True freedom

"Freedom means that in some measure we entrust our fate to forces we do not control; and this seems intolerable to those positivist / rationalist who believe that men can master his fate; as if civilization and reason itself were the fate of his making"
F.A. Hayek

Monday, April 15, 2013

Book Review: The Battle of Bretton Woods; John Maynard Keynes, Harry Dexter White, and the Making of a New World Order

Book Review:  The Battle of Bretton Woods; John Maynard Keynes, Harry Dexter White, and the Making of a New World Order                                                               
By: Pablo Paniagua
April 8, 2013

Book details:

Name: The Battle of Bretton Wood; John Maynard Kaynes and
Harry Dexter White, and the Making of a New World Order.
Author: Benn Steil
Hardcover: 456 pages
Publisher: Princeton University  
ISBN: 978-0-691-14909-7
Release date:  February 24th, 2013

“[…] the illusion that government monopoly would secure for the countries a better money than the market has governed all the development of monetary institutions ever since, the fact is of course that wherever the exercise of this power was not limited by some such automatic mechanism as the gold standard, it was abused to defraud people. A study of history of money shows that no government that had direct control of the quantity of money can be trusted for any length of time not to abuse it.”
F.A. Hayek

“If the Enlightenment has discovered that the role assigned to human reason in intelligent construction had been too small in the past, we are discovering that the task which our age is assigning to the rational construction of new institutions is far too big.”
F.A. Hayek

Right after the 2008 international financial crisis, that was partly caused by severe economic endemic instabilities and systemic financial imbalances. World leaders were advocating for a new international monetary order that would help us deal and manage such imbalances and to control and tame currency and capital fluctuations; which played a huge role in the gestation of the crisis. The voices were almost unanimous: leaders of the world were calling for “a new Bretton Woods”. It almost seemed that the future of the world’s economies will exclusively depend of a new form of international agreement design and led by translational institutions and bureaucrats; this vision is analogous to the one originally crafted in the remote town of Bretton Woods in New Hampshire in July 1944. How accurate is this vision of the world’s macroeconomic check and balances? How effective was Bretton Woods in creating a consciously design monetary regime?; Benn Steil’s splendid book raises this and several other questions concerning one of the most important events in the 20th century; that shaped the geopolitical landscape and the international monetary system towards a United States-based dominion for the last 70 years. And the vital consequences and lessons we can get for the future, from a sober demystifying analysis of Bretton Woods and our intellectual capacity of designing complex social institutions such as monetary systems.

Benn Steil is senior fellow and director of international economics at the Council on Foreign Relations. He was awarded with the Hayek Book Prize in 2010 for his book Money, Markets, and Sovereignty. His vast knowledge on currency wars, protectionist policies and international economics is the perfect background to tell the history of this unique international political-monetary event; his book encompasses not only currency manipulations and economic history but touches geopolitical analysis, espionage and well-documented biographic analyses. This general approach makes this book not a treatise on international economics or economic history but rather a stimulating engaging political and diplomatic history spiced up with backroom negotiations, intellectual-diplomatic duels and soviet spies.

The Battle of Bretton Woods offers a wider and amusing analysis on the political and economic international events prior, which lead to the Bretton woods agreements. It also reveals the details and the political influences that played a major role in the crafting of the new monetary system right after WWII. Steil’s vivid narrative jumps between geopolitical negotiations and international economics while telling us rich and deep portraits of the leading men involved in the intense negotiations, which led to the political and intellectual battle of Bretton Woods. The leading roles were performed by Harry Dexter White on the American side and John Maynard Keynes on the British side. The book indirectly deals with the historical diplomatic and economic context of the decades that marked one of the major geopolitical shifts of power in the world’s history, the decline of the British Empire and the surge of The United States as the major political and economic power; and how this remarkable shift, came, for the first time in history, enacted mainly through macroeconomics. It also shows, how the Bretton Woods monetary system, was undertaken by the vision of a single man Harry Dexter White and the explicit American instrumentalization of this new monetary system, which allowed the U.S. to enforced it to the rest of the world through the Bretton Woods ‘negotiations’, accomplishing the FDR’s government agenda of eliminating completely Britain as an economic and political rival.  

