I just refinanced my loans - thanks, Harry Dexter White!

Harry Dexter White: Legend

I've gotten into a solid morning routine this summer. In the shower, it's gotta be electronic dance music. While I'm drying off and brushing my teeth, it's Bloomberg Surveillance with Tom Keene and Mike McKee. And over breakfast (Chex and Honey Nut Cheerios, with blueberries), it's a podcast. This morning, Planet Money had a segment about the Bretton Woods conference, which happened 70 years ago at the beautiful Mount Washington Hotel (also the site of a Schwarz Family Vacation) in rural New Hampshire.

Mount Washington Hotel, Bretton Woods, NH

The story of Bretton Woods and how it enshrined the US dollar as the official reserve currency was not new to me. In the aftermath of World War II, the world came together to rebuild the architecture of the international monetary system. The World Bank and the International Monetary Fund both were borne from Bretton Woods. But arguably the biggest development was the creation of a system whereby every country would peg its currency to the dollar at a fixed rate, making the dollar the preeminent mechanism for international trade and investment.

Any student of economics has heard this story before, but between bites of blueberries and Cheerios, I realized something about Bretton Woods that wouldn't have occurred to me before this week.

A couple days ago, I finished refinancing my student loans. It felt great. And, like most other recent graduates, refinancing helped me save a ton, capitalizing on the slow and steady decline in interest rates.

Oh Janet... you're the best!

In that moment, I felt a profound sense of gratitude wash over me. I started by thanking Janet Yellen, who happened to be on TV preaching the need for the Fed to keep rates low to support the labor market. I then turned my gratitude to the Chinese, who are buying Treasuries at the fastest pace in 30 years, keeping long-term rates low. And finally, I thanked The Economist for devoting its cover story to the decline in America's potential growth rate, another factor weighing on interest rates.

Source: The Economist

But after listening to Planet Money this morning, I realized I left someone out: Harry Dexter White. White was the American diplomat who secured the dollar's prominence as the international reserve currency. Even today, four decades after the Bretton Woods system collapsed, White's handiwork in New Hampshire endures, as the dollar remains the dominant reserve currency around the world.

White and Keynes

This phenomenon has given the United States (and people like me) what Barry Eichengreen calls the Exorbitant Privilege. Eichengreen's argument goes something like this. Because the world still considers the dollar to be the preeminent reserve currency, the US enjoys certain luxuries that aren't available to other countries. One of these is low interest rates. As long as countries choose to hold the bulk of their reserves in dollars, demand for Treasuries will remain strong, allowing Americans from President Obama to yours truly to borrow cheaply. 

But the Exorbitant Privilege didn't come easy. As Benn Steil describes in The Battle of Bretton Woods, White needed to outmaneuver John Maynard Keynes, the world's most legendary economist, to enshrine the dollar's preeminence. Throughout the conference, Keynes had proposed a supranational currency (called the "bancor", a word that Google doesn't even recognize) to facilitate trade and investment, preventing any single currency from dominating the system. If Keynes had succeeded, today's international monetary system might look completely different. 

Source: Federal Reserve Bank of Cleveland

But, as we stand, the dollar remains by far the most popular reserve currency in the world. This is by no means a permanent condition, however, as countries may hold reserves in whichever currency they desire. Euros have become more popular recently, and there's speculation that another currency -- the Yen, the Yuan, or the Swiss Franc -- could eventually supplant the dollar as the global reserve currency.

But, for the time being, we should all raise our glasses to Harry Dexter White -- the man who made it possible for Americans to buy a house, go to graduate school, start a business, or run outrageous credit card balances, all with the world as our creditor.

(Oh... by the way... he was also a Soviet spy. Nobody's perfect.)