on February 15, 2013
"Battle of Bretton Woods" by Benn Steil
Benn Steil is an exceptional scholar hailing from the Council on Foreign Relations. I approached this book with high expectations and was not disappointed. If I had a buck for every blog, article, or interview referring to the Bretton Woods conference, dollar hegemony, the gold standard, and related monetary matters I could stop reading stuff like this because I would be rich. I surmise, however, that not one in 100 understand what really happened. I do not know if this is THE definitive work on the Bretton Woods conference but it certainly is a definitive treatise. Those who love quotes will burn through a few highlighters. (I did.) The intense discussions--snarky attacks and counterattacks by the combatants--are relayed in detail and in living color. Steil successfully takes you back to the events as though you were there. Minor warning: You do not need to be a wonk to love this book, but you must have some appreciation for wonky. It is not dumbed down to the lowest common denominator. Currency jocks will love the detailed descriptions of the battles over fixed exchange rates, adjustable exchange rates, free trade, dollar hegemony, and the role of gold in this new era.
Steil's discussion can be crudely described in three parts: (1) the decades leading up to the 1944 Bretton Woods conference; (2) the actual conference in which the next 50 years of currency exhanges and global trading rules would be mapped out; and (3) the consequences to the post-war world. The conference stemmed from a few astute players who realized that the world could fall into chaos if plans were not made in advance to establish a global currency regime and rules of global trade--a New World Order. This is that story and the subplots that bring life to the historically profound period.
At stake was a power struggle between the British and the US to establish post war dominance. My preconceived (and decidedly incorrect) notion of WWII was naively simple: the Brits got in a pan-European brawl; the isolationist-prone US sent massive military weaponry and aid via the Lend-Lease program to their strong ally; with Pearl Harbor as a proximate trigger, we entered the war. In reality, the Americans and the British were in a battle royale. The British were trying to establish an aid arrangement that would leave them strong enough to recover some of their imperial splendor after the war. The Americans placed extremely stringent demands on the so-called Lend-Lease program with the explicit intention of leaving the British economically prostrate to ensure American hegemony. There was nothing warm and fuzzy about the alliance. The Battle of Bretton Woods was indeed a battle spanning a number of years, and it got very ugly.
A large portion of the fight was by proxy through two critical figures. Economist John Maynard Keynes, one of the most prominent intellects of the 20th century (whether you like his economic theories or not, which I don't) squared off against Harry Dexter White, a determined yet highly enigmatic American. These two guys were attempting to determine the fate of the global economy through a war of wits and fierce negotions over three years preceeding the conference and at the conference with representatives from dozens of nations. At the conclusion of the conference, each was forced to turn their ample skill to beat back fierce resistance with their respective political elites back home to sell the agreements. It was arguably a fight to the death: both White and Keynes died of heart attacks soon thereafter. One could legitimately argue the Battle killed them.
My image of and respect for Keynes evolved enormously, not as an economist but rather as an unlikely diplomat. He was cantankerous to a fault, but he somehow found a way to compromise when necessary to optimize an otherwise very weak position for Britain and, most importantly, help seal an historically profound agreement. Harry Dexter White's character is confounding and enigmatic. He displayed an unorthodox desire for a strong post-war Russian-Soviet alliance. His pro-Soviet stance is a fascinating sub-plot that only begins to clarify in the post war (cold war) period.
The detailed analysis up to the mid 1950s gives way to a relatively brief synopsis in which Steil races us through the next half century briskly. This final portion, most of which is contained in the Epilogue, is filled with subject matter popular in the blogosphere that I had read many, many times. Steil takes us through deGaulle demanding gold, Nixon taking us off the last residue of the gold standard, the dollar's impact as the reserve currency, and central bankers aggressively fiddling with monetary policy. There was, however, a difference between this post-war synopsis and the reading the blogs: I understood it in a much deeper, contextually accurate way. I've finally got it; I understand our roots. Does it leave me more sanguine about current monetary policies and about the future? Not in the slightest.
on March 9, 2013
There, I said it, and I am an American.
I had heard of the conference but never read about it, and certainly had never heard of Harry Dexter White, but this book goes to great length to explain what happened in this important meeting as World War II was drawing to a close and a plan needed to be developed for a new world order regarding the flows of money to facilitate trade and avoid economic disruptions that the world had seen far too much of.
Steil presents more information on John Maynard Keynes than his American antithesis, Harry Dexter White, and for good reason. Keynes was simply one of the most, if not the most, brilliant intellectuals of the 20th century. His theories of economics were evolving through his life, but he is most remembered for his idea that government stimulus could help alleviate a faltering economy when the private sector failed to do the job, and he was opposed as he said to the "gold cage" that for years had been the standard of international finance. He had a biting wit, coupled with a superior intelligence that far outshone his meager appearance (he was ugly, and knew it) but he was cast in the role of a diplomat to present the case for England as the world entered the post war period.
