up a new global central bank that he called the International Clearing Bank (ICB), which would take on the role of issuing Bancor. Central banks were to buy and sell their own currencies among themselves through a system of debits and credits in their ICB ‘clearing accounts’, with the ICB providing overdraft facilities to cover any temporary balance of payments shortfalls.26 This would avoid the chronic shortage of gold reserves that wrought global financial instability in the interwar years. Although Keynes had accommodated gold within the system in recognition of its historic monetary role, it was provided that the ICB could issue new Bancors in exchange for gold, but that there would only be one-way convertibility, thereby gradually withdrawing gold from its monetary role over time.
Almost in parallel, Harry White had begun work on a competing plan, the first draft of which was completed in March 1942. Though they had worked independently and, initially, without either of them knowing that the other was even working on such a plan, the contours of White's proposal were remarkably similar to Keynes’. However, the White plan also reflected key American interests. Among these were the opening up of international markets for US exports and the elevation of the dollar to become the global unit of exchange.27
The White plan continued to place gold at the centre of the monetary system, alongside dollars. Each currency was to be fixed to the dollar, which was in turn fixed to gold. Currency devaluations under this system were to be rare and would entail significant penalties on the devaluing country. He also provided for two new agencies: a United and Associated Nations Stabilisation Fund (later to become the International Monetary Fund (IMF)) and a Bank for Reconstruction and Development of the United and Associated Nations (later to become the World Bank). The Fund, like Keynes’ ICB, would allow members to buy currency to cover balance of payments shortfalls, but only against adequate collateral in the form of gold or other currencies. Compared with the Keynes plan, therefore, the White plan provided for a far more rigid system of global exchange rates. The mechanism for temporary liquidity support was also far less flexible than the one Keynes had proposed.
White's continued adherence to gold at the centre of the system was, in part, because he simply did not believe that the world was ready to accept that the dollar could play the global role he envisioned without the backing of gold.28 However, the fact that the US held two-thirds of the global reserves of monetary gold also gave it an incentive to ensure that its monetary value was protected. America's large gold holdings at that time nevertheless legitimised the dollar to be ‘as good as gold’ and, by setting all other currencies’ exchange rates by reference to the dollar, the dollar's role at the centre of the global monetary system would be cemented.
White's plan also reflected America's position as a large balance of payments surplus country at that time. Keynes’ proposal would have made surplus nations unsecured creditors to deficit countries that made use of the ICB's liquidity support facility. This was unacceptable to the Americans, as was Keynes’ proposal that countries running persistent large surpluses be subject to automatic upwards revaluations of their currencies, since this would have served to penalise the US. This may seem ironic in light of fierce American criticism of China's large trade surpluses in recent years.
The change in US circumstances was something that Jacob Viner actually foresaw in a July 1943 letter to Keynes, in which he wrote: ‘The expectation that the US will be alone or almost alone as a creditor is plausible for the first period’ but ‘Over the long pull … I think that the US is as likely to be short as to be long of foreign short-term funds.29
Keynes’ plan equally reflected British interests. In light of Britain's strained economic circumstances, it was not realistic for sterling to play the central role as a global reserve currency that it had before. However, Keynes was opposed to the idea that another national currency should do so. Beyond the question of national interests, there was simply a fundamental conflict between the role of a national central bank and that of an issuer of a global reserve currency. The global reserve issuer, as an international liquidity provider, would need to take into account financial conditions in all countries around the world, whereas a national central bank's mandate and allegiance are purely domestic.
It took two years of sometimes heated negotiations between the British and the Americans before the representatives of 44 nations finally, in July 1944, congregated on the Mount Washington Hotel in Bretton Woods, New Hampshire to ratify the historic international agreement. The Bretton Woods conference itself was largely a formality, since most of the terms had been hammered out beforehand. The three-week event had a jovial atmosphere about it, fuelled by the flow of alcohol. The countries taking part included an eclectic mix of Allied Powers, governments in exile, British colonies, and emerging markets. Some were just happy to be there, without really understanding much of what was going on.
America's far stronger negotiating position meant that, on almost all key elements, White's proposal prevailed over the Keynes plan. Even so, Harry White took painstaking care to choreograph every detail of the conference to ensure that the dollar-based monetary order that he had advocated was ratified. History would later vindicate Keynes’ reservations about the White plan, however.
The Bretton Woods system would ultimately break down amidst the Vietnam War, when US deficits made the dollar fix to gold no longer tenable. By that time though, the dollar had already been firmly embedded at the heart of the global monetary system and, after the gold standard was abandoned in 1973, the dollar itself simply supplanted the role of gold in the global monetary hierarchy. Harry White was to die in 1948 under the shadow of a Congressional investigation into his espionage activities on behalf of the Soviet Union. Despite his vehement denials, later revelations from both US and Soviet archives confirmed that he had been passing sensitive information to the Russians since the 1930s.30 Nevertheless, he had undeniably achieved for the dollar a feat of financial alchemy that sterling had never accomplished in its century as the leading global reserve currency.
Bretton Woods ushered in a long period of growth and prosperity in the 1950s and 1960s. The dollar's special status under that system enhanced its role as a currency of lending and borrowing in international markets. Under the previous gold standard, a dollar that flowed out of the US represented a unit of gold outflow that would reduce the lending capacity of the US banking system. However, under the Bretton Woods system, a dollar that left the country had a high probability of finding its way back into a deposit at a US bank, amplifying the amount of credit that US banks could lend out. This should have placed New York at the centre of this international dollar market. However, through a remarkable confluence of circumstances and opportunism, the financial centre that won out was not New York, but that familiar financial capital of the old world: London.
A British Innovation
If governments had laid the foundation at Bretton Woods, it was markets that then took over the next phase of the construction of the dollar's towering role in global finance. It was in capital raising and investment that the dollar would come into its most widespread international use. The spread of the dollar as the dominant currency of international borrowing and investment provided the channels for worldwide transmission of US financial and monetary policies. Further, the dollar-based globalisation of financial markets spurred the development of networks and infrastructure that would give the US unprecedented geopolitical power in the financial sphere. It is therefore all the more surprising that this market for the offshore dollar – otherwise known as the ‘Eurodollar’31 – developed almost entirely outside the purview of American regulators.
The origins of the Eurodollar market are somewhat murky, as there
