The origin story of the Bretton Woods order gives the context required to understand why globalization failed and what is coming next.
In this three-part Emerging Real Estate Digest series we will examine the rise and fall of the global order that has reigned supreme during most of our lives and careers. In this process we will attempt to answer the ambitious questions of why globalism died and what is coming next. The parts are:
👉🏻 Origin Story of the Bretton Woods Order
America’s Prolonged Withdrawl
The “Next” New World Order
The world before globalism was harsh, unforgiving, and humbling. The winners had the best geography, possessed special advantages and technologies, and were usually bordered by non-hostile neighbors. National policies were primarily aimed at keeping the head above water and making sure most everyone was fed, protected, and kept reasonably occupied. Cooperation and trade between nations occurred but it was limited in scope and most interactions were based on mutually beneficial arm's length transactions between nearby allies.
Before World War I the global monetary system was based on one thing: GOLD! The gold standard permitted trade between nations because currencies were effectively IOUs underwritten by the sovereign who agreed to hand over an equivalent value of gold on demand. Currencies are therefore debt instruments and it’s no coincidence that we also refer to them as "notes" and "bills".
A gold standard is only operative so long as the sovereign has the discipline to issue redeemable notes (i.e., currency or IOUs) only to the extent of the value of gold readily on hand. No sovereign has been so disciplined, and the usual justification for excessive monetary expansions is to fund wars; to keep the bullets whizzing and bombs exploding onto and into the enemy du jour.
After World War I the global economy slowed and in the 1930s the world found itself in a great depression. “Competitive devaluation” came into play between nations as one country would issue more currency than it had gold on hand. The effect was to intentionally devalue its currency making its exports appear cheaper on the international market. Most nations engaged in this practice resulting in a situation where there was far more currency promising gold than there was gold in vaults. Exchange rates between currencies became more elastic and less predictable making the costs of international trade difficult to calculate and thus less likely to occur.
Countries with gold and reasonably sound currencies saw the writing on the wall and did all they could to hoard gold and any money that could be converted to gold. The effect was to decrease the monetary supply of the sound currency people wanted to hold, while at the same time increasing the monetary supply of the less desirable fiat notes. Savvy scholars understand that the great depression had more to do with the collapse of the gold standard than a stock market crash in 1929 as impressionable American schoolchildren are taught.
FDR Sets the Stage by Seizing Gold
During his first campaign for President FDR promised to cut government spending by 25% if elected. He broke that promise and instead made one of his first acts the seizure of the nation’s gold. Here’s the timeline:
March 4, 1933 - FDR inaugurated (not in January as they were thereafter).
March 8, 1933 - FDR assures Americans that the gold standard is safe.
March 11, 1933 - Executive order issued prohibiting the redemption of dollars for gold by the treasury just three days after the assurance.
April 5, 1933 - Executive Order 6012 issued seizing all gold coins, bullion, and gold certificates from Americans with penalties for noncompliance of up to ten years in prison and/or a fine of $10,000 (i.e., $236k today). Americans were not permitted to legally hold gold again until 1974.
1934 - Once all gold that could be seized was seized the dollar was devalued by 69 percent against the value of gold greatly increasing the money supply with just the stroke of a pen.
By the time World War II began America had twice as much gold (i.e., 17,800 tonnes) in its reserves than all other countries combined (i.e., 8,300 tonnes collectively).
Three Pillars of Bretton Woods Deal
When World War II ended America was in the driver’s seat of determining the world that would emerge post-war. Its main competitors were the Europeans and they were exhausted spiritually and financially. The Germans and the Soviets had lost 7 million and 26 million people, respectively. The Americans lost 420k people, still had most of the world’s gold, and had forces on friendly terms in the UK, West Germany, France, and most of Europe.
When America summoned the world to the Bretton Woods Conference in 1944 the nations expected to be lectured and educated on the new imperial world the Americans had decided to impose. But conquest wasn’t the goal. Running a global empire requires the constant putting down of rebellions and a mastery of several dark arts that don’t jive with America’s origin story and strengths.
The deal it proposed to the attendees was aimed at gaining enthusiastic cooperation to (1) help contain the USSR and (2) to suck up all the dollars it had just printed to fund the war. The Soviets were the only legitimate contenders with a sizable and independent manufacturing sector, and an Army strong enough to put up a fight. Recall that it was the Soviets who vanquished the Nazis almost singlehandedly at the Battle of Stalingrad.
The bribe to the world offered at Bretton Woods involved three pillars: 1) military supremacy, 2) free trade into America, and 3) the use of dollars to settle international payments.
Military Supremacy. America promised to secure the seas and protect the borders of its allies against the USSR. Not having to invest in defense meant naval supremacy was easier to maintain, and nations could focus on building their economies. The alternative was to disappear into oblivion behind the Iron Curtain
Free Trade. America agreed to voluntarily demanufacture itself and remove all export barriers (e.g., tariffs) to make way for the sea of exports soon to cascade into the country. This is an aspect of the global order not often discussed. If the American workers ever figured out that their jobs and livelihoods were placed on the chopping block at Bretton Woods there would be hell to pay politically.
Use of the Dollar. The Americans printed loads of dollars during the war and needed the world to continue to use those dollars to avoid stagflation. The Gold Standard was replaced by a similar standard whereby all nations’ currencies would be freely convertible to dollars, and those dollars pegged to the price of gold. The IMF and World Bank were organized as part of the deal to permit member nations to borrow to increase their money supplies.
The delegates at Bretton Woods enthusiastically accepted the terms most likely pinching themselves to make sure it wasn’t all a wonderful dream too good to be believed. They were leaving not with a new master but a compliant sugar daddy who would fund and protect them and remove all export barriers to its massive consumer market. In exchange, they only had to accept the dollar as king, resist the USSR, and look the other way when America did what it had to do to maintain the pact.