Books by Steil, Benn

Steil, Benn. The Battle of Bretton Woods. Princeton: Princeton University Press, 2013. ISBN 978-0-691-14909-7.

As the Allies advanced toward victory against the Axis powers on all fronts in 1944, in Allied capitals thoughts increasingly turned to the postwar world and the institutions which would define it. Plans were already underway to expand the “United Nations” (at the time used as a synonym for the Allied powers) into a postwar collective security organisation which would culminate in the April 1945 conference to draft the charter of that regrettable institution. Equally clamant was the need to define monetary mechanisms which would facilitate free trade.

The classical gold standard, which was not designed but evolved organically in the 19th century as international trade burgeoned, had been destroyed by World War I. Attempts by some countries to reestablish the gold standard after the end of the war led to economic dislocation (particularly in Great Britain), currency wars (competitive devaluations in an attempt to gain a competitive advantage in international trade), and trade wars (erecting tariff or other barriers to trade to protect domestic or imperial markets against foreign competition).

World War II left all of the major industrial nations with the sole exception of the United States devastated and effectively bankrupt. Despite there being respected and influential advocates for re-establishing the classical gold standard (in which national currencies were defined as a quantity of gold, with central banks issuing them willing to buy gold with their currency or exchange their currency for gold at the pegged rate), this was widely believed impossible. Although the gold standard had worked well when in effect prior to World War I, and provided negative feedback which tended to bring the balance of payments among trading partners back into equilibrium and provided a mechanism for countries in economic hard times to face reality and recover by devaluing their currencies against gold, there was one overwhelming practical difficulty in re-instituting the gold standard: the United States had almost all of the gold. In fact, by 1944 it was estimated that the U.S. Treasury held around 78% of all of the world's central bank reserve gold. It is essentially impossible to operate under a gold standard when a single creditor nation, especially one with its industry and agriculture untouched by the war and consequently sure to be the predominant exporter in the years after it ended, has almost all of the world's gold in its vaults already. Proposals to somehow reset the system by having the U.S. transfer its gold to other nations in exchange for their currencies was a non-starter in Washington, especially since many of those nations already owed large dollar-denominated debts to the U.S.

The hybrid gold-exchange standard put into place after World War I had largely collapsed by 1934, with Britain forced off the standard by 1931, followed quickly by 25 other nations. The 1930s were a period of economic depression, collapsing international trade, competitive currency devaluations, and protectionism, hardly a model for a postwar monetary system.

Also in contention as the war drew to its close was the location of the world's financial centre and which currency would dominate international trade. Before World War I, the vast majority of trade cleared through London and was denominated in sterling. In the interwar period, London and New York vied for preeminence, but while Wall Street prospered financing the booming domestic market in the 1920s, London remained dominant for trade between other nations and maintained a monopoly within the British Empire. Within the U.S., while all factions within the financial community wished for the U.S. to displace Britain as the world's financial hub, many New Dealers in Roosevelt's administration were deeply sceptical of Wall Street and “New York bankers” and wished to move decision making to Washington and keep it firmly under government control.

While ambitious plans were being drafted for a global monetary system, in reality there were effectively only two nations at the negotiating table when it came time to create one: Britain and the U.S. John Maynard Keynes, leader of the British delegation, referred to U.S. plans for a broad-based international conference on postwar monetary policy as “a major monkey-house”, with non-Anglo-Saxon delegations as the monkeys. On the U.S. side, there was a three way power struggle among the Treasury Department, the State Department, and the nominally independent Federal Reserve to take the lead in international currency policy.

All of this came to a head when delegates from 44 countries arrived at a New Hampshire resort hotel in July 1944 for the Bretton Woods Conference. The run-up to the conference had seen intensive back-and-forth negotiation between the U.S. and British delegations, both of whom arrived with their own plans, each drafted to give their side the maximum advantage.

For the U.S., Treasury secretary Henry Morgenthau, Jr. was the nominal head of the delegation, but having no head for nor interest in details, deferred almost entirely to his energetic and outspoken subordinate Harry Dexter White. The conference became a battle of wits between Keynes and White. While White was dwarfed by Keynes's intellect and reputation (even those who disagreed with his unorthodox economic theories were impressed with his wizardry in financing the British war efforts in both world wars), it was White who held all the good cards. Not only did the U.S. have most of the gold, Britain was entirely dependent upon Lend-Lease aid from the U.S., which might come to an abrupt end when the war was won, and owed huge debts which it could never repay without some concessions from the U.S. or further loans on attractive terms.

Morgenthau and White, with Roosevelt's enthusiastic backing, pressed their case relentlessly. Not only did Roosevelt concur that the world's financial centre should be Washington, he saw an opportunity to break the British Empire, which he detested. Roosevelt remarked to Morgenthau after a briefing, “I had no idea that England was broke. I will go over there and make a couple of talks and take over the British Empire.”

