High Point of Modern International Economic Diplomacy

Ed Conway, The Summit: Bretton Woods 1944,

J.M. Keynes and the Reshaping of the Global Economy 

               During the first three weeks of July 1944, as World War II raged on the far sides of the Atlantic and Pacific oceans, 730 delegates from 44 countries gathered at the Mount Washington Hotel in Northern New Hampshire for what has come to be known as the Bretton Woods conference. The conference’s objective was audacious: create a new and more stable framework for the post-World War II monetary order, with the hope of avoiding future economic upheavals like the Great Depression of the 1930s.   To this end, the delegates reconsidered and in many cases rewrote some of the most basic rules of international finance and global capitalism, such as how money should flow between sovereign states, how exchange rates should interact, and how central banks should set interest rates. The conference took place at the venerable but aging Mount Washington Hotel, in an area informally known as Bretton Woods, not far from Mount Washington itself, Eastern United States’ highest peak.

In The Summit, Bretton Woods, 1944: J.M. Keynes and the Reshaping of the Global Economy, Ed Conway, formerly economics editor for Britain’s Daily Telegraph and Sunday Telegraph and presently economics editor for Sky News, provides new and fascinating detail about the conference. The word “summit” in his title carries a triple sense: it refers to Mount Washington and to the term that came into use in the following decade for a meeting of international leaders. But Conway also contends that the Bretton Woods conference now appears to have been another sort of summit. The conference marked the “only time countries ever came together to remold the world’s monetary system” (p.xx).  It stands in history as the “very highest point of modern international economic diplomacy” (p.xxv).

Conway differentiates his work from others on Bretton Woods by focusing on the interactions among the delegates and the “sheer human drama” (p.xxii) of the event.  As the sub-title indicates, British economist John Maynard Keynes is forefront among these delegates. Conway could have added to his subtitle the lesser-known Harry Dexter White, Chief International Economist at the US Treasury Department and Deputy to Treasury Secretary Henry Morgenthau, the head of the US delegation and formal president of the conference.  White’s name in the subtitle would have underscored that this book is a story about  the relationship between the two men who assumed de facto leadership of the conference. But the book is also a story about the uneasy relationship at Bretton Woods between the United States and the United Kingdom, the conference’s two lead delegations.

Although allies in the fight against Nazi Germany, the two countries were far from allies at Bretton Woods.  Great Britain, one of the world’s most indebted nations, came to the conference unable to pay for its own defense in the war against Nazi Germany and unable to protect and preserve its vast worldwide empire.  It was utterly outmatched at Bretton Woods by an already dominant United States, its principal creditor, which had little interest in providing debt relief to Britain or helping it maintain an empire. Even the force of Keynes’ dominating personality was insufficient to give Britain much more than a supplicant’s role at Bretton Woods.

Conway’s book also constitutes a useful and understandable historical overview of the international monetary order from pre-World War I days up to Bretton Woods and beyond.  The overview revolves around the gold standard as a basis for international currency exchanges and attempts over the years to find workable alternatives. Bretton Woods produced such an alternative, a standard pegged to the United States dollar — which, paradoxically, was itself tied to the price of gold.  Bretton Woods also produced two key institutions, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank, designed to provide stability to the new economic order. But the Bretton Woods dollar standard remained in effect only until 1971, when US President Richard Nixon severed by presidential fiat the link between the dollar and gold, allowing currency values to float, as they had done in the 1930s.  In Conway’s view, the demise of Bretton Woods is to be regretted.

* * *

          Keynes was a legendary figure when he arrived at Bretton Woods in July 1944, a “genuine international celebrity, the only household name at Bretton Woods” (p.xv). Educated at Kings College, Cambridge, a member of the faculty of that august institution, and a peer in Britain’s House of Lords, Keynes was also a highly skilled writer and journalist, as well as a fearsome debater.  As a young man, he  established his reputation  with a famous critique of the 1919 Versailles Treaty, The Economic Consequences of the Peace, a tract that predicted with eerie accuracy the breakdown of the financial order that the post World War I treaty envisioned, based upon imposition of punitive reparations upon Germany. Although Keynes dazzled fellow delegates at Bretton Woods with his rhetorical brilliance, he was given to outlandish and provocative statements that hardly helped the bonhomie of the conference.   He suffered a heart attack toward the end of the conference and died less than two years later.

