Bretton Woods to Nixon

To explain what Nixon did to shock global finance it is first necessary to understand the significance of Bretton Woods. In 1944 there were still at least 5 major battles in two theatres to be won before the end of the war but armistice in the Allies’ favour was expected. It was a measure of the determination to put in place a global economic system, which would prevent future wars that it was convened even as war still raged. Remarkably, this ambitious international agreement was negotiated and ratified in 22 days.

One can imagine a delegate from France, say, whose family lived in Cherbourg, Rouen or Amiens, struggling to concentrate on nutting out the articles of the Fund in a committee or plenary session when you knew your parents would be on the front line of invading allies and Germans retreating.

If you were a delegate from Europe you probably flew in to New York then you would have been driven East on highway 95 to New Haven and then north on 91 for 300 kilometers where you turned right and drove through Bath, Lisbon, Littleton, Bethlehem and Carroll till your tires crunched on the driveway of the massive Mount Washington Hotel in Bretton Woods in the state of New Hampshire. Place names reflecting their British, French, Portuguese and Palestinian heritage. This off the beaten track venue was chosen because it was probably the closest big enough place to New York that only had one access road, so it was easier to secure and also picturesquely situated beneath mountains. Probably as a casualty of the 1929 stock market crash the hotel closed down in 1930 so had to be extensively renovated for the 730 delegates from 44 countries arriving in July 14 years later. As Shirley Boskey recalled in 1957 only “…some of the faucets produced clear water, but not all of the time, a failing for which the free Coca Cola dispensers on the veranda did not fully compensate.”

 

Shirley Boskey 1917-1998

Who the hell was Shirley Boskey? You might wonder. She was smart, had a great sense of humour –­ rare in the world of international finance­­– and became the first woman director of the International Relations Department at the World Bank from 1975 – ’83. She characterized the difference in priorities between the Fund and the IRBD (International Bank of Reconstruction and Development) as “… the [Fund] being the spinach in the international diet and the bank as dessert…and as everyone knows, spinach comes before dessert.” Later in the same recollection she unpacked the euphemism used to describe the Articles of Agreement for the bank – “sufficiently flexible” as being a politer word than “vague”. A year earlier, 1956, yet another institution providing international finance was established. The Economist magazine announced the formation of the international Finance Corporation thus: “To IBRD – a son.” A gender challenged by Shirley who said, “It had kept people waiting since 1951…it would be engaged principally in spending money…And it had already changed its mind…” (Jonas Haralz, in The World Bank: Its First Half Century, Vol. 1, 1997) Shirley Boskey 1917-1998

The purpose of the conference was to learn from the mistakes of the Treaty of Versailles which was overly punitive to the vanquished and set-in train competitive devaluation of currencies which is believed to have fed the rise of Fascism, the stock market crash of 1929, world depression and war. The deliberations were premised on the notion that peace between nations is dependent on international cooperation and economic stability. Although Keynesian government intervention was seen as a good thing in the form of the welfare state, strong currency rules were set up so governments could NOT intervene. The primary instrument of monetary regulation they agreed upon was fixed exchange rates with the US dollar being the reserve currency which itself was pegged to gold. Even an economic neophyte like myself can conclude that a regulatory regime like that has got to reduce the opportunity for gambling with currencies and thus free up money for investing in actual things.

Dismantling of Bretton Woods– the World Bank, as it later became known, and IMF survived–involved the overturning of the fixed exchange rates pegged to the American dollar, which in turn was tied to gold, which ushered in an era of recessions and inflation. According to Lutz Kilian, writing for the Reserve bank of Australia in 2009, there is little consensus on the causal relationship between oil price rise, monetary policy and stagflation (high inflation, slow growth high unemployment) in the early 70s. Since that time, in the absence of ‘wage-rigidities’– the ‘fault’ of powerful labour unions but despite countless stock market crashes, banking crises and massive budget deficits there has not been high inflation which is a necessary ingredient of that uniquely 70s phenomenon: stagflation. The most telling graph, which encapsulates the uniqueness of that post war period, can be found in This Time is Different by Reinhart and Rogoff’s 2010 book detailing the similarities of financial crises over 800 years. The chart shows the number of countries having a banking crisis each year from 1800 to 2010. The graphic resembles Shard-like skyscrapers reaching ever higher as they move towards the year 2000 and the absence of any crises between 1945 and 1971 looks like the gap in the New York sky line where the Twin Towers used to be. Therefore, it has to be concluded the global financially regulated system of fixed exchange rates worked.

Another telling graph with two lines snaking off together from 1948 and remaining entwined until 1972 and then diverging until 2013, shows how productivity rose by 143% but wages by only 8.9 %. (G. White, Atlantic, Feb. 2015) Without going in a too granular analysis of the causes of Nixon pulling out of Bretton Woods, suffice to say the Keynesian approach to economic management was beginning to unravel. Eagerly anticipated by Milton Friedman – the darling of Thatcher, Reagan, Kohl, Hawke, Keating and just about everyone else in the OECD during the 80s. As early as 1962 he was advocating refloating exchange rates, but it was probably his winning the Nobel Prize for economics in ’76 that guaranteed his influence. Although, given Thatcher’s penchant for taking tea with Pinochet, it was more likely to be the shock therapy Friedman advised the Chilean ouster of Allende to deal with Chile’s economic crisis that so impressed the Iron Lady.