Books - The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

Crisis and Leviathan: 

IMF Edition

by Brian Domitrovic

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order

Author: Benn Steil - 

Publish Date: 2013 - 

Publisher / Edition: Princeton University Press

Why do we still have the International Monetary Fund? It began life in 1944 with one rather specific purpose, to make sure that currencies traded at fixed rates of exchange. Since at least 1973, few currency issuers (brave exceptions include China and Panama) have shown the slightest interest in fixed exchange rates. Shouldn’t the IMF have folded a long time ago?

What happened was mission creep. For about thirty years, from 1944 to 1973, the IMF did in fact supervise a world generally on fixed exchange rates. These were the “thirty glorious years” in France; the time of the “economic miracle” in Germany, Japan, and Italy; and the era of “postwar prosperity” in the United States. Yet all the while, and despite the incredible and comprehensive post-World War II boom, the IMF was preparing for a another day, when it might be indifferent to fixed exchange rates and concentrate on other things, such as being the world’s central bank.

Strange—cultivating benign neglect toward the financial architecture of one of the greatest economic expansions in all of history (the postwar boom) in the interest of some alternative future, wherein the IMF would have a more sovereign role, with real consequences necessarily a secondary matter. Then again, public-choice economics has taught us for years that bureaucracies devote themselves to one task above all others, namely mission creep.

After 1973, the year that the major countries renounced exchange-rate fixity, the IMF found that it was ready to thrive in the new world. Countries devalued heedlessly, soon enough they realized (given stagflation) that this was a mistake, and then came to the IMF for loans. It was an upgrade in status. From 1944 to 1973, the IMF had to be content, at least with respect to its major members, with monitoring countries that were generally playing by the rules and getting rich doing it; 1944-73, the IMF was an ever-less-significant adjunct to the world economy. 1973-2008, as the number and importance of countries becoming desperados before the IMF leapt most nicely, the institution became a power broker nearly on par with the top national hegemons.

Shortly before the 2008 crisis, people at the IMF actually were beginning to fret that their institution was becoming obsolete. The mass joint devaluations of currencies around the world of recent years—the thing that gave us the housing and commodities bubble—had created so much global cash that the IMF’s own stash was getting irrelevant. But then came the meltdown. Everyone had to write down losses and endure a flight to the dollar (and, for a time, the euro). Countries ran like the wind back to the IMF for loans. Business picked up like never before, and heretofore secret talk of the IMF’s operating as a world central bank popped out into the open. Instability and recession reigned in the world economy, but the IMF was bolstered.

There is little reason not to believe that if left to its own devices, the international cognoscenti will, over the next decade or two, effect the de-nationalization of central banking in favor of a global institution. The only one plausible enough, and preparing for this day all along, is the IMF. Friends on the American right should be cautious when they make calls to “End the Fed.” Shrewd operators may well take advantage of this sentiment and pull a double-cross by outsourcing monetary policy to this ambitious multinational creature.

Benn Steil’s remarkable book, The Battle of Bretton Woods, is an account of how the IMF first came to be, back in the sleepy New Hampshire summer of 1944. As every student of international economics knows, the United States held a conference in 1944 at the Bretton Woods ski resort there in the White Mountains. Forty some countries attended, and the agreement that emerged stipulated that after World War II concluded, the gold standard would resume operations in a particular fashion. Each currency would trade at a fixed rate of exchange to the dollar, and the dollar would be redeemable in gold at the prevailing price of $35 per ounce.

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