Benn Steil on the Battle of Bretton Woods
Feb 16 2015

Benn Steil of the Council on Foreign Relations and author of The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order talks with EconTalk host Russ Roberts about Bretton Woods, the conference that resulted in the IMF, the World Bank, and the post-war international monetary system. Topics discussed include America and Britain's conflicting interests during and after World War II, the relative instability of the post-war system, and the personalities and egos of the individuals at Bretton Woods, including John Maynard Keynes and Harry Dexter White.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Richard Fulmer
Feb 16 2015 at 5:33pm

Great podcast. Given that the U.S. is now the world’s largest debtor nation, as Great Britain was during Bretton Woods, I would be very interested in hearing Mr. Steil speculate on the chances that we will follow Great Britain’s trajectory and become a former great power.

Shayne Cook
Feb 17 2015 at 8:14am

Russ and Benn:

Marvelous discussion of some of the details of the history of that period and subsequent – thank you both very much!

A question …
In the discussions about Harry Dexter White, you mention that he was adamantly opposed to “imperialism”, but was deeply enchanted by the Soviet notion of centralized control. There is obviously a subtlety that escapes me, but I see the two as being a distinction without a difference. What am I missing? Is the difference that it is “imperialism” if it is implemented by a capitalist nation, but merely “centralized control” if it is implemented by a socialist nation?

Shawn Buell
Feb 17 2015 at 11:40am

I have to admit that my hackles went up listening to the podcast play out due to the fact that it seems as though all of the players involved (at Bretton Woods) were deeply committed men of the left – some so much so that they were even Communist spies!

Am I alone in being alarmed by this? I had no idea that a fellow traveler was so instrumental in crafting American policy in the post-war order and I similarly can’t help but think that Harry Dexter White’s position was used to advance his personal preferences.

Michael Byrnes
Feb 17 2015 at 12:22pm

Shayne Cook,

Maybe Steil meant that White bought what the Soviet Communists were selling. What Soviet Communism was and what it claimed to be… are two very different things.

Shayne Cook
Feb 18 2015 at 6:52am

Michael Byrnes:

You are correct that White “bought into” the notion of central planning/control – the supposed Soviet system. But what I (and Russ) found extraordinary was the discussion of the “Morganthau plan” for the deindustrialization of post-war Germany. It’s not explicitly stated here, but one would have to suppose that White had a great deal of influence in designing that “plan”. (And it sounds a great deal like “imperialism” to me.)

As to White, Steil notes in his book that even the people who knew him well and worked with him for years were of mixed impressions regards his activities and leanings. It seems White was only consistent in one respect – his desire to be “adviser” to those in power (anywhere), or at least to those close to power.

Michael Byrnes
Feb 18 2015 at 4:27pm

Cognitive bias? In all likelihood they saw Germany as the Imperial power.

Feb 18 2015 at 5:53pm

On a positive note, it seems that the “masters of the world” don’t control the long term outcomes (although their misguided ideas cause a lot of intermediate damage).

If so, the impact on the current debates is that the inevitable will happen after long and useless struggles.

Feb 19 2015 at 6:38am

These economic history podcasts are by far the most informative and interesting. More of them, please.

Gary Henricksen
Feb 19 2015 at 8:33am

Great interview, full of surprising information, especially the four fundamental ideas underlying Morgenthau’s and White’s Bretton Woods system…all of which were reversed or never implemented.

Feb 19 2015 at 9:17pm

What a wonderful, fascinating, funny and surprising interview. Thank you very much Dr. Roberts.

It’s interesting to compare the post-war history of Germany and Japan; they are very similar.

“In September, 1945, General Douglas MacArthur took charge of the Supreme Command of Allied Powers (SCAP) and began the work of rebuilding Japan. The occupation of Japan can be divided into three phases: the initial effort to punish and reform Japan, the work to revive the Japanese economy, and the conclusion of a formal peace treaty and alliance.

The first phase, . . . . . . . In the economic field, SCAP introduced land reform, designed to benefit the majority tenant farmers and reduce the power of rich landowners, many of whom had advocated for war and supported Japanese expansionism in the 1930s. MacArthur also tried to break up the large Japanese business conglomerates, or zaibatsu, as part of the effort to transform the economy into a free market capitalist system.” MacArthur’s plan was to make Japan an agricultural country and economy.

“By late 1947 and early 1948, the emergence of an economic crisis in Japan alongside concerns about the spread of communism sparked a reconsideration of occupation policies. This period is sometimes called the “reverse course.” In this stage of the occupation, which lasted until 1950, the economic rehabilitation of Japan took center stage.” Now we began turning Japan into an Industrial economy. “However the most serious problem was the shortage of raw materials required to feed Japanese industries and markets for finished goods. The outbreak of the Korean War in 1950 provided SCAP with just the opportunity it needed to address this problem, prompting some occupation officials to suggest that, “Korea came along and saved us.” After the UN entered the Korean War, Japan became the principal supply depot for UN forces.”

Quotes from

Feb 27 2015 at 9:09pm

Fascinating! I listen to all of these – and this is one of my favorites. In fact, I’ve replayed it three times now.