The problem was that England was broke. She had endured two world wars in the space of 30 years and the empire was begging for funds from Washington, and most of her debt to the US from the Great War was still unpaid. She also had an enemy in FDR, who was determined that the imperial preference of England after the war was to be no more. Her crown jewel, India, was pressing for independence and the empire was in the process of unwinding, as was the strength of the British sterling. Keynes pressed to have the new institutions of the World Bank and the IMF located in London, and the Americans under the leadership of White simply said "hell no."
Enter Harry Dexter White. The name is as deceptive as the individual. He was a son of Jewish immigrants, graduating from Harvard late in life, but brilliant in his intellect and determined that America would rule by the strenght of the dollar and Britain was to be no more as a world power. It was interesting to me to see the Treasury Department so powerful over this whole thing. You may think that the Department of State would have more of an influence because these were important global decisions, but their input was minimal. Regardless, White was a Soviet sympathizer and was just in the process of getting raked over the coals when he died early after the war from a heart attack. Keynes also died at the age of 62, not long after the war. The world remember Keynes and White is more of a footnote. I personally did not like White. He reminded me of a Himmler with his rim glasses and nasty litte mustache. As for his boss, Henry Morganthau, Secretary of Treasury, he was little better. His idiotic plan to strip Germany of all industrial capability after the war and turn it into a nation of small farms was leaked to the press and Goebbels made hay of it, likely resulting in many more American casualities toward the end of the war. Just goes to show that FDR used some strange people in his administration. Thank God his selection of generals was far better.
America was brutal toward the British at Bretton Woods. We often think of the English speaking peoples uniting and working together in true harmony to defeat the fascist nations. That is a myth and this book helps bust it. It shows to me how inhuman America was to our British allies, who bore much of the battle of this war alone, with little hope of survival. It is said that when Winston Churchill learned of the attack on Pearl Harbor, he knew that England would win the war and when he retired, he slept like a baby. Little did he know that the selfishness of the U.S. government would put a boot on the neck of England after the war. Churchill once said that the Germans were either at your throat or under your foot. The later part of that pertains to the American response to England toward the end of the war and after.
A good book. Great information, and highly recommended.
on April 6, 2013
This book sets out to explain Bretton Woods and to explain it in the context of the differences between Harry Dexter White and John Maynard Keynes. But it's a rather frustrating book because its narrow construction leads to a somewhat narrow understanding of the problem. It also offers up a somewhat false choice between the two sets of bad ideas which were not all that different.
The international monetary crisis began in the First World War. The debts, gold and trade imbalances created by the war in favor of the United States destabilized the entire world economy. However, rather than seeing the situation as one that needed to be corrected, the United States viewed the unstable system as the natural order of things. The solution to every global problem was increased American exports in the name of "free" trade. The real problem of the 1920s wasn't maintaining the gold standard, but rather jury-rigging the system so that indebted countries could keep paying for American imports.
The author gives a decent account of the period, but he fails to see that basic problem in the system. He spends lots of time on the development of Keynes ideas and the gold standard. But often in a way that doesn't go anywhere. Keynes could argue against the British gold standard in the 1920s, but what he was arguing for ultimately was devaluation of currency as a solution. But devaluation is never really a solution. Internationally, it's a zero-sum game. Those who devalue get a benefit from those who don't. If all the debtors devalue, the creditors begin to devalue. Devaluation ultimately becomes (as it has in 2013) competitive with everyone trying to devalue.
By the 1930s, many had decided that the private economy was the enemy. That coordinated government policy could overcome the laws of economics (and physics). As the book shows, the US didn't really abandon the gold standard. It simply nationalized the gold standard and made it a thing apart from the private economy. Confiscation policies created a massive US gold hoard in the hands of the government. I don't think the book captures the important point that what many of its subjects were trying to do in the 1930s was to make their domestic economies "walled gardens" in which any policy was allowed while the international economy would be strictly controlled by governments. This was of course, ultimately impossible.
While the book is good in covering US and UK policy at that time, it's not so good at covering the policy of other countries. In particular, it's very negative toward the bilateral trade mechanisms that worked well for Germany and others.
The book then shifts to its core: White and Keynes.
