Planet Money - The dollar at the center of the world (Classic)

Episode Date: March 10, 2022

After World War II devastated the global economy, there was a push for a new universal currency. This is the story of how the U.S. dollar won. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Since Russia invaded Ukraine two weeks ago, the U.S. response has been primarily economic, to punish Russia through sanctions. Now, other countries can impose sanctions, and of course many have, but U.S. sanctions are more damaging. Acting on its own, the U.S. can exact a huge amount of pain. The reason for that is all about the dollar and the dollar's very special status as the world's reserve currency. It's the main currency used by multinational businesses and financial institutions. That

means when the U.S. imposes sanctions, it has more power to mess up the workings of another country's central bank and its global trade relationships. So where does that special privilege come from? Today, we're bringing back an episode from the archives that tells the story of how the U.S. dollar came to have so much clout in the first place. This episode originally ran in 2014. Robert Smith and Zoe Chase take it from here. They say that money makes the world go round, but let's be more specific. It is actually the U.S. dollar. Like if you're a French wine exporter and you need Chilean oak for your wine barrels, you pay in U.S. dollars. If you're a Brazilian coffee maker, you want to sell your coffee to

make drinks in Turkey, you get paid in U.S. dollars. If you're a Brazilian coffee maker, you want to sell your coffee to make drinks in Turkey, you get paid in U.S. dollars. In every other country in the world, every country that is not the United States, there are basically two currencies that matter. The one they use at home with their friends, the Brazilian real, the French euro, and the one they use to trade, which is the U.S. dollar. And this is very, very good for the United States. Crucial, really, to our place in the world. Everyone wants our money. Everyone takes our money. And it's valuable to the United States in all sorts of ways. When U.S. businesses want to trade abroad in U.S. dollars, guess what? We already have the U.S. dollar. And for many complicated reasons, it basically means that when it comes to trade, the wind is at our back. But it wasn't always like this. There was a moment where this became the way we do business.

The world got together in a rare display of global economic planning and decided, we need to cooperate and we need one currency to trade with. But exactly which currency it would be was up for grabs. And it came down to the fight between two men. One British. One American. The Brit you've probably heard of. If you only know one economist, you know this guy's name.

John Maynard Keynes. He had this brilliant utopian dream of a common currency for the world. The other guy, the guy who ended up winning this fight, almost no one knows his name. It's Harry Dexter White. Somehow he managed to outwit John Maynard Keynes and put the U.S. dollar at the center of the world. Hello and welcome to Planet Money. I'm Zoe Chase. And I'm Robert Smith. Today on the show, how the U.S. dollar won.

The story involves a hotel in the woods of New Hampshire. A broken world economy. Late night dancing. And lots of booze. This all went down in the cool mountains of New Hampshire. Way up near the Canadian border, there is a giant hotel. It's whitewood, up on a ridge, looks like a big cruise ship, and it is still open today. Good evening. Welcome to the Mount Washington Hotel in Bretton Woods. Of course, we had to go see it.

Checking in? Yes. All right. You want to go to the reception desk right to the left? The town of Bretton Woods would become famous for what happened in this hotel. It was the end of World War II, and the great economic minds of the world came together to figure out what's next. The newsreels of the time make it seem like a very sober and serious endeavor. At Bretton Woods, New Hampshire, delegates from 44 allied and associate countries arrived for the opening of the United Nations Monetary and Financial Conference. On the newsreel, you can see dozens of men in their wool suits and hats.

They're getting off trains. They're getting out of motorcars. They're flooding into the ornate lobby of the Mount Washington Hotel. These meetings are designed to promote trade in the post-war world and to create a foundation for lasting peace. The delegates here would create these big global organizations that exist to this day, the International Monetary Fund, the World Bank. But the newsreels leave out the real story. This hotel was off the beaten path. It was up in the woods, and it was pretty chaotic inside.