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Podcast Episode Highlights
0:33Intro. [Recording date: January 30, 2015.] Russ: That book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, by Benn Steil. Now Bretton Woods was a legendary international conference in 1944, toward the end of WWWII with the goal of creating an international monetary system, to correct some of the perceived problems in international trade and the health of the world's economies. But to understand what happened there, we have to go back, as you do in your book, to before WWII. What went wrong with monetary policy and trade in the 1930s? Guest: If you want to understand what went wrong with monetary and trade policy in the 1930s I think you have to go back to the eve of WWI. That was formally the ending of the classical gold standard. When countries went back on the gold standard in the 1920s, they were really operating under very different premises. In the late 19th century, for example, when a dollar was sent out of the United States for the purchase of goods abroad, gold would flow out of the United States and interest rates would have to come up in order to attract it back. And this natural correspondence between money flows and gold flows tended to alleviate what we today call global imbalances. But in the 1920s, countries were no longer obeying what you might call the Golden Rule of the Gold Standard. That is, when gold flowed out, they did not raise interest rates; when gold flowed in, they did not lower interest rates. The United States and France in particular were "sterilizing" gold inflows. That is, they were hoarding gold, but they were not allowing monetary conditions to be determined based on the movement of gold. This particularly created grievous problems for Britain, which went back onto the gold standard--which is now really a gold exchange standard in 1925: at the same parity it had left the gold standard in 1914 despite the inflation it had suffered during the war, and this created enormous economic and political frictions among these three countries. Now, from the perspective of the United States, it was Britain exiting the gold standard in 1931 that set off a series of currency and trade wars that spread the Great Depression globally and created the environment of misery and anger that paved the path to aggression for the European dictators, Hitler and Mussolini. So they were very much, the U.S. Treasury in the 1940s, economic determinists in explaining how we came to the eve of WWII. And they were determined to create a new international monetary system founded on the U.S. dollar that would eliminate competitive devaluations permanently. Of course these were competitive devaluations against the U.S. dollar. This is what they were fundamentally most concerned with. Russ: We've done a bunch of episodes and encourage listeners to go back and listen to--we had one with Tom Rustici on Smoot-Hawley and the role of tariffs in creating the Great Depression. And Doug Irwin, an extensive conversation about France's behavior in this period that you're alluding to.
4:46Russ: Before we go into the details of what happened at Bretton Woods, and the players, which are utterly fascinating--it's an amazing book and I learned a shockingly large amount, I'm both proud and ashamed to say--but let's talk just for a second about the inherent tension between being part of an international monetary system and having control over your own fate. So it seems to me that the history of these efforts, Bretton Woods being one of them, is this tension between, you want to be able to trade with your neighbors, interact with your neighbors, accept their currencies--your people--and yet, at the same time you want to be able to control your interest rate, your inflation, stimulate your economy if you need to. And these goals conflict often, and there's an inherent tradeoff there that nobody really likes to deal with. Guest: That's right. In the 1930s there was a mass scramble for gold which was still really the foundation of the global monetary system. And it was very much embedded in people's psyches. Gold was to people around the world money. It was the foundation of the national monies that were printed up. And over the course of the 1930s into the 1940s, as the United States was accumulating more and more gold, the U.S. dollar became the only credible surrogate for gold in the world. So if you didn't have significant reserves of gold or U.S. dollars you were forced basically to resort to barter in order to trade. Russ: What's wrong with that? Explain what that is. Because barter in everyday life is different from barter at the national level. Guest: Basically, we're talking about one country sending, say, commodities to another country in return for a fixed amount of finished goods. Countries, for example, today, like Iran, that are faced with economic sanctions often have to resort to barter. And it's naturally a very inefficient way of trading. So, the monetary chaos of the 1930s, as you had this mad scramble for gold and dollars was one of the causes of the collapse in international trade.
7:25Russ: So, let's turn to the Bretton Woods conference. I'm going to confess that I always thought that John Maynard Keynes had crafted the institutions that had emerged from that--the International Monetary Fund--the IMF--the World Bank, and the World Trade Organization--the WTO. Your book explains that's not true. It was really the vision of Harry Dexter White, a figure whose name I've heard of but who turns out to be a rather extraordinary figure in this story and in the ramifications for all kinds of things, including Soviet espionage. Which is really remarkable. But forgetting the details of White versus Keynes, which we're going to get to, what was the idea behind what emerged from Bretton Woods? What was the goal of the IMF--we'll put the WTO to the side. The WTO is simple, relatively--it was to try to get the world to lower tariffs and to trade more. But let's talk about the IMF and the World Bank. When they were conceived in 1944 and in the aftermath of Bretton Woods, what role were they going to play in the international monetary system. Guest: Let's start with the World Bank so we can get that off the table relatively quickly. By the time we get to the Bretton Woods conference, there really is very little controversy about the World Bank. It's not going to be a very important geopolitical institution, at least in comparison with the IMF. It was called, at the time, the International Bank for Reconstruction and Development. Notice that the word 'reconstruction' comes before 'development.' It's main role was going to be to assist in financing the reconstruction of Europe after the War. Now, a number of nations, particularly those in Latin America, objected to having their scarce dollars put to use reconstructing Europe, and that was part of the reason why the development function of this institution was tacked on. Russ: That was a compromise. Guest: