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Ref should have stopped it

8 March 2013 By Martin Hutchinson

Benn Steil calls his study “The Battle of Bretton Woods” but in reality the 1944 conference which created a new financial system after World War Two was more of a massacre of British interests by the U.S. Treasury’s Harry Dexter White.

Steil is a senior fellow at the American think-tank, the Council on Foreign Relations, and a well-known writer on financial topics. He tells the story as personal, political and economic. John Maynard Keynes, the principal British negotiator, was an hereditary member of the Cambridge intellectual elite and the first “celebrity economist”. White, from a poor background, was a protégé of Henry Morgenthau, Treasury secretary since 1934. He was also an active agent for the Soviet Union.

Both men were determined to replace the pre-war financial system. Keynes thought he had something better. White (and Morgenthau, who generally followed his lead) blamed it for much of the poor performance of the world economy and U.S. exporters during the 1930s.

Steil brings out nicely the parallels between White’s wish for a rigid exchange rate system and today’s U.S. policymakers’ wish for a floating rate system; the common desire for a weak dollar to help U.S. exporters led to diametrically opposed policy prescriptions. Then, fixed rates kept the currency of a country with a payments surplus from rising. Now floating rates allow the currency of a deficit country to sink.

Thus when Keynes brought out his scheme for a new world currency “bancor” to be created by what became the International Monetary Fund, White preferred to restrict the new institution to receiving gold as capital and making loans from that capital. Eventually, by sleight of hand during the drafting process, White ensured that the dollar would be given a special position of convertibility into gold and use for settlement of international transactions. White was also highly sensitive to Soviet demands, but since their main monetary objective was to retain a major position for gold (of which they were a large producer) there was little potential conflict in that area.

Politically, White and the Soviets were also aligned; they both favored a system of fixed exchange rates and the dismantling of Britain’s modest Imperial Preference tariffs. But Keynes also favored government control and distrusted free markets, refusing to explore the possibility of a post-war credit to Britain from Wall Street (which would have greatly strengthened his bargaining position). He made little effort to defend UK tariffs or to obtain the post-war sterling devaluation which British exporters such as Morris Motors desperately needed.

In the event, Morgenthau, White and the Soviets achieved almost all their principal objectives at Bretton Woods, and then went off to play golf. Keynes was left to defend to the House of Lords a deal far different from the one he had contemplated, and to return the following year for a pathetic and only partially successful effort to obtain a post-war credit from the U.S. government.

Steil brings out well the difficult interpersonal dynamics between the two prickly personalities, and makes clear his own view that Britain would have done better to send a diplomat to lead its delegation, who would have been more aware of U.S. procedural shenanigans and more skilled in negotiation, perhaps getting the friendly Dean Acheson at the State Department to help neutralize Treasury’s hostile Morgenthau/White tandem. Steil does not offer a name, but the best alternative might have been Oliver Lyttelton, then minister of production, with a 20-year City and industrial career behind him and a genuine commitment to both free markets and the needs of the British and Dominion economies.

The book shows personal sympathy for the combative White and some political and economic sympathy for the common desire to meddle with free markets. Still, Steil is both a fair-minded and engaging writer, and those with different proclivities, even imperialist Brits, can still enjoy his account of one of the defining struggles in a crucial part of the modern world.


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