Harry Dexter White has always been an enigma. The different parts of his life as soviet spy and American government official are impossible to reconcile. The book indicates that he was not a committed communist or true believer. It somewhat pushes the idea that he was simply in love with the sort of controlled, centrally planned economy that the Soviet Union represented. He saw government control of all economic activity as a great dream.
The book brings one new thing to the study of White. The author found a two-page memo which gives a degree of insight into White's inner thoughts. They reveal him to be a rather stupid bigot who thought the Soviet Union had a large private economy with small farmers, bondholders, independent service workers and so on. The New Deal was no different than the Soviet System in his opinion. All negative opinions of the Soviet Union were simply ignorance or the hand of the sinister Roman Catholic conspiracy at work. He honestly believed that the Soviet model represented the future of the entire world. That he knew nothing really of the Soviet Union other than its propaganda makes him look all the more of a fool.
The book makes a major mistake in treating "operation snow" as a serious source and buying all into its conspiracy theories with regard to White and Pearl Harbor. White was responsible for many bad things, but not Pearl Harbor. While the book pushes "operation snow"'s nonsense, it ignores and does not cover the real damage that White and his friends did to the Chinese economy during World War Two through the US Treasury.
Keynes' idea was to "nationalize" all international trade and movement of wealth. There were a non-monitary settlment mechanism for international trade between countries (bankors) that could be dynamically adjusted. Keynes proposal eliminated
the problems of good money versus bad, the holding of gold and the movement of currency between trading partners. But it
eliminated such things at the price of creating a closed system where governments controlled every bit of wealth under a system of absolute capital controls.
Keynes motivations were also rather questionable. The primary motivation seems to have been to eliminate the power of market forces internationally to interfere with or respond to the keynesian policies of individual governments. That private wealth should not be able to move in response to Keynesian policies that would tend to devalue it. His position almost seemed to be to protect governments and government policies from economic consequences while leaving individuals full exposure to those consequences.
I dont think Keynes plan was all that different ultimately from that of white. Either system ultimately would depend on the gold reserves, economic health and ability to back the system of the United States. Keynes could not wish or pretend away the outsized economic influence of the united states in that era.
I dont think Keynes system could have ever worked. Trade, the movement of money and economic reporting could never have been controlled that tightly. There would be incredible incentives in the system to misreport trade information to game the system. Oddly enough, the system would have had many of the same flaws of the Euro zone with the United States in the world playing the role of Germany in the Euro. There would fraud (Greece). There would be countries that gamed the system (Italy, Spain). There would be terrible conflicts over policy because of the different needs of countries. And ultimately the biggest player in the system (Germany) would have to agree to bail out anyone and everyone in the system if necessary.
Good coverage is given to the hostility of US policy toward the UK during the war. The full hostility and farce of "lend lease" is exposed for all to see in a way few have previously dared. While the US followed a policy of appeasement of the Soviet Union, it followed an overtly hostile policy toward the British. They were to be placed in a position of dependence and debt....then instructed what to do. US priority was not international stability after the war. Even winning the war comes across as a rather secondary priority. The top priority was to pry open every corner of the world (except the Soviet Union) to American exports valued in dollars. The author, at best, portrays FDR as a sort of amiable aristocratic dunce who didn't understand the policies of his own government.
The Bretton Woods conference is the least interesting part of the book. The conference was essentially a stage-managed event where nothing was decided. The author tries to make a distinction between White's gold-backed dollar system of international trade and Keynes artificial currency system. The author does not make the point that they really amounted to the same thing. Good money always drives out bad. In an artificial system, someone will still end up holding the dollars and the gold rather than the drachmas. Keynes system would have been no better than that of White.
In the aftermath of the conference, the author spends too much time on spying and not enough time outlining the scope of the economic disaster created by US policy globally in the postwar period. In many ways, the Marshall Plan was not an act of generosity, but rather of desperation. By calling in all debts owed by the UK days after the end of the war, the US brought the UK and the economies associated with it to their knees. The US plan to basically remove the Germany economy permanently from the world economy brought more ruin across Europe.
Perhaps this was White's plan all along. His economic system created conditions that helped no one in Europe aside from various communist movements. His plans also fit into soviet propaganda against the selfishness of US policy in Europe. And while the UK had to beg for a few billion after the war, White was desperately trying to arrange a US gift of three times as much money directly to the Soviet Union. FDR's death seemed to have ended that dream. But he did manage to get the occupation currency printing plates handed over to the Soviet Union which promply printed the script into oblivion with the Americans picking up the full tab.
Had things gone White's way, it's easy to imagine what it would have looked like. The war economy of the US with its central planning, controls and rationing would have continued forever. The US and its soviet "friend" would have determined based on the economic crisis in Europe that centrally planned wartime economies would be the solution in France, Italy, the UK and Germany. White would personally use the IMF and World Bank to reward and punish countries.
