In 1942, both men had unveiled visions for a new global monetary order that would seek to put an end to the beggar-thy-neighbour policies that accompanied the Great Depression. Keynes was famous, his 1936 General Theory of Employment, Interest and Money an instant classic that would influence a generation of economists and policy makers. But as the lead negotiator for a suffering power, he was in tough against President Franklin D. Roosevelt’s men, who entered the talks representing the world’s only real economic force. Not even the world’s best economist could beat those odds.
Keynes wanted a global central bank that would oversee an international unit of exchange. What he was forced to accept was something closer to White’s proposal—a system of national currencies tethered to the U.S. dollar, which itself would be valued against the price of gold. The IMF would use contributions from member countries to disperse conditional loans at times of crisis. The Bretton Woods arrangements also included plans for the World Bank, which would fund development in poorer countries, and the General Agreement on Tariffs and Trade, a commitment to avoid the pernicious import duties of the 1930s that seeded the World Trade Organization.
Keynes wasn’t the only one disappointed in the final result. Louis Rasminsky, the future Bank of Canada governor who was Canada’s main negotiator at the conference, worried that the U.S. would dominate the system. Still, the agreement provided hope that the self-interested policies that preceded the Great Depression could be avoided in the future. Keynes saw scope for evolution, saying it was better to begin an era of co-operation in misery than to end one that way.
Things looked good at first. The Bretton Woods system fostered stability and confidence. By the early 1950s, the economies of Europe were growing quickly. Meanwhile Soros, a Hungarian Jew who spent the Second World War eluding the Nazis with his family, was in Britain at the London School of Economics. But he was an indifferent student who discovered that his grades were too low to achieve his ambition to become a philosophy teacher. So in 1953, he became an arbitrage trader. Three years later, Soros moved to New York to get away from the “stodginess” of London. The timing of his move was perfect. Wall Street had little idea of all the opportunities that existed in postwar Europe, and the multilingual Soros was happy to make the connection. He was on his way.
The monetary system created in Bretton Woods held up for the next two decades, but eventually, countries found it too difficult to maintain their currency pegs. As the centre of the system, the U.S. had a tacit responsibility to maintain sound fiscal policies that would keep the dollar’s value against gold stable. But in the 1960s, the Johnson administration started running big deficits to finance its domestic program and the Vietnam War. The spending generated inflation. Currency traders began testing the government’s resolve, taking advantage of the U.S.’s promise to redeem dollars for gold. The way to counter these pressures was to raise interest rates. But facing re-election in 1972, Richard Nixon was uninterested in making money more expensive. Instead, he ended the gold standard, declaring the U.S. would no longer exchange dollars for the metal.
The international monetary system has functioned without concrete rules ever since. As members of the IMF, countries pledge to adhere to sound fiscal policies and floating exchange rates, but the IMF has no power to enforce these protocols. Co-operation has always been an ad hoc thing.
Keynes’s global central bank would have promoted stability by taxing the accumulation of excessive reserves and limiting countries’ ability to run deficits. But without such an organizing principle, countries pursued their own agendas, however short-sighted. China began piling up foreign exchange reserves to keep its currency low against the dollar. The value of China’s reserves surpassed $3 trillion (U.S.) this year, a sum that even the head of the People’s Bank of China concedes is more than the country needs. The policy contributes to any number of distortions in global financial markets. The most important is the creation of cheap money in the United States. To keep its exchange rate low, the Chinese government buys U.S. Treasuries. This keeps interest rates low, which encourages borrowing.