(Bumped. This terrific essay got buried this morning by the news of Colin Powell's endorsement of Obama. It deserves another round of readers. Susan)
The Mount Washington Hotel is a sprawling white structure that dates from the turn of the Twentieth Century. Sitting at the foot of the tallest (and windiest) mountain in the Northeast, the hotel today is usually occupied by visitors to a nearby ski lodge, or those that come to enjoy the grand architecture and grander view. But what makes the Mount Washington Hotel famous is something that happened there in 1944. That's where, with World War II still raging on both fronts, 730 delegates from the Allied Nations sat down to a conference that still bears the name of the town nearest that old hotel -- Bretton Woods.
The Bretton Woods conference was not about bombs or planes or soldiers, at least not directly. It was about economics. At the time, the rules that bound those nations together economically consisted of a few broadly acknowledged international agreements, a rat's nest of often conflicting treaties between individual nations, and a mass of tradition. Solving this wasn't just a matter of working out a "free trade" deal. The basic nature of global capital had been called into question by countries that had manipulated the value of their currency to bludgeon a competitor. The rampant inflation that struck many countries during the Great Depression had made transactions between nations essentially worthless. How could you loan money to a state that could pay you back in mounds of devalued bills? How could you compete with a nation that moved its currency's worth up and down to keep trade flowing in one direction? The delegates were intent that the system be rebuilt with more security and predictability.
Out of that conference came the International Monetary Fund, the World Bank, agreements on monetary standards, and much of the system that drives the world's economy today. If the Potsdam Conference shaped the political boundaries of the world following World War II, Bretton Wood defined the economic boundaries of the world outside the Iron Curtain (and for everyone once that curtain was lowered).
All of the decisions that came from that conference were designed to fit within an agreed upon framework: they would allow the market to work with minimal government intervention, they would limit barriers to trade, and they would accept the intervention of the newly created agencies to regulate national finances. The Allies agreed on this not because it defined the universal principles of all the nations involved. Many of the delegates gathered there would have preferred more regulation of markets, more state involvement in financial systems, more flexibility in protecting local markets, and less control from the new agencies. But they signed the agreements – because the United States asked them to.
The Allied Nations at that point were fiscally and physically exhausted. They were also genuinely grateful. When the conference was held, the Normandy Invasion was only a month in the past. In many cases, their survival as nations depended on the continued intervention of US military forces. There was also the example of the Great Depression and the political turmoil it had spawned. None of them wanted to repeat that experience in the aftermath of World War II. The United States demanded a position of international economic leadership, and a weary world handed it over.
The soaring industrial power of the United States that advanced so quickly during the war years, served as the centerpiece of a world wide expansion in the decades that followed. While the east bumbled along under Soviet mismanagement and corruption, the west experienced a period of unprecedented growth. The Breton Woods System, designed around what the United States wanted from the world, worked splendidly for almost three decades – until it was smashed by the United States.
What might have been the most important part of the system designed at the Mount Washington Hotel was the requirement that all national currencies be "convertible." That is, that they could be exchanged for an equal value of gold. That one step kept nations from assigning an arbitrary value to their currency to invalidate debts or manipulate trade. For the United States, the value of the dollar was pegged at $35 to an ounce of gold. But the supply of dollars grew at a rate much more quickly than US holdings of gold. The system that was designed to stabilize currencies was itself becoming more and more unstable. Several other currencies were forced to devalue themselves against gold while the US held stubbornly to the $35 price even though it didn't hold nearly enough gold reserves to meet its obligations under Bretton Woods.
Throughout the 1960s, the growing gap between US gold holdings and US dollars floating around the world placed an increasing strain on the system. By 1968, that strain was too great to sustain. While the United States was distracted by escalating violence at home and the escalating war in Vietnam, the economic action that year was in Rio de Janeiro. That's where the IMF created a new type of document in which nations were required to hold their US debts. These instruments could not be exchanged for gold, to keep nations from demanding some of the US reserves. These documents became a kind of "paper gold" used to prop up the system. The gratitude of the western nations was starting to run thin.
By 1971, the United States was, for the first time since World War II, running a trade deficit. Inflation was kicking into high gear. The war in Vietnam was exploding the federal budget. In a single year, the numbers of dollars floating on the world market went from about twice as much gold as we held in reserve, to five times as much. International confidence in the dollar collapsed. On August 15, 1971, Richard Nixon changed the world. Americans who lived through the period remember the ninty day freeze Nixon placed on prices and wages in an effort to stem growing inflation. They're less likely to remember that Nixon imposed a 10% tariff on all imports in an effort to top the growing trade deficit. On the same day, he also put an end to the paper-thin illusion that US currency was still backed by gold. From that point on, the dollar would be allowed to float on the market. So would gold. Those holding US notes would have to deal with the market to determine their value.
In one day, Richard Nixon had completely reshaped the world's economy, and he did so without consulting with either foreign leaders or the institutions created at Bretton Woods. Within a year, the price of gold in dollars had doubled and was still rising. New agreements signed at the end of 1971 left the dollar as the world's "reserve currency." In essence, the US economy was left as the system by which all others were valued. The US had become like AIG – too big to fail. And no one was happy about it.