Bretton Woods represented a unique crossroads of economic and political power; it represented the political battle that gave an end to the British supremacy and the end of British imperialism and monetary hegemony and the rise of the U.S. economic supremacy and international free-trade; while also giving the U.S. dollar the role of the world’s main currency. The book shows this economic-political intersection represented in the face of two remarkably gifted men in the political-intellectual battlefield. The British side was represented by the savvy intellectual luminaire Lord Keynes which was at the time to world’s first and most famous and influential celebrity-economist; and on the American Side Harry Dexter White a short-tempered U.S. Treasury technocrat, New-Dealer Democrat and self-made economist from Harvard. The book beautifully portraits the problems and difficulties of Keynes on the British side to negotiate their terms in the discussions; specifically due to the lack of political sensitivity of Lord Keynes and mainly due to the fact that Britain was virtually insolvent and the U.S. was her major creditor. In addition, the Americans had the benefits of having the biggest gold reserves, being the main world lender after WWII and they counted on the political skills of White, which seized the perfect moment in time to bring the U.S. dollar as the world leading currency. White was no match for Keynes intellectuality, but White was on the American side and his bargaining position was total. The position of the U.S. as the major borrower allowed him to practically dictate and craft by himself the new monetary order that had the main objective of being the macroeconomic instrument to bring the U.S. as the new economic and political leader and impede foreign nations to arbitrary depreciate their currencies.

Steil’s animated narrative of the years that preceded the Bretton Woods agreement tells the political negotiations and the intellectual and political battles held multiple times by White and Keynes and others. Through these international battles we not only gained incredible insights on political negotiations and international manipulations; but we also gained beautiful portraits of the man that shaped the 20th Century. Here is where the books turn into a very diverse intellectual and narrative endeavor. This well documented book, moves constantly away from economic history and dives into American realpolitik, British politics and concise and rich intellectual biographies plus deplorable illustrations of government officials deeply involved with the Soviet Intelligentsia. This is a very appealing part of the book, which makes it more suitable for the general readership. In these personalities’ portraits, we gain very enjoyable insights of one of the very much neglected but yet fascinating figures of the 20th century: Harry Dexter White. Steil’s bring into light one of the most rich and controversial expositions on White’s life; in particular his secret connections with the Soviet Union and how White was secretly a promoter of Russian Political interests while at the U.S. Treasury. The Battle of Bretton Woods sheds light on Whites long-time affair with central planning and socialism, since his doctoral days in Which White wanted a scholarship to study abroad in Russia to learn socialist-economy. His passion for socialism and the soviet union, paradoxically did not play any role in his drafting of the U.S. led monetary regime, however through the designing and planning of the monetary system, we see how White’s saw (poorly)  economics simply as a mean to higher nationalistic and political ends.

The book then shows how White, while skillfully designing almost single handed, the world monetary system from the U.S. Treasury, he was simultaneously engaged in secret communications with Soviet  spies; facilitating confidential and sensitive information from the Treasury to the Soviet Union. White also consciously placed other several Russian fellow-travelers as full-time employees inside the Treasury. The book unmistakably represents White as probably one of the most important and influential Russian connections inside a governmental American position in the 20th century. In addition the book highlights the symbiotic political dependency between U.S. Treasury Secretary Henry Morgenthau and his right-hand advisor Harry Dexter White and how White through Morgenthau, directly influenced the international politics of Franklin D. Roosevelt’s White House. In particular, the book shows how White directly influenced and skewed the American-Japanese relationships that ended up in the Japanese retaliations on Pearl Harbor.  

At the end of White’s career he reached bureaucratic excellence within the U.S. Treasury under Morgenthau’s direction allowing him to create and draft the monetary system that would allow the U.S. macroeconomic international governance and hegemony. Through this two and a half years process of negotiations between the British and the Americans, the book glance interesting aspects of John Maynard Keynes; his political defeats in the Anglo-American negotiations, his obsession of leaving his personal stamp as the father of a new monetary system and his long-term compulsion of being internationally relevant at all cost. This extreme self-involvement ended up playing against the British government’s necessities and hampering their debt negotiations. At this point, the book give us White’s most brilliant political move: the actual organization of the Bretton Woods meeting at the perfect time and place that provided him with the perfect smoke and mirrors situation to blindside Keynes from the real negotiations concerning the U.S. currency hegemony. White divided Bretton Woods in two major commissions, the first one, dealing with the establishing of the international stabilization fund, currently the International Monetary Fund, and the settlement of a new international dollar-based monetary system, led by White; and the second less relevant commission that dealt with the International Bank for Reconstruction and Development, renamed in 1992 the World Bank which was led by Lord Keynes. White’s scheme worked perfectly, side-lined Keynes from the most relevant discussions concerning trade liberalizations and currency convertibility.  

Bretton Woods was therefore simply a charade to obscure the fact that the new world monetary system was a bilateral political prearrangement between the U.S. and Britain; that was being planned two and a half years before the conference itself and it was marked by nationalistic conflict of interests; such a short-sided political and nationalistic biased is one of the structural weakness that still reign in our current international monetary fiat system in the form of “monetary nationalism” and an international race to the bottom sort of monetary policy.   

