The American Enterprise Institute (AEI) recently hosted a presentation by Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations, of his award-winning book titled "The Battle of Bretton Woods."
The presentation was followed by discussion by Desmond Lachman and Alex Pollock, both of AEI, and moderated by Peter Wallison, also of AEI. Steil is one of the most entertaining lecturers on the subject of finance, and it is a treat to find him at AEI, CATO or C-SPAN.
In his introduction, Wallison called the book a history of an under-reported subject, how the International Monetary Fund (IMF) and World Bank came into being thanks to the machinations of Harry Dexter White, an assistant Treasury Secretary who was also a Soviet mole who managed to outmaneuver the world's first celebrity economist, the very first Keynesian, none other than John Maynard Keynes, who lost virtually every round of this contest due to the financial weakness of his client, the United Kingdom.
Wallison recalled the famous quote in which Keynes said that when the facts change, he changes his mind and asked what do you do? In this case, he seemed to vacillate even though the underlying facts did not change. When he was rolled, he would rationalize the defeat as a partial victory. (Readers might associate this tactic with the opponents of Obamacare after their defeat in the Supreme Court, although there are still more rounds to be fought.)
Keynes didn't seem to be able to figure out what White was trying to do. Perhaps Keynes' pampered upbringing had not equipped him to deal with an adversary from a merchant background such as White.
Steil explained that he decided to try to write on Bretton Woods in 2009 when leaders were talking about a new version of Bretton Woods. Over a three-week period in 1944, Bretton Woods, N.H., hosted the most significant international conclave since the Versailles in 1919. Seven hundred delegates attended, and FDR was eager to demonstrate that the United States had a vision for the postwar financial world.
The content of the conference was entirely scripted by White, who served as the "brains" for Treasury Secretary Henry Morgenthau, one of the few cabinet officers FDR would listen to, because they were friends from their days in Hyde Park. They believed that economic power would determine the balance of power. The IMF and World Bank would complement the United Nations.
White was a hardcore proponent of American national interest, and he saw the postwar circumstance as a unique opportunity to remake the world order at the expense of the British, building on the fact that the United States held 80 percent of the world's monetary gold reserves, and under Bretton Woods, the dollar would be recognized as synonymous with gold, according to White.
His obsession with the rivalry between the United States and Britain dated back at least to 1936 when he wrote a memo setting forth his plans. Morgenthau told President Truman that he wanted to move the financial center of the country from Wall Street to Washington.
The United States trapped Britain in a Faustian bargain when it imposed conditions under the lend-lease program that provided vital supplies and materiel. The British had to agree to end their imperialistic trade preferences, thus opening the Commonwealth to U.S. trade, and they had to agree to make the pound convertible into dollars, rendering Britain virtually bankrupt.
Keynes the celebrity economist wanted to create a super currency to overthrow the dollar, much as some economists and finance ministers are discussing today. However, he developed a "Stockholm syndrome" relationship with the U.S. Treasury. He wanted to go down as having overthrown the gold standard and to avoid Britain becoming a satellite of the United States.
Steil reported that the New York bankers saw what was coming and launched a rear-guard effort to stop the IMF, offering to give the British the financing they needed, but Keynes turned them down, which Steil called a fatal blunder on his part.
Expanding on White's concurrent role as a mole for Soviet intelligence, White railed against the influence of the Catholic hierarchy in the United States, and he joined Lincoln Steffens in lauding the progress the Russians had made in improving the lot of Soviet workers. (One might say, those who weren't shot or sent to the Gulag. A cynic might observe that in subsequent decades the United States would move toward a model that relies heavily on central planning.)
Finally, Steil considered whether Bretton Woods was in some sense a success. He concluded that the arrangements were not fully implemented until 1961, when the United States was rapidly losing gold reserves. Ten years later, President Nixon "temporarily" closed the gold window, ostensibly to combat "speculation," so perhaps the system was effective for 10 years.
Another view is that Bretton Woods was quickly overthrown by the Marshall Plan, and the IMF didn't come into its own until it created a role as the world's "crisis manager" beginning after the United States reneged on its promise to exchange gold for dollars. Now the debate is shifting toward how long the dollar-based system will last, and the United States is in a position analogous to that of Britain, while the Chinese are making arguments reminiscent of those the United States employed at Bretton Woods.
In comments, Lachman pronounced the Bretton Woods system a failure because the United States could not maintain gold convertibility, but he credited it with helping to maintain global economic stability from 1945 to 1971. Now he sees Asia and the emerging markets as in the ascendancy, while the United States is in decline. On the whole, there are more players, as opposed to the domination by the United States in the immediate postwar period.
Pollock saw drama and big ideas in the story of Bretton Woods. He pointed out that the British agenda was to get the United States to cancel its lend-lease debt. He recalled the closing dinner of the conference as marked by "drama and pathos," as participants serenaded the loser, Keynes.
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