The Bear of Bretton Woods

BERKELEY – This is the season for international monetary conferences. In March, national leaders assembled in Nanjing, China, to speechify on exchange and interest rates. And, in early April, leading thinkers and former policymakers met in Bretton Woods, New Hampshire, the birthplace in 1944 of the International Monetary Fund and our dollar-centered international monetary system.

The 1944 Bretton Woods conference was marked by a clash between the United States and the United Kingdom, represented by the economists Harry Dexter White and John Maynard Keynes, respectively. The UK wanted a system in which global liquidity would be regulated by a multilateral institution, while the US, for self-interested reasons, preferred a dollar-based system.

Given its immensely greater economic and financial power, America predictably carried the day. Keynes failed in his quest to endow the IMF with the power to create a new international reserve unit as an alternative to the dollar. And he failed to secure agreement on measures that might force surplus as well as deficit countries, and the issuer of the international currency as well as its users, to adjust.

The latter failing haunts us to this day. Countries that run chronic external surpluses, like China, and countries whose currencies are widely used internationally, like the US, do not face the same pressure as other countries to correct their policies when economic imbalances arise.