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
