When Harry Met Keynes

The financial crisis of 2007-08 has sparked a renewed interest in the Bretton Woods compact, which created a “prosperous” world for about 20-30 years. Academics across the world have been wondering whether the world needs a new agreement and new institutions to meet the demands of a new economic order. The perception is that the 44-nation Bretton Woods discussions, which gave birth to the multilateral institutions World Bank and the International Monetary Fund, were held in a generally conducive and collegial atmosphere. This is not true. A new book on the Bretton Woods discussions — The Battle of Bretton Woods by Benn Steil —  shows how the talks were held in a generally combative atmosphere.

My review of the book was carried by Business Standard (http://goo.gl/s758Q). Here it is:

In a rare photo op, the heads of the World Bank and the United Nations flew to violence-scarred East Africa recently. There was nothing spectacular about this visit – it showcased two ageing international bureaucrats posing together and providing sound bites about how their respective institutions were willing to work together to bring peace to this war-ravaged region, also known as the Great Lakes region. It could well be a convergence of coincidences: both dignitaries happened to be there at the right time, and both were born in Korea.

But there was another bit of detail that made this visit interesting and historic: this was probably the first time these two multilateral institutions were actually seen working together and promising to enhance this co-operation in future. Though they had made similar noises in the past, they unfailingly broke their promises. Both institutions, with unwieldy and terribly insular bureaucracies, have been distrustful of each other.

The genesis of this strife and suspicion towards each other can be found in the circumstances surrounding the birth of the World Bank along with its sister institution, the International Monetary Fund (IMF). Both these multilateral agencies were the outcome of a post-Depression meeting comprising 44 nations in a small New Hampshire town called Bretton Woods. The meeting, which was held in Mount Washington Hotel, was aimed at creating a lasting post-war global economic compact – an agreement that would lay down the long-term blueprint for global economic prosperity.

In reality, the conclave turned out to be a contest between two powers: the United Kingdom, a waning imperial power keen to reverse its ebbing national self-esteem; and the United States of America, the global superpower eager to leave its imprint on the global economy.

At first sight, the dice seemed loaded in favour of the UK team, which included the first celebrity economist of modern times, . His formidable reputation, his distaste for intellectual lightweights, his irascible temper, and his sharp tongue gave the British side a psychological advantage. Keynes had been planning to create an international currency union, which would launch its own international currency – “bancor”, an alternative to the all-powerful dollar – and lend to indebted countries such as Britain.

But the American side had a surprise: , a dogged and industrious bureaucrat who enjoyed the confidence of Henry Morgenthau Jr, then Treasury secretary. White, a Harvard-trained economist, had been hatching a plan to create an international stabilisation fund. This fund would not only lend dollars to debtor countries, but also stabilise currency movements across the world by convincing countries to peg their currencies to the dollar and, in turn, peg the dollar to a fixed gold price.

When Keynes’ and White’s plans collided at Bretton Woods, the result was the birth of the IMF. History shows that the discussions took place in a collegial atmosphere, but author ‘s latest version injects an undercurrent of understated hostility, marked by a sparring match between two monumental intellects, and egos.

Differences even crept up as to where to locate the IMF – Keynes felt New York (in close proximity to the UN’s Economic and Social Council) was ideal, but his suggestion was railroaded by the US’ preference for Washington, DC. The dividing lines were also quite pronounced about the IMF’s future role.

A book that describes in detail such a conference, its leading characters, and changing moods and directions is usually as dull as dishwater. There are quotes from agendas, memos, official correspondence, file notings, research papers and personal letters. What saves the day, or adds colour, is the insight into the character of White, whose personal papers were made public only recently. He was believed to be a Russian spy and was accused of passing on the details of the Treasury department’s plans and former US president Franklin Roosevelt’s thoughts to his contacts in the Russian embassy. Mr Steil has refrained, sensibly, from dwelling too much on Keynes’ homosexuality and its presumed impact on policy making, as some right-wing historians have tried vainly in the past.

The book’s over-reliance on minutiae can be crushing, but given the renewed interest in economic history – especially the Great Depression and the creation of the Bretton Woods institutions – Benn Steil cannot be faulted for his timing.

John Maynard Keynes, Harry Dexter White, and the Making of a New World Order
Benn Steil
Princeton University Press
449 pages; $29.95


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