White was a contrast to Keynes in just about every way. He came from a modest first generation Jewish immigrant family from Boston and had to scramble for his education. Unusual for the time, in his 30s White earned an undergraduate degree from Stanford after having spent the better portion of a decade as a social worker. White had a dour personality, with none of Keynes’ flamboyance. Then there were the physical differences.   Keynes stood about six feet six inches tall (approximately 2.0 meters), whereas White was at least a foot smaller (approximately 1.7 meters). But if Keynes was the marquee star of the Bretton Woods because of his personality and reputation, White was its driving force because he represented the United States, undisputedly the conference’s driving force.

By the time of the Bretton Woods conference, however, White was also unduly familiar with Russian intelligence services. Although Conway hesitates to slap the “spy” label on him, there is little doubt that White provided a hefty amount of information to the Soviets, both at the conference and outside its confines. Of course, much of the “information sharing” took place during World War II, when the Soviet Union was allied with Britain and the United States in the fight against Nazi Germany and such sharing was seen in a different light than in the subsequent Cold War era.  One possibility, Conway speculates, was that White was “merely carrying out his own, personal form of diplomacy – unaware that the Soviets were construing this as espionage” (p.159; the Soviet Union attended the conference but did not join the international mechanisms which the conference established).

The reality, Conway concludes, is that we will “never know for certain whether White knowingly betrayed his country by passing information to the Soviets” (p.362).   Critically, there is “no evidence that White’s Soviet activities undermined the Bretton Woods agreement itself” (p.163;). White died in 1948, four years after the conference, and the FBI’s case against him became moot. From that point onward, the question whether White was a spy for the Soviet Union became one almost exclusively for historians, a question that today remains unresolved (ironically, after White’s death, young Congressman Richard Nixon remained just about the only public official still interested in White’s case; when Nixon became president two decades later, he terminated the Bretton Woods financial standards White had helped create).

The conference itself begins at about the book’s halfway point. Prior to his account of its deliberations, Conway shows how the gold standard operated and the search for workable alternatives. In the period up to World War I, the world’s powers guaranteed that they could redeem their currency for its value in gold. The World War I belligerents went off the gold standard so they could print the currency needed to pay for their war costs, causing hyperinflation, as the supply of money overwhelmed the demand.  In the 1920s, countries gradually resorted back to the gold standard.

But the stock market crash of 1929 and ensuing depression prompted countries to again abandon the gold standard. In the 1930s, what Conway terms a “gold exchange standard” prevailed, in which governments undertook competitive devaluations of their currency. President Franklin Roosevelt, for example, used a “primitive scheme” to set the dollar “where he wanted it – which meant as low against the [British] pound as possible” (p.83).  The competitive devaluations and floating rates of the 1930s led to restrictive trade policies, discouraged trade and investment, and encouraged destabilizing speculation, all of which many economists linked to the devastating war that broke out across the globe at the end of the decade.

Bretton Woods sought to eliminate these disruptions for the post-war world by crafting an international monetary system based upon cooperation among the world’s sovereign states. The conference was preceded by nearly two years of negotiations between the Treasury Departments of Great Britain and the United States — essentially exchanges between Keynes and White, each with a plan on how a new international monetary order should operate. Both were “determined to use the conference to safeguard their own economies” (p.18). Keynes wanted to protect not only the British Empire but also London’s place as the center of international finance. White saw little need to protect the empire and foresaw New York as the world’s new economic hub.  He also wanted to locate the two institutions that Bretton Woods would create, the IMF and World Bank, in the United States, whereas Keynes hoped that at least one would be located either in Britain or on the European continent. White and the Americans would win on these and almost all other points of difference.

