In the first days of July 1944, while Allied troops were still fighting through the Normandy hedgerows, some 730 delegates from 44 nations arrived at the Mount Washington Hotel in Bretton Woods, New Hampshire, to redesign the world's money. The vast resort had been mothballed in the Depression years and was hurriedly reopened for the occasion; the staffing and plumbing were nearly as improvised as some of the drafting. Out of three sweltering weeks of committee rooms came the institutions that still frame the global economy — the International Monetary Fund and what became the World Bank — and a monetary order built, for once in history, by deliberate negotiation rather than by accident. Even the Soviet Union sent a delegation and signed the final act, though Moscow never ratified the agreements and stayed outside the system it had helped to draft.
The conference is remembered as a duel. In one corner stood John Maynard Keynes, the most famous economist alive, leading the British delegation with a plan for an International Clearing Union and a new world currency he called bancor, designed to force surplus and deficit countries alike to adjust. In the other stood Harry Dexter White of the US Treasury, a combative, self-made technocrat whose rival plan put the dollar at the centre of everything. Britain was heroic, exhausted and broke; America held the bulk of the world's monetary gold. The outcome was never seriously in doubt: White's plan, seasoned with some of Keynes's language, prevailed.
The system that emerged was a gold-plated dollar standard. The United States pegged the dollar to gold at 35 dollars an ounce; everyone else pegged to the dollar at fixed but adjustable rates, with the IMF standing by as lender to countries in balance-of-payments trouble. Neither architect saw the machine mature. Keynes died of a heart attack in 1946, weeks after the fractious inaugural meetings in Savannah, Georgia. White served briefly as the first American executive director of the IMF he had done so much to design, then died in 1948, days after appearing before the House Un-American Activities Committee to deny passing information to the Soviet Union — accusations later given weight, in the judgment of most historians, by the decrypted Soviet cables of the Venona project.
The flaw in the machine
For a generation the system presided over extraordinary growth, but it carried a design flaw now named the Triffin dilemma, after the economist Robert Triffin, who set it out to the US Congress in 1960. The world economy needed an ever-growing supply of dollars for trade and reserves; yet the more dollars piled up abroad, the less credible America's promise to redeem every one of them in gold. By the late 1960s, with spending on Vietnam and the Great Society swelling the outflow, foreign central banks held claims far beyond what Fort Knox could honour. For much of the decade a "gold pool" of Western central banks quietly sold bullion in London to hold the price at 35 dollars, until the effort collapsed in 1968. France made the point theatrically, converting its dollars into bullion; the jibe about America's "exorbitant privilege" is usually credited to President de Gaulle, but the record shows it came from his finance minister, Valéry Giscard d'Estaing.
Fifteen minutes on a Sunday night
On Sunday 15 August 1971, Richard Nixon took over American television screens — famously displacing the western Bonanza — and announced that the United States was "temporarily" suspending the dollar's convertibility into gold, alongside a ninety-day freeze on wages and prices and a 10 per cent surcharge on imports. The package had been settled during a secret weekend at Camp David; allies and the IMF learned of it roughly when everyone else did. The Nixon shock was meant to force a realignment, not to end the system; Treasury Secretary John Connally caught the new mood when he told European officials that the dollar was "our currency, but your problem". The Smithsonian Agreement of December 1971 — which Nixon hailed in extravagant terms — repegged the currencies at new rates, but it crumbled within about fifteen months, and by 1973 the major currencies were floating.
Bretton Woods proper lasted barely twenty-seven years, yet its ghosts still run the world. The IMF and the World Bank operate from Washington to this day; the dollar remains the world's dominant reserve currency with no gold behind it at all; and every scheme for reforming global money, from special drawing rights to talk of new reserve currencies, is measured against what was agreed at a hotel in New Hampshire. Keynes lost the argument in 1944. Economists have been asking ever since what the world would look like if he had won.
Quiz nuggets
- The Bretton Woods conference met in July 1944 at the Mount Washington Hotel in New Hampshire, with 44 nations attending.
- Keynes proposed a world currency called "bancor"; the rival plan of America's Harry Dexter White won out.
- The conference created the IMF and the World Bank, with the dollar pegged to gold at 35 dollars an ounce.
- "Exorbitant privilege" is usually attributed to de Gaulle but was coined by his finance minister, Valéry Giscard d'Estaing.
- Nixon ended dollar–gold convertibility in a televised address on 15 August 1971; major currencies floated from 1973.