A lot of the real action took place in the basement of the hotel in a bar called the Moon Room. The owner of the hotel strolled down on that first night to the Moon Room and just had a look around. Our guide is Ed Conway. He's a reporter for Sky News, and he's the author of the new book, The Summit. There were essentially representatives of almost every country in the world there before him, drinking away, enjoying themselves. And I think there was the sense that never before had this corner of New Hampshire had quite such a cosmopolitan crowd. And apparently he was kind of ashen-faced and needed to be taken away because he was so shocked

at the proceedings. I mean, you hear about that more back in the day. People used to faint a lot more back then, I think. When you picture Bretton Woods, picture sweat, cigars, whiskey, high levels of emotion. There were episodes where even the kind of strongest men there burst into tears because it was entirely stressful. They were working 18-hour days. And on top of this, drinking copious amounts of alcohol. copious amounts of alcohol. I've rarely read anything, economics or otherwise, any account that has so much about the amount of booze that was consumed during a short period of time. And that was one of the fears that Keynes had going into this. He said that he was worried that alcohol poison was going to set in before the end of it. There was a reason for so much alcohol,

because the problem they were dealing with was huge. They were trying to put the whole world back together. Even before the war, the global economic system was broken. Countries had mostly stopped trading with each other. First, there was the Depression. Countries put up these high trade barriers to try to protect their domestic industries. And there was a bigger problem. The world had gone off the gold standard.

Under the gold standard, every country's currency was backed by a precise amount of gold. You knew exactly what a French franc or a U.S. dollar was worth. Gold made trading easy. But without the gold standard, countries could print money, and they did. And the value of their currencies went wildly up and down. It was hard to trade when you never knew on any given day what the other guy's currency was worth. So this was the issue they were trying to solve at Bretton Woods. How do we stabilize the world's currency so people can start trading again? There are basically two ideas to deal with this, two pretty different ideas to bury different men. The first guy, John Maynard Keynes. He arrived at Bretton Woods as the biggest celebrity economist

in the world. Now, he had a long experience with this kind of stuff. He had watched the world screw up the economic recovery after World War I. He helped guide Britain through the Depression. The man is gregarious. He's brilliant. He's magnetic. He's the one that's in all the photos. He's the one that talks in the newsreels. He'd been working quietly away in the cool woods and mountains of New Hampshire. And I doubt, I doubt if the world yet understands how big a thing we are bringing to birth. I love that. The bigger thing we are bringing to birth. Even today, when people think about Bretton Woods Conference, they think about John Maynard Keynes.

When you're at the hotel, everyone knows exactly what room he stayed in. We went to it. Room 219, still in use. Hi. Hi. We're economics reporters, and this is the room that a famous economist slept in. Oh, really? John Maynard Keynes.

Oh, okay. We were just wondering if we could look at it. Sure. Is that okay? We don't want to bother you. Sorry to bother you. It's a beautiful room. Fireplace, big bedroom, looks out on the mountains.

So right in here, this is where John Maynard Keynes' wife, the Russian ballerina, would do her dance exercises in Keynes' suite. And we know that it was this room because downstairs was where Treasury Secretary Morgenthau was trying to sleep with his wife, Eleanor, and they were getting mad because of all the ballet exercises over their head. Bretton Woods was like a summer camp. You know, if a summer camp determined the future of the economy. It was like dirty dancing. It's like dirty dancing if John Maynard Keynes were there, saying, nobody puts the British pound sterling in a corner. Yes.

Because Keynes is walking into this conference worried about Britain's place in the world. When he grew up in Great Britain, it was a colonial power. It ran the world economy. And now the best he can hope for is a new currency system that does not put the Americans in charge. He wants something where everyone's included and where, frankly, Britain is not bossed around by the United States. Keynes' rival is an American. Harry Dexter White, he was actually the man running the conference. And today, everyone knows the room that Keynes stayed in. No one has any idea where White stayed. And even when he was alive, he was an enigmatic figure.

We did find a little archive tape of him. The representatives of 44 nations here in Bretton Woods are taking steps to prevent a repetition of the currency chaos, which is usually followed in the wake of war. Harry Dexter White was the assistant secretary of the United States Treasury. He'd sort of wormed his way in there. While Keynes was born an aristocrat, White was kind of from the wrong side of the tracks. He had immigrant parents. His dad was a hardware peddler. White worked his way up from a temp in the Treasury Department. And where Keynes was magnetic and charming, White was not. White is about the most unlikable character you will ever see. Even his colleagues who were admirers of his ability

never had anything nice to say about the man. No one says anything nice about him. Ben Steele's with the Council on Foreign Relations, and he wrote a book about the two guys. It's called The Battle of Bretton Woods. He says Harry Dexter White had been fantasizing about this conference for years before it happened. It was time White felt that America take its proper place as the leader of the world economy. While White and Keynes were maneuvering for power behind the scenes at Bretton Woods, the rest of the representatives

