Re-Shuffling the Deck: Bretton Woods

[don]

By FRED ANDREWS

“DOWNTON ABBEY” has tapped our inner Anglophile on a wide front. But Americans were not so besotted with Britain in the first half of the 20th century, when it was a powerhouse of international trade. Until World War II, Britain ran international finance to its liking, and Americans were thirsting to chop it down to size. We need to understand that to grasp the importance of the Bretton Woods monetary conference.

Representatives of some 44 nations gathered in July 1944 at Bretton Woods, a resort spot in New Hampshire, to hammer out a world monetary system, replacing the gold standard that had failed so woefully. But only two nations mattered: Britain and the United States.

In “The Battle of Bretton Woods” (Princeton University Press, $29.95), Benn Steil, a senior fellow and director of international economics at the Council on Foreign Relations, describes that effort from its roots and projects its effect on today’s conflicts among the dollar, the euro and the Chinese renminbi. Although America’s global dominance has long since melted away, no substitute is yet strong enough to shove the dollar aside, in part because of Bretton Woods.

Britain entered the conference exhausted and broke, crippled by the war. It desperately needed flexible exchange rates to rekindle its vital exports to pay for the imports it required to live. It clung to a privileged access to trading with its empire, one-fourth of the Earth’s land and people.

America was unscathed at home and far stronger in 1945 than in 1941. Owner of the bulk of the world’s gold bullion, a stunning 20,000 metric tons, the United States wanted to emerge from World War II with fixed conversion rates assured by a dollar tied to gold. And it went without saying that it was bent on becoming the globe’s financial capital.

Representing America at Bretton Woods was Harry Dexter White, an economics professor who had joined the Treasury as an adviser in 1934. By dint of intellect and hard work, he became grudgingly accepted as its ranking expert on international finance. He labored as the brains buttressing the Treasury Secretary, Henry Morgenthau, who described himself as “just a farmer,” albeit a close gentleman-farmer friend of Franklin D. Roosevelt. Morgenthau presided at Bretton Woods but White ran the show.

Dr. Steil presents evidence that White was also an informant for the Soviet Union, a starry-eyed admirer of what he saw as its remarkable economic success. For years, Dr. Steil says, White provided documents to the Soviets and favored their side in policy debates. In 1948, White fended off the House Un-American Activities Committee, denying that he was a Communist. A more adverse light was shed on his activities when wartime codes were broken years after his death. Dr. Steil is more convinced of the espionage claims surrounding White than some historians who see his actions as more innocent. There is no sign that his interest in the Soviets affected his work at Bretton Woods.

Taking Britain’s part at the 1944 conference was the celebrated John Maynard Keynes, who knew full well that war had reduced Britain to a hapless debtor, obliged to accept whatever the United States offered. The book confirms that Keynes was an intellectual giant with flawless intuition for finance, but it also exposes his caustic criticisms of lesser men and his tin ear for workaday diplomacy. The Americans considered him too bright for his britches and bottled him up at every opportunity.

White had prepared so well that the actual conference was well-orchestrated, everything the Americans wanted. “Now the advantage is ours here, and I personally think we should take it,” Morgenthau said to White, who fully agreed. As White said, “If the advantage was theirs, they would take it.”

The Americans wanted free trade and open markets; they feared postwar inflation. Bretton Woods helped by providing for stable but convertible currencies, tied within limits to the dollar and ultimately to gold. It also created the International Monetary Fund, a money pool from which nations with trade deficits could borrow to satisfy international accounts. And it set up what became the World Bank, initially focused on rebuilding Europe, and later on the developing world. Britain lost out on looser exchange rates, and its imperial trade preferences were doomed.

On item after item, Keynes found a stone wall. What Dr. Steil calls his “most tangible legacy” from Bretton Woods was pathetic. Norway moved to abolish the Bank for International Settlements for cooperating with the Nazis, a motion that Keynes vehemently opposed. The delegates eventually agreed that the bank would be “liquidated at the earliest possible moment.” The bank is still in business today.

Keynes ended up having to play an impossible hand. In 1945, he was left to sell Parliament on accepting arrangements that he had exhausted himself resisting. Four months later, he was dead. History later vindicated his advocacy of flexible exchange rates. The Bretton Woods system, not fully in effect till 1961, died only a decade later when President Richard M. Nixon ended the gold standard. The United States was running such large international deficits, paying out so many dollars, that not even Fort Knox had enough gold.