Yeah. And eventually of course it became the dominant role of the World Bank. But there was enormous controversy in the two-year run-up to the Bretton Woods conference between the United States and Great Britain over the IMF, which was clearly going to be a very, very important geopolitical institution. The biggest controversy between the two of them was over the role of the U.S. dollar in the post-War order. John Maynard Keynes, who was the head of the British delegation at Bretton Woods fought relentlessly with the Americans about this. He wanted the U.S. dollar to have no special role in the international monetary architecture. He had proposed a new supranational currency which was to be called Bancor, which he hoped over time would come to supplant the dominant international role of the U.S. dollar. The Americans and Harry Dexter White in particular would have absolutely none of this. They actually wanted to give the United States even more of a privileged role than it had on the eve of the conference in 1944. And they were in a powerful negotiating position because of the fact that the United States at the time controlled about two-thirds of the world's monetary gold reserves. Now, at Bretton Woods, Harry Dexter White used a number of rather remarkable ruses in order to have the U.S. dollar and only the U.S. dollar declared the equivalent of gold for the purposes of carrying out the operations of this new powerful International Monetary Fund. Keynes, as I said, had objected to any special status for the U.S. dollar, was forced to sign the agreement as he was being told to check out of the hotel with the other delegates and later complained bitterly that he hadn't even had time to read the document properly. Russ: But, it's unlikely, had he had that time, he would have gotten much different in terms of results out of the negotiations, according to your story about where the power stood. Guest: Absolutely. And even though he had a number of fights with Harry Dexter White after the conference--he was trying to revise some of the provisions--he didn't even raise this one any longer because he knew he was going to lose this battle and didn't want to draw any more public attention to it. Russ: So, what would the IMF do in the post-War era, the way White structured it? Guest: The way White structured the IMF, countries would contribute gold, securities, U.S. dollars, and a limited amount of their own domestic currency to a pool of valuable assets. That would be used to help finance countries that were running what were seen as temporary balance of payments deficits. What White was trying to achieve was to stop those countries' running balance of payments deficits from erecting trade barriers and making it more difficult for the United States to export. In particular that's what he was concerned with. He knew that in the 1930s that--at least in his mind, this was the way it had happened--that trade broke down when currency conflicts rose up. Again, he blamed the British in particular for destroying the gold exchange standard in 1931. So, he was determined to establish a mechanism that would discourage countries which were running balance of payments deficits from interfering with the operation of a new multilateral trading framework. Which interestingly enough would not be established till 3 years after the Bretton Woods Conference--the GATT (General Agreement on Tariffs and Trade) was only agreed in 1947. Russ: General Agreement on Tariffs and Trade. Guest: Which was a precursor to the World Trade Organization.
14:37Russ: And it turned out that we have seen a steady growth in international trade since 1946, more or less. But he gets some other problems along the way, which we'll get to in a sec. It wasn't a free lunch there. Before we do that, I want to focus on a really eye-opening set of economic issues between the United States and Great Britain, during the War and after, which I was unaware of. And to get there, let's start with a thumbnail sketch of Harry Dexter White and Keynes. And you start with White; and I have to read one line that you used to describe him, because I really loved it. You said, "Now in his mid-forties, White was on the tall side of short." He was 5'6", and that's me. I have a new way to describe myself. I used to be 5'6 and 3/4", maybe 5'7", but as I've gotten older, I have to be honest: I'm really 5'6". And I love calling that the tall side of short. But carry on. Tell us about White and Keynes's careers and personalities as they arrived at Bretton Woods. Guest: Right. White was 9 years Keynes's junior. He was born in 1883. He was the youngest of 7 children of Lithuanian Jewish immigrants. His father was a hardware peddler. He grew up in working class Boston. His parents died when he was very young--his mother when he was 9, his father when he was 16. He actually dropped out of college in his first attempt to get a degree in order to go back into the family hardware business. This was a very intelligent, ambitious man. He eventually made his way back to college: he got his undergraduate degree from Stanford in 1924 at the age of 32. Went on to Harvard to do his Ph.D. in economics, which he finished in 1930; but he was not able to get tenure there. He moved on to a small college in Appleton, Wisconsin, Lawrence College, where he was very unhappy. And he wrote to his former supervisor at Harvard, Frank Taussig, that he was studying Russian and hoped to get a scholarship to go to Moscow to study Soviet economic planning. This man was very much a political romantic, somewhat out of the mainstream. When he was at Stanford, for example, he was a passionate supporter of Fighting Bob La Follette's independent Progressive Party campaign for the Presidency on a policy of nationalizing key American industries and ending American imperialism in Latin America. Russ: He fought for it, right? He agreed with it. Guest: Oh, very passionately. Harry Dexter White was a man whose political passions always came first, and his economics he saw as a tool to advance his political agenda. And he was fascinated with the Russian Revolution and in particular with what he saw as a great success of Soviet state economic planning. But before he could go off to Moscow, he was invited by Jacob Viner, U. of Chicago, economist who was working temporarily at the U.S. Treasury, to come to Washington, D.C. to work temporarily on a study of U.S. monetary and banking institutions. And to make a long story very short, he arrived there in 1934, just have Henry Morgenthau, and old friend of FDR's (Franklin Delano Roosevelt's) with no background in economics, had become Treasury Secretary. And he makes himself absolutely indispensible to Henry Morgenthau. And the two in the next 12 years develop a very complicated symbiotic relationship, where Morgenthau becomes dependent on White for actionable policy ideas, which he can sell to the President. And White becomes dependent on Morgenthau in order to be able to stay in Washington