Bretton Woods at 75

This summer marks the 75th anniversary of the Bretton Woods conference. With victory in their grasp, the allied powers met at the New Hampshire ski resort from July 1-22, 1944 to establish the basic principles and central institutions governing the post-war international economic system: the IMF and World Bank. In his closing address on July 22, 1944 U.S. Treasury Secretary Henry Morgenthau told the delegates that “We have come to recognize that the wisest and most effective way to protect our national interests is through international cooperation—that is to say through united effort for the attainment of common goals.”

The commemorations of this historic event has been muted and analyses and predictions concerning the future of the system have been somber. French Finance Minister Bruno Le Maire has lamented that “Unless we are able to reinvent Bretton Woods, the New Silk Roads might become the New World Order and Chinese standards—on state aid, on access to public procurements, on intellectual property—could become the new global standards.” The editors of the Economist warn darkly that a “minimally disruptive end …remains within the realms of possibility….but the experience of the 1930s might prove to be a more apt guide.”  

One lesson from Bretton Woods is the historically close association of hegemony with international monetary stability, a thesis that, not surprisingly, has been virtually axiomatic among U.S. scholars ever since the early 1970s. Notwithstanding the rhetoric, post-war cooperation was based on U.S. power and preferences. Although the Soviet Union participated actively in the draft agreement, Josef Stalin ultimately refused to ratify it on the grounds that membership would subordinate the Soviet Union to the United States. Stripped of its gold and dollar reserves by war Great Britain under the leadership of John Maynard Keynes proposed a supranational currency— Bancor—that would set limits on U.S. power to the benefit of debtor countries and prolong Britain’s imperial role. However, possessing two-thirds of the world’s gold and 50% of global production capacity, the United States rejected Keynes’s vision in favor of a fixed exchange rate system based on the dollar pegged to gold at $35/oz.

The dollar/gold standard served to underwrite the postwar“ golden age” of full employment, growing prosperity and greater equality throughout the global north along with the steady increase of world trade. However, the decline of U.S. production superiority throughout the 1960s placed growing pressure on the dollar as the twin trade and budget surpluses turned into deficits. The deepening contradiction between monetary stability and liquidity—both requirements of the system--invited speculative attacks on the dollar, most notably from the French, who complained of the American “exorbitant privilege.” In early August, 1971 Georges Pompidou dispatched a destroyer to Fort Lee, New Jersey to redeem gold for dollars and transport it back to France. British Prime Minister Edward Heath requested similar redemptions, although more diplomatically. On August 15 an infuriated Richard Nixon suspended the convertibility of dollars into gold and enacted 10% tariffs across the board without consulting trading partners. By 1973 a new era of floating exchange rates had emerged, but the fiat dollar remained the international reserve currency.

The collapse of the dollar/gold standard was widely attributed to the loss of U.S. power, giving rise to predictions that a nascent multipolarity among the Western powers would usher in a new era of mercantilism and global conflict, reprising the experience of the 1930s. The reality was more complicated and the nature of global power relations more complex and dialectical, just as today.

To be sure, U.S. production supremacy in relation to its major trading partners had diminished. At the same time, however, the dollar could now be unleashed (at least partially) from self-imposed constraints and U.S. monetary policy could become increasingly unilateral and more purely self-interested. U.S. Treasury Secretary John Connolly famously informed the Europeans, “The dollar is our currency but your problem.” Richard Nixon declared, “There is no longer any need for the United States to compete with one hand tied behind her back.”

“Bretton Woods II,” the system that emerged gradually out of the crisis of the 1971, contains its own contradictions. The fiat international reserve currency underwrote the ascendancy of finance capital and the concomitant development of neoliberalism, cause and effect of the decline of labor movements on a global scale. This transformation was aided at every step by the IMF and World Bank, first during the global debt crisis of the early 1980s, with the imposition of crippling structural adjustment programs throughout the global south, then more recently in the de-regulatory bacchanal that contributed to the global financial crisis that started in 2008. The remedies- more deregulation, privatization, and austerity, endorsed enthusiastically by the EU and only somewhat less so by the IMF—have generated growing inequality, poverty, and unemployment, provoking a backlash to a supposedly benign globalization.

There can be little doubt that the resilience of the dollar as international reserve currency is generating growing instability and conflict, not least because the ability to prevent access to payment systems enables the United States to carry out economic warfare through the use of extraterritorial sanctions. In addition, the dollar’s “safe haven” status has allowed the Treasury to finance massive and seemingly unsustainable debt levels, currently $22 trillion and set to approach $34 trillion by 2028 alongside massive increases in consumer debt. Trump’ ominous but incorrect designation of China as a ‘currency manipulator” along with pressure on the Federal Reserve to reduce interest rates also suggests that central banks may be brought up to the front lines of the trade war that has thus far been waged through tariffs, sanctions, and the campaign against the WTO.

Can the dollar be replaced, either wholly or in part, by either the euro or the renminbi? Noting that the EU pays for 80% of its energy imports in dollars, outgoing Commission President Jean-Claude Juncker has called for the euro to become the “active instrument of a sovereign Europe.” Yet, the EU’s inability to develop even a modest “special purpose vehicle” to resist U.S. extraterritorial sanctions on Iran illustrates vividly the limits of Europe’s power. The share of reserves held in euros by central banks has remained at approximately 20% for many years, compared to the steady U.S. share of 62%. While the euro serves the (sputtering) German export machine, it contributes to regional disintegration by promoting austerity and uneven development.

The renminbi is gaining some reserve currency status through the Belt and Road Initiative. China has also established a place in the IMF’s basket of reserve currencies. In contrast to Europe, China played a central role a decade ago (along with the USA) in providing global stimulus in response to the global financial crisis.   However, it is not certain that such a rescue operation could be repeated today. The slowdown in growth, the persistence of capital controls, and soaring debts levels greatly limit the international reserve currency status of the renminbi, which now accounts for less than 2% of central bank reserves.   China’s $3 trillion holding of U.S. Treasuries represent just 17% of total foreign- held U.S. Treasuries and in fact provides only very limited leverage over Washington. At the present time, the dollar remains the dominant anchor currency; the challenge to its supremacy lies primarily in U.S. domestic politics. Even a modest increase in Special Drawing Rights supervised by the IMF is unlikely to be any more acceptable to Washington than was Bancor was 75 years ago.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.