International economic relations seem in disarray right now, and there is no consensus on how they might be improved. In such a situation, history often beats economic theory as a source of insights. Philosopher George Santayana’s 1905 assertion that “those who cannot remember the past are condemned to repeat it” rings true.
Unfortunately, it is not always clear exactly what happened in the past or why. Director John Ford’s 1962 film “The Man Who Shot Liberty Valance,” which centers on this problem, concludes: “When the legend becomes fact, print the legend.’’ But is it wise to base contemporary policies on lessons distilled from legend rather than facts?
Economic historian Benn Steil’s work does us all a service in separating fact from legend. Speaking in Minneapolis recently, he distinguished the facts of the 1944 Bretton Woods Conference from the myths.
Why should this be of interest seven decades later? Because two international institutions designed at the conference, the International Monetary Fund and the World Bank, remain important in the global financial regime. An International Trade Organization also designed there seemed stillborn at first but over time led to the General Agreement on Tariffs and Trade and today’s World Trade Organization. The IMF and the WTO in particular lie at the core of the current policy debate.
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Meantime, the postwar stability of the Bretton Woods payments system, with all major currencies fixed to the U.S. dollar and the dollar in turn referenced to gold, now seems like an idyllic age. This as fluctuations in currency exchange rates flagellate U.S. agricultural, mining and medical device sectors, among others, and as Japan, the European Union, the United States and China engaged in anarchic currency wars since 2008. One often hears calls for “a new Bretton Woods system.”
Steil, who detailed the issues in his 2012 book, “The Battle of Bretton Woods,” injects realism. Yes, the conference was important, particularly in setting the tone for postwar multilateral negotiations on economic and security issues. Yes, “the Fund” and “the Bank” still play roles. Yes, given the realities of 1944, with Britain effectively bankrupt, ravaged France still occupied, Germany and Japan in the process of being bombed into ruins and the United States holding at least two-thirds of all the world’s gold, the outcome was about the best one might expect.
The myths, however, are many. The conference did aim to restore prosperity to Europe and avoid the post-World War I economic turbulence that led to an even greater war. Yet the dramatic economic growth there actually stemmed primarily from the Marshall Plan of direct U.S. aid. Indeed, that plan was instituted hurriedly in 1947 as it became apparent that a process planned at Bretton Woods was not materializing.
And as for the IMF and World Bank, their policies and roles today are diametrically opposed to what their Bretton Woods designers intended.
The comparative exchange rate stability for a quarter-century was not a myth. But the term in which the system actually functioned was much shorter than commonly thought. The pound and other important currencies were not even freely convertible until the end of the 1950s. By that time, the central role of the United States already was eroding. The balance of payments surpluses the U.S. saw in the immediate post-war era — largely because our nation’s was only industrial power not devastated by fighting — soon turned into deficits. These bled away the enormous gold reserves we owned in 1944.
Tying the dollar to gold at $35 an ounce meant we had to surrender an ounce of gold to every central bank that came to us with that number of greenbacks. This eventually led the Nixon administration to unilaterally repudiate the system in 1972.
The outflows of gold differed little from the outflows of dollars, yen and euros China faces now. Even as U.S. presidential candidates of both parties excoriate China for manipulating its currency to gain unfair trade advantages, that nation is actually burning through hundreds of billions in foreign reserves to keep the value of its yuan from falling.
The Chinese can take a lesson. Trying to maintain an overvalued exchange rate in the face of powerful opposing fundamental pressures can be impossible, even for very large nations starting with great reserves, whether of gold or dollars.
Why should anyone here care about this? The unsustainably high exchange value of the dollar in the 1950s and 1960s acted as a tax on potential U.S. exports, such wheat, corn and soybeans, and as a subsidy to imports of steel, cars and household goods, just as today.
When Nixon “closed the gold window,” thus devaluing the dollar, U.S. farm exports burgeoned and raising crops became much more profitable.
Prosperity in agriculture leads to rising land prices, often unsustainably. Ten years after the dollar devaluation, when the spend-and-borrow policies of the Reagan administration collided with the tight money policy of the Volcker-headed Fed, the value of the U.S. dollar soared, squelching exports and putting U.S. agriculture into the worst financial crisis since the 1930s.
Right now, the rising value of the U.S. dollar is one reason why farmland prices are dropping after a decade of increases.
Steil’s insights on the conference remain relevant, as is his current work-in-progress on a history of the Marshall Plan will. One also often hears that “we need is a new Marshall Plan” for this country or that. Such calls often are based even more on myth than appeals for a new Bretton Woods payments system. One can only hope that when this new book comes out, it will interject some reality into these appeals to history.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.