Keynesian Economists Arrogantly Declared that We Need Not Worry about Dollar Balances Piling Up Abroad under Bretton Woods

It took a great deal of American pressure, wielding the club of Lend–Lease, to persuade the reluctant British to abandon their cherished currency bloc of the 1930s. By 1942, Hull could expect confidently that “leadership toward a new system of international relationship in trade and other economic affairs will devolve very largely upon the United States because of our great economic strength. We would assume this leadership, and the responsibility that goes with it, primarily for reasons of pure national self-interest.”

For a while, the economic and financial leaders of the United States thought that the Bretton Woods system would provide a veritable bonanza. The Fed could inflate with impunity, for it was confident that, in contrast with the classical gold standard, dollars piling up abroad would stay in foreign hands, to be used as reserves for inflationary pyramiding of currencies by foreign central banks. In that way, the United States dollar could enjoy the prestige of being backed by gold while not really being redeemable. Furthermore, U.S. inflation could be lessened by being “exported” to foreign countries. Keynesian economists in the United States arrogantly declared that we need not worry about dollar balances piling up abroad, since there was no chance of foreigners cashing them in for gold; they were stuck with the resulting inflation, and the U.S. authorities could treat the international fate of the dollar with “benign neglect.”

—Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 250.

The National and Regional Economic Warfare During the 1930s Precipitated World War II

Since only the United States remained on even a partial gold standard, while other countries moved to purely fiat standards, gold began to flow heavily into the United States, an inflow accelerated by the looming war conditions in Europe. The collapse of the shaky and inflationary British-created gold exchange standard during the depression led to a dangerous world of competing and conflicting national currencies and protectionist blocs. Each nation attempted to subsidize exports and restrict imports through competing tariffs, quotas, and currency devaluations.

The pervasive national and regional economic warfare during the 1930s played a major though neglected role in precipitating World War II. After the war was over, Secretary of State Cordell Hull made the revealing comment that

war did not break out between the United States and any country with which we had been able to negotiate a trade agreement. It is also a fact that, with very few exceptions, the countries with which we signed trade agreements joined together in resisting the Axis. The political lineup follows the economic lineup.

A primary war aim for the United States in World War II was to reconstruct the international monetary system from the conflicting currency blocs of the 1930s into a new form of international gold exchange standard. This new form of gold exchange standard, established at an international conference at Bretton Woods in 1944 by means of great American pressure, closely resembled the ill-fated British system of the 1920s. The difference is that world fiat currencies now pyramided on top of dollar reserves kept in New York instead of sterling reserves kept in London; once again, only the base country, in this case the U.S., continued to redeem its currency in gold.

—Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 249-250.