For those of you who don’t know (and I can hardly believe you don’t, but life has moved on) Bretton Woods was an agreement settled 81 years ago which essentially put the US Dollar at the centre of the world’s monetary system. Every other currency was denominated in Dollar terms. Even the mighty pound would in future only be talked of as so many Dollars to the pound.
Of course the pound was no longer mighty. Two world wars had reduced Great Britain to abject poverty, and the same applied pretty much to every other country in the world. So much so that by 1948 it became clear that unless America literally gave countries liquidity, the world would be stuck in an endless depression.
And so they did. From April 1948 to December 1951 the US showered money particularly on Europe and the defeated Axis powers to the tune of $13.2billion. That’s around $135 billion in today’s money, which just goes to show what bad value we get now from our governments.
But in many ways the most important part of Bretton Woods was the confirmation of the gold price. It had been set in 1934 by the US Treasury at the price of $35 per ounce. And it continued then until 1971, when the US broke the link and effectively allowed the price of gold to float. But it didn’t really until the following year when the US effectively devalued the dollar. Gold then started on its relentless rise to its present level of over one hundred times its pre 1972 price. So do please just remember it is entirely possible that the dollar might be devalued again.
Why am I repeating old history?
Firstly, it was J.M Keynes who finally persuaded the Americans that they had to “ do something” about the wasteland that was Europe. Keynes theories propounded that when times were economically challenging, the government was the only body capable of getting the money moving round the system again and producing prosperity and growth. Absolutely correct. Hence all those lovely dollars washing through Europe and priming the pump as it were. The problem is, everyone always forgets the second part of Keynes theory, which was that as the economy picked up, the government would be able to recoup the money it had put out. Unfortunately, as I say, everyone has forgotten that bit. As the economy improved and growth resumed there was capacity within the economy to have resources drawn out of it. Unfortunately, politicians saw pound signs (or Dollars or Francs) in their eyes and thought hey this is good we can bribe the electorate with all this lovely cash coming in and keep our jobs. But of course they got greedy and took too much out and suddenly there was no money back in and more had to be put out to keep the merry-go-round turning. And the problem is once you give someone something you can never get it back. The only exception to that rule is when there is a depression and the value of money is falling (DEflation as opposed to INflation) when people are happy to get less because otherwise they might not get anything. Deflation terrifies central financial institutions. Why? Because instead of reducing what they owe by a nice steady 2-3% clip every year through inflation, they might suddenly find themselves owing more as deflation took hold and made them owe real money as opposed to inflated money.
Keynes had a beautiful way of expressing how things worked, and how everything was connected. Bees, he said, all work co-operatively for the good of the hive, and one bee’s production is the consumption of another. So obviously if production falls, consumption will, too, to the detriment of all. Which is pretty much where we are at the moment.
But it’s just worth contemplating what has happened to those countries that have NOT espoused Keynesian principles. The two most relevant are what was East and West Germany and North and South Korea. In its 4 and a bit decades of separation from the rest of Germany, (and bearing in mind East and West Germany effectively started at the same level) West Germany ended up more than three times as prosperous as its Eastern neighbour. North and South Korea is even more stark. As of last year North Korea had a living standard that was 1/23rd of its southern counterpart. Long live Keynes.