The book is flawed in that it does not properly cover all the events in Europe that eventually lead to the creation of the economic union and the euro. He doesn't quite understand the French and German resistance in Europe to Americans economic ideas. He sees things often from a very exclusively American or British perspective. He doesn't cover the economic costs of "containment" nor does he deal with the rise of the "Eurodollar" market in the postwar period.
He gives a very sketchy study of the contradictions that ultimately brought down Bretton Woods in the 1970s. He doesn't effectively make the point that Keynesianism collapsed at the same time though. He has far too much to say about Nixon and far too little to say about Lyndon Johnson. The story of Johnson physically assaulting a fed chairman would have made an effective point. He also doesn't make the point that US policy from the end of Bretton Woods to today has been to use devaluation to create economic growth in the US at the expense of the rest of the world.
The final point the author doesn't quite make is that system has been turned inside out since the 1930s. Today the private economy operates on a sort-of gold standard through currency trading, the gold market and derivatives. Governments have been boxed in to a point where they only often control their unreal internal economics of budgets and debts. The role of governments has been gradually reduced from a leading one to one where their only role is to create giant pools of safe debt that the private market is unable to create.
In summary, I found the book an interesting read. But I didn't find many of the author's arguments interesting or often complete. The differences between the Keynes plan and the White plan are not at all as significant as the author would make them. There was, in fact, no battle of Bretton Woods. It was closer to a surrender ceremony.
The point I think that needs to be made is that all these ideas are now failed ideas and have little useful to tell us about the crisis of today. Gold Standards don't work because tying monetary growth to mining activity makes no sense as a basis for international settlement. A single-currency standard doesn't work because the contradictions between national policy and reserve currency policy cannot be reconciled within any government. The "basket" of currencies approach will never work because everyone wants to hold "good" money and nobody wants to hold "bad" money. As well, the Keynesian idea that governments can avoid economic pain through economic controls or create growth through government spending has been discredited.
My opinion is that we are in many ways back at 1919 again. There are mountains of bad debt in the world that need to be cleared to create growth and there are currency surpluses that need to be given up. In the course of clearing that debt, there also needs to be painful reform of government policy. But the status quo seems more likely.
A great book on the formation of our international economic system, with proper attention given to the bureaucratic experts, in-fighters, and wizards who gave it life.
For me, the name "Bretton Woods" has been just a short-hand reference to the conference that created the various international financial bodies (mainly the IMF and World Bank) at the end of World War II. Beyond this I knew little. I now have a much better understanding of the actual event held in New Hampshire and the current meaning of this pivotal moment of diplomatic history.
Mr. Steil brings to life the policymakers who argued over perplexing issues, many that still remain with us today: John Maynard Keynes, the English economic superstar, and Harry Dexter White, the America with Soviet sympathies, being two of the more prominent players in this drama.
Lend-lease, how to treat post-war Germany, the implosion of the British Empire, Soviet espionage, the changing status of the U.S. dollar, the lingering role of gold, the eventual rise of China, the Euro, all, and more, are touched upon here in clear, careful explanatory prose.
This book will win prizes.
on March 12, 2013
The author manages to bring an amazingly contemporary and detailed account of the (mostly) forgotten conference, whose consequences and reverberations have determined to a significant degree the subsequent economic and imperial destiny of Great Britain, and that of the US. The main players i the drama are vividly portrayed, their motivations, personalities, lethal charisma and lack of it thereof - a book well written for the interested layman as much as the academic reader. I hope Mr Steil has collected enough unanalyzed material for a follow up on the life and what if scenario had Harry Dexter White lived longer to climb higher up the ladder of power after the sack of Secretary Morgenthau by President Truman.
on February 19, 2014
In 1944 delegates from 44 countries convened at the Mount Washington Hotel in Bretton Woods, New Hampshire. The topic of discussion was the post-World War II international financial system. In this book Benn Steil tells the story of what transpired at that meeting; he explains how the main characters interacted with each other, and how a rather obscure American civil servant was able to have his plan for the global financial architecture approved. This book masterfully tells the story of the “war of ideas” between Harry Dexter White and John Maynard Keynes, arguably the most famous economist of the 20th century. The style is lucid, the prose is elegant, and the attention to details is superb. This is economic history at its best.In 1944 delegates from 44 countries convened at the Mount Washington Hotel in Bretton Woods, New Hampshire. The topic of discussion was the post-World War II international financial system. In this book Benn Steil tells the story of what transpired at that meeting; he explains how the main characters interacted with each other, and how a rather obscure American civil servant was able to have his plan for the global financial architecture approved. This book masterfully tells the story of the “war of ideas” between Harry Dexter White and John Maynard Keynes, arguably the most famous economist of the 20th century. The style is lucid, the prose is elegant, and the attention to details is superb. This is economic history at its best.
