In Battle for Bretton Woods, Benn Steil is a storyteller first, economist second. But that doesn’t mean this intriguing account of the two men who made the international monetary world sacrifices on the tricky, technical implications thereof.

Following the tradition of Liaquat Ahmed’s wildly-successful Lords of Finance, Steil writes the financial history following the life of an economic great, John Maynard Keynes, and his rogue rival, Harry Dexter White.

For a book discussing the most important economic event of the century, Steil is working in a surprisingly uncompetitive market. There seem to be no other books aimed at a popular audience describing the brilliant exploits of this Soviet spy. It turns out that White – the American economist who taught not at Harvard or MIT but Appleton, Wisconsin – was Red. As Steil noted from his essays,

“Russia is the first instance of a socialist economy in action,” the bureaucrat wrote in an unpublished essay that Mr. Steil discovered in White’s papers. “And it works!”

But perhaps what sets White apart from his undercover counterparts is, we learn, his zeal to secure unquestionable American dominance in the new world order. By any measure, the debate between the two men was hardly ideological. Indeed the ultimate result largely matched the expectations of both parties – discouragement of competitive devaluations, stability in exchange rates, control of cross-border capital flows nestled in the spirit of never-before-seen international cooperation in economic affairs.

Rather, the differences derived entirely from the relative position of an emerging behemoth to a fading empire decades past its prime. Where Britishers wanted to think, until the last minute, that Bretton Woods was a landmark conference between two great equals, the Americans saw it as a way to end British dominance forever.

Maybe the most fascinating part of the book, especially for someone of Indian-descent, is the extent to which the socialists in FDR’s administration advanced the anti-colonialist cause, dismantling imperial preference and hence empire itself.

Steil recounts this drama as the magical coincidence of far left and far right. On the one hand, the State department was filled with hardcore free marketers that wanted a world without any tariffs or subsidies, something at odds with imperial preference (which in effect provided Britain’s otherwise uncompetitive exporters captive demand). On the other hand, the socialists advising FDR (not the least White himself) saw the British empire as a grotesque invasion of national sovereignty and axiomatically hated imperialism.

I was always taught that the Americans, despite their lip service towards democracy, always did too little, too late when it came to expediting the end of European Colonialism. While White’s role does not definitively challenge this, it does provide evidence that the Americans went well out of their way by ending a system that would cripple Britain and only benefit American exporters modestly at best.

The central debate between White and Keynes concerned the relationship between creditor and debtor nations, and the role of the American dollar. While Keynes wanted a system that placed the burden of responsibility on creditors to sap their trade surplus, White insisted on a less forgiving system that wouldn’t require very accommodative monetary policy. This is where the latter question comes in: Keynes advocated for the creation of an international reserve currency that would help deficit countries to settle their balances, the bancor, with an elastic supply from a fund towards which all countries would contribute, splitting the austerity between creditor and debtor nations. White, instead, wanted a system where all countries were pegged to the dollar at a fair rate and only the dollar would be convertible to gold, in which debtor countries may only obtain a limited loan from an international fund (the IMF), and where debtor countries may devalue their currencies only 10% (and another 10% if needed). White won the day.

Thus was born the gold-exchange standard where foreign currencies were pegged to the dollar which in turn was convertible to gold to qualified parters (as opposed to the classical standard where all currencies were convertible at any time, by anyone).

As promised, the economics is less interesting than the intrigue thereof, and Steil does a wonderful job telling the tale of deceit and drama that wrought Bretton Woods. We learn of the carefully orchestrated conference agenda in which Keynes was relegated to the debate of a relatively irrelevant institution (the World Bank) while White carefully controlled the creation of the Fund.

The timing of this book couldn’t be better. We are today living through the logical conclusion of a system that was bound to break. As the sole producer of an international reserve currency, it became necessary for the United States to run persistent trade deficits to ensure adequate supply of liquidity abroad. However, the fixed exchange rate system exported American monetary policy, and hence inflation, abroad. The mad irony then is that America is today the world’s largest debtor, a paradox otherwise known as the Triffin dilemma.

Published earlier this year is Eswar Prasad’s The Dollar Trap which discusses the impossibility of a dollar standard in a world with free capital flows, but the lack of any viable alternative. The irony comes from the fact that both official and unofficial American attitudes towards the situation echo Keynes, not White (again reflecting its relative position in the world).

More than anything else, Steil paints the picture of a rich intellectual, nationalistic, and ideological drama between a technocrat and an economist that set the tides for economic policy in the twentieth century. It was economists more than army generals or foreign diplomats that defined geopolitics. This is a trend that continues to this day. Indeed, whereas American-led peace talks secured by the Security Council may seem like a century-old anachronism, the international affairs office of the Treasury department continues to be an exceedingly important component of our foreign policy.

And, people don’t even know about it. When Ben Bernanke opened American credit lines of over half a trillion dollars to a select-few countries and rebuked the requests of others, he arguably made more important geopolitical decisions than Hillary Clinton ever did as Secretary of State. Indeed, the Indonesian Prime Minister once even personally requested Clinton to open a swap line between its reserve bank and the Fed. Unfortunately, that’s not a question over which she much control.

