Few ideas today are more unfashionable than globalization. Across the ideological spectrum, a once-robust consensus about the liberating power of free trade and financial markets has transformed into the conviction that the world has spun out of control. Economic inequality is rising in developing and developed countries alike. Hopes for a global human-rights awakening have given way to frank assessments of the persistence of slave labor and extreme poverty. Climate change is accelerating, diplomatic relations between the United States and China have reached a new nadir, and the European Union has devolved into a forum for resentment. A project forged to spread democracy has brewed a new authoritarian politics on multiple continents.
These horrors were evident before the outbreak of COVID-19; the pandemic has escalated them all. But this is not the first time globalization has run aground. Seventy-six years ago, leaders of the world’s democracies gathered in the mountains of New Hampshire hoping to end the chaos and enmity spawned by the collapse of the global trading system known as the gold standard. Guided by the great British economist John Maynard Keynes, more than 700 delegates from 44 nations sought to establish a new international order in which democracies would cooperatively tame the excesses of high finance in the name of international harmony. The fruits of their labors would become known as the Bretton Woods Accord, and the 25 years of unprecedented prosperity that their effort inaugurated offers profound implications for our own age of calamity.
For it is not globalization that has brought us to the brink of the abyss, but the peculiar strain of globalization that emerged in the 1990s—a system in which international financial markets would discipline the bad habits of democratic governments, not the other way around. Instead of linking countries together in shared investment priorities and social goals, the World Trade Organization and other institutions of global commerce have thwarted government interference in the profits of international investors—profits that often come at the expense of public health, environmental protection, and geopolitical stability.
International crises demand international solutions. If today’s leaders hope to escape the havoc on our horizon, they cannot succumb to the temptations of nationalist demagoguery. It is time to relearn the lessons that once brought a generation’s greatest economic minds to Bretton Woods in the summer of 1944.
The Mount Washington Hotel was not a healthy place. The American hosts had believed that the resort’s remote locale would ease wartime security concerns, but the building was a relic of another age, and its slapdash upgrades simply couldn’t handle the burdens of the conference. It had barely enough rooms for the 720 delegates, never mind the hundreds of journalists from around the world who crammed the hallways for interviews and photographs.
“The taps run all day, the windows do not close or open, the pipes mend and unmend and no one can get anywhere,” Keynes’s wife, Lydia Lopokova, wrote on July 12.
Delegates worked through a haze of scotch and sleep deprivation. Negotiations began before breakfast and dragged on past midnight, ballrooms filling with smoke, talks at times giving way to bawdy drinking songs. (The unofficial anthem of the conference included the line “And when I die, don’t bury me at all / Just cover my bones with alcohol.”) Privately, Keynes half-expected the “monstrous monkey house” to founder on a wave of “acute alcohol poisoning.” Though he was strictly forbidden from attending cocktail hours by his wife, who demanded reasonable bedtimes, Keynes nevertheless collapsed from the event’s sheer strain on the evening of July 19—an episode so severe that German newspapers printed premature obituaries for him.
But this boozy mayhem was better than the conference that had made Keynes’s career 25 years earlier. In 1919, Keynes had joined other victors of the Great War in Paris to craft a peace settlement with Germany. With all the delights of the French capital at their disposal, the affair became a vector for the transmission of the Spanish flu, which knocked Keynes into a hallucinatory, bedridden stupor for days. Talks dragged on for six months, and their product—the Treaty of Versailles—had appalled Keynes as a blueprint for authoritarian violence. The compact failed to establish a workable international economic system, Keynes had argued, leaving victor and vanquished alike with unpayable debts that would breed misery and resentment before marching Europe into another catastrophe.
Keynes’s scathing critique, with the unassuming title The Economic Consequences of the Peace, became a sensation, running through hundreds of thousands of copies on multiple continents. It transformed Keynes from a respected bureaucrat into a bona fide celebrity. In 1925 he had married Lydia—the most famous ballerina in Britain at a time when ballet was the most prominent public art in the Western world. Their wedding had been covered by Vogue and newspapers from Britain to Burma. His reputation as a prophet only grew as Europe lurched between calamities after the war. Everything seemed to show his prescience—the hyperinflation that ravaged the Weimar Republic, soaring British unemployment, and even Hitler’s rise in the 1930s.
But for all his intellectual prowess, Keynes had not been able to prevent the gold standard from coming undone. Nothing particularly eventful had happened in the British economy during the summer of 1931. It was a bad year, as all years of the Great Depression were, but the terms of trade or industrial conditions underwent no sudden changes. Instead, a big, politically connected bank in Austria failed.
Every nation on the gold standard fixed the value of its currency to a specific amount of gold. This simplified international trade, as it made calculating the price of goods in foreign markets easy, and allowed gold to serve as a medium of exchange across borders. The idea was to constrain inflation and prevent sovereigns from interfering with the flow of trade. Because governments were required to pay gold on demand to anyone who wanted to cash in their paper money, sovereigns couldn’t simply print money to escape economic problems. If they wanted to print money, they’d need gold.
The trouble was that governments in an economic jam could also run out of gold, leaving investors with piles of worthless paper. If enough anxious investors cashed out, this fear of national bankruptcy could become a self-fulfilling prophecy. When Creditanstalt went under in Vienna, on May 11, 1931, a wave of fear swept through the European financial world as investors weighed the prospect of the Austrian government literally emptying its coffers to save its banking system. Investors around the world not only cashed out of their holdings in Austrian banks, but began dumping the Austrian currency itself.
As soon as it became clear that the schilling was in trouble, the panic spread to Germany. If Austria defaulted on obligations to German creditors, the mark could be in trouble. As soon as the mark came under pressure, the run spread to Britain. Chained together by the gold standard, all the European economies were tumbling.
To fight the panic, the British government did everything that the time’s conventional Wall Street wisdom said it should. It raised interest rates—people were less likely to part with their pounds when they paid a high return—and obtained a huge loan from the New York bank J.P. Morgan, which would allow it to keep paying investors when they cashed out. Under the loan’s terms, Prime Minister Ramsay MacDonald—a socialist—agreed to cut public spending by slashing unemployment benefits and public employees’ salaries.
Keynes had sustained his career as an intellectual by attacking Wall Street views of economic soundness. He watched his government’s policy making in horror, telling the House of Commons that the Morgan budget was “one of the most wrong and foolish things which Parliament has deliberately perpetrated in my lifetime.” Every part of the response would damage the British economy. Britain was already in a depression—high interest rates would increase costs for businesses, forcing layoffs and bankruptcies. Slashing public pay and unemployment relief would further weaken the domestic market for British goods. Keynes was quickly proved right: Within months, British unemployment had reached its worst level on record; roughly one out of every six workers was out of a job.
None of MacDonald’s austerity did any good. Britain burned through the Morgan loan in a few weeks, and the run on the pound didn’t relent until Britain abandoned the gold standard altogether in September.
A dozen years later, history not only defined the economic agenda at Bretton Woods—the world needed a new monetary system—but shaped the more fundamental geopolitical dynamic of the conference. The gold standard was a British system. The British Empire had essentially imposed it on the rest of the world at the height of its power, refusing to trade with countries that didn’t make their currencies convertible into gold. Now the Empire had abandoned its own monetary regime. To top figures in the Roosevelt administration, this financial ineptitude was a symptom of broader dysfunction in British leadership. The British might have the world’s best economist, but to much of the American elite, they represented everything backward and broken among the fading European imperial powers.
The Soviet Union, on the other hand, was a young and interesting new superpower. Like America, the Soviets had thrown…
Read More:How to Fix Globalization – The Atlantic