Bretton Woods Is No Mystery and The Nixon ShockPosted: March 7, 2021
Breaking the Breton Woods agreements, the American president said that the dollar would have no reference to reality, and that its value would henceforth be decided by an act of language, not by correspondence to a standard or to an economic referent.
Everywhere I turn these days, from the new Adam Curtis documentary to the Bitcoin-heads on Twitter, I hear about Sunday, August 15, 1971. On that evening, Richard Nixon, after conferring with his advisors in a weird weekend at Camp David, went on TV and announced he was taking the US dollar off the gold standard, ending the “Bretton Woods system.”
I’ve always had an interest in the Bretton Woods system, because it was worked out at the Mount Washington Hotel in Bretton Woods*, New Hampshire. My dad and I used to go cross-country skiing up there.
The hotel shut up for winter had a grand, imposing, and spooky quality.
President Franklin Roosevelt proposed the conference site, the Mount Washington Hotel, as a ploy (successful, as it turned out) to win over a likely opponent of the pact, New Hampshire senator Charles Tobey.
That’s from Michael A. Martorelli’s review of Benn Steil’s book about the conference, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.
The conference happened in July 1944. The Allied forces were still stalled in the bocage of Normandy, but the leadership was already planning for the postwar order. The famed economist John Maynard Keynes, who’d studied the disaster of the last postwar peace, was trying to avoid some of the same mistakes while also attempting to save the status and dignity of the UK Keynes suggested the world switch to a new global currency called Bancor. The US, represented by Harry Dexter White, militarily and financially dominant, had the strongest position. The US proposed a system that would ultimately leave the US dollar, pegged to gold, as the world’s reserve currency.
Deeply indebted to the United States after the long, costly ordeal of World War II, the United Kingdom inevitably lost the battle. To secure one key victory, however, White had to resort to stealth. In the waning hours of the conference, he and his assistants replaced the phrase “gold” with “gold and US dollars” in the agreement, thereby enshrining the US currency as the international medium of exchange. Keynes confessed that he did not read the final version of the document he signed.
You think there aren’t thrills in a book about a 1944 economic conference whose results have mostly been overturned? Guess again:
In one noteworthy coup, [Steil] disproves Keynes biographer Robert Skidelsky’s claim that Keynes was assigned Room 129 in the Mount Washington Hotel.
The summit does sound kind of exciting. The Soviets brought a bunch of beautiful female “typists” to seduce everyone.
One committee of delegates took a 15-minute recess in the bar each night at 1:30 to watch the “titillating gyrations of Conchita the Peruvian Bombshell.” Afterward, reinvigorated, they would negotiate for another hour or so. The long arguments left White increasingly short-tempered on less than five hours of sleep a night. Keynes, already weakened by the heart disease that would kill him within two years, was soon holding court from his bed, tended (and guarded) by Lydia, his eccentric Russian ballerina wife. At one point, a rumor spread that he was near death; when he then appeared at dinner, the delegates spontaneously stood and sang “For He’s a Jolly Good Fellow.”
from a different review of a different book about the conference:
I’ve now taken a look at both Steil and Conway’s books. The Summit by Conway is a lot more fun and easy to read, and focuses more on the wild details – what he calls the “noises off” stuff – from the conference. The drunken songs, the parody newspaper about the “International Ballyhoo Fun,” the pleasure the delegates from wartorn countries took in huge plates of “chicken Maryland” and enormous bowls of ice cream, the South Africans chilling and playing golf once it was clear gold wouldn’t be replaced by silver, the results of the Soviet vs USA volleyball game (USSR won), that’s in Conway.
The details of the conference are interesting, but in a way the outcome was inevitable. The US was more or less the last power standing as World War II wound down. The UK was tremendously in our debt (literally). What we ended up with was the system we more or less devised, that left the dollar as the default world currency.
The true significance of the conference was noted by Keynes in a speech at the farewell dinner:
We have shown that a concourse of 44 nations are actually able to work together at a constructive task in amity and unbroken concord. Few believed it possible. If we can continue in a larger task as we have begun in this limited task, there is hope for the world.
If you read one review of one book about the conference, I recommend James Grant’s review of Steil in the Wall Street J (behind a paywall I suspect, they’re no fools about money at the WSJ):
Gold figures largely in these pages. The ancient metal was deeply rooted in the psyche of Keynes’s contemporaries, including that of Lt. Col. Sir Thomas Moore, a British Conservative member of Parliament. In parliamentary debate, Sir Thomas said that he had “the impression, not being an economist, that currency had to be tied to or based on something; whether it was gold, or marbles, or shrimps, did not seem to matter very much, except that as marbles are easy to make, and shrimps are easy to catch, gold for many reasons possessed a more stable quality.” For the soundest doctrine expressed in the fewest words, Sir Thomas was hard to beat.
