The phone rang, as it did in those days.
“This is Gottfried Haberler.”
I was stunned, even amazed.
“Can you come to tea on Wednesday?”
I agreed of course but I could not believe it was happening. As a young publisher, I just brought into print an old book he had written on business cycles, and he was grateful. Meeting the man was another matter.
The book was a worthy successor to the great treatises that had come before. Its contribution was dealing with the terrible times in the interwar period. Germany’s economy had been wrecked a decade earlier with a hyperinflation that destroyed the economy. The United States was in economic depression and the administration was experimenting with forms of centralized control. Fascism and Nazism were on the march in Europe.
The world monetary system had been in upheaval since Franklin Delano Roosevelt shut the banks, forcibly collected gold from the people, and devalued the dollar. The great question of the times concerned what kind of world monetary system would replace the existing chaos.
There was a sense even in 1936 that the unresolved issues left over from the Great War were feeding more conflict that could lead to another world war. Haberler was likely sure of that. His book, then, was already looking at what kind of trade and monetary system could best emerge after the war that would provide the best guarantee of long-term peace and prosperity.
More on the book in a moment but let’s return to the afternoon tea.
I walked in and there he was, and others arrived too. I was a very young man and these were all quite elderly men. As they introduced themselves one by one, I gradually came to realize that this room was filled with the men who were behind the Bretton Woods agreement of 1944 and also the men who inhabited hugely important positions with the Bank for International Settlements and the International Monetary Fund.
For most of the two hours that followed, I only sat and listened in awe.
These days, these gentlemen are not treated well in pop history. They are considered the “neo-liberal” architects of the post-war trading and monetary system. This is correct, but the assumption that they were up to no good is not correct. What they longed for and tried to correct was a free and fair system that would establish economic interdependence of nations in order to stop the violent conflicts and bring about a postwar prosperity for all.
Haberler’s 1936 book provided a major part of the template, far more so than anything written by John Maynard Keynes. If you look at this book, you will discover that as much of a third of it deals directly with the problem that consumes the United States today, namely the settlement of trade accounts.
The burning question at the time was how to create a system of mutual advantage that preserved most of the historical industrial and resources status that belonged to each nation, without the danger that any single country could gain a permanent advantage in wages and prices.
In figuring this out, Haberler drew heavily on historical free-trade literature, which had long presumed that countries involved in cooperation held currencies rooted in hard specie like gold and silver. That was generally the case in the 18th and 19th centuries, and this solved the problem of settlement. Countries that exported experienced an inflow of money that would drive up prices, wages, and production costs, thus flipping the advantages to others, who, in reverse, experienced rising purchasing power and lower productive costs.
In this way, there was a long-run tendency toward international equilibrium. That, however, was not the case in 1936. The age of devaluation and paper money was dawning, and this posed serious problems. If one nation undervalued its currency permanently, without a correction, it could empty out the manufacturing industries of another. The accounts could not clear in the way they had. Haberler explored this problem at great length.
After the war came the rush to put in place a policy. The result was the Bretton Woods system, called the dollar-exchange standard. Gold would no longer convert domestically in any country but it would flow between countries to settle accounts. Countries that experienced a gold inflow would face upward pressure on production costs while those that experienced gold outflow would let prices adjust downward in order to regain advantage.
There is much more to this system, but suffice it to say that it looked good on paper. Let’s just say that they did their best. The new system was the product of the best minds, working for many years, cooperating with all the stakeholders, drawing from all the literature, and genuinely and earnestly seeking a system of stability, peace, and prosperity for all.
Was Hazlitt correct? Eventually. Twenty years later, following the assassination of JFK, the United States embarked on a wild spending spree, fueling both war and the welfare state to shore up Lyndon Johnson’s political standing. This means of course printing up money through debt creation. It did not take other nations long to figure out what to do: demand gold in payment of debt.
By 1968, the gold flows outward had become too much to ignore. Three years later, Richard Nixon took a step with which he fundamentally disagreed but felt he had no choice. He slammed shut the gold window, effectively defaulting on debts. That was the official end of Bretton Woods, the system put together by the people I was now meeting in this room.
By 1973, a new system was in place. It would fully embrace paper currency. It would establish a trading market between currencies, same as a stock market. How would settlement occur? The new architects had an answer. Outward money flows would lead to lower prices and inward flows would lead to higher prices, same as under a gold system.
There were true believers of the new system but far fewer than before. There was a deep flaw. The U.S. dollar, now fully paper and not restrained by gold, would be printed up forever. There would always be an international demand for dollar paper so it would never be repatriated, and let’s face it: there would never be a price adjustment.
There were three major problems with the new system. 1) It would lead to inflation and gut savings and the middle class, 2) central banks would manipulate interest rates and cause business fluctuations, and 3) it could lead to the gradual but systematic deindustrialization of the United States, for reasons perhaps too complicated to go into here.
In short, we’ve had 50 years of tragedy under the system of 1973, a far worse order than that which preceded it. It was cobbled together in a panic, never a good way to proceed with any dramatic reform.
In contrast, these architects of the old system were brilliant men. They considered all the angles. They did their homework. They had the best of intentions. They worked within political limits. And their system might have worked if other factors had not intervened.
For this generation, it was not about politics. It was about creating a stable world order that benefited everyone. They were imperfect but they tried their best.
There is talk now about a new monetary accord forced by the Trump administration in the wake of the financial and economic bomb that just exploded with his tariff push, one that reversed 80 years of economic policy. We can only speculate about the structure but I have grave doubts. Truly.
The lessons I’ve learned from looking deeply at this long history are three. First, no one fully understands the operations of the whole. Second, and for this reason, the best-laid plans can and do go awry. Third, no group of intellectuals, no matter how high minded, can anticipate the fallout from change, including second-order effects and all the cascades the follow.
This is why the best approach to all these delicate issues is humility, diplomacy, and careful thought. I’m not sure I see these values alive in current affairs, which is why we should all be extremely concerned.
This is not the place to offer a detailed critique and we are still seeing matters unfold hour by hour. My intuition is that something new is coming. Something big. We can hope against hope that it will be better than what we’ve experienced over several decades of nonstop state aggrandizement, inflation, business cycles, and trade imbalances.
What would the wise men of 1944 say? They would counsel a better approach than panic and extreme action that risks dangerous outcomes. They might suggest that we consider all the options over tea, maybe even over many months or even years.