on September 10, 2015
Bretton Woods was the most important international gathering since the Paris Peace Conference of 1919. I read this book looking for clues on how to host international conferences: how to accommodate delegates, maintain protocol, overcome obstacles, build consensus, and reach a satisfying outcome. I was disappointed on that count. The Battle of Bretton Woods doesn’t focus on the Bretton Woods conference per se. It is a work of intellectual history built around the two characters of John Maynard Keynes and Harry Dexter White. It describes the way these two Treasury officials negotiated the main financial issues facing the United States and the United Kingdom during World War II and immediately after: the Lend-Lease Act of 1941 granting the British access to war finance and equipment; the blueprints for a postwar monetary order that began circulating in 1942 and ultimately culminated in the adoption of the Articles of Agreement of the International Monetary Fund and the International Bank for Reconstruction and Development at Bretton Woods; the signing of the $4.4 billion Anglo-American Financial Agreement in December 1945; and the inaugural meeting of the IMF board of governors in Savannah, Georgia, on March 8, 1946. It mixes these elements of diplomatic history with personal aspects of the lives of the two main characters: Keynes’s inflated ego and lack of diplomatic acumen that resulted in missed opportunities for Great Britain; and White’s dual personality as the braintrust of the US Treasury and as a mole operating clandestinely for the Soviets.
To be sure, there are some useful indications on the Bretton Woods conference itself. It took place in the Mount Washington Hotel in New Hampshire, a luxury resort with striking views of the White Mountains. The organization itself was a mess: “everything is in a state of glorious confusion,” commented British economist Lionel Robbins, who added: “with all their virtues as technicians—and these are very great—the Americans are not good organizers of international conferences.” The conference took place in war time, and army bus and personnel brought the delegates in and out. Delegates were thrown out of the hotel on July 23 for fear they would reopen the discussion and have a closer look at the hastily agreed texts. The location itself owed a lot to domestic politics. US Treasury Secretary Henry Morgenthau wanted to court a local politician for future support of the agreement in the Senate, remembering the disastrous defeat of Wilson’s League of Nations in Congress after World War I. The press was also in attendance, and Bretton Woods became one of the first international conferences to be covered live by the media. Most of the delegates came from Ministries of Finance or central banks, and true diplomats—the ones hailing from Ministries of Foreign Affairs—were a rare occurrence. The US Treasury Department had willingly kept the State Department out of the loop, and considered the only senior diplomat present, Undersecretary of State Dean Acheson, as “one of them”.
The conference was only the tip of the iceberg: everything was set in advance, during the two years when plans were circulated and drafts were discussed. The invitations were sent to forty-four nations, but the United States ran the show from start to finish, and even British delegates were relegated to a secondary role. Keynes, who had termed the Reconstruction Bank scheme imagined by White “the work of a lunatic,…some sort of bad joke,” was named chairman of the commission that drafted the Bank’s Articles of Agreement, while White himself dealt with the much more significant IMF. As for other nations, their input was limited to discussing the national quotas that would measure their relative power and influence at the boards of the two institutions or, in the case of the Cubans, to “providing the cigars”. White’s goal was to “channel the energy, aims, ambitions, and vanities of the mass of delegates into meaningless debate.” As an American organizer wily remarked, “there should be just one general rule: that anybody can talk as long as he pleases, provided he doesn’t say anything.” To make things even safer, the session secretaries were all Americans, appointed by White, and it was they who wrote the official minutes of the committees. Some important remarks made during sessions disappeared from the draft minutes, while crucial provisions were introduced surreptitiously in the final text versions. As an example, White’s technicians strategically replaced “gold” with “gold and dollars” in the paper describing the foundations of the postwar monetary order, a crucial modification that Keynes discovered only after his departure from Bretton Woods.
