Comparative Reviews of Books on Bretton Woods: Ben Steil's The Battle of Bretton Woods and Richard Gardner's Sterling-Dollar Diplomacy

Something about Ben Steil's Bretton Woods book didn't sit right with me after I'd finished reading it, but I couldn't quite place what it was. Now, having finished Gardner's Sterling-Dollar Diplomacy, I feel I have enough perspective to say exactly what it was. It's not the fact that Battle is a history of Bretton Woods written by a Hayekian (which Ben Steil is), nor the fact that Steil glosses over so much of the substance of the Bretton Woods System. It's the fact that Steil, evidently, wrote his book for the singular purpose of humiliating J.M. Keynes. Now that I've had the opportunity to read something else, something less gossipy and nasty, it has become obvious.

The first few chapters of Battle go over the intellectual come-ups of the story's two main protagonists: Harry Dexter White and J.M. Keynes – and the story of the latter's life is much more entertaining, so there's much more to write about. Keynes was a celebrity economist in the 1920s and 1930s. His works on the Versailles Peace Treaty and on Monetary Theory earned him fame and admiration in the avant-garde upper crust of Anglo-America. Ben Steil isn't entirely impressed with this however, as he takes note of Keynes' apparently mercurial thinking on economic theory: in the 20s and 30s he was more of a protectionist, and in the 40s he came to a more 'multilateralist' position, i.e. a particularly Keynesian perspective that might better be known as 'embedded liberalism', a liberalism in which countries trade freely with each other but their capital bases are anchored to their respective societies, freeing up the governments of each to pursue macro-economic planning. Steil takes care to note in the early part of Keynes' life his connections to Oswald Mosley and his casual distaste for world Jewry. In one of his correspondences to a friend he wrote that there was no other race on earth so curiously attached to the gains accrued of usury. Oswald Mosley, leader of the British Union of Fascists, wrote Keynes love letters, showering him in praise for his propositions for British protectionism within a system of Imperial Preference. These apparently distasteful aspects of J.M. Keynes' character were necessary precursors, whose inclusion in the story was necessary for the full effect of the events that came later.

Before Keynes arrived at the Bretton Woods conference, as the United Kingdom's unofficial but official representative for determining economic policy, Steil provides the context for the dying empire. The United Kingdom, still hamstrung from WWI and the disastrous deflationary policy of pursuing the pre-war sterling-dollar parity for all of the 1920s, and now eminently crippled from spending the last of its reserves on fighting the Third Reich, was cash-poor and land-rich. Steil suggests that the New Deal administration of Henry Morgenthau (Secretary of Treasury, advisor to FDR) and Harry White, aware of the UK's weakened bargaining power, didn't mind putting the Brits on the hook for all of the war materiel that was being shipped overseas and then, when the war was finished, collecting on these debts by forcing the UK to pay by liquidating her Imperial assets, by selling them off at distressed prices (pennies on the dollar). Steil suggests that the New Dealers implicitly relished the thought of liquidating the British Empire, which may have been true, considering the way that Morgenthau (not innacurately) perceived the City of London to be the center of world Usury and wanted to dethrone banking in the post-war world. Morgenthau, despite his own sometimes-conventional views on finance, had a strong dislike of bankers and especially of their involvement in politics.

This helplessness of the Brits at the hands of the Americans sets the stage for Steil's particular rendition of the great White-Keynes arguments in the 1940s. He wants us to know how little the Brits had to bargain with, so that we can know how pathetic Keynes lobbying efforts were against the immovable White.

When Keynes came to Bretton Woods, Steil wants us to be aware mainly of one thing: that Keynes wanted the new monetary order to be based off of an expansionary international monetary standard, equipped with a liberally accessible international credit facility, and that White wanted the new monetary order to be based off of a contractionary international monetary standard (gold), equipped with a conditionally accessible credit facility, i.e. conditionally in the sense that borrowers were subject to America's terms (which would be natural since she would be the main creditor). This is the main conflict that takes center stage in Steil's Battle. Keynes did unsuccessfully try to lobby White to adopt his Bancor, which was something like a Bitcoin except the opposite – it would have an inherently expanding basis, rather than an inherently finite basis. Keynes wanted this because as a British patriot he knew that the UK no longer had any gold and wanted to create a world for her in which currency was amputated from gold, in which the gold-rich could thus no longer dictate the terms of credit. And yes, Keynes' attempts to get White to come around to this plan were unsuccessful and somewhat pathetic. Yes, he did dissimulate to his friends back home on how close White was to adopting this new system – White would not and did not. Steil would have us believe that Keynes was constantly and sycophantically trying to ingratiate himself with White so as to wheedle his way into fixing the world economy to an expansionary base money.