But Keynes and White shared a broad general vision that Bretton Woods should produce a system designed to do away with the worst effects of both the gold standard and the interwar years of instability and depression.   There needed to be something in between the rigidity associated with the gold standard on the one hand and free-floating currencies, which were “associated with dangerous flows of ‘hot money’ and inescapable lurches in exchange rates” (p.124), on the other. To White and the American delegation, “Bretton Woods needed to look as similar as possible to the gold standard: politicians’ hands should be tied to prevent them from inflating away their debts. It was essential to avoid the threat of the competitive devaluations that had wreaked such havoc in the 1930s” (p.171).  For Keynes and his colleagues, “Bretton Woods should be about ensuring stable world trade – without the rigidity of the gold standard” (p.171).

The British and American delegations met in Atlantic City in June 1944 in an attempt to narrow their differences before travelling to Northern New Hampshire, where the floor would be opened to the conference’s additional delegations.  Much of what happened at Bretton Woods was confined to the business pages of the newspapers, with attention focused on the war effort and President Roosevelt’s re-election bid for a fourth presidential term.  This suited White, who “wanted the conference to look as uncontroversial, technical and boring as possible” (p.203).  The conference was split into three main parts. White chaired Commission I, dealing with the IMF, while Keynes chaired Commission II, whose focus was the World Bank.  Each commission divided into multiple committees and sub-committees.  Commission III, whose formal title was “Other Means of International Cooperation,” was in Conway’s view essentially a “toxic waste dump into which White and Keynes could jettison some of the summit’s trickier issues” (p.216).

The core principle to emerge from the Bretton Woods deliberations was that the world’s currencies, rather than being tied directly to gold or allowed to float, would be pegged to the US dollar which, in turn, was tied to gold at a value of $35 per ounce. Keynes and White anticipated that fixing currencies against the dollar would ensure that:

international trade was protected for exchange rate risk. Nations would determine their own interest rates for purely domestic economic reasons, whereas under the gold standard, rates had been set primarily in order to keep the country’s gold stocks at an acceptable level. Countries would be allowed to devalue their currency if they became uncompetitive – but they would have to notify the International Monetary Fund in advance: this element of international co-ordination was intended to guard against a repeat of the 1930s spiral of competitive devaluation (p.369).

 

The IMF’s primary purpose under the Bretton Woods framework was to provide relief in balance of payments crises such as those of the 1930s, when countries in deficit were unable to borrow and exporting countries failed to find markets for their goods. “Rather than leaving the market to its own devices – the laissez-faire strategy discredited in the Depression – the Fund would be able to step in and lend countries money, crucially in whichever currency they most needed. So as to avoid the threat of competitive devaluations, the Fund would also arbitrate whether a country could devalue its exchange rate” (p.169).

One of the most sensitive issues in structuring the IMF involved the contributions that each country was required to pay into the Fund, termed “quotas.” When short of reserves, each member state would be entitled to borrow needed foreign currency in amounts determined by the size of its quota.  Most countries wanted to contribute more rather than less, both as a matter of national pride and as a means to gain future leverage with the Fund. Heated quota battles ensued “both publicly in the conference rooms and privately in the hotel corridors, until the very end of the proceedings” (p.222-23), with the United States ultimately determining quota amounts according to a process most delegations considered opaque and secretive.

The World Bank, almost an afterthought at the conference, was to have the power to finance reconstruction in Europe and elsewhere after the war.  But the Marshall Plan, an “extraordinary program of aid devoted to shoring up Europe’s economy” (p.357), upended Bretton Woods’ visions for both institutions for nearly a decade.  It was the Marshall Plan that rebuilt Europe in the post-war years, not the IMF or the World Bank. The Fund’s main role in its initial years, Conway notes, was to funnel money to member countries “as a stop-gap before their Marshall Plan aid arrived” (p.357),

When Harry Truman became President in April 1945 after Roosevelt’s death, he replaced Roosevelt’s Treasury Secretary Henry Morgenthau, White’s boss, with future Supreme Court justice Fred Vinson. Never a fan of White, Vinson diminished his role at Treasury and White left the department in 1947. He died the following year, in August 1948 at age 55.  Although the August 1945 change in British Prime Ministers from Winston Churchill to Clement Atlee did not undermine Keynes to the same extent, his deteriorating health diminished his role after Bretton Woods as well. Keynes died in April 1946 at age 62, shortly after returning to Britain from the inaugural IMF meeting in Savannah, Georgia, his last encounter with White.

