- 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 