from all those other countries were having a fine old time arguing about global economics during the day and partying late into the night. Like there was this one drafting committee. The chairman went on to become a governor of the Central Bank of Canada. He made sure every evening to declare

a 15 minute recess at 1.30 a.m. So they were going on through the evening here-minute recess at 1.30am. So they were going on through the evening here, and it was at 1.30am, to enable, and I quote, to enable the members of the drafting committee, including the chairman, to join the party downstairs in the moon room and observe the titillating gyrations of Conchita, the Peruvian bombshell. Thus refreshed and reinvigorated, we were able to carry on with renewed vigor for another hour or more. John Maynard Keynes allowed himself a little champagne,

but he was mostly careful. He had a bad heart. His wife was with him, made him go to bed early. Harry Dexter White said he never slept for more than five hours because he was working all the time. Keynes worked pretty hard during the day because he had this plan that he'd come up with before the conference that even now seems amazingly audacious. To get countries to trade with each other again, Keynes said what the world needs is to create a new international currency to replace gold. Every nation could still use their own money inside their countries, but when a country traded, it would use this brand new currency. The Brits even had a contest to name it.

And then suddenly letters started flooding into the treasury. You had suggestions like Fint, Proud of, Unibanks, Bit, Poundol. That's, I presume, a mixture of pound and dollar. And Keynes' favourite was Orb. I don't know why Orb, but he really liked Orb at the time. He kind of underlined that a few times. But then later on, he kind of sent around a note to his Treasury colleagues and it said, do you think it's any use to try Unicorn on Harry? It is, of course, much more picturesque and romantic and would have the advantage of supplying a suitable emblem for the institution's notepaper and hereafter for a note

issue should the course of evolution ever bring them to that. When Keynes actually drew up his plan, there was no mention of unicorn. Keynes called the new currency Bancor, B-A-N-C-O-R. It's French, bank, gold, Bancor. And it was such a Keynes-like idea, right, that governments could come up with something that was actually better than gold. But the idea was the same. When you traded with another country, you would use Bancor. And there would be a central bank of the world to keep track of all the Bancor, and they would make sure that no one was exporting too much or importing too much. Corps, and they would make sure that no one was exporting too much or importing too much.

It was utopian, but it was also a little selfish for Keynes because his plan was to base this global bank in London. And the new currency was better than gold for the British because Great Britain had sold most of its gold to fund the war. It was in their best interest to create something new. So that was the Keynes proposal, and Harry Dexter White had a different idea. His big plan for the world also involved a kind of universal currency, not the unicorn or the orb. He thought it should be the U.S. dollar. Woods, if he could somehow get all of the new international rules that all these countries were going to sign on to, to include the dollar somehow, then every country here would have to use dollars. Harry Dexter White drove Keynes nuts. White was always trying to control everything. He was this typical American. He was trying to slip the dollar in and all these complicated ways. Ed Conway read us a quote from John Maynard Keynes. This is intolerable, he said. We should simply better break off negotiations.

Harry Dexter White replied to Keynes, we will try to better create something your highness can understand. And this is how Harry Dexter White pulled off his little plan. He never openly suggested that world trade should be based on the U.S. dollar. What he did instead was he'd written this euphemism into all the documents. Whenever he needed to talk about some form of international trade, he referred to gold convertible currency, as in every country on earth should peg their currency to some unnamed gold convertible currency. Of course, what country had the gold? The United States. The U.S. had 80% of the gold of the world. Ben Steele told this story in his book.

At one of the committee meetings, the Indian delegate got fed up and said that it was high time that the Americans explained what a gold convertible currency was. At that point, the British delegate, who was not Keynes because Keynes was off dealing with the World Bank, his name was Dennis Robertson, fell into White's trap. He thought that they were discussing a minor accounting issue and suggested that for the sake of clarity, they might simply say U.S. dollars. White thanked him very much and said that the matter would be referred to a technical committee. Harry Dexter White had the green light that he'd been looking for. He ran this technical committee. The British suggestion that someone should just write in the word dollar, he took that and ran with it.

The technical committee stayed up all night going through the relevant documents. That night, they went through the draft IMF articles of agreement, ultimately 96 pages, They went through the draft IMF articles of agreement, ultimately 96 pages, and changed every reference to gold convertible currency to U.S. dollar. The British author that we talked to, Ed Conway, he doesn't think it was quite this sinister, quite this much of a master plan. But the result was the same. All the documents governing the new monetary system had the term U.S. dollar written right in. Keynes didn't even know it was all happening. He was stuck in these meetings about the World Bank in another part of the hotel.