Throughout the 1950s, the US dollar assumed a “new degree of hegemony,” becoming “formally equivalent to gold. So when they sought to bolster their foreign exchange reserves to protect them from future crises, foreign governments built up large reserves of dollars” (p.374). But with more dollars in the world economy, the United States found it increasingly difficult to convert them back into gold at the official exchange rate of $35 per ounce.  When Richard Nixon became president in 1969, the United States held $10.5 billion in gold, but foreign governments had $40 billion in dollar reserves, and foreign investors and corporations held another $30 billion. The world’s monetary system had become, once again, an “inverted pyramid of paper money perched on a static stack of gold” and Bretton Woods was “buckling so badly it seemed almost certain to collapse” (p.377).

In a single secluded weekend in 1971 at the Presidential retreat at Camp David, Maryland, Nixon’s advisors fashioned a plan to “close the gold window”: the United States would no longer provide gold to official foreign holders of dollars and instead would impose “aggressive new surcharges and taxes on imports intended to push other countries into revaluing their own currencies” (p.381).  When Nixon agreed to his advisors’ proposal,  the Bretton Woods system, which had “begun with fanfare, an unprecedented series of conferences and the deepest investigation in history into the state of macro-economics” ended overnight, “without almost anyone realizing it” (p.385). The era of fixed exchange rates was over, with currency values henceforth to be determined by “what traders and investors thought they were worth” (p.392).  Since 1971, the world’s monetary system has operated on what Conway describes as an “ad hoc basis, with no particular sense of the direction in which to follow” (p.401).

* * *

            In his epilogue, Conway cites a 2011 Bank of England study that showed that between 1948 and the early 1970s, the world enjoyed a “period of economic growth and stability that has never been rivaled – before or since” (p.388).  In Bretton Woods member states during this period “life expectancy climbed swiftly higher, inequality fell, and social welfare systems were constructed which, for the time being at least, seemed eminently affordable” (p.388).  The “imperfect” and “short-lived” (p.406) system which Keynes and White fashioned at Bretton Woods may not be the full explanation for these developments but it surely contributed.  In the messy world of international economics, that system has “come to represent something hopeful, something closer to perfection” (p.408).  The two men at the center of this captivating story came to Bretton Woods intent upon repairing the world’s economic system and replacing it with something better — something that might avert future economic depressions and the resort to war to settle differences.  “For a time,” Conway concludes, “they succeeded” (p.408).

Thomas H. Peebles

La Châtaigneraie, France

March 8, 2017

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6 Comments

Filed under British History, European History, History, United States History, World History

6 responses to “High Point of Modern International Economic Diplomacy

  1. David Gross

    Tom, this is an interesting history. It brings to mind many questions I have about macroeconomics today and in the future. I’m a little surprised Conway would consider the Bretton Woods agreement to be the summit when it had serious flaws. As you point out, the agreement still tied worldwide currency to gold, which seems anachronistic to me because gold may have been of great importance in previous centuries, but not so much now. Then to tie currencies around the world to one particular powerful nation seems ultimately unworkable as that nation inevitably becomes less powerful, like if an authoritarian comes to power in that nation by duping its people with lies and fantasies.

    It seems like there would be two ways to approach where we need to go from here. There would be a utopian vision of what economists think would be the end goal, and there would be the practical way forward. I have no idea how what would be politically possible in our messy world currently, but my guess about the utopian ideal would involve a world-wide currency wisely governed by respected international institutions. There must be smart economists who have thought about these things. I should read one of their books.

    Of course what is smart or wise for long-term improvement is almost certainly what will not happen. There always seem to be men in power who seek to make as much wealth for themselves as quickly as possible without regard for the future of their children and grandchildren. It boggles my mind that we suffered the great recession of 2008 which took a number of years to overcome, and yet we did almost nothing to correct the irresponsible behavior of transnational financial institutions which caused it. Now with a kleptocrat as our illegitimate president, we are actually rolling back some of the modest improvements made following the recession. Also, we know climate change will cause economic suffering for everyone and challenge everything we have built, yet shortsightedness seems to always prevail among our leaders.

