Bridge over ocean
12 September 2017 Financial Analysts Journal Book Review

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (a review)

  1. Martin S. Fridson, CFA
This thorough, fascinating account of the international conference that culminated in the 1944 agreement to maintain stable exchange rates skillfully places it in its economic and geopolitical context. Although the author presents no boldly original interpretation of Bretton Woods, he offers excellent insight into the tribulations of the key players.

Among investors who fear that the prevailing friction over trade imbalances will morph into outright currency war, it is common to regard the Bretton Woods years as a golden era of international harmony. Global economic performance was, in fact, excellent in the period beginning with full implementation of the 1944 agreement to maintain stable exchange rates through 1971, when the United States terminated the dollar’s gold convertibility and thereby ended the Bretton Woods system. Inflation and interest rates were lower and per capita income growth was higher than under the regime of floating exchange rates that followed.1  However, as implied by the title of Benn Steil’s new book—The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order—the conference that launched the system was not especially harmonious.

Steil, senior fellow and director of international economics at the Council on Foreign Relations, portrays the Bretton Woods conference primarily as a struggle between the United States and the United Kingdom. Harry Dexter White, a U.S. Treasury Department official who masterminded the negotiations on the U.S. side, sought to eliminate the United Kingdom as a rival in the international economic order and establish the supremacy of the dollar. The eminent economist John Maynard Keynes, eager to introduce a global currency of his own design, headed a U.K. delegation intent on preserving that nation’s global standing as well as its trade preferences within the sterling area.

Deeply indebted to the United States after the long, costly ordeal of World War II, the United Kingdom inevitably lost the battle. To secure one key victory, however, White had to resort to stealth. In the waning hours of the conference, he and his assistants replaced the phrase “gold” with “gold and U.S. dollars” in the agreement, thereby enshrining the U.S. currency as the international medium of exchange. Keynes confessed that he did not read the final version of the document he signed.

A host of additional conflicts complicated efforts to bring the parties together. Imperialists in the United Kingdom and isolationists in the United States railed against the proposed agreement, along with the American Bankers Association, the U.S. Chamber of Commerce, and the National Economic Council. White and his Treasury colleagues vied with U.S. State Department officials who regarded advancement of free trade as the paramount objective. Each country fought to maximize its borrowing capacity at the International Monetary Fund (IMF), which was, like the World Bank, a child of the Bretton Woods deliberations. The Soviet Union adopted an especially intransigent stance. In the midst of the negotiators’ attempts to define the precise role of gold in the new monetary regime, Mexico and senators from several Western U.S. mining states lobbied for the remonetization of silver. Mexico relented after the introduction of the so-called Coconut Clause, whereby the IMF would accept various commodities as collateral for loans.

Internal U.S. politicking exerted a heavy influence as well. The conference’s timing (July 1944) was chosen to fall between the Democratic and Republican presidential conventions, thereby deliberately injecting its debates into the campaign. President Franklin Roosevelt proposed the conference site, the Mount Washington Hotel, as a ploy (successful, as it turned out) to win over a likely opponent of the pact, New Hampshire senator Charles Tobey.

Steil not only recounts the intricacies of the deal making but also details the economic dimensions of Bretton Woods. Far from collapsing because of unique circumstances in 1971, the agreement was doomed from the outset because of a paradox identified by economist Robert Triffin in 1959. As other countries accumulated large dollar reserves, they loaned their excess dollars back to the United States. Those loans increased U.S. short-term liabilities, implying that the United States would have to increase its gold reserves in order to uphold its convertibility pledge. Doing so, however, would perpetuate the shortage of dollars needed to support international trade. But if the United States did not increase its gold reserves, it would find itself in the untenable position of trying to guarantee an increasing number of dollars with a decreasing amount of gold. According to the “Triffin dilemma,” the United States could never simultaneously create enough dollars to satisfy trade requirements while ensuring that it could always redeem those dollars for a fixed amount of gold.

Continuing his narrative beyond the conference, Steil chronicles the postwar probe of Harry Dexter White’s connections with a Soviet espionage ring. He also documents U.S. hypocrisy regarding the question of fixed versus floating exchange rates. As a huge creditor nation at the time of the Bretton Woods conference, the United States insisted on a fixed-rate system centered on the dollar. Now, with the United States transformed into a massive debtor, we are treated to the spectacle of Senators Charles Schumer of New York and Lindsey Graham of South Carolina insisting, incorrectly, that floating-rate currencies have always been a basic tenet of free trade.

With the help of 10 research assistants, Steil has tirelessly tracked down minute details of the Bretton Woods story and its epilogue. In one noteworthy coup, he disproves Keynes biographer Robert Skidelsky’s claim that Keynes was assigned Room 129 in the Mount Washington Hotel. Among other evidence, Steil notes that U.S. Treasury secretary Henry Morgenthau, in Room 119, complained of thumping on his ceiling, which resulted from the dance exercises of Keynes’s wife, the retired ballerina Lydia Lopokova.2  (I confirmed with the hotel’s public relations head that Baron and Baroness Keynes occupied Room 219, the hotel’s finest, and that the plaque commemorating their occupancy has been removed from Room 129.)

Despite his painstaking research, Steil perpetuates an error by writing that circa June 1981, a “global dollar glut had fueled lending to poor countries in Latin America and elsewhere in the 1970s, underwritten by Citicorp chairman Walter Wriston’s dictum that ‘countries don’t go bankrupt.’” In truth, Wriston first used that phrase in September 1982,3  by which time the Latin American borrowers’ repayment difficulties had become painfully apparent. Wriston was not justifying loans to emerging markets by naively suggesting that nations never default on their debts. He was simply making the technical point that there is no sovereign analogue to such corporate mechanisms as the U.S. Bankruptcy Code for dealing with national insolvency.

All in all, The Battle of Bretton Woods is a thorough and fascinating account of a historic event, skillfully placed in its economic and geopolitical context. Although Steil presents no boldly original interpretation of Bretton Woods, he offers excellent insight into the tribulations of the key players. He also tells the interesting tale of how, if not for the well-founded suspicions regarding Harry Dexter White’s cooperation with Communist spies, the tradition of an American heading the World Bank and a European heading the IMF would have been reversed.


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