When we look at other histories of the Bretton Woods system, however, a somewhat different picture comes into focus. Gardner's Sterling-Dollar Diplomacy shows just how much White and Keynes had in common. The absolutely most important thing about the Bretton Woods System was that it was an international monetary and commercial framework that allowed each of its members to pursue policies of Full Employment at home without being subjugated to the external deflationary pressures of international finance. This was a radical new proposition for world commerce and it it did not sit well with the vast majority of economists and bankers at the time. In fact there were multiple attempts to scuttle the Bretton Woods agreement through back channels, when representatives of the American Bankers Association offered the UK a series of massive loans on the condition that they back out of Bretton Woods. Both Keynes and White agreed to a system of fixed exchange-rates and access to international credit facilities so that each member-country could pursue an inflationary domestic policy so that it could achieve a full employment economy. The idea was that, if each member of the system had a fixed exchange-rate and had the ability to easily finance the management of this parity, each member would thus be freed up to pursue an inflationary monetary policy; each country would devalue its currencies in tandem. This of course made bankers gnash their teeth in despair because it meant a less favorable balance in creditor-debtor relations. It made investors gnash their teeth because full employment meant a less favorable balance in employer-employee relations. But it made everyone else happy because finally there would be a radical new way of life that would break from the traditional reality that somebody, somewhere was getting the shit end of the stick (and the broader social reality being implicitly conditioned by the threat of getting the shit end of the stick if you didn't play along).

This centrally-important Full Employment aspect of the Bretton Woods system is curiously absent from Steil's history. Instead, it is focused more on the debate between fiat currencies and gold standards. This is made all the more curious by the fact that the main anxiety that the Brits had in a gold-dollar-backed monetary framework was that the Americans would pursue a deflationary policy, starving them of the dollars they needed for their foreign exchange reserves, and then collect their pound of flesh. But in fact the opposite happened: the United States pursued an inflationary policy and flooded Europe with dollars. The main British anxiety, which was fundamentally an anxiety over liquidity, turned out to be misplaced and the problem was actually the opposite: Europeans started to resent the flush of liquidity in that they were stuck holding increasingly worthless dollars.

On the White-Keynes relationship – it certainly could be tense. Keynes was a blue-blooded English aristocrat and Harry White was a middle-class book-jew; they had little cultural common ground between them. But having said that, they had more than enough intellectual common ground between them. They both disliked the international gold standard, which White only pursued because it was so obviously within American national interests. America was by this point the main holder of gold bullion several times over, and if any representative of American interests tried to cede this natural advantage so that the British could prop themselves up on a new-fangled invented currency, he would be lynched in the street. Gold was the only course of action that was publicly available. But even so, the United States did not treat the Bretton Woods system like a gold standard; it treated it like a money-printing machine, which is all that Keynes ever wanted in the first place. Keynes admired White's diligence and conceptual acuity. White admired Keynes' conceptual ability even if he was annoyed by his incessant attempts to put the Bancor through. One of Harry White's friends even mentioned that he was thrilled to be able to call Keynes by his first name in these talks, because he had been such a great intellectual influence on him as a young economist, particularly his Economic Consequences of the Peace and his Treatise on Money. - As an aside: Steil notes again, with some tenseness, that Keynes derided Harry White's jewish assistant as a little shtetl rabbi who didn't understand the importance of global affairs. - They didn't agree on currency standards but they agreed on a lot of other things. And ultimately, their differences on the currency standard didn't matter because the post-war American government treated their gold-backed dollar the same way that Keynes wanted the Bancor to function anyways. So ultimately there was no great conflict of interest in the long run.

So why is it that Ben Steil's history of the Bretton Wood System leaves out the parts about Full Employment and intellectual friendship between Keynes and White? Why is it called The Battle of Bretton Woods? What is the real battle here? Is there one? I think there is really only one explanation. Ben Steil, as a Jew and a Hayekian, resents Keynes: he resents his easy arrogance, his commitment to (implicitly anti-semitic) capital controls – which, after all, are just a fancy way of saying "preventing people from leaving the country and taking their money with them when they dislike a new policy" -  , and his denigration of the International Gold Standard. He wanted to shove Keynes' face in the mud by showing the world how impotent his attempts at staving off a gold-backed currency ultimately were. Gold won, Keynes lost. Absent from this analysis is the fact that the gold-backing hardly mattered in the end.

