Ed Conway, The Summit, Higlights

Tags: bretton-woods

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep … He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality … But most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous and avoidable.

pp. 23-24 quoted from The Economic Consequences of the Peace.

Copper coins were too heavy, as the Swedes discovered to their cost when they experimented with a copper standard in the seventeenth century. Citizens tired of having to carry around rectangular copper slabs which were a hundred times the weight of identically valued silver coins. There were positives, however. Burglars who broke into a house in Viborg and discovered a pile of cash had to leave it behind because they could not carry it. The weight is also said to have encouraged government investment in the road network between Stockholm and the provinces, as tax revenues could not be transported without the use of wagons.

pp. 56-57

The system [the gold standard] promised to be self-correcting. When country A had a trade deficit with country B (i.e. it imported more goods from that country than it exported), it would gradually pass its gold reserves on to B. With less gold circulating in country A, its prices would fall (and workers would face pay cuts), while they would rise by a similar amount in country B. This change in prices would encourage country B to start buying more of those cheaper goods from country A, and the system would correct itself - or so went the Price Specie Flow theory developed by eighteenth-century philosopher David Hume.

pp. 59

The plan, which became known as the Clearing Union, was certainly novel. Consider a high street bank: it can allow even its indebted customers to borrow money through overdraft facilities - though it charges them for the privilege. Keynes’s Clearing Union attempted to apply the same principle to international economic relations. There would be an international central bank, the Clearing Union itself, with its own currency, ‘bancor’, freely convertible at a fixed rate into all other currencies. Every country would have its own individual account at the Union, denominated in bancor, and countries would use these accounts whenever there was trade between them. If country A was selling bananas to country B, a debit would be made (in bancor) in country B’s ledger as those bananas changes hands and a credit posted to country A’s account. (Of course, this would all be invisible to the banana-seller, who would trade in local currency; the real actin would happen at central bank level.)

Countries with a heavy reliance on imported goods would eventually find themselves with a large overdraft at the Clearing Union - this would be limited to a certain size (a percentage of the country’s pre-war trade volumes), and there would be interest charges to try to encourage that country to get back into balance. Should it suffer persistent overdrafts (‘deficits’), it would be designated a ‘deficiency’ country and be allowed to depreciate its currency by a limited amount.

There would also (and this was the unusual element) be similar penalties imposed on those with large credits at the Clearing Union to incentivise them to import more and export less. Bancor was to be given a value in gold, but while one could pay in gold to exchange for bancor, one could not withdraw it by paying in bancor. This was Keynes’s coup de grâce: slowly but surely, gold would be retired from monetary service.

pp. 126-127

Just as the failure to develop an effective League of Nations has made possible two devastating wars within one generation, so the absence of a high degree of economic collaboration among the leading nations will, during the coming decade, inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale.

In economic terms, there were two distinct objectives: first to ‘stabilise foreign exchange rates’; after all, the beggar-thy-neighbour sequence of competitive devaluations in the 1930s was widely regarded as responsible for the worst of the Depression and the eventual war. Second, to set up an agency charged with rebuilding the world economy after the war.

pp. 130-131

Bretton Woods was about creating a structure to stabilise and correct imbalances in the international monetary system - to prevent a repeat of the Great Depression, where some parts of the world had become so indebted and reliant on imports that they were left vulnerable to sovereign debt crises.

pp. 210

Controls on capital movements, which had been an integral part of the Bretton Woods system in its infancy, had largely been dismantled, thanks in part to the creation of new international money markets such as London’s Eurodollar market. Money could flow freely to wherever investors thought it best placed - which at this point meant anywhere except the United States.

pp. 378

Between 1948 and the early 1970s, the world enjoyed a period of economic growth and stability that has never been rivalled - before or since. During that time, global gross domestic product expanded by 2.8 per cent - more than double the 1.3 per cent achieved during the gold standard ad comfortably stronger than the 1.8 per cent between the early 1970s and the financial crisis of 2008. Remarkably, there was not a single global downturn - something, again, which one cannot say about any other period in economic history (particularly recent history).

pp. 388

Contrary to the architects’ hopes that countries might be able to alter their exchange rates as they saw fit, the stigma of devaluation remained as traumatic and painful as it had been in the interwar years. Member nations (Britain being a good example) did everything they could to avoid devaluing until a crisis pushed them into it.

pp. 389