The legends of Bretton Woods - monetary system - Economic Myths Explained

ORBIS,  Spring, 1996  by Francis J. Gavin

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What were the larger motives of the founders of the plan? It has often been noted how remarkable it was that Keynes and White, despite the vastly different economic priorities of the countries they represented, were able to come up with such an extraordinary compromise.(11) Indeed, Keynes's original plan envisioned a "currency union" in which countries would have to pay a penalty on their surplus payments balances. Additionally, debtor nations would have unrestricted and virtually unlimited access to the resources of the clearing fund without having to seek international approval or make domestic adjustments to correct payments disequilibrium.(12) That plan had an enormous inflationary bias and would have allowed Britain to tap the immense resources of the United States without having to go through the arduous and embarrassing process of asking for direct aid.

Were White and Keynes driven, as Shelton has argued, "by a humanitarian desire to prevent the kind of financial stresses and economic dislocations that might lead to future wars"? Shelton nicely sums up the conventional wisdom:

In short, Keynes and White were convinced that international economic cooperation would provide a new foundation of hope for a world all too prone to violence. 'If we can continue,' Keynes observed, 'this nightmare will be over. The brotherhood of man will have become more than a phrase.'(13)

Keynes's own writing calls this interpretation into doubt. Not only would his plan protect Britain's intended full-employment policies from balance-of-payments pressures, but it would also present a convenient and politically painless way to get money out of the United States in the guise of international reform:

It would also be a mistake to invite of our own motion, direct financial assistance after the war from the United States to ourselves. Whether as a gift or a loan without interest or a gratuitous redistribution of gold reserves. The U.S. will consider that we have had our whack in the shape of lend-lease and a generous settlement of consideration. . . . We in particular, in a distressed and ruined continent, will not bear the guise of the most suitable claimant for a dole. . . . On the contrary. If we are to attract the interest and enthusiasm of the Americans, we must come with an ambitious plan of an international complexion, suitable to serve the interests of others sides ourselves. . . . It is not with our problems of ways and means that idealistic and internationally minded Americans will be particularly concerned.(14)

The Americans rejected the currency union plan as too radical, but the British came up with a substitute in the so-called scarce-currency clause, which permitted extensive capital controls and trade discrimination against major surplus countries. Both Keynes and R.F. Harrod, a Treasury official, suggested that the scarce-currency clause not be discussed in public for fear that the U.S. Congress might figure out its true implications. Harrod wrote, "In view of the need for 'good handling' the less public lucidity there is on this matter the better." And Keynes stated, "The monetary fund, in particular, has the great advantage that to the average Congressman it is extremely boring."(15)