I didn't mind this book at first because it was good to absorb all the interesting information, but upon reflection, it really is a vicious work. It kills two birds with one stone, by obfuscating the actual purpose of Bretton Woods by focusing narrowly on currency and by triumphally gloating over Keynes' desperate and failed attempts, from no bargaining power, and his nervously dissimulating letters to the inquiring minds at home, to secure a stronger monetary position for the UK. If it were an honest and clean-spirited work, it would have shown the mutual admiration between White and Keynes, it would have dealt more heavily with the topic of fixed exchange-rates and the implications for economic planning bureaucracies, and it would have discussed the ultimately marginal role of gold in post-war monetary affairs. But this was never Steil's intention because, as a Hayekian, he never really saw the importance of Bretton Woods as a guarantor of Full Employment anyways. And he even says so in his book, towards the end, that the UK didn't need membership in the International Monetary Fund (IMF – the global fund created by Bretton Woods). All it needed, he says, was a good loan to tide it over until it could shore up enough liquidity and resume things as normal. The implication here is that the world of Full Employment, what some have called 'The Golden Age of Capitalism', was sort of an unnecessary experiment. The other implication is that Harry White was a champion of gold, which is a statement that has its own complications.

But, to return to the original question, what was the Battle of Bretton Woods, if there was one at all? Maybe a better question would be, what would have happened to the UK if not for Bretton Woods? This is a better question, and one that Gardner's Sterling-Dollar Diplomacy does a better job of engaging. The credit here must go to Gardner not so much because of his own opinions, but because he is a competent, dispassionate record-keeper of the events, factions, interests and complexities surrounding the Bretton Woods agreement. For the record, he was a liberal of the Rhodesian flavor; so, not exactly a Keynesian embedded liberal, but not a Yankee gold-hawk either: someone generally sympathetic to free trade and freedom of capital movement but, more importantly, a pragmatist. Best of all, he's not a resentful backbiting tapeworm. 

Gardner's view of Keynes and the UK's post-war situation is clarifying: Keynes didn't so much change from being a Protectionist to a Free-Trader, rather he recognized just how much the UK had to lose in a world of autarkic states and how much it had to gain from the resumption of open commercial relations between states. The thinking on economic issues in the UK had changed since the 1920s and there was a significant segment of society that wanted to drop out of the Bretton Woods agreement and have the UK pursue its own autarkic policy of Full Employment and state-controlled foreign exchange. They wanted to possibly even do the same kind of trading that the Third Reich did, where officials from the commerce bureaucracies calculated the values of proposed trades and then executed them on a barter basis, obviating the need for money or financing. Many of the people who proposed this kind of British National Socialism also wanted to maintain the Imperial Trade Relations (or what they called 'Imperial Preference'), wherein a kind of Free Trade Zone was maintained between all the countries that used the Pound Sterling but trade outside of this zone was prejudiced. This plan might have sounded good but it was, in Keynes' view, impracticable for the fact that the UK didn't have any money anymore. 

There was nothing with which to back the Pound Sterling and thus nothing with which to pay the Dominions (the non-English members of the Empire) for their raw materials. Plus, it is possible that Keynes wasn't as in love with the Empire some of his peers. He saw, rather, that the greatest self-interest of the UK lay in recreating the open commercial relations that existed previously, in an American-led world. The reason for this was that the UK's bread was always buttered on international commerce and international finance. What use would its mercantile fleets be in a world of autarky? What use would London be in a world of bilateral barter agreements between national socialist states? The UK, if it were to pursue the autarkic path, would have to accept an immediate drop in living standards and would have to have the political will and national vision to pursue a 'Socialism in One Country' (but on a tiny island) for a long time before the benefits of such a course of action would start to manifest. Maybe he didn't think that the middle-class English people, the nation of shopkeepers, were prepared to make that sacrifice. Either that, or he probably didn't think that it was befitting of England to revert from its prior station as Mercantile and Financial Aristocrat of the world, to becoming a Stalinist country of machinists and agricultural workers. The only vision of the future in which the strengths of the UK could continue to be relevant was one in which America and Europe were tied together by a system of multilateral trade. This was the only way that the UK could continue to be relevant in its traditionally preferred ways.

Ultimately, if there was a 'Battle' at Bretton Woods, it was one that occurred within a war that the British won. I stated at some point earlier that the UK wanted either an international fiat currency or the preservation of its imperial commercial system, and that it got neither. It is true that the center of world finance was re-cemented in New York. On the other hand, the UK got the enormous advantage of restoring multilateralism to the Western world, which allowed it to survive as a particularly English (piratical), rather than as a European (self-sufficient), entity.