and to advance with the U.S. Treasury, and to avoid having to go back to Appleton, Wisconsin. Now, this whole idea of an international monetary conference had been at the forefront of White's mind from the time that he arrived in Washington. For example, I found a fascinating memo in White's archives, dated 1936. He is a man literally obsessed with the relative geopolitical and economic positions of Britain and the United States, and he writes, 'The more sterling countries there are in the world'--that is, the more countries that use the pound sterling or which tie their currency to the pount sterling--'the stronger will be England's position around the bargaining table, should an international conference take place.' Now, in 1936 is no more than a bureaucratic temp at the U.S. Treasury. But he's already planning, 8 years before Bretton Woods, a major international monetary conference at which he, Harry Dexter White, will best the British. Russ: Now, talk about Keynes. A lot of us know something about Keynes. But your portrait of him is very--it's very subtle; it's very revealing. I learned a lot about Keynes I didn't know. Talk about Keynes and then we'll talk about the positions they found themselves in. Guest: One of the things that makes the story so fascinating and compelling on a personal basis is the enormous differences--cultural, lifestyle, the way the grew up--between Harry Dexter White and John Maynard Keynes. Keynes was the son of two upper middle class Cambridge academics. He was raised by a governess and servants. He was expected to go on to great things in life. This was certainly very different from Harry Dexter White. He had worked in the U.K. Treasury briefly during the First World War, and that's where he cut his teeth in international diplomacy. All of his official missions to Washington, throughout his entire career, were begging missions. So, he was very, very sensitive to the fact that his ideas on monetary architecture needed to be actionable ideas that would help insulate Britain from economic and geopolitical pressure from the United States. He and White became sort of intimate interlocutors after 1942. Both he and White were working on their own monetary plans for a new international monetary fund. They had enormous disagreements over the institution, on the role of the U.S. dollar, on the ability of countries to devalue their countries' currencies independently, on whether the IMF would be a powerful institution as the Americans wanted, or basically an ATM (Automatic Teller Machine)--a cash machine for debtors, as Keynes had wanted. But because of their very, very different backgrounds and temperaments, the exchanges between the two were truly memorable. My favorite one is in October of 1943. White presents Keynes with a new version of the White Plan for Bretton Woods; Keynes hurls the document on the floor and yells, 'This is intolerable. It is yet another Talmud.' Of course, the word 'Talmud' is a reference to White being Jewish. Russ: And he calls White the 'Talmudist' occasionally. Guest: Exactly. He also refers to him as the 'Grand Rabbi.' Russ: Yeah. I view those as compliments. I don't think Keynes did. That's not my impression. Guest: He did not. But White's response was also memorable. He bowed and said, 'We will try to produce something which Your Highness understands.'
24:08Russ: So, the part of this story that I was really unaware of--I'm a casual student of WWII; I've read a bunch of books on it but I don't read systematically on it. You think about the War, and you think about the fact--it's well known there's a strong isolationist part of the United States, that Roosevelt was more eager to get into the world, perhaps, than the American people; that Pearl Harbor is what eventually precipitated our involvement in the War in Europe, because Germany declared war on the United States--which is a fascinating part of history. They had a treaty with Japan, and when the United States and Japan were at war, Germany held up the treaty. Which is shocking, really. Really bad move on Germany's part; ultimately could argue cost them the war. So, when we think about the U.S.-British relationship, my thought is, Well, we got into the world later but we helped a lot before because we gave them a lot of stuff. And you talk very informatively of how that relationship worked, which I didn't know much about, which is the Lend-Lease Program. What I learned--and I'm going to give away the punchline, because there's some details to go through, but the punchline is amazing. The war broke Britain, financially. And the United States' relationship over this was remarkably contentious. I didn't realize how contentious it was. So, talk about how Lend-Lease got started and why it was important and why it ultimately affected Keynes's and the British delegation's bargaining position. Guest: Well, British Prime Minister Winston Churchill famously referred to American Lend-Lease during the War as "the most unsordid act." But Churchill was painfully aware of the fact that Lend-Lease aid came with very objectionable economic and geopolitical conditions, all of which interestingly enough had been devised by the U.S. Treasury. FDR certainly had quite a bit of anti-British animus; but he had no intention of using Lend-Lease in any way to reduce Britain's role in the post-War world. This was very much an object of the U.S. Treasury. The Treasury exploited the fact that Congress insisted that the United States should get "consideration" for Lend-Lease aid. And the Treasury basically devised three types of consideration that they were demanding from the British. Russ: Before you talk about the 3 types--say what it literally was. We were sending munitions--right? We were sending weapons. Guest: Yeah. Absolutely a brilliant contrivance of FDR to get around the fact that Congress didn't want to give Britain any more financial aid.Russ: Didn't want to take sides. Guest: Yeah. And Britain had defaulted on its WWI debts. And there was a lot of bitterness toward the British. So, FDR came up with this idea that we would not give them aid. We would not simply lend them money. We would have a swap. We would give them things that they need; they would give us things that we need. If they couldn't give us these things now, they would just return the items that we loaned them after the War. Russ: It's such a strange idea. These are airplanes and tanks-- Guest: Yeah. Absolutely. Russ: And food. It's a marketing plan. Guest: Yeah, of course it is. But brilliant political marketing. He used a garden hose analogy. He said, if your neighbor's house is burning down, you don't try to sell him a garden hose. You lend him your garden hose. And after the fire is put out, he gives it back to you. So this is the way FDR tried to sell aid to Britain, politically. But this, as I said, was not enough for Congress. And it was certainly not enough for the U.S. Treasury. And two men in particular: Henry Morgenthau and Harry Dexter White--who--you