Under the new agreement, basically every country would have to peg their currency to the U.S. dollar, like make sure that roughly a certain number of francs is always going to equal the dollar. And in order to make this work, every country would have to keep a lot of dollars in their vaults as a sort of reserve currency. That way, if the currency went up or down, they could use dollars to stabilize it. And dollars would be the new anchor for trade. And these new organizations they created, Bretton Woods, the World Bank and the IMF, they too would use dollars. In order to become a member of the organizations, you'd have to pay a fee in gold or gold convertible currency. Dollars. Dollars. In order to become a member of the organizations, you'd have to pay a fee in gold or gold convertible currency. Dollars.

Dollars. And then these organizations would lend those dollars to indebted countries at cheaper rates. Ben Steele says if you put a plaque up at Bretton Woods, this is what it would say. This is where the U.S. dollar was crowned, the supreme unrivaled currency for the world. But no one other than Harry Dexter White really knew this at the time. Everyone was working at such a breakneck pace. No one had time to read over the documents as they were being written. John Maynard Keynes was struggling just to keep up. His health wasn't great.

It was so overwhelming that at one point, as Keynes is rushing up the stairs to go to a meeting, he collapses. His wife tries to hush it up, but word spreads quickly. The papers say he had a heart attack. Some German newspapers ran obituaries. Keynes reportedly was pleased by what they wrote. By this time, the conference had stretched on for three weeks, and there was a push to finish up quickly. The food supplies at the hotel were running low. The final dinner at Bretton Woods, all they had was chicken and green beans. But the ailing John Maynard Keynes managed to make it to the podium,

and superstar that he was give an inspiring speech to send everyone home with. Ed Conway reads the words of John Maynard Keynes. The brotherhood of man will have become more than a phrase. Mr. President, I move to accept the final act. Big words for a man who hadn move to accept the final act. Big words for a man who hadn't actually seen the final document. They were presented with it for a signature as they were checking out of the hotel. There's no record of Harry Dexter White speaking at the final dinner, even though he had orchestrated everything.

The IMF, the World Bank, both headquartered in the United States, and the thing he was really after, the dollar would be the way the world did business. John Maynard Keynes didn't read the fine print until he got back to Britain. He was reportedly furious, not specifically about the dollar provisions, but about all of the little ways that he felt Britain had been screwed over by the Americans. What was laid out at Bretton Woods did work for a few decades. Everyone stayed pegged to the dollar. The dollar stayed pegged to gold. In 1971, famously, that goes away. But the dollar by that point is entrenched. It's the way that countries trade with each other. It's been the center of the global economy. Harry Dexter White, the man behind it all, he didn't fare so well in history. We'll tell you more about that in just a moment. Before we finish, we need to have a little serious talk about Harry Dexter White, our hero, the guy who sealed the dollar's dominance in the world. Well, it turns out that is not how he is going to be remembered,

because he got in a little trouble. For days, the nation awaited word from former President Harry Truman on the Harry Dexter White case. The Harry Dexter White case. Harry Dexter White, it turns out, was moonlighting as a Soviet spy, passing some information to the Soviets. This apparently was not that uncommon at the time. The Soviets were our allies, and historian Ben Steele told me the Treasury Department was literally littered with spies. In 1946, White defended himself in front of a congressional

committee. He died of a heart attack the next day. A few years later, there was a dramatic moment where a Soviet double agent pulled some microfilm out of a hollow pumpkin. That's where he'd hidden some evidence that White was indeed passing information to the Soviets, as Steele recounts it. But no one claims that anything he did at Bretton Woods was anything but patriotic. Although that is what Harry Dexter White is generally remembered for, the spy allegations, instead of the victory for the U.S. dollar. There is a lot happening in the world right now, and we're keeping a close watch on the fallout from Russia's invasion of Ukraine. If there are questions you'd like us to answer or stories you'd like us to tell, send us a note. You can email us at planetmoney at npr.org and look for us on social media at Planet Money. Today's episode was originally produced by Jess Jang. Our rerun was produced by Willa Rubin

and edited by Molly Messick. Alex Goldmark is our executive producer and Planet Money is a production of NPR. I'm Erika Barris. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.