Why Hazlitt Opposed the Bretton Woods System
The Bretton Woods plan for monetary reconstruction did not go as far as Keynes would have liked. He proposed a full-scale world central bank and a single paper currency for all nations, which he wanted to be called the “bancor,” so there could be no escaping inflation. That plan is still awaiting implementation. As it was, the Bretton Woods conferees, under pressure from the United States—which wanted the dollar to be the bancor—took a compromise position. They would create not a gold standard—though it was called that for reasons of credibility—but Instead a global gold dollar standard. Or, more precisely, a phony gold standard.
The Bretton Woods system established a gold dollar that was fixed at $35 per ounce. But it was the only currency so fixed. Every other currency could be a fiat currency based on the dollar. What this obligated the United States to do, as the main creditor nation to the world, was ship out dollars to the world while somehow maintaining the dollar’s connection to gold. It was a prescription for disaster, as should be obvious.
To be sure, there is nothing wrong with having a gold standard in one country. The United States could do that now. But that was not what Bretton Woods established. The dollar was not convertible into gold at the domestic level. You could not go into your bank and exchange dollars for gold. It was only convertible on an international level, and only for governments, so that the United States was obligated to ship out gold instead of paper when it was so demanded.
This established some limit on credit expansion at home but not enough of one. Few were courageous enough to demand gold from the empire. Yet it is clear just from this description of the plan that the pressure to spend and redeem would eventually lead the United States to go back on its word. It took some twenty years, long after the original crafters of the deal had left the scene, but economic logic could not be gainsaid.
The breakdown really began soon after the plan was implemented. But most of the effects were disguised through currency controls. Once the 1960s came, and the expenses of LBJ’s welfare-warfare state mounted, the Fed played its traditional role as the financier of big government. Pressure on the dollar mounted, foreign governments became more interested in the gold than the paper, and the whole cockamamie scheme unraveled under Nixon’s welfare-warfare state. When the world entered the all-paper money regime, most economists said than the price of gold would fall from $35. The Austrians predicted the opposite.
From the very beginning, Henry Hazlitt saw it all coming and warned against Bretton Woods. He took the job of editorial writer for the New York Times in 1934, after having been drummed out of the editorial spot at the post-Mencken American Mercury because he was Jewish. Mencken had called Hazlitt “the only economist who can really write,” and the Times job was a good position for him, one for which he was well prepared. He would write mostly unsigned editorials, speaking for the paper and not for himself
In fact, when many years later his editorials were collected in a book edited by George Koether, called From Bretton Woods to World Inflation, his archives were the only place that revealed his authorship. Because he was writing them in an institutional voice, his tone was moderated to some extent, a fact he later regretted. Even so, anyone today has to stand in amazement when reading the New York Times editorializing against loose money, paper currency, central banking, and the like. But that was what Hazlitt accomplished.
He began his editorials in 1934 with a major call for the reinstitution of the gold standard. He urged that the United States and Britain jointly agree to a fixed gold standard. He said that this action would “symbolize a return to international collaboration in a world that has been drifting steadily toward a more and more intense nationalism.” And truly, if one thinks about it, a world that had heeded Hazlitt’s advice might have avoided the incredible calamity of World War II, the tens of millions of dead, the communization of Europe, and the bankruptcy and horrors the followed. And why? Because the nationalism about which he warned in 1934 would have abated, and all governments would have sought diplomatic rather than murderous solutions.
Of course, his advice was not heeded, and the drive to destroy money and prosperity continued, all the way to the globalized holocaust of World War II.
Now let us jump ahead, ten years after Hazlitt had written his first blast. Hazlitt was still advocating the same thing, not a system in which strong currencies subsidize bad policies, but a system in which each nation maintains the integrity of its own currency. That requires not centrally planned integration but the opposite. Instead of promising to intervene to bail out bad debt, nations should swear not to intervene. Only this path prevents moral hazard and maintains the gold standard.
He wrote as follows: “the belief that only a rich nation can afford a gold standard is a fallacy.” Gold is suitable for every nation, he explained, provided it has something to sell. He concludes with these words before the Bretton Woods conferees gathered:
The greatest single contribution the United States could make to world currency stability after the war is to announce its determination to stabilize its own currency. It will incidentally help us, of course, if other nations as well return to
Article from Mises Wire