Keynes described an early U.S. negotiating position as a desire by the U.S. to make Britain “lose face altogether and appear to capitulate completely to dollar diplomacy.” And in the end, this is essentially what happened. Morgenthau remarked, “Now the advantage is ours here, and I personally think we should take it,” then later expanded, “If the advantage was theirs, they would take it.”

The system crafted at the conference was formidably complex: only a few delegates completely understood it, and, foreshadowing present-day politics in the U.S., most of the delegations which signed it at the conclusion of the conference had not read the final draft which was thrown together at the last minute. The Bretton Woods system which emerged prescribed fixed exchange rates, not against gold, but rather the U.S. dollar, which was, in turn, fixed to gold. Central banks would hold their reserves primarily in dollars, and could exchange excess dollars for gold upon demand. A new International Monetary Fund (IMF) would provide short-term financing to countries with trade imbalances to allow them to maintain their currency's exchange rate against the dollar, and a World Bank was created to provide loans to support reconstruction after the war and development in poor countries. Finally a General Agreement on Tariffs and Trade was adopted to reduce trade barriers and promote free trade.

The Bretton Woods system was adopted at a time when the reputation of experts and technocrats was near its peak. Keynes believed that central banking should “be regarded as a kind of beneficent technique of scientific control such as electricity and other branches of science are.” Decades of experience with the ever more centralised and intrusive administrative state has given people today a more realistic view of the capabilities of experts and intellectuals of all kinds. Thus it should be no surprise that the Bretton Woods system began to fall apart almost as soon as it was put in place. The IMF began operations in 1947, and within months a crisis broke out in the peg of sterling to the dollar. In 1949, Britain was forced to devalue the pound 30% against the dollar, and in short order thirty other countries also devalued. The Economist observed:

Not many people in this country believe the Communist thesis that it is the deliberate and conscious aim of American policy to ruin Britain and everything Britain stands for in the world. But the evidence can certainly be read that way. And if every time aid is extended, conditions are attached which make it impossible for Britain to ever escape the necessity of going back for still more aid, to be obtained with still more self-abasement and on still more crippling terms, then the result will certainly be what the Communists predict.

Dollar diplomacy had triumphed completely.

The Bretton Woods system lurched from crisis to crisis and began to unravel in the 1960s when the U.S., exploiting its position of issuing the world's reserve currency, began to flood the world with dollars to fund its budget and trade deficits. Central banks, increasingly nervous about their large dollar positions, began to exchange their dollars for gold, causing large gold outflows from the U.S. Treasury which were clearly unsustainable. In 1971, Nixon “closed the gold window”. Dollars could no longer be redeemed in gold, and the central underpinning of Bretton Woods was swept away. The U.S. dollar was soon devalued against gold (although it hardly mattered, since it was no longer convertible), and before long all of the major currencies were floating against one another, introducing uncertainty in trade and spawning the enormous global casino which is the foreign exchange markets.

A bizarre back-story to the creation of the postwar monetary system is that its principal architect, Harry Dexter White, was, during the entire period of its construction, a Soviet agent working undercover in his U.S. government positions, placing and promoting other agents in positions of influence, and providing a steady stream of confidential government documents to Soviet spies who forwarded them to Moscow. This was suspected since the 1930s, and White was identified by Communist Party USA defectors Whittaker Chambers and Elizabeth Bentley as a spy and agent of influence. While White was defended by the usual apologists, and many historical accounts try to blur the issue, mentions of White in the now-declassified Venona decrypts prove the issue beyond a shadow of a doubt. Still, it must be said that White was a fierce and effective advocate at Bretton Woods for the U.S. position as articulated by Morgenthau and Roosevelt. Whatever other damage his espionage may have done, his pro-Soviet sympathies did not detract from his forcefulness in advancing the U.S. cause.

This book provides an in-depth view of the protracted negotiations between Britain and the U.S., Lend-Lease and other war financing, and the competing visions for the postwar world which were decided at Bretton Woods. There is a tremendous amount of detail, and while some readers may find it difficult to assimilate, the economic concepts which underlie them are explained clearly and are accessible to the non-specialist. The demise of the Bretton Woods system is described, and a brief sketch of monetary history after its ultimate collapse is given.

Whenever a currency crisis erupts into the news, you can count on one or more pundits or politicians to proclaim that what we need is a “new Bretton Woods”. Before prescribing that medicine, they would be well advised to learn just how the original Bretton Woods came to be, and how the seeds of its collapse were built in from the start. U.S. advocates of such an approach might ponder the parallels between the U.S. debt situation today and Britain's in 1944 and consider that should a new conference be held, they may find themselves sitting the seats occupied by the British the last time around, with the Chinese across the table.

In the Kindle edition the table of contents, end notes, and index are all properly cross-linked to the text.

October 2013