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.