“The Battle of Bretton Woods” should become the gold standard on its topic. The details are addictive. But be warned: the book is dense. Every skirmish, every exchange — and the book gets into hundreds of thems — was presumably meaningful to the participants. But while some episodes mattered much, many did not. The author is no Robert Caro, who in his multivolume biography of Lyndon B. Johnson delves into minute details but also explains their larger significance.

Perhaps that is what is missing here — an unmistakable voice, a sense that this rich history is told by one mind. Mr. Caro is known for working on his own, with the assistance of his wife. In his acknowledgments, Dr. Steil thanks 10 research assistants and an advisory panel of 18 luminaries. The book sometimes reads like a succession of brilliant but loosely connected graduate seminar papers — an assemblage, a very fine one, but an assemblage nevertheless.

http://www.nytimes.com/2013/03/03/bu...-new-book.html

[lektrode]

Re: Re-Shuffling the Deck: Bretton Woods

.......and its imperial trade preferences were doomed.

On item after item, Keynes found a stone wall. What Dr. Steil calls his “most tangible legacy” from Bretton Woods was pathetic. Norway moved to abolish the Bank for International Settlements for cooperating with the Nazis, a motion that Keynes vehemently opposed. The delegates eventually agreed that the bank would be “liquidated at the earliest possible moment.” The bank is still in business today.

Keynes ended up having to play an impossible hand. In 1945, he was left to sell Parliament on accepting arrangements that he had exhausted himself resisting. Four months later, he was dead. History later vindicated his advocacy of flexible exchange rates. The Bretton Woods system, not fully in effect till 1961, died only a decade later when President Richard M. Nixon ended the gold standard. The United States was running such large international deficits, paying out so many dollars,

that not even Fort Knox had enough gold.

“The Battle of Bretton Woods” should become the gold standard on its topic. ....

funny - isnt it - that all these years later - still can never forget keynes' most famous quote:

"in the end, we're all dead" seems to describe the 'federal' reserve's - and the beltway, by collusion..

'plan' to 'fix' what the same bunch did to break the system THEY created.

but back to the funny stuff....

kinda funny aint it, that the place all this happened, just happens to be - probably only coincidence -
where We, The People are STILL IN CONTROL - since NH still operates the way the founders intended.

but i guess its just mere co-incidence and/ or 'conjecture'

i guess....

but i'll have to read more on this one, mr don - and get back....

DISCUSS, discuss, awready....

[Thailandnotes]

Re: Re-Shuffling the Deck: Bretton Woods

"But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." Keynes

Mr. President, what place do you think you will have in history?
George W. Bush: History? In history we'll all be dead!

The latter was the cynic.

[don]

Re: Re-Shuffling the Deck: Bretton Woods

"But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." Keynes

Mr. President, what place do you think you will have in history?
George W. Bush: History? In history we'll all be dead!

The latter was the cynic.

To which he added - the Bill of Rights was just a piece of paper.

[lektrode]

Re: Re-Shuffling the Deck: Bretton Woods

To which he added - the Bill of Rights was just a piece of paper.

and glass-steagall was just 38 of em.
but surely 2500+ more will 'assure' that "...financial institutions... "aren't cheating customers or making risky bets that could damage the whole economy" have nothing to fear from reforms.

[don]

Re: Re-Shuffling the Deck: Bretton Woods

but surely 2500+ more will 'assure' that

Lek, I couldn't make it through War & Peace, and that's a great story, though I did listen, along with the Big Boss, on an unabridged audio version while cruising across the country. I already miss the trip.

[lektrode]

Re: Re-Shuffling the Deck: Bretton Woods

Lek, I couldn't make it through War & Peace, and that's a great story, though I did listen, along with the Big Boss,on an unabridged audio version while cruising across the country. I already miss the trip.

eye hear that, mr d.