brought up the fact that White had engaged in some fascinating freelance diplomacy on behalf of the Soviet Union. But the counterpart to that was that he was very anti-imperialist. He was very much against the old European imperial powers-- Russ: Colonial order-- Guest: Britain and France in particular. And he was determined to force liquidation of the British Empire after the War. So the three things the Treasury demanded were, first, that after the War, Britain would have to end imperial trade preference. This was the arrangement by which Britain gave itself privileged access to the markets of its colonies and dominions. Second, it would have to make the pound sterling once again fully convertible into U.S. dollars at a fixed and overvalued exchange rate, on a fixed date after the War. That date was ultimately set at July 15, 1947--a day that would live in infamy for the British, because it effectively marked their bankruptcy. Their colonies and dominions were braying[?] to convert their worthless sterling into dollars. And July 15, 1947, they were finally able to do so. And, finally, Britain would, at Bretton Woods, accept the U.S. dollar as the foundation of a new world economic order after the War. These were all seen as very objectionable conditions in Britain. But as British Bretton Woods delegate and famous economist in his own right, Lionel Robbins put it at Bretton Woods: "We needed the cash." Russ: They were out of money. They couldn't buy any more tanks. They couldn't buy any more stuff. And they couldn't produce enough on their own, obviously, at the time. They were desperate.
31:04Russ: So, these of course were remarkably unpleasant, as you point out, from the British perspective. But they felt like they were over a barrel. They didn't have a choice. Guest: Right. But there was, I should emphasize, quite a bit of controversy within the British Civil Service about what to do. Some top civil servants, one of whom I talk about in the book, Sir Richard Clarke, Otto Clarke, as he was known, was scathing about Keynes's strategy of cooperating with the U.S. Treasury. He did not want to go into Bretton Woods under the conditions that the Americans were demanding. He said, 'Look, we can borrow this money from other sources. We can borrow more from the Canadians. We can borrow from the American Import-Export Bank, which didn't have this geopolitical agenda-- Russ: And we're all from the--go ahead, sorry.-- Guest: And most importantly, we can borrow the money privately. And in fact there was a rear-guard action, launched in May of 1944, just before the Bretton Woods Conference, by a group of influential New York bankers, who very much hated the Bretton Woods agenda. They offered to lend Britain at least $3 billion dollars after the War, in return for which Britain would walk away from the Bretton Woods Conference. Clarke and others in the British Treasury wanted to pursue this idea. But Keynes would have none of it. And this, I think, was perhaps Keynes's most conspicuous weakness as a diplomatic--that he really had a vested interest in the Bretton Woods agenda. He knew that White's blueprint for Bretton Woods would win out in the short term. But he hoped that his blueprint would win out in the long run. Because he wanted to be known as the man who overthrew the gold standard and replaced it with a new, rational, managed international monetary system. So he very much had his own personal legacy at heart here. And I don't think he always fully recognized the options that he could have pursued in order to avoid these terms that the Americans were requiring. Russ: Well, he was an economist. And he had a characteristic, which many economists do, which disturbs me deeply as a fellow economist: that we want to run the world. And a single system, someone gets to run it. And probably should be the smartest person. And that would be Keynes. So I think he probably thought somewhere down the line he would continue to influence, if not manage, such a world system. I think it's true he certainly thought he would influence it. But going back to Lend-Lease for a minute: So, at the end of the War--this is the part that again, I know nothing about, at the end of the War, we presented the British with a very large bill, of money that they owed us. How did that interact? That was Lend-Lease? That was? Guest: We didn't really expect to get that money back. The big conflict with the British after the War was over British demands that the Americans should basically give them a gift of a few billion dollars--this was Keynes's idea--to account for the fact that Britain had entered the War much earlier than the United States. And had effectively been forced to fight on its own in a common cause. And the Americans naturally found this perspective extremely offensive. So, when Keynes went to Washington in September of 1945 for his last major begging trip, he had convinced the British government that they should not accept any more loans from the United States--that that would be extremely offensive, would just put the United Kingdom further in hoc to the Americans: We should demand "justice." We should demand that the Americans pay us for the services that we rendered in the common cause. The Americans scoffed at this idea and basically offered Britain a loan. Which Keynes, as usual, was ultimately forced to accept. The British government was furious at him, because he had convinced them that they should not take a loan and ultimately would not have to take a loan. This loan was ultimately paid off--you know when, Russ? Russ: I do, because I read your book. Guest: 2006. Russ: That's what blew me away. It's stunning. But of course along the way, Britain went from being a world power to being an important country with important things that it contributes and great achievements. But it did not, it was not on top of the world the way it had been, or at least close to, in the run-up to WWI or even WWII. It was marginalized as a player, at least at the national level at least in the international monetary system. Now, you could argue that's not really important. Some of that's ego; some of that's national pride--which I think, silly. But the part that is important is that England just was broke. They didn't have much economic capacity. And what economic capacity they had in the aftermath of WWII--a lot of it went to--is it true? How much of it went to finance the debts they had run up in the War? Guest: Enormous. On the eve of WWI, Britain's debt-to-GDP ratio was about 25%. By the time we get to Bretton Woods it was about 250%. So, Britain had gone from the world's largest creditor nation to the world's largest debtor nation. And this is a very, very important part of my story. I think in terms of understanding contemporary affairs, is, well, this was effectively Bretton Woods a negotiation between the world's largest creditor nation, the United States, and the world's largest debtor nation, Great Britain. Over the terms of a new monetary