Ahead Of Economic Summit, Bretton Woods Recalled

Countries came together for the 1944 Bretton Woods conference to deal with the economic devastation left by World War II. Financial historian John Steele Gordon says unlike the upcoming economic summit, the 1944 conference was planned for two years before it took place.

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ROBERT SIEGEL, host:

One of the prescriptions you hear nowadays for what ails the world financial system is, go back to basics. Or as we just heard, go back, at least in spirit, to Bretton Woods.

(Soundbite of vintage broadcast)

Unidentified Announcer: At Bretton Woods, New Hampshire, delegates from 44 allied and associate countries arrived for the opening of the United Nation's Monetary and Financial Conference. Invited by President Roosevelt to the first major world financial meeting since the London Conference of 1933, they will work in the seclusion of this White Mountains resort.

SIEGEL: The monetary and economic system that governed the world's big capitalist economies for decades was hatched at that conference in 1944 in New Hampshire. Who was there? What did they do? And what sort of model might that be for world leaders today as they plan a financial summit for next month? Well, those are questions that we have for financial historian John Steele Gordon. Welcome back to the program.

Mr. JOHN STEELE GORDON (Financial Historian): Delighted to be here.

SIEGEL: And first, set the scene for us. Why was there a big conference in Bretton Woods, New Hampshire, in July '44?

Mr. GORDON: Well, it had been in preparation for, actually, two and a half years because they could see that World War II - the end of World War II was in sight, and they needed to plan a post-war world. And everybody agreed that the 1930s had been a mitigated disaster for the international financial system, and they wanted to create a new one that hopefully would work better.

SIEGEL: So, what did they agree on, and how much did that change the world financial system from what had been in effect in the '30s?

Mr. GORDON: Well, what they agreed on was that the predatory devaluation of money by each country - there effectively trying to beggar thy neighbor by suddenly devaluating their own currency, thus making their trade goods cheaper in other countries, which triggered retaliatory devaluations and what have you, and the international trading system in the 1930s largely collapsed. Trade in 1939 was lower than it had been in 1896. And so what they wanted to do was find a way to create a new system in which that kind of behavior would not take place. And what they came up with at Bretton Woods was a new system.

SIEGEL: Well, first, who was there? Who actually took part in the conference at Bretton Woods?

Mr. GORDON: Just about everybody. There were 44 countries present in 1944. That was just about every sovereign state that was not, you know, being bombed into oblivion by the allies.

SIEGEL: There are institutions that exist to this day that were really created at Bretton Woods, or at least the idea for them was agreed to at Bretton Woods.

Mr. GORDON: Yes, the IMF, the International Monetary Fund, and the World Bank both came out of Bretton Woods.

SIEGEL: So the idea that there would be these agencies that would actually play an international role in addressing the grave economic problems of particular countries is an idea that came into force there at that meeting.

Mr. GORDON: Yes. Rather than independent countries having to be by themselves and to solve their own economic problems, these international institutions were supposed to help out countries that got into financial trouble. And sometimes they have, and sometimes it has been argued that they made matters worse.

SIEGEL: The moment of this conference in 1944 with World War II still in progress both in Europe and Asia, but people seeing an end in sight, emerged at a time when people understood there'd been a terrible crisis in the world, the war, and preceded by the Great Depression. Do you think there's any comparable consensus among financial leaders and government leaders today about what the problems are and what the solutions might be?

Mr. GORDON: Well, we're nowhere near the situation we were in in the 1930s or happened within World War II. We have a serious financial situation going on right now, but it is no way comparable to what we endured in the Great Depression. And this conference that's coming up is going to be nowhere near as big or as lengthy or as decisive, I expect, as Bretton Woods turned out to be.

SIEGEL: John Steele Gordon, thank you very much for talking with us.

Mr. GORDON: Thank you.

SIEGEL: That's financial historian John Steele Gordon, the author of, most recently, of "An Empire of Wealth: The Epic History of American Economic Power."

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Is The World Ready For A New Bretton Woods?

English economist John Maynard Keynes. i i

English economist John Maynard Keynes, photographed about four years before the Bretton Woods conference. Walter Stoneman/Samuel Bourne/Getty Images hide caption

itoggle caption Walter Stoneman/Samuel Bourne/Getty Images
English economist John Maynard Keynes.

English economist John Maynard Keynes, photographed about four years before the Bretton Woods conference.

Walter Stoneman/Samuel Bourne/Getty Images
John Maynard Keynes at the Bretton Woods conference. i i

Keynes, center, talks with representatives of the Soviet Union and Yugoslavia during the Bretton Woods conference. Hulton Archive/Getty Images hide caption

itoggle caption Hulton Archive/Getty Images
John Maynard Keynes at the Bretton Woods conference.

Keynes, center, talks with representatives of the Soviet Union and Yugoslavia during the Bretton Woods conference.

Hulton Archive/Getty Images

It was the summer of 1944, still a year before the end of World War II. The Allies had gained a foothold against the Nazis in France and were advancing against the Japanese in the Pacific. But far from the battlefields of Europe and Asia, representatives of 44 nations gathered in an idyllic northern New Hampshire resort to reshape the global economy.

Three weeks of meetings at the Mount Washington Hotel produced the Bretton Woods Agreement, creating the now familiar World Bank and International Monetary Fund and establishing a currency exchange regime that would guide monetary policy for decades.