A year before those agreements, Nixon gave a speech in which he defended the US position in the world, railed against the protests at home, and demonstrated a level of paranoia all too familiar in this "Age of Terror."
"My fellow Americans, we live in an age of anarchy, both abroad and at home. We see mindless attacks on all the great institutions which have been created by free civilizations in the last 500 years. Even here in the United States, great universities are being systematically destroyed. Small nations all over the world find themselves under attack from within and from without.
If, when the chips are down, the world's most powerful nation, the United States of America, acts like a pitiful, helpless giant, the forces of totalitarianism and anarchy will threaten free nations and free institutions throughout the world."
--Richard M. Nixon
Nixon's worry about the "pitiful helpless giant" has been used over the nearly forty years since by those who defend vigorous American military actions abroad. But it has certainly been applied equally in the economic arena.
For our allies, the United States has seemed anything but helpless. Too often they've seen as more as a ravenous Cyclops, seeing only what's good for us without regard to the broad long-term consequences of our actions.
Certainly this has been true of the Bush administration. Far more than any president since Nixon – whose administration "gifted" its ideological follower with such luminaries as Dick Cheney and Donald Rumsfeld – George W. Bush has evinced a philosophy in which being self-centered is a virtue. Bush has trumpeted American exceptionalism on the battlefield and in the boardroom. When our allies signed onto the Kyoto Accord, the United States refused to participate, with no excuse but that our own short term economy is more valuable than the consequences to the globe. After proclaiming that he would demand that the members of the United Nations Security Council "put their cards on the table" in a vote over Iraq, Bush backed away without a vote. Which didn't stop him from carrying on with his invasion.
Under Bush, the United States hasn't just looked only to its own interests, it's held anyone who even considered the consequences of our actions on the world outside our borders under suspicion. A lack of international knowledge was elevated from a shortfall to an asset. A leader who can inspire the hopes of those nations we consider allies by definition can't be wholly American. Ignorance isn't just bliss, it's required. This is a philosophy rushing toward its ultimate expression in the nomination of Sarah Palin, where never having given a moment's thought to any nation but our own is equated with patriotism.
No modern Odysseus is required to test the Cyclops when the creature is voluntarily blind, but the world will not suffer us to lumber on unchecked.
If you were to pick up a paper and find yourself looking at foreign leaders proclaiming that the world needed to be protected from "infection" by the American system, that the United States needed to be "contained," that the United States was the source of disaster in their own land, you might be forgiven for thinking that you're listening in to Tehran or Moscow. But that's what the leaders of our greatest international friends have been saying. At home, we may have some doubt about the causes of the financial calamity we're now experiencing, but our allies have no doubt as to its origin.
"The United States is solely to be blamed for the financial crisis. They are the cause for the crisis, and it is not Europe and it is not the Federal Republic of Germany."
--German finance minister, Peer Steinbrück
While we are fretting about our plans to restore the broken economy, there's one point that isn’t making the debates, and only rarely making the news. In many ways, we will no longer be the masters of our own economic ship. The factors that will most affect us in the future may no longer be under our control, or in the hands of those inclined to place our needs very high on their list of concerns. In a study conducted by the Guardian newspaper, not one country could be found – not France, not Japan, not neighboring Canada, not our "special friends" the United Kingdom – where a majority of the people viewed their relationship with the United States as "friendly." More than the losses in Iraq, or the dollars going to the bailout, this may be the biggest cost of the last eight years. The conservative philosophy that America has an inalienable right to unilateral action has certainly earned our nation an exceptional position around the world – we're seen as exceptionally dangerous.
After sixty years of Bretton Woods, the world is looking for a less dollar-centric alternative to our current fiscal system. And they're not begging for our permission. This past week has seen French President Nicolas Sarkozy demanding a new global summit to "recreate the capitalist system," and it's seen finance ministers from India to Africa scoffing at the idea that the United States can lecture them on how markets can be run.
Conservatives have made it fashionable to sneer at the rest of the world. That attitude hasn't gone unnoticed, and anyone looking for some lingering attitude of gratefulness and compliance is about to be disappointed.
We think of ourselves as a benevolent giant, more akin to the Jolly Green fellow than the character at the top of the beanstalk. But whether it's malevolence or merely carelessness, the inhabitants of the valley are tired of being stepped on. They're sharpening their sticks. We view ourselves as "first among equals," but even our closest allies are bitterly aware that there are no equals as long as there's a first.
As the world meets in global summit to "rebuild capitalism," the United States may host the event, but don't expect the rest of the world to turn to America for ideas. Instead, they will try and sort out if we are AIG -- salvageable, and possibly too large to fail -- or Lehman Brothers -- a former titan allowed to crash on the rocks. Whatever emerges from this summit, it's going to be a very different world than the one we've lived in since that meeting at the Mount Washington Hotel.
"Europe wants the summit before the end of the year. Europe wants it. Europe demands it. Europe will get it."
-- French President Nicolas Sarkozy