architecture. Naturally, the position the position that the U.S. government took was very creditor-friendly. Of course, today the disputes are mainly between China and the United States, today China being the world's largest creditor nation; the United States being the world's largest debtor nation. And the position that the U.S. government takes today in such discussions is almost precisely the position that Keynes and the British had taken during WWII. Russ: Explain. Guest: Uh, well-- Russ: And I say 'explain' because the dollar remains the closest thing to an international currency. Guest: Absolutely. Russ: It's threatened. But that's the situation--the pound sterling was not the world's currency at the time of Bretton Woods. So, explain what you say--the U.S. position today is like the British. In what way? Guest: Right. You might remember back in 2010, former Treasury Secretary Timothy Geithner proposed that there should be caps imposed on persistent current account surpluses. That is, that there should be financial consequences for countries--of course this was directed first and foremost at China--that run persistent current account surpluses. That were essentially abusing their creditor position. This was precisely the position that Keynes and the British had taken at Bretton Woods. Keynes actually wanted to impose financial penalties on the United States for running these persistent creditor positions. And Harry Dexter White and the U.S. Treasury would have absolutely none of this. He warned the U.S. delegation before they went off into negotiations at Bretton Woods that the British and others were going to be demanding this. But we would not tolerate any foreign interference in the operation of our current account surpluses. And of course this is really the position that China takes today. So, where you stand depends on where you sit. Russ: Absolutely. Guest: The United States supported fixed exchange rates during WWII when the pressure on its currency was up. And the United States supports floating exchange rates today when the pressure on its currency is down. And it sees countries like China that try to fix their exchange rate as interfering with the more competitive dollar.
40:54Russ: So, I just want to clarify one thing, going back to the British debt. Two things. One of course: I cannot but note the irony, and I think this is half humorous but it's half very serious, which is that Britain ran large deficits during WWII. Which did not stimulate their economy. I just want to get that in. I hate it when people say that war spending is good for the economy. Or borrowing to finance war is good for the economy. I think that's a terrible argument. I don't think it's true, and I think it leads to encouragement of war. I think it's a bad idea. But I want to make sure I understand: When you say Britain's debt-to-GDP ratio was very high in 1945--I think you said 250%--who did they owe that money to? Was that to the United States, as a result of the Lend-Lease Program? Guest: The United States, the Canadians, their colonies and dominions mainly. Russ: And did anybody in England say, Well, we just need to walk away from it? Rather than pay it? Guest: Walk away from the-- Russ: the debt? Guest: the debt? Well, they certainly hoped to walk away from their U.S debts. And Keynes had argued that their debts to some of the colonies and dominions, for example, South Africa, should be written off. Because those countries, he argued, had in many cases benefited from the war. And certainly benefited from the efforts that Britain had made on behalf of the collective. So, Britain didn't want to "walk away" from the debts. But they wanted other countries to acknowledge that they had made great sacrifices on their behalf and that those countries should therefore willingly write off some of Britain's debts. Russ: And, you can certainly tell that story, that Britain did make great sacrifices. They lost a lot. They were bombed every night. And they died. And they went to France when France lay down its arms. The war was very expensive in the real sense of the term. Not just in money. But you point out that most Americans at the time didn't feel any gratitude. Europe's always getting itself in a mess and we always bail 'em out, which was WWI-- Guest: Quite the opposite. Exactly. Russ: That's just fascinating. Guest: Exactly. That the Europeans keep dragging us into their conflicts, and this has become extremely costly for us not just in terms of national treasure but in terms-- Russ: lives-- Guest: of American lives.
43:42Russ: So, let's talk just for a minute--it's a side note but it's an interesting one. Henry Morgenthau was Secretary of the Treasury. Talk about what his plan for Germany--this is just extraordinary, again an episode of history I knew nothing about. What was his plan for post-War Germany? And what was the impact of that plan being announced, even though it was never implemented? Guest: Yeah. Let me put it in a wider context, one that involves Bretton Woods. You can understand my perspective on the failings of Bretton Woods. There were really four major foundational ideas that Morgenthau/White brought into Bretton Woods. The first was that the British Empire could be peaceably dismantled. The second was that the Soviet Union could be co-opted into a permanent peacetime alliance. The third was that Germany could be profitably dismantled and dismembered, broken up into pieces, and be industrialized. This was the-- Russ: Germany. You just said 'Britain'. Guest: I'm sorry. I apologize. Germany. Germany could be deindustrialized. This was the Morgenthau plan for post-War Germany, restoring to return Germany to an agricultural nation. And finally, that a multilateral trading system could be constructed on the basis of making short-term loans to countries making balance of payments deficits. Now, all of these things turned out to be completely misconceived. If you fast forward three years, to 1947 and the launch of the Marshall Plan, you see it's all founded on the fact that the FDR Administration had gotten this all wrong. Britain's empirical collapse was very rapid and violent in 1947; and this was causing enormous trouble for the United States. It was when Britain walked out of Greece, in February of 1947, because it was running out of dollars; that the Germany Administration had to launch the so-called Truman Doctrine. Second, the Soviets, of course at this point-- Russ: That's so interesting. Guest: No, they are not seen as potential allies, obviously. They are not seen as a country that can be co-opted into any sort of alliance; they have to be contained, a country that can be contained. In George Kennan's famous words--and Kennan had been scathing about the U.S. Treasury, under FDR, with regard to Germany, the United States did a complete 180 in 1947. Morgenthau had been warned, over and over, by the War Department and the State Department that his plan would lead to civilian catastrophe in Germany. Mass starvation. And would