The result was, in Keynes’s words, “the most monstrous monkey-house assembled for years.” The distinguished Cambridge don liked that expression, and indeed often referred to non-Anglo-saxons as monkeys, with a special mention to the French which he utterly despised. But the monkey-king in this diplomatic jungle was certainly Keynes himself. Long before Paul Krugman and Thomas Piketty, Keynes was the first-ever international celebrity economist. He was surrounded by an aura of awe and admiration, and the printed media craved for his every declarations. In Benn Steil’s rendering, he had “an effortless facility with words that might have made him a master diplomat, had he actually been more concerned with convincing opponents than with cornering them logically and humiliating them.” “The man is a menace for international relations,” remarked fellow British economist James Meade, who nonetheless revered him. He would make aggressive jokes on lawyers in front of American lawyers, show his contempt for other delegates by displaying his immense intellectual superiority, and try to steal the show by pretending the outcomes of negotiations were all due to his influence while in fact they ran counter to his prescriptions. His last speech in Savannah, where he metaphorically summoned spirits and fairies to bestow the newborn institutions with their gifts, was taken as a personal attack by the American delegate: “I do mind being called a fairy,” he muttered to his aide.
If a statesman is to be judged by his capacity to serve the national interest, Keynes failed miserably in his attempt at statesmanship. This is not to say that he didn’t have Britain’s interest in mind. His visionary monetary schemes notwithstanding, he had ultimately come to the United States with the mission of conserving what he could of bankrupt Britain’s historic imperial prerogatives. As Schumpeter wrote, “Keynes’s advice was in the first instance always English advice, born of English problems.” Keynes was thoroughly British, and it was the British problems of his day that drove his theorizing: problems of deflation and depression, paying for war and surviving the perilous transition to peace. He had spent his career thinking about monetary issues as a way to preserve his country’s clout in the world. In particular, the shift of financial power from London to New York was a matter of constant concern for him. But he lacked the basic insight that the Americans did not share British national interests, and that they could even be rival powers on the international scene. Throughout the war, Keynes continuously overestimated American sympathies with Britain and underestimated the importance of public and congressional resistance to US aid or involvement. He thought of Bretton Woods as a battle of ideas, counting on his immense intellectual superiority to carry the day, whereas it was first and foremost a battle of power and influence, with the United States as the clear winner.
Indeed, British and American interests were not identical, however much both peoples were dedicated to destroying Nazism. Henry White had a clear goal in Bretton Woods: to entrench the dollar as the world’s currency, and to make it “as good as gold”. He used the leverage provided by the Lend-Lease agreement and Britain’s quasi-bankrupt situation in order to put a permanent end to the pound sterling’s international role. This required dismantling the structural supports of the British empire. In particular, Americans sought to put an end to “imperial preference”, by which Britain secured privileged trade access to the markets of its colonies and dominions. There was no room in the new order for the remnants of British imperial glory: the postwar world needed to be grounded in nondiscriminatory multilateral trade and full monetary convertibility. The Americans never deviated from their hard-line geopolitical terms. Many held no particular sympathy for the British, who had “shamefully walked away from their Great War debt obligations,” and who were trying to extend their Empire’s lease of life by credit. At Bretton Woods, we see American power in full swing, and in particular the role of the US Treasury as the economic arm of American foreign policy.
Contrary to the myth, Bretton Woods did not provide the economic foundation for postwar prosperity and monetary stability. And it was not the cooperative, disinterested, forward-looking endeavor that people often have in mind when they stress the need for a new Bretton Woods. The Bretton Woods system didn’t work the way it was supposed to. It was effective for only a brief period, and then not for the reason its authors had envisaged. It was not until 1961, fifteen years after the IMF was inaugurated, that the first nine European countries formally adopted the required provisions that their currencies be convertible into dollars. Even then, Bretton Woods was an ineffective and crisis-prone monetary system. It began experiencing potentially fatal difficulties as early as the late 1950s, and was only kept alive by a series of political fixes that made little long-term, macroeconomic sense. It could never have survived the globalization of finance and the removal of capital controls that began to take place in the 1970s. Indeed, it can be argued that the system was doomed the moment that it came into existence, and that the Bretton Woods agreements contained fatal flaws that could only lead to the abandon of gold convertibility.
Not only was Bretton Woods a crisis-prone, unstable system: it was also a bad deal for Great Britain and, one could argue, for the United States and for the world as well. What Britain actually needed in 1944-45 was short-term financing at reasonable cost with few geopolitical strings attached, and possibly a lower exchange rate. There was evident hubris in the attempt to design a global monetary system, to be managed by an international body, at a time when the outcome of the war was not yet clear. Keynes and White’s ambition was to create “a New Deal for a new world,” but they lacked the political legitimacy and also the effective means to achieve such a grand plan. Another course of action was possible for the United Kingdom, one suggested by a British Treasury official after the facts: postpone the “Grand Design” negotiations, avoid irreversible decisions, try to buy time until you see how the new postwar world develops, and borrow your way out of the crisis by getting a commercial loan from Wall Street. Who at Bretton Woods would have thought that the British empire would unravel, the United States and the Soviet Union turn into arch-enemies, and the world divide into hostile camps just two years after the conference? There was no necessity to conclude Bretton Woods in a haste. Waiting for the San Francisco conference to address the issue of money and finance jointly with the creation of the United Nations would have made the postwar institutional framework more coherent. The world would have avoided the dichotomy between the Bretton Woods institutions in Washington and the United Nations in New York, in which both seem to live on completely different planes.
