So I realized earlier this week, while staring at the return address stamped on the sign outside the small post office on the lower level of the resort my grandfather selected for us on our family trip, that we were in fact staying in the same hotel which hosted the famous Bretton Woods Conference, that resulted in the Bretton Woods System that governed post-WWII economic rebuilding around the world, and laid the groundwork for our modern economic system, helping to cement the idea of currency as we consider it today.
Needless to say, I find this intensely fascinating; both the conference itself as a gathering of some of the most powerful people at one of the major turning points in history, and the system that resulted from it. Since I can’t recall having spent any time on this subject in my high school economics course, I thought I would go over some of the highlights, along with pictures of the resort that I was able to snap.
First, some background on the conference. The Bretton Woods conference took place in July of 1944, while the Second World War was still in full swing. The allied landings in Normandy, less than a month earlier, had been successful in establishing isolated beachheads, but Operation Overlord as a whole could still fail if British, Canadian, American, and Free French forces were prevented from linking up and liberating Paris.
On the Eastern European front, the Red Army had just begun Operation Bagration, the long planned grand offensive to push Nazi forces out of the Soviet Union entirely, and begin pushing offensively through occupied Eastern Europe and into Germany. Soviet victories would continue to rack up as the conference went on, as the Red Army executed the largest and most successful offensive in its history, escalating political concerns among the western allies about the role the Soviet Union and its newly “liberated” territory could play in a postwar world.
In the pacific, the Battle of Saipan was winding down towards an American victory, radically changing the strategic situation by putting the Japanese homeland in range of American strategic bombing. Even as the battles rage on, more and more leaders on both sides look increasingly to the possibility of an imminent allied victory.
As the specter of rebuilding a world ravaged by the most expensive and most devastating conflict in human history (and hopefully ever) began to seem closer, representatives of all nations in the allied powers met in a resort in Bretton Woods, New Hampshire, at the foot of Mount Washington, to discuss the economic future of a postwar world in the United Nations Monetary and Financial Conference, more commonly referred to as the Bretton Woods Conference. The site was chosen because, in addition to being vacant (since the war had effectively killed tourism), the isolation of the surrounding mountains made the site suitably defensible against any sort of attack. It was hoped that this show of hospitality and safety would assuage delegates coming from war torn and occupied parts of the world.
After being told that the hotel had only 200-odd rooms for a conference of 700-odd delegates, most delegates, naturally, decided to bring their families, an many cases bringing as many extended relatives as could be admitted on diplomatic credentials. Of course, this was probably as much about escaping the ongoing horrors in Europe and Asia as it was getting a free resort vacation.
As such, every bed within a 22 mile radius was occupied. Staff were forced out of their quarters and relocated to the stable barns to make room for delegates. Even then, guests were sleeping in chairs, bathtubs, even on the floors of the conference rooms themselves.
The conference was attended by such illustrious figures as John Maynard Keynes (yes, that Keynes) and Harry Dexter White (who, in addition to being the lead American delegate, was also almost certainly a spy for the Soviet NKVD, the forerunner to the KGB), who clashed on what, fundamentally, should be the aim of the allies to establish in a postwar economic order.
Everyone agreed that protectionist, mercantilist, and “economic nationalist” policies of the interwar period had contributed both to the utter collapse of the Great Depression, and the collapse of European markets, which created the socioeconomic conditions for the rise of fascism. Everyone agreed that punitive reparations placed on Germany after WWI had set up European governments for a cascade of defaults and collapses when Germany inevitably failed to pay up, and turned to playing fast and loose with its currency and trade policies to adhere to the letter of the Treaty of Versailles.
It was also agreed that even if reparations were entirely done away with, which would leave allied nations such as France, and the British commonwealth bankrupt for their noble efforts, that the sheer upfront cost of rebuilding would be nigh impossible by normal economic means, and that leaving the task of rebuilding entire continents would inevitably lead to the same kind of zero-sum competition and unsound monetary policy that had led to the prewar economic collapse in the first place. It was decided, then, that the only way to ensure economic stability through the period of rebuilding was to enforce universal trade policies, and to institute a number of centralized financial organizations under the purview of the United Nations, to oversee postwar rebuilding and monetary policy.
The devil was in the details, however. The United States, having spent the war safe from serious economic infrastructure damage, serving as the “arsenal of democracy”, and generally being the only country that had reserves of capital, wanted to use its position of relative economic supremacy to gain permanent leverage. As the host of the conference and the de-facto lead for the western allies, the US held a great deal of negotiating power, and the US delegates fully intended to use it to see that the new world order would be one friendly to American interests.
Moreover, the US, and to a lesser degree, the United Kingdom, wanted to do as much as possible to prevent the Soviet Union from coming to dominate the world after it rebuilt itself. As World War II was beginning to wind down, the Cold War was beginning to wind up. To this end, the news of daily Soviet advances, first pushing the Nazis out of its borders, and then steamrolling into Poland, Finland, and the Baltics was troubling. Even more troubling were the rumors of the ruthless NKVD suppression of non-communist partisan groups that had resisted Nazi occupation in Eastern Europe, indicating that the Soviets might be looking to establish their own postwar hegemony.
The first major set piece of the conference agreement was relatively uncontroversial: the International Bank for Reconstruction and Development, drafted by Keynes and his committee, was established to offer grants and loans to countries recovering from the war. As an independent institution, it was hoped that the IBRD would offer flexibility to rebuilding nations that loans from other governments with their own financial and political obligations and interests could not. This was also a precursor to, and later backbone of, the Marshal Plan, in which the US would spend exorbitant amounts on foreign aid to rebuild capitalism in Europe and Asia in order to prevent the rise of communist movements fueled by lack of opportunity.