[Prazak]

Re: Re-Shuffling the Deck: Bretton Woods

Interesting interview with the author, teasing out a few of the book's tidbits, appeared on today's WaPo site:

Print

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How a Soviet spy outmaneuvered John Maynard Keynes to ensure U.S. financial dominance

By Neil Irwin , Updated: March 14, 2013

In July of 1944, as the end of World War II started to come into sight, financial leaders from around the world gathered at the Mt. Washington Hotel in Bretton Woods, N.H. There, they hammered out what would be the post-war global monetary system, agreed to create the International Monetary Fund and World Bank, and generally established the world economic order that has shaped the global economy ever since.
But in a new book explaining what really happened at Bretton Woods, Benn Steil shows that what happened in the mountains of New Hampshire that summer is not quite the story we have been told. The gathering was more about the United States seizing from Britain its role as dominant global financial power and establishing the dollar as the world’s reserve currency—steps engineered by senior U.S. Treasury official and sometime Soviet spy Harry Dexter White.
Steil, a senior fellow at the Council on Foreign Relations, spoke with Wonkblog recently about about his book, “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order,” available now from the Princeton University Press. Our conversation has been edited for length and clarity.
Neil Irwin: First things first. What would I have seen if I had been in Bretton Woods in July of 1944, and why should anyone today care what happened there?
Benn Steil: This was the most important international gathering since the Paris Peace Conference of 1919. As early as 1936, Harry Dexter White, who was then a little-known official at the Treasury Department, was planning precisely this sort of conference, with the aim of establishing the dollar as the global unit of account of the entire world, and, very importantly, eliminating the pound sterling as a rival. You have memos in White’s archives which show almost an obsession with the relative position of the U.S. dollar and pound sterling at the time. He expresses enormous concern that there should be as few sterling countries as possible around the table, to maximize U.S. leverage.
White is already thinking about the conference in geopolitical terms, and what it means for the relative position of the United States and Great Britain, not just economically but politically. In the 1940s, after the war had started, the FDR administration is already thinking quite seriously about how Britain’s impending bankruptcy can redound to the geopolitical benefit of the United States. They were thinking about how if we manage our financial aid to Britain carefully and control it tightly, we can get Britain through the war, but also simultaneously limit its room for maneuver in the postwar world. It was a conscious effort to force liquidation of the British empire after the war.
Bretton Woods was in the view of FDR’s Treasury very much a geopolitical event. I should emphasize that FDR himself did not think of economics as a geopolitical tool. But White in particular saw economics as a means to much more.
NI: So is it fair to think of Bretton Woods as the beginning of the American Century, the era of American global hegemony?
BS: I think that’s absolutely fair. In fact the British empire only collapsed as quickly and violently as it did after the war because the British ran out of dollars and gold. This was something both treasury officials in the United States and Britain were very conscious of. These were very tense negotiations between the Americans and the British. This was not the amiable collaboration that Bretton Woods is often portrayed as.
NI: Right, that contrasts with the simplistic version of Bretton Woods a lot of us learned in history class, which is that it was the moment when everybody came together to create a better post-war economic order. So how did the Americans get their way and get establish the dollar as the reserve currency for the world?
BS: During the war, it was literally impossible to trade in any form other than barter without gold or U.S. dollars. We’re talking about a dollar-starved world in 1944. The United States offers the world a deal. We will establish a new institution, the IMF, which will provide you with short-term balance of payments support if you get into difficulties. In return for which you promise to forswear competitive devaluation, devaluing your currencies against the US dollar without our approval. The world said that’s as good a deal as we’re going to get right now, and they took it.
It’s remarkable how much the details were determined between the Americans and the British [out of 44 nations represented at the conference]. I’d say 95 percent of the final version turned out to be the American solution.
The U.S. demanded through Bretton Woods that Britain essentially agree to establish the U.S. dollar as the global trade and finance vehicle, the global unit of account. This is something the British resolutely refused to agree to in the run-up to Bretton Woods and arguably never agreed to at Bretton Woods. White used ruses that I describe in the book, whereby his technocrats changed all the text behind the scenes, changed this inscrutable language. Various delegation heads only saw this at the end of the conference when they were being told to check out.
Keynes, when he finally had time to read this thing he had signed up to was pretty damn annoyed. This was truly power politics at its best or worst, however you want to look at it.
NI: What was it about that moment that allowed all these nations to set aside their own interests to create a financial system that served the world pretty well for 30 years? Did they succeed?
I don’t believe they did. There are three foundations on which Bretton Woods was built. First is that the British empire could be peaceably and profitably dismantled. Second is that Germany could and would be deindustrialized after the war. Third is that the Soviet Union could be permanently co-opted into a global alliance with the United States.
