK wanted from the IMF was a cheap source of credit underwritten by the US. Britain was portrayed as profligate, just as the US is today by China. The achievement of Bretton Woods was to find a language to express such differences – a language of mutual adjustment and conditional assistance – that did not just amount to finger-pointing.

2. The  weapon of debtors. They have the threat to walk away from the table – default, throw their toys out of the bath. The US bullied weak and impoverished GB during and after the war. It wanted to take over UK assets on the cheap. It wanted to move the financial leadership of the world from London to Washington DC. It wanted to eliminate permanently any possibility of sterling to be a rival to the dollar sterling. But it also needed GB’s consent to the new world order. Without GB’s agreement, the US would not have Bretton Woods, which was intended to provide a cooperative wrapping for US power – a velvet glove for the iron fist of military and political hegemony. Through agreement with the principal debtor country, the US obtained a means for enforcing its way of doing things, its view of correct behaviour, on the world. It wanted to build a system where the world would be invited “voluntarily” to finance its neo-imperial ambitions. Now again the roles are reversed; it is the US – as the largest debtor – that the new creditors will need to persuade to acquiesce in their new world order – when they start to articulate it. It is now the US that, like GB 70 years ago, lives in a cloud of illusions. It is the US that threatens default – that has in effect already defaulted.

3. Lack of an agreed mechanism of adjustment
. Without agreed rules, norms and proceedures governing international monetary relations, there is no way of bringing the collective interest to bear – at least in any rigorous and sustained way – on individual national policies. The architects of Bretton Woods recognised this and tried to solve it by institutionalising international cooperation through the IMF. They created a mechanism that combined short-term financial assistance with an arrangement to correct longer-term imbalances by changing the exchange rate. But it was always difficult to apply these rules to large countries and since the breakdown of Bretton Woods in 1971 the effort to use group pressure to discipline any large country has failed. This lack of an agreed adjustment mechanism means that we again run the constant risk, as in the 1930s, of competitive currency depreciations.

4, The relationship between governments and financial markets also bears comparison. Keynes and White, with the backing of the US government  – especially Treasury secretary Henry Morgenthau and President Roosevel – were determined to bring private finance to heel. They wanted make bankers submit to democratic, politically-determined rules and the rule of experts. They wanted “to drive speculators from the temple of international finance”. We face similar challenges today from too-big-to-fail banks, shadow banking, and financial innovation. But what tools can we use? In the 1940s, there were no qualms about using phyisical controls, such as exchange restructions, controls oncapital movements, state direction of credit. Keynes and White believed in state planning. We don’t. So the question, exactly how can governments control private finance without throttling the life out of it, remains open.

(It is ironic, by the way, that US bankers vigorously opposed Bretton Woods – yet one of the fund’s main tasks in the past 30 years has been lending to countries experiencing capital outflows to permit them to service debt to large banks.)

5. Lack of academic consensus on the way forward; then as now, Keynes looms large, but he had opponents from Hayek downwards and today opinion remains split, above all on exchange rate policy. Now most economists favour flexible exchange rates; indeed, many think we need more flexibility; but in Europe 17 countries have opted to join not just a fixed rate system but a monetary union and are making huge sacrifices to keep it going. Many others in effect peg to the dollar or the euro. Some economists favour currency boards or heavily managed rates. Despite obvious huge differences in the geo-political context, and the institutional environment, the lack of an academic consensus on exchange rate policies, as on other elements of the IMS, hampers progress.


But this is where there is such an opportunity. 

What both Keynes and White did in their quite different ways was to make a convincing political case for linking domestic economic difficulties – the Great Depression – with lack of a coherent international order and international money. That is brought out well in Benn’s book. It is the kind of narrative missing today.



The biggest difference between then and now is that at Bretton Woods an anchor was already in place with the dollar fixed at $35 an ounce, the rate chosen by President Roosevelt in January 1934. Bretton Woods merely put clothes on a structure whose most important element was already in place. Indeed, it is President Roosevelt who has the strongest claim to be the unwitting architect of what came to be called BW, but would be better called an anchored dollar system. We don’t have an anchor today. Nobody has any idea what the price level in any country will be in five or ten years time. Prices could be lower than today, or twice what they are today. The world price level is indeterminate. In that respect we are starting from a worse position that Keynes and White did.


Keynes had the last laugh

Finally, on Benn’s main theme – how the tough, wily, arrogant, rude, duplicitous Soviet informer and agent White outmanouvred the sickly, silver-tongued British patriot – I take a rather different view.

 It was Keynes who has had the last laugh. For a start, at least since 1971 the IMF has more closely resembled the Keynesian rather than Whitean vision – like it or not, the Fund’s main role has been as a source of credit. Conditionality – which Keynes fought against though he recognised the need to protect the Fund’s resources – has become more flexible. The Fund’s resources – and so its ability to support countries in difficulties – have vastly increased to an extent that would have horrified Harry White. A country can devalue without seeking IMF approval, as Keynes wanted.

We remember Bretton Woods for Keynes’s not White’s contribution. We hold to the vision that Keynes articulated of a global international monetary system that would provide an appropriate mix of national discretion and external discipline. We remember Keynes’s articulation of a symmetrical system that would apply discipline equally on creditors and debtors. We remember his “new-fangled” creation, the bancor, the benchmark for all proposals for super-sovereign currencies.

Above all, we honour Keynes for insisting on – and demonstrating – the connection between a good international monetary system and good domestic policies.

Bretton Woods was a successful conference because it went beyond business as usual in a practical way, reflecting a revolution in ideas that he brought about. That is what we need today.

18 December 1945, Keynes opened the second day’s debate in the House of Lords on the Bretton Woods and US loan agreements legislation with a passionate plea for his handiwork:

The proposals were, he said, an attempt “to use what we have learnt from modern experience and analysis, not to defeat, but to implement the wisdom of Adam Smith..We are attempting a great step forward towards the goal of international economic order amidst national diversities of policies….Fresh tasks now invite. Opinions have been successfully changed. The work of destruction has been accomplished and the site has been cleared for a new structure”.

Robert Skidelsky labels this as the greatest of all Keynes’s public speeches. Indeed, Skidelsky suggests, perhaps it is in the realm of rhetoric that Keynes’s true greatness lies. Benn Steil also refers to his great rhetorical powers.  Somehow, this rhetoric still echoes to us, still resonates…Benn’s book brings it alive for a new generation.

The big lesson for us is this: no country can get out of this recession by itrs own unaided efforts.