The Biggest Battle of the Second World War — Fought Behind Closed Doors
By Ed Conway
Little, Brown, £25.00
Economist John Maynard Keynes (left) and Harry D White in March 1946 ... “Booms and busts, the very things that Keynes and White wanted to rid the world of, have become regular parts of our lives as have the austerity policies to deal with them. Conway’s book is a fine and timely reminder that there are alternatives if the political will and the intellectual imagination can be found to grasp them.” Picture: Thomas D. Mcavoy/Time & Life Pictures/Getty Images
IN 1944, whilst war still raged in Europe and the Pacific, a group of economists, bankers and politicians gathered at Bretton Woods in New Hampshire. Their aim was to put in place a system for managing the international economy. Such a system, they hoped and believed, was necessary if the world was to avoid the type of economic crisis that had led it to war.
The Breton Woods conference was only partly a success. The conference did design a new way of regulating the global economy, which was promptly named the ‘Bretton Woods System’. But the system designed at Bretton Woods was flawed and it collapsed in the 1970s.
Ed Conway tells the story of the rise and fall of the ‘Bretton Woods System’ with brio. The Victorian historian Thomas Carlyle called economics the ‘dismal science’ because it simplified everything to supply and demand and reduced ‘the duty of human governors to that of letting men alone’. The architects of Bretton Woods, British economist John Maynard Keynes and American Harry White, were very much concerned to not let ‘men alone’ to repeat the mistakes that had led to two World Wars and the Great Depression of 1929.
Keynes and White were also anything but dull. Keynes was mercurial and brilliant.
He was unorthodox in his social life, and prone to arrogance and rudeness. White was an outsider in the American establishment. A latecomer to education — he only went to college after working in the family firm and army service — he was temperamental and easily offended. He may also have been a Soviet spy, although it is more likely that he just overreached his brief when talking to Soviet economic officials to try to encourage them to join the Bretton Woods talks and system.
Accusations of spying where to plague his career after Bretton Woods and probably hastened his death.
Keynes and White were both convinced of the need to put in place a new system of international economic regulation because of their experiences of World War One and the disastrous failure to manage the economics of peace after 1918. The main failure was that policy makers tried to return to the gold standard — whereby a nation’s currency exchange rate was fixed to the price of gold — in an effort to return the post-war world to the system for managing the international economy that had failed so dramatically in 1914. This effort was one of the causes of the Great Depression of 1929 and delayed dealing with the economic downturn that the Depression created.
Keynes saw that linking exchange rates to gold weakened the ability of governments to stimulate their economies and frequently forced them into austerity policies not too dissimilar to those that blight Ireland today. When the value of a currency was tied to gold the amount of money a country could issue was limited by the amount of gold that a country had in its reserves. Central bankers had to keep an eye on the state of their gold reserves to fund international trade. This meant that it was not possible to issue more money to bail out failing banks or to create jobs through public spending programmes. It was also hard to clear trade deficits without tremendous social cost. If a country’s goods became too costly because the value of their currency was set too high and fixed against gold they could only make money through foreign trade to pay off their debts by squeezing their economies.
This meant fixing interest rates to protect stocks of gold, rather than using them to stimulate economic activity, and squeezing people’s wages and standards of living to lessen demand for imports and lower the price of exports so that debts to other countries could be cleared.
The great fear, realised in Germany in the 1930s, was that such austerity policies weaken people’s attachment to democracy. Keynes’s solution was to end the gold standard so that governments could fund economic recovery without austerity. The USA managed this to some extent in the 1930s with Roosevelt’s New Deal. To do it more comprehensively and for more of the countries of the world required some level of international regulation and rule. Bretton Woods was supposed to set these rules and create the institutions to do the regulation.
White’s place in the US government and Keynes’s reputation as the man who had explained the economic disasters of the 1920s and 1930s made them the natural leads to take charge of drawing up these rules. Their very different characters and positions of their two countries did not make things easy, however. At first, getting agreement over a new system of international regulation was held up as White and Keynes’s different personalities caused friction. But their personal differences paled in comparison to the economic problems that they faced.
Thanks to the war Britain was a debtor nation and the USA a creditor. Keynes wanted a system of global economic regulation that penalised countries with a trade surplus as well as countries with deficits. For Keynes achieving a balance between nations was essential so that no one would be subjected to economic pain too deep to bear. White was not unsympathetic, but it was politically impossible to write down most debts to the USA. Congress and Senate would not buy any deal that was too lenient to US debtors.
These differences were played out over three weeks of fevered work at Bretton Woods. Conway brings out the drama of the meeting and shows how ultimately the talks were a missed opportunity. There was too much politics and too much to do.
The result was a compromise, and thanks in part to an accident, a bad one.
A new system of valuing currencies against the US dollar was agreed. However, there were no penalties for creditors as well as debtors as Keynes wanted. The accident was that one of Keynes’s colleagues allowed the US dollar to continue to be tied to gold. No one, Keynes included, noticed until it was too late. Indirectly, and through the US dollar, the world’s currencies were still tied to gold, and there was no mechanism for forcing creditor nations to reduce their surpluses and help out debtors.
At first this did not seem to matter. Europe’s economy was saved by the Marshall Aid plan, rather than by Bretton Woods. The global economy boomed, and the US economy thrived at the centre of this system. But this boom could not last anymore than any other boom has. The USA imported more than it exported. As its expenditure grew to cover its international adventures, in particular the Vietnam War, it was crippled by the fixed price of the dollar in gold. In 1973 Nixon took the US off the gold standard and Bretton Woods was dead.
There has been no Bretton Woods II. The conference of 1944 truly was the ‘summit’ of achievement in international economic regulation. After 1973 deregulation became the norm. Exchange rates across the world were allowed to float and money moved around the world freely and often, as Keynes feared, destructively.
Booms and busts, the very things that Keynes and White wanted to rid the world of, have become regular parts of our lives as have the austerity policies to deal with them. Conway’s book is a fine and timely reminder that there are alternatives if the political will and the intellectual imagination can be found to grasp them.
* Neil Robinson is professor of politics at the University of Limerick
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