    The messiness of the world leaves me less than hopeful that international institutions can deal with the difficulties of macroeconomics. Off the top of my head we have a terrible conflict in Syria, nuclear weapons development in North Korea, a Russian state ruled by organized crime, a repressive Chinese state, Great Britain retreating from international cooperation, and complete failures of currencies in Venezuela and Zimbabwe. The motivations of the international institutions we do have, such as the World Bank and IMF, often seem suspect. They promote counterproductive austerity policies in impoverished nations, motivated more by rapid repayments of debt rather than long-term structural improvements.

    As you point out, these issues are crucial to peace and stability, and always have been. I’m sure there are great examples from antiquity, but I know more recently at the founding of the United States, the whole thing would have been short-lived if not for Alexander Hamilton’s understanding of macroeconomics and his persistent advocacy for responsible economic policies. Ever since then, we can see economic struggles as integral to political upheavals here in the U.S. and around the world.

  2. Thanks, Dave, there’s a lot to unpack in your comment. Keynes actually pushed for a universal currency at Bretton Woods that would supplant national ones. He was outvoted by.. guess whom. Conway’s book doesn’t take us much beyond Nixon’s 1971 decision to delink the dollar-gold nexus, although I do recall that he mentions at one point that the relationship between the United States and Great Britain during the Bretton Woods era was about what it is today between Germany and Greece. Most of what I know about macroeconomics comes from Conway’s book, so I’m hard pressed to comment intelligently on the current state of affairs. But it does seem like our Federal Reserve has an inordinate influence on international financial markets, with the IMF and World Bank being at best minor players. Bi-lateral and multi-lateral trade agreements and how the WTO operates all seem important parts of today’s story, but I’m not versed on theml. How much the ’08 crisis could have been averted if something like Bretton Woods II had been in place is another question I wondered about after reading the book, but Conway doesn’t broach this area. If there has been a fragile if less formal international financial order in place in the decades since ’71, it seems that the current administration in the US is bent upon doing what it can to fracture that order. And the tendencies you cite in other countries around the world are not causes to be hopeful either.

  3. bwismer5

    Hi Tom and Dave,
    I just wanted to add that I personally have always tied Nixon’s removal of the gold standard to the fact that, starting at that time, suddenly couples could not manage to live without BOTH parties working – husband AND wife. Up until that time, along with the “stability” engendered by Bretton Woods, you had families being able to afford to live on one income. Now say what you will about women and the workplace – and I personally have benefitted from Women’s Lib and being able to forge a good career and not being dependent on a man – I believe there are casualties from that change and that our world has changed greatly (not always for the better) because both adults in the family have to work in order to survive and have a “good life”. No one seems to mention that change, but it happened in the ’70’s and I blame Nixon (ok for that and a bunch of other things.) I don’t know where we should go from here but the financial regulations put in place after 2008 (and currently being removed by the doofus in the WH) are a start. We do need a better, fuller understanding of economics by our politicians, because with climate change we are heading into increasingly troubled times.

    • bwismer5

      And I, too, wish that the author had addressed the time since the ’70’s and our future.

    • Interesting point, Barb, worth exploring; but I’m wondering how you connected the dots. How did you get from your realization that both spouses now needed to work to make a go of it to “Nixon’s the one” (do you remember the sensation that that photo prompted, an obviously quite pregnant woman holding up a campaign sign with those words?). What made you think: “If only that sob would have kept the dollar’s link to the gold standard intact, women could have the option of staying home and tending to their children, rather than turning them over to the uncertainties of day care.”

  4. Interesting point, Barb, worth exploring; but I’m wondering how you connected the dots. How did you get from your realization that both spouses now needed to work to make a go of it to “Nixon’s the one” (do you remember the sensation that that photo prompted, an obviously quite pregnant woman holding up a campaign sign with those words?). What made you think: “If only that sob would have kept the dollar’s link to the gold standard intact, women could have the option of staying home and tending to their children, rather than turning them over to the uncertainties of day care.”

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