The Hotel New Hampshire
The Hotel New Hampshire, written by John Irving, the author of The World According to GARP, is populated with unlikely characters—Egg, Win, Iowa, Bitty Tuck, a Viennese Jew named Freud, and Sorrow, a dog repeatedly restored through taxidermy. In July 1944, a similarly dysfunctional group of politicians, economists, and bankers gathered in Bretton Woods, New Hampshire, at the Mount Washington Hotel, to establish the post-Second World War international monetary and financial order. The pivotal figures were John Maynard Keynes, representing the UK, and Harry Dexter White, representing the United States.
Selected as one of Time’s 100 most influential figures of the twentieth century, John Maynard Keynes was the author of General Theory of Employment, Interest, and Money and one of the fathers of modern macroeconomics. A product of the English elite and a member of the Bloomsbury group, Keynes was equally at home among academics, politicians, businessmen, bankers, philosophers, and artists. An incorrigible pamphleteer and prolific author, he influenced public policy in a manner that has rarely been surpassed. Keynes was also a successful investor. Managing the endowment fund of King’s College, Cambridge, he outperformed the stock market over two decades, increasing the value of the portfolio by around ten times. A study concluded that: “On the basis of modern portfolio evaluation measures...Keynes was an outstanding portfolio manager ‘beating the market’ by a large margin.”17
Harry Dexter White, a descendant of Jewish Lithuanian Catholic immigrants, was an economist and a senior U.S. Treasury department official. White may have also been a Soviet spy, who passed confidential information about the negotiations to the Russians.
Bretton Woods took place against the background of a still raging brutal war, the rise of fascism, and the economic experience of the Great Depression. The focus was on establishing free trade based on convertibility of currencies with stable exchange rates. In the past, this problem was solved through the gold standard where the standard unit of currency was a fixed weight of gold. Under the gold standard, the government or central bank guaranteed to redeem notes upon demand in gold.
The gold standard was not feasible for the post-war economy. There was insufficient gold to meet the demands of growing international trade and investment. The communist Soviet Union, emerging as a rival to the United States in the post-war order, also controlled a sizeable proportion of known gold reserves. Keynes’ bold solution was a world reserve currency (the bancor) administered by a global central bank. White rejected the proposal: “We have been perfectly adamant on that point. We have taken the position of absolutely no.”
The United States was the undisputed preeminent economic and military great power as well as the world’s richest nation and the biggest creditor. The British and the French, devastated by two world wars, needed American money to rebuild their economies. White’s view prevailed.
Bretton Woods established a system of fixed exchange rates where countries would establish parity of their national currencies in terms of gold (the peg). All countries would peg their currencies to the U.S. dollar as the principal reserve currency and, after convertibility was restored, would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1 percent of parity (the band).
The U.S. dollar was to have a fixed relationship to gold ($35 an ounce). The U.S. government would convert dollars into gold at that price. The dollar was as good as gold. It was more attractive because dollars—unlike gold—earned interest. The U.S. dollar reigned supreme as the world’s currency, taking over the role that gold had played in the international financial system.
Barbarism—gold—had triumphed. George Bernard Shaw would have been pleased: “You have to choose between trusting the natural stability of gold and the...honesty and intelligence of the members of the government...I advise you...to vote for gold.”18 The gold standard would remain in place until 1971.