As we move towards a G-Zero world, as international relations superstar Ian Bremmer likes to call it, the United States dollar still represents an overwhelming majority of foreign exchange transactions and is the primary reserve currency. To this end, American monetary policy is exported worldwide and will continue to create dramatic tensions with other countries.

Battle for Bretton Woods is first an epic story (even for those with little interest in economics). But it’s also a reminder how economic policy dominates geopolitics.

I don’t think Paul Krugman is very convincing in his argument that repeated calls for higher interest rates derive from class interest:

You’re living in a fantasy world if you don’t think this has something to do with the diatribes against currency debasement and all that.

Krugman’s argument is simple, and fair at first approximation: the rich earn a disproportionate share of their income from interest-bearing assets and have the most to loose from “artificially low” interest rates.

Similarly, to the extent low interest rates create inflationary pressures, the rich have more to loose given a net surplus position in nominal assets. However, as I remember the story, the economists making this argument made a fundamental error in assuming simple asset swaps (i.e. QE) could somehow cause hyperinflation. Arguing against hyperinflation may be a straw man, but it’s still a fair worry (for rich and poor alike). I don’t think you had many rich people militate in favor of deflation.

But that’s not the most puzzling part of this argument. A side-effect of the Fed’s stimulus have been elevated asset prices. There’s no voodoo behind this: the price of an asset is the discounted value of its future cash flows, and this necessarily increases as the interest rate falls. Since the rich own a disproportionate share of real assets across the country – primarily real estate and equities – they stand to benefit from this program. Indeed the stock market has been setting record highs for the past few years.

Krugman’s tandem argument that high interest rates/low inflation portend a redistribution from the young to the old is also tenuous. (Sure, if there was a long-term increase in expectations this would act like a one-off capital levy. But that hasn’t been the case.) Note that wealth is just a claim on future income, and since Fed policy has increased asset prices and therefore P/E ratios, capital gains will fall in the future, ceteris paribus. To think about it another way, the Fed has moved future returns into the present to stimulate consumption. Or, equivalently, low interest rates increase asset prices redistributing consumption from the future to the present. (Or young to the old, contra Krugman).

Magnitudes matter. Nothing Krugman is saying is inherently false, but seems to be guided more by intuition than data. I’m just pointing out a number of other effects. His primary source indicates that the ratio of interest-bearing income to debt increases as we move up the income distribution. But even at the latter end, debt is twice as important. Krugman is probably right that were the last group to be spliced further, those at the tippy-top may have more even portfolios.

But at the tippy-top you also have a diverse group of people without homogenous incentives. For example, the private equity industry has made a killing financing large, leveraged buyouts at throwaway prices. This similarly stimulates demand for mergers and acquisitions which is one of the few profit centers left for investment banks. These people surely fall among the rich.

On this note, observe that to the extent the data Krugman presents holds to any significant magnitude, we’re talking about 0.01% of the population. Sure, class interests matter for this group, but more effective avenues (even if low interest rates were a huge problem for them) would include lobbying for specific subsidies and tax breaks, which actually works, rather than have discredited economists spill ink in the Wall Street Journal.

Another overlooked consideration is that the United States is somewhat unique. Despite a large current account deficit and soaring obligations, we earn more in foreign income than foreigners earn here. And in fact, the ratio of GNP/GDP has only been increasing. This derives from a large long position by (rich) American investors in emerging markets. To the extent the the dollar is debased (something Krugman suggests the rich are very worried about), the US claim on the rest of the world’s future income increases. (And, conversely, foreign reserves across the world would plummet).

None of this is to say that any of the noisemakers clamoring about money printing and debasement are right. I’m just suggesting that class interest may not be nearly as relevant as Krugman suggests. Occam’s Razor would demand a simpler explanation: these people are simply ignorant or want to sound serious.

But hey, which one percenter among us hasn’t dumped our net worth into the money market.

The National Association for Business Economics recently published Larry Summers’ remarks on secular stagnation earlier this year. The conversation picked up after his speech at the IMF conference last year, though has been floating around for some time. Excluding gloomy prognostications from Alvin Hanson in the 1930s, I can trace back the idea that the US has fallen into a secular trap back to Paul Krugman at the Munk Debates in 2011.

Though Summers is seen today as the ringleader of the stagnationistas, Krugman’s formidable opponent was none other than Larry Summers. Summers has since undergone, as I’ve documented before, a remarkable intellectual evolution making very similar claims to Krugman in 2011 (though with more rigor and a stronger platform). While even the chance of a somewhat permanent slump is sobering, there are reasons to doubt both the theory and evidence behind this claim.

Let’s start with the labor force. Summers is understandably unhappy about the recent decline in participation rate. He controls for demographic factors by looking only at working age (25-54 yo.) men which should account for an older population and students staying in school longer:

But that is not the largest part of the story. Even if one looks at 25-to-54 year-old men, a group where  there is perhaps the least ambiguity because there is the greatest societal expectation of work, Figure 3 shows that the employment/population ratio declined sharply during the downturn, and only a small portion of that decrease has been recovered since that time. The recovery has not represented a return to potential; and, according to the best estimates we have, the downturn has cast a substantial shadow on the economy’s future potential.