The modern world economy materialized in the mountain air of Bretton Woods, New Hampshire, in July 1944. Three weeks after the D-Day landings on the beaches of Normandy, delegates from forty-four Allied countries gathered at the Mount Washington Hotel to devise institutions meant to foster multilateral cooperation, financial stability and postwar economic reconstruction. Their expressed goals were not just economic; the delegates were convinced that the success of the Bretton Woods conference would ensure world peace as well as prosperity. In the words of the most famous of the attendees, John Maynard Keynes, their efforts could create a world in which “the brotherhood of man will have become more than a phrase.” But first they had to overcome deep divisions rooted in national interests.
Two men dominated the planning for Bretton Woods and the negotiations at the conference. On one side, representing the declining power of Great Britain, was Lord Keynes, the most famous economist in the world and an unpaid adviser to the UK Treasury. For several years, he had been refining his plan to create an International Currency Union, a kind of global central bank that would create its own money (“Bancor”) to lend to indebted countries like Britain so they could import more goods than they were able to export in the lean postwar years. On the other side, representing the ascendant power of the United States, was an obscure Treasury Department official named Harry Dexter White. Although he was hardly known outside Washington, White was a brilliant, Harvard-trained economist who was empowered and completely trusted by Treasury Secretary Henry Morgenthau Jr., in turn a close friend and trusted adviser of President Franklin Delano Roosevelt. For three years, White had been working on his own plan for an International Stabilization Fund that would steady foreign exchange rates by persuading countries to peg their currencies to the US dollar, while pegging the value of the dollar to a fixed price for gold. White’s fund would lend dollars—and, potentially, other convertible currencies or gold—to debtor nations, but on tighter terms than were envisaged by Keynes. These two plans were reconciled at Bretton Woods to create the International Monetary Fund (IMF).
The “battle” between Keynes and White was a tense and occasionally explosive but mostly collegial negotiation conducted in the midst of World War II. It was a struggle between two vastly different men on behalf of two countries that were immensely powerful in vastly different ways. White had the upper hand, and only partly because the United States held most of the world’s gold and was the only creditor country of any relevance. Circumstances also gave White the high moral ground. Britain was desperate to hold on to its empire, its system of “imperial” trade preferences and its “sterling area” of countries pegging their currencies to the pound. In the United States, the Roosevelt administration was eager to tap into markets in the British orbit, and it therefore favored a more rapid and complete opening up of trade and finance. In White’s plan, lending by the fund would be secondary to its focus on creating an open multilateral financial system.
Because Roosevelt and Morgenthau saw the greater purpose of Bretton Woods as promoting a lasting opportunity for peace, White also viewed Great Britain as a secondary player in this scheme. Of far greater portent was the US relationship with the Soviet Union. Although the USSR, like Britain, was a US ally that was being impoverished by the war, White foresaw that it would hold the key to world security in the aftermath of the conflict. A prosperous Russia would provide a counterweight in Europe to Germany (still the enemy), and trade with Russia was potentially valuable for the West.
White spent some five months in the run-up to Bretton Woods in a series of meetings in Washington with a high-level delegation of experts from the Soviet Union, explaining the benefits of joining the proposed international agencies and responding to their concerns about the apparent capitalist nature of the enterprise. His efforts succeeded to the point of getting the Soviet delegation to sign the Articles of Agreement at Bretton Woods, but at the end of 1945 Joseph Stalin decided not to join the IMF, which he feared (not without cause) would be controlled largely by the United States.
The history of Bretton Woods and the creation of the postwar international financial system has been told often and well in numerous books and articles. The latest contribution, The Battle of Bretton Woods, by Benn Steil of the Council on Foreign Relations, purports to add to our knowledge but gets the history consistently wrong. It would be tempting to ignore it, except that Steil’s account creates a dangerously misleading history not only of how and why today’s financial system came into being, but also of the motives that guided White’s efforts.
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Part of the problem is confusion about the economics. A central element of what Keynes and White were trying to create was a way to have stable exchange rates and prices and economic growth. That required limiting—or in Keynes’s view, eventually abolishing—the international role of gold as a base for money. No one at Bretton Woods was arguing for a return to the classical gold standard that had prevailed before World War I. That system suffered not only from its inflexibility but also from large, arbitrary and capricious changes in the supply of gold. In the gold-standard era, prices were stable on average over the decades, but they rose and fell in response to the presence or absence of new discoveries. Nations prospered or suffered depending on where and when gold might be found. The delegates at Bretton Woods wanted a new system that would depend importantly on the cooperative management of money by central banks. The only dispute was over how best to discipline the system by circumscribing central bankers’ scope for discretionary policies.
Steil’s analysis of the role of gold in the Bretton Woods negotiations is colored by his own nostalgia for the classical gold standard. He criticizes Keynes—the father of macroeconomic theory—for not understanding gold’s monetary role. “Keynes blamed much on the gold standard,” Steil writes, “that he might just as well have blamed on the weather.” He concludes that Keynes favored controls on financial capital flows only because he failed to appreciate what a return to the gold standard could have offered: “Keynes argued that speculative capital would, without controls, periodically wreak havoc…. Yet speculative capital does this precisely because of the lack of a credible anchor for the exchange rate, such as gold provided during the late nineteenth century.” In truth, Keynes understood exactly what the problem was, and he knew that a return to gold would not solve it. A system without the gold standard requires a means of allowing flexible policy-making within real constraints. Keynes never found a fully effective solution, but he was surely on the right path.
The second, and larger, problem is political. Steil accepts the belief—long propagated on the right—that White’s negotiations with the Soviets amounted to espionage and were motivated by his secret admiration for the Soviet economic system. Steil makes much of a handwritten document that he claims to have discovered, but which he has simply misunderstood and misinterpreted. The document, which resides among White’s personal papers in the manuscript library at Princeton University, is an incomplete first draft for an article on the postwar political arrangements that would soon be enshrined in the UN Security Council. Though undated, the draft was written soon after the publication of Walter Lippmann’s bestselling 1943 book U.S. Foreign Policy, to which it refers admiringly, and probably before the formalization of the proposed United Nations organization at Dumbarton Oaks in October 1944.
In this unpublished draft, White argues—as he regularly did in public—that the best way to prevent a postwar resurgence of military aggression by Germany or Japan would be to maintain the alliance among the four great powers: the United States, the United Kingdom, the Soviet Union and (Nationalist) China. That, of course, is exactly what was envisaged in the creation of the Security Council in 1945. (White omits France, which seldom got any respect in those days.) He notes that the main objection in the United States to continuing this Grand Alliance after the war is repugnance for the Soviet economic system, and he therefore dismantles that objection and argues that the Soviet system is not so different from every other country’s as to make it unfit for cooperation with the West. Nowhere—either in the unpublished draft or anywhere else—does he suggest a preference for the Soviet system over that of the United States. Although Steil acknowledges correctly that “there is no evidence that [White] admired communism as a political ideology,” he hints that heretofore dubious accounts of White’s “secret” admiration for the Soviet economy are now “wholly credible.”
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