Bretton Woods and the Epic Story Behind It

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“Russia is the first instance of a socialist economy in action,” the bureaucrat wrote in an unpublished essay that Mr.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.