Grant, if you can’t read it, isn’t too boosterish on the Bretton Woods system:
Rare among nations, America pays its overseas debts in money that it alone may lawfully print. Naturally, being human, we Americans have printed to excess. Not since 1975 has the United States exported more goods and services than it has imported. There is no institutional check to square up accounts. We buy Chinese merchandise with dollars. The Chinese, in turn, invest those dollars in U.S. government securities (the better to suppress the value of the Chinese currency). It’s as if the money never left the 50 states. In possession of the “reserve currency” franchise—White’s dream fulfilled—America has become the world’s leading debtor nation. At Bretton Woods, it was the world’s top creditor.
I mentioned the Nixon Shock to a bud who works at a hedge fund, and he put me on to WTF Happened in 1971, which takes a darker view. I love the idea that this is the moment everything went wrong and reality broke, but I’m not totally convinced. What about the Triffin dilemma? Was Nixon changing reality, or acknowledging it?
Consider how things worked before Bretton Woods. Both Conway and Stiel note that FDR would sometimes dictate the dollar price of gold from bed in the morning, once suggesting raising the price by twenty-one cents because that was a lucky number. This was hardly more “real.”
A crazy element of the conference is that the leader of the US delegation, Harry Dexter White, was secretly communicating with the Soviets. To what extent he was a traitor, a spy, vs kind of backchannel communicating with our wartime ally is unclear. But declassified transcripts make clear he was a Soviet asset known at “Jurist” or “Richard.” That’s if you trust our own NSA. Who knows?
White testified in front of HUAC that he was not a Communist, then had a heart attack. He went up to his home in New Hampshire and died four days later.
Is it possible White sabotaged the US team in the Bretton Woods volleyball game? Perhaps to provide a propaganda win for his Soviet masters? The Russians got a lot of concessions at Bretton Woods to induce them to sign on to the agreements, but I don’t see in Steil or Conway any strong case that White’s possible connection helped them unduly. Conway is more of a skeptic on the spy stuff, suggesting that yes, it looks pretty fishy, but it’s impossible to prove White “betrayed his country.”
One person who would’ve known White had been a spy? President Richard Nixon.
Following Alger Hiss’s perjury conviction in 1950, Representative Richard M. Nixon revealed a handwritten memo of White’s given to him by Chambers, apparently showing that White had passed classified information for transmission to the Soviets. Yet his guilt would only be firmly established after publication of Soviet intelligence cables in the late 1990s.
The IMF and World Bank still linger as Bretton Woods legacies. Conway in his epilogue notes how even after the demise of the Bretton Woods system, the IMF is still imposing the “Washington Consensus” on the developing world in return for loans, with mixed results. Maybe someone should activate the Coconut Clause:
Conway also notes that after the demise of the system, US and British banks became vastly more profitable.
In the United States, by the turn of the millennium banks now accounted for around 8 per cent of the country’s total economic output – more than double their zie when the Bretton Woods system ended… Until 1970, an investor in a UK bank could expect to make about 7 per cent a year on his investment. After 1970, the return on equity roughly trebled to 20 per cent, a figure maintained without a break until the financial crisis of 2008.
There is no single, simple explanation for this astonishing rise of the financial sector; however, there is no doubt that one important element is the sudden change in the international monetary architecture following the collapse of Bretton Woods. Almost immediately after the demise of Keynes and White’s system in the early 1970s, every single measure of the size, profitability, and leverage of the banking industry has begun to increase at unprecedented rates.
The big banks in the USA tried to stop Bretton Woods at the time,
After the Bretton Woods conference, the countries involved still had to sell it to a confused public. One method the USA used was to produce a pamphlet called Bretton Woods Is No Mystery, illustrated by the New Yorker cartoonist Syd Hoff. I’m on the trail of a copy, I can only find a few images online.
It’s heartbreaking to hear the names bandied about for the world currency, and think what might’ve been. From Conway:
among the suggestions were Fint, Proudof, Unibanks, Bit, Pondol, and Keynes’ favorite, Orb. Months later, Keynes sent round a note to his Treasury colleagues asking: “Do you think it is any use to try unicorn on Harry?”
What do you guys think will be the world’s reserve currency in 2031? Dogecoin?
*an archaic name for what’s now part of Carroll, New Hampshire.