lead to enormous costs to the United States, that would be forced to prop it up. He didn't buy it. He didn't care. But when we get to 1947, now it becomes a priority of the United States to turn Western Germany into a bulwark against Soviet expansionism by making it the new industrial engine of an integrated Western Europe. So this is really 180 degrees from what Morgenthau had planned. And actual scriptwriter for the Morgenthau plan was Harry Dexter White. Morgenthau wanted to go farther than White; but White actually wrote the blueprint. Russ: And what was the fourth one? The fourth piece of the--? Guest: The fourth one was basically the establishment of the IMF, that the IMF would lend money to countries running balance of payments deficits would revive a global trading system. This turned out to be complete and utter nonsense. People forget, today, but the IMF was basically mothballed by the Truman Administration. It did nothing for the rest of the 1940s and for most of the 1950s. It was the Marshall Plan that began to revive the European economy and it was the establishment of the European Payments Union in 1950 that began to revive some form of multilateral trade within Europe. It was not the IMF. So, you know, this idea of lending ever more money to bankrupt nations in order to stimulate trade, you can see that's not particularly working out very well in the Eurozone; and it certainly didn't work out after WWII. So, really, FDR's Treasury got this completely wrong at Bretton Woods.
48:46Russ: I'm going to add a fifth one. A fifth goal that they had, which I got from your book. Which was they were very eager for the IMF and the World Bank to be in Washington, D.C. rather than in New York City. And-- Guest: Not merely eager--they demanded it. Despite the fact that Keynes was bitterly, bitterly opposed to it. Russ: And the reason being that they wanted to have more influence--they had hoped to have more influence over the international monetary system, coming from the Treasury and Washington rather than from the banking community. But of course, the banking community today, as we look back on this--it's so pretty influential. I think, unfortunately. But that didn't work out so well, I don't think. Guest: One of the reasons that the FDR Administration--and the Truman Administration--was insistent that the World Bank and the IMF be in Washington and not New York was that they wanted to keep the bankers away from this. Henry Morgenthau, in 1945, when he was explaining to President Truman what he had set out to achieve at Bretton Woods, he said, 'I wanted "to move the financial center of the world from London and Wall Street to the U.S. Treasury".' Note the 'on Wall Street' part. This is very much an anti-banker agenda. Russ: Yeah. Those bankers are hard to keep down. Didn't work out so well. Guest: Not quite as they had planned, no. Yeah. Russ: But just to stay one more second with the Morgenthau plan. What I found extraordinary about it: the Morgenthau plan to deindustrialize Germany was announced during the War. Which motivated the German army, apparently. And I found it remarkable that, having lived through Versailles and the settlement of WWI, the reparations, which Keynes appears to have [?] about, that in the aftermath of WWII, Morgenthau was going to do the same thing. Guest: Yeah. He even quipped, though he seemed to be serious about it, about taking away German children, re-educating them. He believed that there was something fundamental in the German psyche that had to be addressed through radical reform of the country, and that included taking away its entire industry. So he had no confidence whatsoever that Germany could ever become a peaceful industrial democracy. Russ: Well, he had two data points. Two world wars. One of which probably was not Germany's fault, although at the time I think many people thought that it was. But the idea that you'd impoverish, that you'd keep people from hurting you by impoverishing them--you'd think that strategy had been shown to be not so effective. Guest: Well, by 1947, the bill for supporting Germany to the United States had become enormous. So, it was clear that not only was the policy hurting Germans, but it was hurting the United States. Because unless Germany could pay its way in the world, it wasn't going to be able to feed its own people. Russ: Yeah.
52:13Russ: Just talk for a second about the impact on the German war effort. Guest: Yes. The Morgenthau plan was a huge propaganda coup for Hitler and Goebbels. They used it relentlessly to motivate the German troops, to convince them that the United States was determined to enslave Germans after the War and if they did not fight on to the bitter death, they were going to meet an ignominious mass starvation after the War. And many U.S. commanders believed that the war lasted longer than it needed to have, with many more U.S. casualties, because of the Morgenthau Plan and how the Nazi government was able to use this in its propaganda. Russ: So, this grand achievement at the time, which Harry Dexter White was I'm sure very proud of and appeared to be a triumph for the Americans, this happens in 1944; it takes a while to be signed, implemented, etc. But most people, I think you do in the book, call the 1946-1971 period the Bretton Woods era, where ending in 1971 when the U.S. goes off the gold standard. But you are suggesting that it really even--wasn't that much Bretton-Woodsy about 1946-1971 in that the IMF was relatively unimportant. So my question is this--two questions. I could spend another hour on this--sorry; I'll try to make it brief. It's a tough question. It would seem to me that we muddled through with something; I'm not sure what it was. But certainly in the aftermath of Bretton Woods, it was the Milton Friedman era--floating exchange rates, which no one thought possible other than Milton Friedman for a while. And eventually the world came to say [?], it's pretty good. So, talk about how that transition--do the best you can on how that transition occurred and the world we live in now. Guest: Yeah. I should emphasize that there's a lot of mythology about Keynes that really doesn't hold up to scrutiny. He was not in favor of fluctuating exchange rates. He was in favor of stable exchange rates. He wanted Britain to have complete autonomy over its exchange rate, but he argued very, very passionately against British devaluation after the war, which turned out to be a huge mistake, because when Britain did wind up devaluing by 30% in 1949, its financial problems started dissipating very, very quickly. So, this was--Friedman was very much on his own here. Certainly flexible exchange rates were not part of the political debate at Bretton Woods. I should emphasize that the Bretton Woods monetary system, the system set up by Harry Dexter White at Bretton Woods could not really be said to have started until 1961, because it was only in 1961 that the first 9 European countries met the convertibility requirements of