Bretton Woods II

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.


The Mount Washington Hotel is in Carroll, New Hampshire. It is not the hotel featured in the Jack Nicholson movie “The Shining.” That was the Timberline Lodge near Mount Hood, Oregon. So it’s ok to stay in rooms 215 and 217 (or is it 415 and 417 ?) The hotel’s golf club-the course was designed by Donald Ross- has enshrined the locker used by Babe Ruth on his visits there. Because it’s near the Bretton Woods ski area, the conference of Allied world leaders held towards the end of World War II at the hotel was called the Bretton Woods Conference. That is a much better name than Mount Washington Resort Conference. The conference was held in July of 1944. The war was still raging. The D-day Normandy invasion of Europe was barely a month old and the tide of war had changed, but the outcome was not yet assured. The 44 countries that attended had been victims of unenlightened monetary and fiscal policies in the 1930’s and had come to realize international cooperation was necessary. Repeated currency devaluations to increase the competitiveness of exports had led to corresponding actions by other nations and only worsened deflationary spirals. In a sense, WW II was an economic savior as demand for goods was met by labor shortages and inflation fears broke the deflationary mindset.

But few, if any, believed the conditions that spawned the Depression were gone, so at the behest of the U.S. and Britain who had been talking and planning for a few years, the conference to figure a post war economic agenda was held.

The conferees decided on a fixed exchange rate for currencies pegged to gold, with the only currency worth anything after the devastation of the war, the dollar, as the “reserve” currency. In reality, the conferees knew the only country that had an industrial base capable of pulling the world back from the precipice was the United States. The rest of the world was in ruins. The organizations that became known as the International Monetary Fund and the World Bank were created. And it all more or less worked until the world outgrew the supply of gold and the U.S went off the gold standard in 1971.

There is to be a new “Bretton Woods II” conference in Washington, D.C. starting November 15. The underlying truth about the world economy that led to BW I is still true today. The U.S. economy is still the largest and most powerful economy in the world. A crisis in the U.S. is a worldwide crisis. The dollar, and only the dollar, has a large enough global presence and a measure of trust (although that trust has been damaged) to be used as the “reserve” currency for the world. It was not until Fed Chairman Bernanke made unlimited dollar loans to the Central Banks of the world that the international chaos started to subside.

Much has been written that this conference is to pave the way for the U.S. to be supplanted as the global economic leader. That is not what the goal will be. The European Central bank helps steady the financial system of its members. But it lacks the authority to regulate banks, lacks taxing power, and has no central political voice. Like it or not (and many do not like it), the U.S. economy and dollar will be the forces to stabilize the financial mess.

Some European leaders think there should be new universal regulatory powers. That is not going to happen if for no other reason than the U.S. is in between Presidential administrations. If President-elect Obama has the sense that he appears to have he will stay away and not be subject to international maneuvering before he even takes office. And, no one nation is going to cede regulatory oversight of its financial institutions to another.

Hopefully, a long term agenda for regulatory cooperation and communication can be set with the next meeting’s agenda decided upon. Far better to talk then not, but no real decisions will come out of this meeting. There will be gnashing of teeth and venting of rage at the mess that excess securitization has created, and the international regulation of and accounting for such derivatives will probably be a focus.

Interestingly, the Mount Washington Hotel failed and was taken over by the FDIC in 1990 during the Savings and Loan bailout. Having been built for $1.2 million in 1902, it was auctioned for $3 million in 1991 and is thriving today. Maybe that’s a story line that the world can follow.


Breton Woods II
Vincent Farrell
Soleil Securities, Nov 10, 2008

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