So are there practical lessons from Bretton Woods for statesmen and diplomats hosting international meetings, such as the Paris Conference on Climate Change that will take place in end-November and December 2015? First, as the previous attempt to tackle climate change at Copenhagen taught us, the summit itself is not the place where comprehensive negotiations should take place. Most items on the agenda should be solved beforehand, in preparatory meetings among experts or in a pre-summit rehearsal such as the UN General Assembly in New York. Second, organizers should make sure they keep a bone for the leaders and national delegates to chew, one that is easy enough to grasp and with a clear payoff in terms of national interest, such as the quota issue at Bretton Woods. Managing expectations and egos will always be a tricky issue, but one that diplomats are best equipped to handle. How to deal with the media is also a key issue, particularly in our age of instant communication and world broadcasting. Lastly, a modicum of modesty should be in order: the world is not going to be saved by international conferences, however successful they turn out to be. For Britain in 1944 and for the planet as a whole in 2015, buying time is always a sensible option.
on April 13, 2013
Do you ever get the feeling that great historical events rarely happened how you initially presumed that they did? This book certainly exploded a few fundamental preconceptions I had about Bretton Woods, and Keynes' role in it. A must read for all interested in international economics and currency issues.
The Bretton Woods conference during the end of WWII is frequently referenced by progressive economists in reverential tones, and often held up as a useful example to be followed of forward looking international economic cooperation. The conference supposedly marks the point when the dark days of selfish 1930s national competitive deflation policies and destructive national trade balancing policies were overcome, and the enlightened path towards the international economic common good was set out. But, like good books should, the author Benn Steil challenges some of these lazy generalisations:
* While Keynes undoubtedly influenced the overarching economic theory regarding the benefits of international cooperation to boost and stabilise aggregate demand, much of the outcome of BW, especially the future centrality of the American dollar, hinges on the determined power brokering, deal-crafting and deft underhand conference managing of Mr Harry Dexter White. An interesting and dubious character as Steil reveals.
* Part of the accepted conventional wisdom has always been that Keynes went into the conference with a weak hand, and America had from the start wanted to use the war to replace British Imperialism with American led free trade. However the impression provided by this book is that Keynes was to a certain extent not beaten, but duped in these negotiations, though when the extent of White's slight of hand finally was revealed, Keynes surprisingly does not draw much attention to this central blunder, as if to limit the damage to his own reputation. There are also a few other examples in the book where Keynes seems to insist on spinning a private capitulation into a public victory. It pains me very much to say it, but with the picture Steil paints, it is possible to imagine someone with less prestigious baggage and less of a towering reputation at stake, as being a better negotiator for Britain than Keynes. (But this does not take away the credit that must go to Keynes for setting the background macroeconomic theory foundations which fathered the conference).
* Interestingly Steil reveals that, at this point when Britain was on her knees financially, there was in fact a no strings private loan being offered by New York bankers, as an alternative to the US Treasury BW route. As Steil notes, this non Treasury option was still compatible with the possibility of returning to a progressive BW type of international meeting at a later date, when a less grossly uneven balance in negotiating power would have existed.
* Left wing commentators hold up Bretton Woods as ushering in a quarter of a century of prosperity, but the reality Steil partly reveals is that:- Many of its tenants were dwarfed by the more progressive and Communist threat motivated Marshall plan a few years later; Making the dollar central to the worlds financial system quickly ran into trouble; Some of the dimensions of BW only came fully operational in 1961, therefore 10 not 25years could be interpreted as its true reign:
"The quarter-century period from 1945-1971 is typically referred to as 'the Bretton Woods era,' yet the monetary regime called for in the agreements could not be said to have become operative until 1961, the year in which the first nine European countries, plus Peru and Saudi Arabia, formally adopted the convertibility commitments required by IMF Article VIII ..." p 332.
* On a few aspects, arguably Keynes was right and BW was wrong. As America quickly found, there was an inherent conflict between a country's national currency being both the worlds reserve currency and freely convertible for gold, which, in a modern expanding world, the country in question had to buy more and more of to keep in reserve to back up this pledge. (Triffin dilemma, p333) The current US - China dynamic, which Steil refers to towards the end of the book, is the obvious significance for today, and, with China not having a viable international currency, the bancor and clearing union idea now get renewed interest. Also the foundational principle Keynes held, that creditor countries should be made to shoulder the effort of maintaining international equilibrium, is something the Americans have, as Steil notes, come around to agreeing with, now the creditor is the other party.
