[...] From my parents' stories I have come to believe that the truth does not reside exclusively on one's own political side. My father reinforced this one day when he told me something that has remained etched in my mind ever since. 'When I was in the prison camp,' he said, 'I knew in my bones that, even if our side had won the civil war, I would still be in the camp, only the guards would have been different.'

[...] A tale of two debts was turning into a morality play with no end. Europe is an ancient continent and our debts to each other stretch decades, centuries and millennia into the past. Counting them vindictively, and pointing moralizing fingers at each other, was precisely what we did not need in the midst of an economic crisis in which large new debt, piled upon mountains of legacy liabilities, was a mere by-product.

One of the casualties of the European war was money. Nazi-affiliated regimes in occupied countries had printed so much of the local currencies to support the Axis’s war effort that the money in Europeans’ pockets was not even worth the paper it had been printed on. And even in countries that had escaped occupation, such as Britain, the costs of war and the collapse of trade had led to a combination of government indebtedness and value destruction that rendered the currency worthless, at least in the arena of international trade. In short, the greenback was the only currency left standing and capable of lubricating world trade.

Keynes’s proposal was brimming with intellectual power; White was overflowing with the power vested in him by America’s economic and military might. Keynes advocated a global system that could stabilize capitalism for a fabulously long time; White's brief was to push through a system consistent with the United States' new-found strength but viable only as long as America remained the surplus nation extraordinaire. [...]

On the one hand, the Bundesbank had a duty--to the Bretton Woods system, to defend the realm of Germany--to see the speculators off and hold the line. On the other hand, the Bundesbank intensely disliked printing Deutsche Marks in defence of exchange rates it had not chosen and in quantities it despised because these marks threatened to flood back into Germany later, causing domestic prices to rise and bringing back memories of the hyperinflation of the early 1920s.

[...] as long as they felt that the Bretton Woods system was sound. And the system was sound as long as America was in surplus with the rest of the world.

[...] Eventually de Gaulle softened his opposition to the European Union, after repeated American pledges in the 1950s that France would remain Europe’s administrative center. But he would only embrace it so long as, in his own words to a visiting journalist, the European Union resembled 'a horse and carriage: Germany [being] the horse and France . . . the coachman.'

Alas, by 1963 it was clear that the horse was developing a mind of its own and the coachman was losing his grip. France’s accelerating trade deficit with Germany meant that Paris would be forced into a perpetual Sophie’s choice. Regularly go cap in hand to the IMF for permission to devalue the franc, admitting to permanent national weakness, or rely forever on the Bundesbank to print Deutsche Marks with which to buy francs, admitting to an unending dependency upon the old enemy. Either way, France’s aspirations for political and diplomatic domination of the European Union were unravelling.

In a global system of fixed exchange rates, shock absorbers take the form of strong regional currencies, issued by potent central banks, to act as secondary pillars in support of the system's main currency. There was need for at least one such currency in Europe and another in Asia. Of course strong regional currencies cannot be created; heavy industry powerhouses must underpin them. But here is the tricky part: industrial powerhouses produce more manufacturing goods than their domestic economies can absorb--think China today. To keep going, powerhouse economies need markets--surrounding states in permanent deficit with them so that they can remain in surplus.

So the first question was: which would the powerhouse economies in Europe and Asia be? In Europe the United Kingdom was an early candidate. Only, like most early front-runners, Britain went by the wayside. Its elites were determined to retain their grip on an empire that, in Washington's eyes, was both repugnant and unsustainable. Its returning soldiers, having shed their blood for king and country, were determined not to return to their prewar pitiful wages and abject living conditions. This was why Winston Churchill, the nation's wartime tower of strength, was swept away in a 1945 electoral landslide that ushered in a radical-sounding (especially to American ears) Labour government. A year later a fiscal crisis ended sterling's convertibility and further tarnished Britain's candidacy as the European pillar of America's global plan. [...]

[...]

Why not France? For three excellent reasons. First, Germany industry was far more advanced than France's. In 1945, despite the hammering it had received from the Allies in the final stages of the war, German factories produced more than twice as much as France's. Secondly, the defeated Germans, fearing a pastoral future, would breathe a sigh of relief if the United States were to patronize their economy, invest in it and generally take it under their wing. In contrast, General de Gaulle and the vast majority of the French would be incensed by any hint of similar intervention, let alone a takeover. Thirdly, just as in the case of Japan America had written the constitution of the Federal Republic of Germany and even created the Bundesbank from scratch. The fact that American forces controlled West Germany's land, sea and airspace did not harm the notion either.

The second question now remained: who would provide the deficit hinterland for Germany's and Japan's powerhouse economies?

[...] Germany's export-led economy could never afford its own genuinely free-floating currency. The reason is simple: if the Deutsche Mark's international value were to be determined freely by the money markets, Germany's surpluses would create demand for its money, which would push up its value until German goods became so expensive abroad that German surpluses would disappear. The ambition to remain a surplus nation could not be served by a free-floating Deutsche Mark.

While the mark was embedded in America's global plan, its value fixed within the Bretton Woods international monetary system, German leaders and officials could behave like the managers of Europe's gleaming factory. They could concentrate solely on making sturdy cars and impressive gadgets, letting America mind global capitalism--exactly as the United States had planned things in the late 1940s. Alas, once the United States jettisoned Bretton Woods, and Europe along with it, German leaders could no longer treat the global environment as they treated the weather--as a natural system impervious to their actions and beliefs. They had to concede that the international economic environment was no longer divinely ordered and independent of what they decided. They had, in other words, to do something to shape that international environment in ways consistent with Germany's continued economic success.

So, when in 1971 Europe was jettisoned from the dollar zone, and exchange rates between its currencies started bobbing up and down, some of them falling as violently as others were rising, the European Union had real trouble managing the heavy industry cartel and the common agricultural policy that were its core. Without stable steel, coal and agricultural prices across France, Germany, Belgium, the Netherlands and Italy, cartel-like price fixing was impossible. [...]

[...] nations in deficit could not sustain fixed exchange rates with the rest, especially in times of crisis. To remain within Europe's monetary snake, a country with a trade deficit, France for example, urgently needed to attract foreign money to finance its net imports. Foreign money is attracted by high interest rates and deterred by any prospect that the state will not be able to pay its bills or repay its creditors. In other words, to stay in the snake Paris had to make borrowing dearer and simultaneously reduce public spending. But dearer money would reduce investment by French business, which would in turn depress employment and private incomes. [...]