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Book Review: Benn Steil, The Battle of Bretton Woods, John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, N.J., Princeton University Press, A Council on Foreign Relations Book, 2013)
Two international institutions, the World Bank and the International Monetary Fund, were created at a conference of the nations allied in the war against Hitler Germany, Fascist Italy, and feudal Japan called by the United States at Bretton Woods New Hampshire in the midst of WWII. The principal negotiators, notwithstanding the multitude of countries in attendance, were Harry Dexter White, an under-secretary of the U.S.arry Treasury Department, and John Maynard Keynes, the great English economist, representing Great Britain. The purpose of the conference was to create a world monetary system that would promote free trade and a system of stable monetary exchange rates to prevent the manipulation of exchange rates for foreign trade gains. Both the principal negotiators sought, in the International Monetary Fund, an institution that would ensure that exchange rates would not be manipulated for competitive trade advantage. They succeeded in creating the IMF but it never measured up to this expectation.
The Roosevelt administration had to overcome the isolationist proclivities of most Americans as represented by the opposition to lend-lease of Republican Senator Taft and Democratic Senators James Byrnes and Harry Byrd. Sen. Taft was prescient in denouncing membership in the monetary fund as “like pouring money down a sewer.” White and Keynes clashed as the former successfully pushed for an end to the policy of “imperial preference” by which Britain secured privileged trade access to the markets of its colonies and dominions. Steil describes it as a ploy to ensure that “war-ravaged Britain would remain wholly dependent on American succor to pay for imports vital to its survival.” The British had been anxious to see themselves as partners with the Americans in creating the ground rules for the postwar order but the Americans kept reminding them that “there was no room in the new order for the remnants of British imperial glory.”
Keynes views on economic policy in general and monetary policy in particular were constantly changing. In 1933, he made a strong case for economic national self-sufficiency. He had once said that he considered protectionist thought evidence of a poor education and dim-witted. But he later declared that if other countries pursued beggar-thy-neighbor policies, he would defend the British workers. He thought the benefits of an international division of labor were overrated. He wrote, “let goods be homespun whenever it is reasonably and conveniently possible” and “let finance be primarily national.” International capital flows, of all the various economic entanglements, had the most pernicious effect in his opinion.
Steil traces the “improbable” rise of White from his birth as the son of Jewish Lithuanian immigrants, through academia, and ultimately to his role in the Bretton Woods negotiations. He described White as Keynesian in his economics but with an admiration for the Soviet Union, a fellow-traveler and later shown to be a Soviet agent. He writes that White believed that Soviet socialist economics had proven itself a success. In White’s words, “Russia is the first instance of socialist economy in action. And it works!” The USSR did not join the Bretton Woods talks but participated in funding the IMF. It was in another theatre of war that White served the Soviet Union. When Pres. Roosevelt became tired of negotiating with Japan about the possible withdrawal from China and Indo-China, he authorized Secretary of State Cordell Hull, to present Japan with “broad basic proposals”, in effect an ultimatum leading to a collision course. Steil writes, “That White was the author of the key ultimatum demands is beyond dispute.”
Steil does an excellent job of describing Keynes’s development as an author and celebrity, starting with his 1923 Tract on Monetary Reform. His post World War I books included “The Economic Consequences of Mr. Churchill”, decrying a return to a high value of the pound in terms of gold. It is easier, he believed, to lower the gold content of the pound rather than deflate wages and prices to achieve a balance of trade. Keynes wrote extensively on monetary theory, for example his Treatise on Money. Of course, the book that made him famous was The General Theory on Employment, Interest, and Money, which created the economic school called Keynesianism, a school to which we do not belong. Keynes pressed for recognition of Britain’s sacrifices but in the end, White succeeded in denying Britain an easy way out of the economic distress caused by the war. Not until the Marshall Plan, after White’s death, did Britain regain Washington’s graces and the USSR become the concern of U.S. policy.
In the discussions preceding Bretton Woods, White and Keynes had discussions about a postwar international agency to regulate foreign exchange rates and promote free trade. White envisioned a stabilization fund and Keynes an international clearing union. Both plans envisioned a reduction in tariffs and trade barriers, including barring export subsidies. White desired to entrench the dollar as the world’s currency while Keynes wanted a unit called bancor. Early in January, 1943, in a speech before the American Economic Association, White called for an international stabilization fund and an international bank. On February 1, the U.S. State Department sent a draft of the White plan to the British Embassy with copies to the Russian, Chinese, and other ambassadors, ultimately to 37 finance ministers. Keynes and the Brits were outraged. The Brits submitted a draft of their plan to the Allied governments. But in the end American power called the tune and the dollar was established as the world’s currency and tied to gold.
The book is a superb work of history detailing the role of the Harry White and Lord Keynes and the latter’s humiliation, and the discussions that led to the Bretton Woods agreement. The author details the debates which ended in the creation of the International Monetary Fund and the World Bank and the success that the U.S. had in imposing its views on the world. But the World Bank contributed little to the World and its principal beneficiaries seem to be its staff, principally the high officials of the agency. As for the IMF, it has served mainly to bail out countries unable to service their debts. It has done nothing to stabilize currencies nor prevent countries from manipulating their currencies to obtain trade advantages, or imposing artificial barriers to free trade. In 1968, the Board of Governors of the IMF Created the Special Drawing Right (SDR), increasingly viewed by America’s competitors as a first step to a true international currency, dethroning the dollar. As the author writes, “The Bretton Woods monetary system was finished.” “Instead, what we have is a system of floating rates with no possibility of a system of fixed exchange rates.”
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