Being a massive fan and avid reader of Keynes, I was on a certain level upset to understand how he was cajoled and out manoeuvred. In conceiving the great forces acting on his self identity and sense of legacy, (given that he was still only human and his previous success and public notoriety had built him up to such a massive extent), I could almost feel the tumultuous personal conflict and strain delivered upon him, ... which eventually of course helped to kill him aged just 62. Knowing that he was to die soon after, for me gave the book a feeling of pathos and empathy. Most great economists are never placed in a position where they have to get their hands so dirty with the real world to such an extent. An analogy could be to compare the Bretton Woods conference to the making of a Hollywood film. Keynes not only came up with the concept for the film and co-wrote it, but also starred in it. Like a famous actor who had fulfilled all three roles, it is no wonder he would have been emotionally invested in its success, a bit blind to its flaws, and defensive and sensitive to any criticism of his baby. But he had been relatively powerless to control key parts of the final edit, because in the end, Harry White was in the Director's chair and it was an American movie. The deft exercise of national power undercover of seeming international legitimacy practised by White is a key theme the book coveys well, and parallels with the WTO or the Washington consensus of the 1990s came strongly to mind for me. I suppose as they say, you should; 'start as you mean to go on.'
As Bretton Woods is referred to so often and is such a key point in economic history, this book is invaluable in pointing out what it was, and what it was not. Timely is an over used word in book reviews, but this book does draw timely attention to THE big international China - US imbalance issue, which one could imagine Keynes would also have wished to highlight were he alive today. A highly recommended serious read.
Update October 2013
Since reading more about Keynes' contributions during this period, I have changed my mind a bit. There was never any question that anyone else but Keynes would have headed the British negotiations, as even if someone else was inserted as the figurehead, his towering abilities and status would have ran the British side from behind the scenes anyway. I still rate this book highly, but I now think Steil exaggerates the weaknesses of Keynes against his favour. Like many people who throw seemingly uncontrollable tantrums, Keynes did so with an instinctive awareness of when he had the goodwill, influence and power to carry it off. I also think Steil miss emphasises a bit what part of Britain's disadvantage was down to the personalities involved, and what was down to the clearly asymmetric power relationship between the two countries. Keynes was, it seems to me, on the whole more of a knowing realistic and pragmatic good loser, rather than being a temperamental and naive liability.
The extract below contains two comments from his BW delegation colleagues which the editors of Keynes' collected works, (volume XXVI, p112) chose to include:
"Keynes's role during the Conference was the subject of comments from two members of the Delegation. Professor Robbins recorded in his dairy:
At the end Keynes capped the proceedings by one of his most felicitous speeches, and the Delegates paid tribute by rising and applauding again and again. In a way, this is one of the greatest triumphs of his life. Scrupulously obedient to his instructions, battling against fatigue and weakness, he has thoroughly dominated the Conference...
R.H. Brand wrote to Sir Richard Hopkins:
I hope you will think the Conference was a success. I must tell you that Keynes was without doubt quite the dominant figure. He certainly is an astonishing man. Frail in body but will-power and mental brilliance and flexibility enough for 10. I feel like the stupid boy in school in his company. He got thro' much more real work than any of us."
on April 2, 2014
"The Battle of Bretton Woods" is a great read. I have a long standing interest in fiance and economics having studied the subject in college and graduate school. Steil's description of the disastrous financing of World War One and the following bitterness and mistrust created between the US and England by Europe's default on its loans (not to mention the fateful failure of the US to join the League of Nations) is told with clarity and great insight into the personalities who were called upon to finance the Second World War as well as rebuild the world following the war.
This is a great book. Easy to read and complex issues such as the Gold Standard are fully explained.
on July 13, 2013
The political battles of the WWII era is often overshadowed by the drama of those battles fought with real bullets. "The Battle of Bretton Woods" tells, in a quite readable way, the diplomatic battle between the US, who was looking to make permanent the economic supremacy they had achieved during the War and Britain, who was looking to salvage whatever economic leverage they might still have by the end of the War. The "Special Relationship" between the US and Britain that was established during WWII was in reality an uneasy alliance between two rivals that was never fully put aside for the duration of the War.
I liked this book. I gave it four stars (instead of five) as I think this book might be a bit of a slog for readers who don't have a familiarity with the various characters and events that populate this book. However, if you've got a familiarity with the subject, I think you'll enjoy this book.