Bretton Woods (officially known as the United Nations Monetary and Financial Conference) is little remembered outside university economics classes, overshadowed in history by the cataclysmic events of the time.

Now world leaders — dismayed by the current chaos in financial markets — are calling for a sequel of sorts.

But economists and historians are quick to point out that a Bretton Woods-style solution is unlikely in the current environment. In 1944, the economic road ahead seemed clear. The resolution of the current global crisis, by contrast, seems to elicit little consensus.

And while European leaders are calling for a massive rethinking of how the global economy functions, it's less clear that U.S. authorities are interested in comprehensive change.

What Happened At Bretton Woods?

By early 1942, renowned British economist John Maynard Keynes and Assistant U.S. Secretary of State Harry Dexter White had independently drafted plans that would lay the foundation for the conference. Although the two were largely in concert, they disagreed on many of the details.

They shared the belief that an international organization should act as a lender of last resort to assist nations that were having short-term problems with "balance of payment" deficits. These deficits, caused largely because some nations had more imports than exports, were blamed for slowing economic growth and spurring inflation among many of the world's economies.

No More 'Go It Alone'

Keynes and White brought to Bretton Woods an understanding that global finance was too big and too complex for each nation to "go it alone" on economic decision making.

"They believed we cannot have a stable international financial architecture without a will for cooperation," says Benjamin Cohen, a political science professor at the University of California, Santa Barbara.

"Keynes wanted a world central bank that would be capable of creating money out of thin air in the same way that national central banks can do," says Cohen, who is author of the book International Political Economy: An Intellectual History.

Keynes and White agreed on the necessity to head off protectionist policies that worked to isolate the United States from other nations before the war. They believed that high tariffs on imported goods — meant to protect American jobs — had deepened the severity of the depression. They also hoped to use the promise of a new post-war economic order to strengthen the anti-Axis alliance.

"We needed to assure [the Allies] that we wouldn't return to the 'beggar thy neighbor' financial and monetary chaos of the 1930s," says David Andrews, a professor at Scripps College, whose latest book is Orderly Change: International Monetary Relations since Bretton Woods.

An 'Audacious' Plan

White and Keynes envisioned a post-war restarting of international financial markets that had virtually ceased to function during the Great Depression and World War II.

Their plan was "audacious," says Andrews.

At Bretton Woods, nations agreed to adopt a monetary policy that tied currency exchange to gold reserves, a return to the gold standard that had prevailed before the depression.

The British, facing massive deficit spending to rebuild their shattered homeland, objected to a fixed rate, anticipating a need to devalue the pound.

But the conference participants ultimately agreed that currencies would be permitted to fluctuate within a few percentage points of a fixed rate, pegged to the U.S. dollar, which was backed by America's gold reserves.

Lasting Legacies

Keynes' vision of a world central bank became the International Monetary Fund, to be funded by member nations. The forerunner of the World Bank, an institution that today provides loans to developing nations for reconstruction and infrastructure projects, was also created.

While the IMF and World Bank are lasting legacies of Bretton Woods, the fixed exchange rate is not. By the early 1970s, U.S. inflation had made the fixed exchange rate regime untenable.

"The U.S. was supposed to keep inflation down. Until about 1965, it did just that," says Michael Bordo, an economics professor at Rutgers University. "But around 1965, inflation took off."

By 1971, the rising cost of the Vietnam War, coupled with President Johnson's Great Society programs, had increased inflation and forced President Nixon to effectively rescind the U.S. gold standard and allow the dollar to float freely.

Why A Bretton Woods II?

In that sense, a key tenet of Bretton Woods — the effort at a fixed exchange rate — was a failure. So why have French President Nicolas Sarkozy, European Central Bank President Jean-Claude Trichet and others called for a "new" Bretton Woods?

"There's a broad sense on the part of the Europeans that the international monetary, financial and trade institutions are stuck — that they haven't worked properly for some time and in a sense they see this crisis then as an opportunity to address a long-standing set of concerns about how the international economy ought to function," says Andrews.

But today, there is no international consensus on which direction to move and considering the timing of a mid-November summit — scheduled days after the U.S. presidential election — there is unlikely to be enough political will to move ahead quickly.

Without the serious groundwork laid by a Keynes and White, "I can't imagine there would be any real result in terms of reform of the system," says Cohen.

A Changing Economic Climate

Since Bretton Woods, the world has been transformed again.

The United States remains a major force in the world economy, but it also has major competition. China and Europe have become economically much more important since Bretton Woods, while the "rise of the rest" makes the emerging economies of Southeast Asia and Eastern Europe bigger players.

Then there's Russia. In 1944, White managed to get a reluctant communist Soviet Union to attend the conference, only to see Moscow subsequently refuse to join the IMF or ratify the agreement. Today, Russia has emerged as a major exporter of oil and other commodities and would undoubtedly take a much more prominent seat at the table.

Cohen says the fact that the U.S. is less powerful than it was at Bretton Woods "makes consensus far more difficult."

"The likelihood is that the United States will seek only minimal changes to the status quo, in part because it doesn't know what kind of changes it wants," Andrews says.

In short, Andrews expects "nothing on the order of Bretton Woods" to emerge from November's summit.

"You don't draft a document like [the Bretton Woods Agreement] over the course of a weekend," Andrews says. "You draft it over the course of several years and then you finalize it at a summit."

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