Consequently, the structure of the new monetary system created by White at the commission became only fully operative after Bretton Woods, officially in 1961. The main feature of the post WWII Bretton Woods monetary regime was to seek a fixed exchange rates system for currencies and having the U.S. Dollar as the only currency directly pegged to gold at a ‘fixed exchange’ rate. The system obviously beneficiated the U.S. Federal government, allowing it to become the orchestra director of monetary policy in the world. This scheme liberated somewhat the Federal government discretionary powers, towards to consciously plan and managed the U.S. macro economy through accommodating monetary policy. Unfortunately, Steil argues, White’s design and the Bretton Woods agreement were very short-lived due to its inconsistencies and lack of internal tendency to control imbalances and the lack of restrain of the U.S. government to increase the supply of dollars devaluating the currency. The scheme ended only 10 years later in August 15, 1971 when President Nixon closed the gold window and ended any form of dollar convertibility to gold. These phases were marked with the tension and conflicting inconsistencies of trying to design a system, based on a national currency that seek to be both, the international settlements character and the national U.S. domestic monetary role. Steil stresses the inherent contradiction in White’s system, concerning how to provide enough liquidity as an international settlement currency, highly demanded internationally, while at the same time restricting its liquidity in order to keep the dollars redeemable to gold at the fixed exchange rate.

1971 concluded the last form of relationship of the U.S. dollar with gold and simultaneously opened the door the our new current system based on international fiat money; a system without tangible connection to any form of commodity, in which politicians and technocrats are freer than ever to follow arbitrary and nationalistic policies aimed at depreciating currencies and generating secular inflations that allows them intrinsically to increase secular discretionary government spending. Nixon’s decision to close the gold window could be seen only as the obvious most preferable political path available, under the road that White’s system had initially paved. The book shows us how political biased and governmental interests permeates the design of fundamental social institutions, creating deep structural institutional inconsistencies that leads to unstable economic systems characterize by unsustainable imbalances and credit expansions that have no  built-In counterweights to correct them as the classical gold standard somewhat offered instead.

The book leaves us with the sober conclusion about the possibilities and limitations of politicians and technocrats to consciously design an efficient monetary system that will take into account monetary imbalances and at the same time put checks on nationalistic arbitrary monetary policies. Bretton Woods, the book shows, was far from an international agreement in which every country had a saying in the making of the system. It was only a nationalistic political-macroeconomic weapon used by the U.S. Federal government to increase their political and economic power in the world and it was the greatest case in which the U.S. government came to instrumentalize something as fundamental to human prosperity as the monetary system. The book teaches us how, monetary systems and currencies are deeply attach to international politics and geopolitical power struggles; it also provide us a very interesting lesson of skepticism concerning the capacity to consciously and deliberately create competently something as complex as a monetary system.

Steil’s book in addition, periodically references the benefits of the first gold standard trough 1880-1913 and how even with all its faults and imperfections it still possessed a higher control on the level of discretion of central banks; it possessed an automatic built-in tendency in the system to control and contain international imbalances and credit expansions; ironically enough this monetary regime was neither design nor imposed; but it was unexpectedly shaped through a system of try and error. The original gold standard can be seen as a Hayekian social institution that aroused organically as a self-organizing structure, somewhat removed from nationalistic and political design and it gave birth to one of the most prosperous centuries in human history. In contrast, the gold-exchange standard after WWI, the Bretton Woods dollar-based gold-exchange standard and the international fiat money system as seen in this splendid book, were the results of consciously design, artificially fabricated, deliberate politically leveraged institutions that ended up creating unsustainable imbalances, wars and serial catastrophic bubbles opening the door to a century overwhelmed by volatility, long economic recessions and monetary distortions.

In conclusion this unique book is a delightful blend of politics, espionage and economic history. The book give us a fundamental lesson for future international economic arrangements; that we have to be aware of the limitations of our knowledge to consciously design such a intricate and relevant social institution as a monetary system and at the same time, raises awareness of the risks of allowing political and nationalistic interests to manage and control these systems at will, because as seen with Bretton Woods this will be the seeds of its own demise. These lessons that Steil’s book gives us today is a relevant modest lesson on the dangers of mixing short-sided political aims and  social institutions and is as relevant today as it would have been for the ‘enlighten’ ones in New Hampshire in 1944.   

“The Bretton Woods monetary system was finished. Though the bond between money and gold had been fraying for nearly sixty years, it had throughout most of the world and two and a half millennia of history been one that had only been severed as a temporary expedient in times of crisis. This time was different. The dollar was in essence the last ship moored to gold, with all the rest of world’s currencies on board, and the United States was cutting the anchor and sailing off for good.”
Benn Steil 

“The gold standard was, without any international agreements, the most satisfactory international standard that has ever been devised…It is often said that the gold standard ‘failed.’ The truth is that governments sabotaged it deliberately, because it interfered with nationalistic ‘planning’ that governments preferred to stability of exchange rates…It is not necessary to invent elaborate technical devices to secure monetary stability. The nineteenth century developed them through the gold standard.”
The New York Times March 30, 1943