IMF Article 8. So this is already 17 years after the Bretton Woods Conference. And by the time we get to 1961, the system is already coming under extreme strain as the United States is losing gold reserves. Now, Harry Dexter White said that this could never happen. There could never come a day when the United States would not be able to credibly back its currency with gold. But he insisted that should that day ever come, the international role of the U.S. dollar would be finished. Of course, Milton Friedman thought this was absolute nonsense, and I think the post-1971 era for all its difficulties--it's far from a Nirvana system--really bore him out. Russ: So, what would have happened--speculate for a minute on what would have happened had there been a big fight at Bretton Woods--which, there were a few. But suppose as they exited the hotel and they said, 'Sign here,' and nobody signed. And they just went back. What would have possibly emerged, if anything, rather than the attempt at a top-down system, which Bretton Woods represented. Guest: Well, the symbolism of Bretton Woods, 44 allied nations coming together and agreeing on a new, grand architecture, I think was very powerful. But I think the important thing to emphasize is that very little of this actually became operational after the War. In fact, the IMF directors in 1949 and again in 1952 issued official statements lamenting the fact that the problem of inconvertible currencies and countries resorting to barter was actually worse than it was in the 1930s. So, what was it that revived the international trading system after the war? Again, I would point to two policy initiatives in particular: first and foremost the Marshall Plan, which was a very different idea from Bretton Woods. The Truman Administration rejected the idea of lending more money to bankrupt countries. We had to do it in the form of grants. And second, the European Payments Union, that allowed the Europeans to reconstruct some semblance of a multilateral trading system within Europe. So, I wouldn't give Bretton Woods any credit for the economic successes of the 1950s. As I said, the IMF was no more than a bystander during this period.
58:47Russ: So, I have a lot of friends who work at the IMF and the World Bank. They are good people; I like them; they are great economists; they are smart; they have good intentions. But I've often felt, sorry to say, that if the IMF had never come to be, that the world would be a better place. Guest: Well, I should emphasize, Russ, that the institution that the IMF is today was never one that was envisioned by Keynes or White; and despite the disagreements between the two, both of them would have objected vehemently to what the IMF has become--essentially a crisis fire-fighter. Neither Keynes nor White ever wanted the IMF to play a major role in dealing with crises. It was supposed to be an institution that would help prevent crises. But if crises emerged, countries that were at the source of it were supposed to change their domestic policies. So, this may be right, this may be wrong; but I should emphasize that the IMF is a very powerful, important institution today because of a blueprint that is wholly different from the one that was established at Bretton Woods. Russ: Could be a good book on how that happened. Maybe there is such a book. And similarly the World Bank, the development part, was tacked on; that has become its public mandate. I think it's done a very poor job at helping poor countries get rich. I think it's been a bad thing. Guest: I should point out though, one anecdote about Bretton Woods with regard to the leadership of those institutions that I think is quite interesting, a legacy of Harry Dexter White's freelance diplomacy that lives on to today. White [?] an American run the World Bank today and the European run the IMF, when it was clear that the IMF was a much more important institution to the United States. Well, in January of 1946, Truman nominates Harry Dexter White to be the first U.S. Executive Director of the Fund and is going to nominate him to be the first Managing Director--the head of the Fund. But when FBI (Federal Bureau of Investigation) Director J. Edgar Hoover gets wind of it, he writes a long memorandum to the President telling him not even to think of such a thing, because he, Hoover, can prove that White is in fact a Soviet spy. Now, Truman didn't trust Hoover but knew that he had an enormous political problem on his hands. And though his Secretary of State and Treasury Secretary wanted White out of government entirely, Truman didn't want to draw attention to this. He argued that he could quarantine White as U.S. Executive Director; he just wouldn't nominate him to be the Managing Director. So in March of 1946, just before the Savannah Conference to inaugurate the IMF, the U.S. Treasury Secretary Fred Vinson tells a shocked Keynes that the Administration had decided after due consideration that it wanted Presidency of the World Bank and that it did not want to take the head of the IMF as well because that would be ungracious of the United States to demand the heads of both institutions. So the only reason why a European still continues to head the IMF to this day is because of President Truman's efforts to cover up the growing White spy scandal. Russ: And of course as you point out in the book, there wasn't just a wild theory of J. Edgar Hoover; there appears to be quite a bit of evidence that he was correct-- Guest: And [?] knew very little of it. Russ: It came out later, right? Guest: Much later. Russ: Although the White family continues to protest his innocence, it appears to be that he--I want to clarify this, though. He was not in the pay of the Soviet Union. He did it out of misplaced love for what he thought was their economic success and importance of being part of the world community. Correct? Guest: Absolutely. Russ: Have to be careful--he took a rug; he took some liquor. Guest: Yes. Russ: But he was not-- Right? Guest: Well, you talk about that. His daughter's-- Guest: I was just going to bring that up. There is some evidence that he had some gifts. And Soviet intelligence cables also suggest that White's wife had agreed to let the Soviets fund their daughter's education after the War. They wanted to leave Washington. His wife wanted White to go into the private sector and start earning some money. The Soviets were naturally very much against that given how important White was to them. So they offered to help fund the White daughter's education--as I said, at least the cable suggested that that was favorably received. Russ: But it wasn't like he was passing documents and accepting bags of money. He mostly just passed documents. Guest: He was certainly passing documents. He copied classified documents. He wrote down classified information that he was privy to at meetings and passed them on to his conduits, both American interlocutors and to Soviet agents in the United States posing for example as news reporters.