If I told you that every decision your business makes is affected by agreements made between an American Treasury official who was probably a Soviet spy and a homosexual British celebrity in a luxurious ski hotel in New Hampshire during WWII, would you believe me?
I recently finished reading The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil. This was a very detailed history of the conference between delegates from 44 nations in Bretton Woods, New Hampshire near the end of WWII to determine the financial order of the post-war world. The first thing I learned from this book is that dense, wonky, academic books are very difficult for me to read. I suppose there's a reason I got an MBA and not a PhD. But, as someone not familiar with the entire history of global finance, some of the implications of the conference were fascinating.
As WWII was drawing to a close, it became obvious that the financial order of the post-war world would need to be decided in advance of the final shot fired. The British, probably aware of their waning power in the world, were very reluctant to cede the position of leader to the Americans. However, the British were also up to their ears in war debt from fighting Germany--a debt that was not fully repaid until 2006! Enter British celebrity economist John Maynard Keynes. If you've heard of one economist (and it's not Milton Friedman), you've probably heard of Keynes. He's so well-known that his theory of economics, appropriately referred to as Keynesian economics, persists to this day.
Facing off with Keynes was American Harry Dexter White. While it is clear that the Americans were sometimes overly charmed with Keynes, White was determined to push an American agenda at the conference. First and foremost, this meant establishing the US Dollar as the world's reserve currency in the post-war world. The other countries represented at the conference would peg their currencies to the US Dollar, essentially adopting US monetary policy as their own.
So what is a reserve currency and why is it important? With so much business occurring between two nations with different currencies, it is important to have one standard for exchange. Theoretically, this is the most commonly-accepted, credible, and sound currency available. By maintaining a store of this currency, transactions can occur without constant need for foreign exchange. As you can imagine, there are tremendous network benefits: in other words, there is a great incentive for an entity's reserve currency to be whichever reserve currency is most popular for other entities. This might even outweigh concerns about the currency's viability. Think Facebook: as much as you may hate it, you won't delete your account as long as everyone else is on it.
There are major advantages to the country that has its currency as the predominant reserve currency. For one, there will always be demand for that currency, contributing to its strength (though this can also hurt exports). This also decreases costs for businesses in that country, as they will deal exclusively in that currency, and enables those businesses to borrow at lower rates. This can provide downward pressure on prices of goods from that country. The reserve currency is also the currency in which major commodities are priced, such as oil and gold, so the strength of the currency can have a major affect on commodity prices. Finally, and somewhat ominously, the country issuing this currency has great power over other countries, and is thus in a position of additional military power. After all, it is Mayer Amschel Rothschild who is quoted as saying "Let me issue and control a nation's money and I care not who writes the laws."
Knowing full well this meant that the country with the world's reserve currency would be the preeminent super power in the post-war world, White somewhat deviously maneuvered to make sure that this currency was the US Dollar, which he claimed was as good as gold. As Steil explains in the book, this was done in a way that it was part of the agreement without Keynes becoming aware until after the conference had ended. The US government then promised to allow any country to redeem their dollars for the value in gold at any point. Eventually, this system became unsustainable as the US could not maintain required gold reserves and Nixon severed the tie between the US dollar and gold in 1971. As Steil points out, somewhat cheekily, "Dollars were not synonymous with gold, as White had contended; only gold was gold."
There were numerous other agreements made at the Bretton Woods conference, such as establishment of the International Monetary Fund. But if the core agreement of a US Dollar global reserve currency, redeemable in gold, is no longer valid today, why is the conference still important?
Just because the dollar lacked gold convertibility did not mean it lost its designation as the most widely used "safe" currency. According to Wikipedia (I'm not writing this for a class, so Wikipedia is a legitimate source), to this day around 63% of the world's reserves are held in dollars. Looking at the history of reserves, it is clear that increased confidence in the Euro has been one major detractor to the usage of US Dollars. What does this mean if the Greeks exit the Eurozone and the Euro eventually collapses? Will the increased demand for dollars increase imports to the United States? Even if the Euro remains a legitimate reserve currency, where would American business be today without the borrowing advantage that it is continually afforded? What would have happened in the Cold War if another currency had been selected as the world's reserve, such as the Soviet ruble? What will happen if the Chinese Yuan is elevated to be the dominant global reserve currency?
The book quoted a government report around the time of the conference: "There is virtually no public opinion about the Bretton Woods conference...there is no interest because there is no comprehension of the issues involved and the plans proposed, or their importance." Even Keynes and White didn't have much time to care about the results of the conference; Keynes suffered health problems almost immediately after the conference that would eventually kill him while White was accused by Joseph McCarthy (with fairly convincing evidence, actually) of being a Soviet spy. Both were dead from heart attacks within three years of the war ending. Personally, I have sympathy for an apathetic public, as I can't say that I understood the implications of every action at the conference even after spending so much time learning about it. But the results of Bretton Woods undoubtedly have had a tremendous affect on the landscape of business and finance, even 70 years later.
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