Three years after Bretton Woods, the Truman administration is terrified over the rapidity and violence of the collapse of the Britishe Empire, and concerned about the potential collapse of Britain and communist takeover of Western Europe. Germany, under the Marshall Plan, is being rehabilitated and turned into the industrial engine of an integrated Western Europe. And finally the Truman administration concluded we were not going to co-opt Soviets into postwar alliance and we had to contain them. Everything was turned on its head.
FDR’s Treasury really did have a very romantic vision of what the postwar period could be, particularly with regard to cooperation with the Soviets. Harry Dexter White of course is a controversial character. Historians still argue about him passionately. Was he or was he not a Soviet agent?
I found this remarkable handwritten essay in White’s archives, written in ’44, in which he denounces American hypocrisy toward the Soviet Union at length and extols the virtues of Soviet socialism. He paraphrases Lincoln Steffens: I have seen the future and it works. He writes that Russia is the first instance of a socialist economy in action, and it works! White believes very passionately that the world is moving in this direction, and he is one of many Anglo-American policymakers who felt that way.
NI: It’s rather striking that the man who created post-war U.S. economic dominance was a communist.
BS: It is, this question of why a founding father of postwar capitalism spied for the Soviets. The “why” part is the fascinating thing. He was a patriot in his mind. He does things that are illegal in order to assist the Soviets. But in his mind he is furthering enlightened American interest. In his last years before he died in 1948, he really struggled to reconcile his view on the one hand that the world needed a free trading dollar-centric global architecture with his view on the other hand that the Soviet Union needed to be co-opted into this structure when the Soviet Union had no interest in it.
NI: So we had a massive global crisis in 2008. Five years later, why haven’t we had a re-ordering of the global financial architecture on the scale of Bretton Woods?
BS: In the 1940s, Britain was the world’s largest debtor, and the United States was the world’s largest creditor. Today, the U.S. is the largest debtor and China is the largest creditor. So why can’t they do a deal of some sort? Well, neither side has an incentive to change this system. The United States is certainly not the supplicant that Britain was in 1940s. We still mint the currency in which we issue our debt. We’ve been issuing quite a bit of it in recent years, and we sell it at tremendous prices. We don’t have any great incentive to change the system. When we send a dollar to China for Chinese goods, it basically comes back to us in the form of a near-zero interest loan, which gets recycled through the U.S. financial system to create yet more credit, which we can use to buy more Chinese goods. In other words, the imbalances which we and the Chinese have created seem like they can go on indefinitely.
The Chinese rail against U.S. dollar supremacy, and how reckless we are with monetary and fiscal policy. But they also don’t see any strong interest in moving toward another system, basically because they are very concerned with what would happen to the purchasing power of their vast horde of dollar denominated securities if the dollar were to cease to be the global unit of account. It would hurt them significantly.
Where do you go from here? There’s no obvious alternative. The euro is in its own existential crisis. China would face big problems in trying to internationalize the renminbi. What’s left? Could we create a supranational currency, perhaps based on the IMF’s [strategic drawing rights]? I don’t see any appetite for moving that direction in the United States, and without U.S. cooperation it’s impossible.
What’s left? I think if people around the globe lost confidence in fiat currencies generally, that gold could re-emerge as an international currency without governments ever officially recognizing it as such. Many central banks around the world have been rebuilding their gold stocks over the past decade. Eventually those gold stocks could be used to settle international trade balances. You already have the embryos around the world of gold banks. You can imagine a situation in which enough of us had such accounts that the purveyors of these gold banks could start issuing debit cards and you could walk into a cafe, pay for cappucino with 1/10 of a gram of gold. I’m not saying this is likely. But it is what could happen if people fundamentally lose confidence in fiat money.
NI: With central banks around the world undertaking quantitative easing and other unconventional easing, there’s been a new surge in talk about currency wars. Do you see anything happening now that makes you worry?
BS: It’s not nearly as terrifying as the early 1930s. Then, countries were moving from currencies fixed to gold and therefore fixed to each other, to nothing. They were just unmooring themselves. This was a far more radical shift than anything we’re talking about today. Things like QE are not nearly so radical an innovation as unmooring from longstanding fixed exchange rates.
Having said that, what’s worrying about the 1930′s precedent is that when countries couldn’t achieve what they wanted to achieve by devaluing their currencies, then they moved toward overt protectionist trade barriers.
You can imagine a circumstance in which this continues to play out badly, if governments feel like they’re victims of the operations of other central banks. The risk is that a currency war can start to become a trade war. I should emphasize that we’re a ways away from that. But we’re beginning to slowly move that direction, and that’s what’s genuinely worrying.



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