Review: Birth of the postwar economic order

Review: Birth of the postwar economic order

John M. Berry, Special for USA TODAY.

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order. by Benn Steil. Princeton University Press. 449 pages. $29.95.
  • Book tells the story of the batttle for control of the postwar economic order.
  • Summit turned wartime allies into adversaries.
  • Bretton Woods conference pitted U.S. Against U.K.
  • The 1944 conference of 44 nations at Bretton Woods, N.H., Which led to creation of the International Monetary Fund and the World Bank, is generally regarded as a signal success that laid the foundation for international economic cooperation following World War II. In fact, its accomplishments fell far short of that.

    The United States dominated the conference and got what it wanted: a declaration that the dollar would be the only currency guaranteed to be convertible into gold; and an institution that was supposed to prevent erection of post-war trade barriers and the willful currency devaluations that marked the Great Depression.

    Almost as soon as the fighting stopped, however, the nascent IMF proved to be unable to deal with the economic chaos that enveloped war-torn Europe. Most countries, including Britain had few dollars with which to finance imports much less costly reconstruction projects. Britain had been the major U.S. Adversary at the conference as it sought to preserve an international role for the pound sterling.

    To provide essential aid to Europe and counter the rising Soviet power took a new effort altogether, the Marshall Plan.

    All this and more is laid out in Benn Steil’s fascinating The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order. Steil, director of international economics at the Council on Foreign Relations, spins the tale of how U.S. Treasury Secretary Henry Morgenthau, a close friend of President Franklin D. Roosevelt, allowed White, a little-known economist who wasn’t even on the U.S. Treasury’s regular payroll, to dominate the department’s monetary and trade policies beginning in the 1930s.

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    Morgenthau was oblivious to the fact that all the while White was regularly feeding classified information to the Russians whose economic central planning he admired.

    However, White’s treasonous actions had little impact on the conference outcome. The Russians were there but had no interest in the monetary issues. They declined to sign the conference agreement and never joined either the IMF or the International Bank for Reconstruction and Development, the official name of the World Bank, until 1992. The book would have benefited if most of the detail about White’s treason had been relegated to an appendix.

    According to Steil, Roosevelt, Morgenthau and White all distrusted the British. They blamed them for worsening the Depression by dropping the gold standard in 1931. Actually, today economic historians such as J. Bradford DeLong of the University of California at Berkeley point out that the countries that were quickest to go off the gold standard began to recover fastest. Roosevelt did not take the U.S. Off gold until 1934.

    U.S. Officials also wanted to force Britain to end the so-called imperial preference system in which British empire countries traded with each other and paid for imports with sterling rather than dollars. Neither Britain nor most of the other nations had many dollars to spend, but American leaders saw the whole scheme as a way to deny markets to U.S. Goods.

    That animosity colored monetary negotiations with the British for more than a decade. It also affected the terms of the Lend Lease agreement under which the U.S. Supplied war material to Britain before the U.S. Entered the war and during it. The terms were tough, partly to overcome strong opposition from most of the public and Congress, who wanted the U.S. To stay out of the war in Europe.

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    On the day after Pearl Harbor, Morgenthau took the extraordinary step of putting White in charge of all foreign affairs activity in the Treasury. A week later he directed White to prepare a memorandum on establishment of an “inter-Allied stabilization fund” which would “provide the basis for postwar international monetary arrangements.”.

    In Steil’s view, that made Harry White “one of the most powerful men in Washington.” By March 1942, White had the memo ready.

    Keynes, the brilliant economist who changed much of the world’s thinking about how to deal with economic slumps, was an adviser and often the leader of British delegations meeting with the Americans. His goals included trying to persuade the U.S. To provide grants rather than loans to help finance the war. He also hoped to find ways for Britain to come out the war with enough resources to resume exporting and earn enough to repay its war debts.

    Like White, Keynes wanted to create an international stabilization organization, but one in which debtor nations had as much power as creditors ones, with countries still permitted to impose trade barriers when they were essential.

    Steil recounts all the negotiations in great detail, sometimes too much so. He also puts them in the context of the difficult political realities in both countries. In the end, White rigged the conference–for instance, he chaired the committee on the stabilization fund and left an exhausted, ill Keynes to the handle the less important bank committee. And he had American technicians draft key provisions. At one point they substituted “gold and U.S. Dollars” whenever “gold” was mentioned.

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    In the rush to finish as their time in Bretton Woods’s Mount Washington Hotel ran out, Keynes signed the draft of the conference conclusions without ever having a chance to read it, and so did not see that key change.

    When White had written his 1942 memo he had argued that without the new institutions in place to oversee a high degree of economic collaboration among nations, the world would face “a period of chaotic competition, monetary disorders, depressions, political disruption, and finally…New wars within as well as among nations…”.

    He was right. Essentially all those things did happen. Unfortunately, as Steil notes, the new institutions were wholly inadequate to provide that collaboration. The dollar did reign supreme but there just weren’t enough dollars outside the United States.

    A decade or so later, a fatal flaw in White’s planned role for the dollar became evident: Within a decade, partly as a result of military spending needed to thwart Russian threats around the world, U.S. Gold began shifting to other nations. By the early 1960s that had become a significant constraint on U.S. Economic and foreign policies.

    “Harry White, simply stated, had been wrong,” Steil says. “The United States could not simultaneously keep the world adequately supplied with dollars and sustain the large gold reserves required by its gold-convertibility commitment.”.

    There were further years of monetary turmoil before President Nixon threw in the towel on Aug. 15, 1971, and closed the gold window. Foreign central banks could no longer swap dollars for gold. That part of Bretton Woods was dead. The era of floating but often manipulated exchange rates had arrived.

    Berry has covered the economy for four decades for The Washington Post, Bloomberg News and other publications.