We very nearly entered into a world of autarkic states, with a vastly reduced role for finance. The American conservatives of the Old Right did not have any love for the Bretton Woods system. They didn't see why America should enter into some system where it served as the global creditor for a slew of socialistic Old World rubble-heaps. It didn't see why it should impose fixed exchange-rates on these countries, which privileged their exports vis a vis American exports, and that the stability of these exchange-rates would be financed by American gold. They did not have the New Dealer zeal for remaking the world in their particular New Dealer way. They would rather have simply cut off from Europe and resumed a normal gold standard. If America had done this, it would have imposed enormous debt obligations on the European countries and, in likelihood, they would have simply rejected the international system of gold and adopted the national socialist system of fiat currencies and bilateral exchange controls. The European world would thus have been more like a patchwork of nationalisms, perhaps evolving into a confederal one, rather than a mulitlateralist integration of economies. That wonderful, dependable mix of myopia, stinginess, common sense and isolationism of the American Old Right could have been the impetus for Europe to transcend the need for finance once and for all. 

Alas, instead, the UK wriggled its way into the New Dealer vision for the future and secured the creation of a world in which it would continue to be relevant. And Keynes is largely to thank for this, which is something around which Ben Steil apparently cannot wrap his head. If we take the narrow view of the Bretton Woods talks themselves, we might well say that Keynes lost to White. If we take the broader view of the Bretton Woods system and all the other courses of action that the Western world might have taken in its absence, the loss of the Keynes and the UK becomes much harder to see. And this, again, particularly in light of the fact that the Bretton Woods gold standard behaved in a very 'fiat currency' kind of way.

On a final and unrelated note: I hope that people will someday drop their homily for Hayek (especially as a 'man of the right' *yegh*). The criterion by which an economist should be judged is the question "Does he say anything both true and important?" For Hayek, I think the answer is pretty much 'No'. We can see the fruits of Hayekianism in Steil's Battle and the fruits are bitter. Battle is as much a pathetic hit-job on J.M. Keynes as it is an obfuscation of Bretton Woods' inner workings. 

Furthermore, Steil implicitly renounces the blueprint for a second Golden Age of Capitalism in his apathy towards the first one's great success. All the UK needed was a good stiff loan? What would have happened then? A return to the international gold standard and then fiscal policy being written informally by international finance, rather than formally by national planners. Or maybe the UK would have gone national socialist, as E.F. Schumacher apparently wanted to in his 'Export Policies and Full Employment' (1944)? The Times, was, amazingly, at this time stocked with many people who held a kind of Imperial Autarky policy vision for the UK. We can't underestimate how much the Bretton Woods system created great economic conditions, but also may have been terrible politically, in that it kept a place for finance in Europe alive. Many were prepared to drop the whole Trade & Finance charade altogether.

What is Hayek's legacy in economics? His work focuses on the deep economic significance of the information conveyed by interest rates and of the scarcity of capital. But we know this is all bullshit because Capital is worthless; Capital is free. Both are true. Banks have, do, and always have, created loan-capital with a flick of a pen or a keystroke on their balance sheets. We know this know thanks to a handful of economists not entirely without courage, and dozens of ignored ignominious pamphleteers. Loan-capital is created at no cost. It is not representative of the underlying savings in real resources so much as the arbitrary privilege of the ledger-keeper and the existence of a willing customer. The corollary of this fact is that the value of capital, as a scarce means of investment that must be economized, is predicated on the non-existence of a State Banking system. If one did exist, that was prepared to function as a public utility by way of credit facility, the entire Hayekian idea would be dissolved. That which is extended at-interest and sparingly so, could be extended abundantly, cheaply, and for productive purpose. But the net value of the creditor class would fall and scarcity would be reduced such that labor could no longer be effectively disciplined. The whole point of Hayek and Mises' business cycle theories was that, on the downslope, productive capital should pay for the speculative gains of financial capital accrued on the upslope; real productive capital formation, and not asset speculation and the banking system's inherent fragility, were in their view the culprits of the Boom-Bust Cycle. Austrianism is demonically oriented toward demolishing production. We can see how in the experience of the East Asian Developmentalist bureaucracies of Japan, South Korea, and China (when they functioned properly), credit could be created arbitrarily to mobilize productive capital for rapid economic growth, as long as the exchange rate situation was stable. The jig is up, respecting Hayek is unnecessary. Prices convey information? That's great. What economist didn't say that? His work amounts to a defense of arbitrary scarcity; capital is non-scarce, it's a false category and interest is little more than a rent.