The second major set piece is where things get really complicated. I’m massively oversimplifying here, but global macroeconomic policy is inevitably complicated in places. The second major set-piece, a proposed “International Clearing Union” devised by Keynes back in 1941, was far more controversial.
The plan, as best I am able to understand it, called for all international trade to be handled through a single centralized institution, which would measure the value of all other goods and currencies relative to a standard unit, tentatively called a “bancor”. The ICU would then offer incentives to maintain trade balances relative to the size of a nation’s economy, by charging interest off of countries with a major trade surplus, and using the excess to devalue the exchange rates of countries with trade deficits, making imports more expensive and products more desirable to overseas consumers.
The Grand Ballroom was thrown into fierce debate, and the local Boy Scouts that had been conscripted to run microphones between delegates (most of the normal staff either having been drafted, or completely overloaded) struggled to keep up with these giants of economics and diplomacy.
Unsurprisingly, the US delegate, White, was absolutely against Keynes’s hair brained scheme. Instead, he proposed a far less ambitious “International Monetary Fund”, which would judge trade balances, and prescribe limits for nations seeking aid from the IMF or IBRD, but otherwise would generally avoid intervening. The IMF did keep Keynes’s idea of judging trade based on a pre-set exchange rate (also obligatory for members), but avoided handing over the power to unilaterally affect the value of individual currencies to the IMF, instead leaving it in the hands of national governments, and merely insisting on certain requirements for aid and membership. It also did away with notions of an ultranational currency.
Of course, this raised the question of how to judge currency values other than against each other alone (which was still seen as a bridge too far in the eyes of many). The solution, proposed by White, was simple: judge other currencies against the US dollar. After all, the United States was already the largest and most developed economy. And since other countries had spent the duration of the war buying materiel from the US, it also held the world’s largest reserves of almost every currency, including gold and silver, and sovereign debt. The US was the only country to come out of WWII with enough gold in reserve to stay on the gold standard and also finance postwar rebuilding, which made it a perfect candidate as a default currency.
Now, you can see this move either as a sensible compromise for a world of countries that couldn’t have gone back to their old ways if they tried, or as a master stroke attempt by the US government to cement its supremacy at the beginning of the Cold War. Either way, it worked as a solution, both in the short term, and in the long term, creating a perfect balance of stability and flexibility in monetary policy for a postwar economic boom, not just in the US, but throughout the capitalist world.
The third set piece was a proposed “International Trade Organization”, which was to oversee implementation and enforcement of the sort of universal free trade policies that almost everyone agreed would be most conducive not only to prosperity, but to peace as a whole. Perhaps surprisingly, this wasn’t terribly divisive at the conference.
The final agreement for the ITO, however, was eventually shot down when the US Senate refused to ratify its charter, partly because the final conference had been administered in Havana under Keynes, who used the opportunity to incorporate many of his earlier ideas on an International Clearing Union. Much of the basic policies of the ITO, however, influenced the successful General Agreements on Tarriffs and Trade, which would later be replaced by the World Trade Organization.
The Bretton Woods agreement was signed by the allied delegates in the resort’s Gold Room. Not all countries that signed immediately ratified. The Soviet Union, perhaps unsurprisingly, reversed its position on the agreement, calling the new international organizations “a branch of Wall Street”, going on to found the Council for Mutual Economic Assistance, a forerunner to the Warsaw Pact, within five years. The British Empire, particularly its overseas possessions, also took time in ratifying, owing to the longstanding colonial trade policies that had to be dismantled in order for free trade requirements to be met.
The consensus of most economists is that Bretton Woods was a success. The system more or less ceased to exist when Nixon, prompted by Cold War drains on US resources, and French schemes to exchange all of its reserve US dollars for gold, suspended the Gold Standard for the US dollar, effectively ushering in the age of free-floating fiat currencies; that is, money that has value because we all collectively accept that it does; an assumption that underlies most of our modern economic thinking.
While it certainly didn’t last forever, the Bretton Woods system did accomplish its primary goal of setting the groundwork for a stable world economy, capable of rebuilding and maintaining the peace. This is a pretty lofty achievement when one considers the background against which the conference took place, the vast differences between the players, and the general uncertainty about the future.
The vision set forth in the Bretton Woods Conference was an incredibly optimistic, even idealistic, one. It’s easy to scoff at the idea of hammering out an entire global economic system, in less than a month, at a backwoods hotel in the White Mountains, but I think it speaks to the intense optimism and hope for the future that is often left out of the narrative of those dark moments. The belief that we can, out of chaos and despair, forge a brighter future not just for ourselves, but for all, is not in itself crazy, and the relative success of the Bretton Woods System, flawed though it certainly was, speaks to that.
Works Consulted
IMF. “60th Anniversary of Bretton Woods.” 60th Anniversary – Background Information, what is the Bretton Woods Conference. International Monetary Fund, n.d. Web. 10 Aug. 2017. <http://external.worldbankimflib.org/Bwf/whatisbw.htm>.
“Cooperation and Reconstruction (1944-71).” About the IMF: History. International Monetary Fund, n.d. Web. 10 Aug. 2017. <http://www.imf.org/external/about/histcoop.htm>
YouTube. Extra Credits, n.d. Web. 10 Aug. 2017. <http://www.youtube.com/playlist?list=PLhyKYa0YJ_5CL-krstYn532QY1Ayo27s1>.
Burant, Stephen R. East Germany, a country study. Washington, D.C.: The Division, 1988. Library of Congress. Web. 10 Aug. 2017. <https://archive.org/details/eastgermanycount00bura_0>.
US Department of State. “Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 1-22, 1944.” Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 1-22, 1944 – FRASER – St. Louis Fed. N.p., n.d. Web. 10 Aug. 2017. <https://fraser.stlouisfed.org/title/430>.
Additional information provided by resort staff and exhibitions visitited in person.