Book Review: 'The Battle Of Bretton Woods'

by: John M. Mason

"The Battle Of Bretton Woods: John Maynard Keynes, Harry Dexter White And The Making Of A New World Order" By Benn Steil (Princeton University Press, 2013)

"The Bretton Woods saga unfurled at a unique crossroads in modern history. An ascendant anticolonial superpower, the United States, used its economic leverage over an insolvent allied imperial power, Great Britain, to set the terms by which the latter would cede its dwindling dominion over the rules and norms of foreign trade and finance. Britain cooperated because the overriding aim of survival seemed to dictate the course. The monetary architecture that Harry White designed, and powered through an international gathering of dollar-starved allies ultimately fell, its critics agree, of its own contradictions."

This is the conclusion of this well-written, fascinating history of the Bretton Woods conference on the international monetary system in July 1941. The book is deep, well researched, and hard to put down. Benn Steil, a senior fellow and director of international economics at the Council on Foreign Relations, has produced a book that will help us to understand history, but also one we can use to contrast with the current international economic situation.

Furthermore, Steil writes that "the agreements could not be said to have become operative until 1961, the year in which the first nine European countries, plus Peru and Saudi Arabia, formally adopted the convertibility commitments…" (Page 332)

And the Bretton Woods system died on August 15, 1971 when U.S. President Richard Nixon floated the dollar and closed the gold window (Page 337). The G-10 "formally acknowledged" in March 1973 that the Bretton Woods system was truly dead and ceased its efforts to re-establish a world of fixed exchange rates.

We hear calls today for a new Bretton Woods conference to resolve the world's monetary problems and financial crises. Yet, note what Steil writes in the last paragraph of his book, the "monetary architecture" created at Bretton Woods "ultimately fell of its own contradictions." Not an encouraging conclusion.

And what about the call for a new Bretton Woods? Well, Steil gives us lots of things to think about. First of all, how do you convince a lot of nations to come together to discuss global problems…or, at least problems that involve quite a few countries? The answer seems to be that you need some kind of a crisis that forces leaders to try and work something out…to make things function more effectively…or to function at all.

At the end of the book, Steil discusses the possibility of the United States and China coming together to work out a new, cooperative monetary structure that will be to the benefit of not only themselves, but of most of the world. Steil concludes that "history suggests" that such a structure "will not emerge until the United States and China each comes to the conclusion that the consequences of muddling on, without the prospect of correcting the endemic imbalances between them, are too great." History suggests that people don't stop muddling through until they experience some kind of crisis.

Once you agree that something needs to be done, who takes the lead in moving the effort forward? In the situation described in this book, the need for some meeting of the minds arose because one country was seriously weak, in the Bretton Woods case it was Great Britain, and one country is quite strong and wanting to establish their ascendance, in this case, the U.S.

Steil describes the situation faced by Great Britain, the most financially powerful country in the world going into World War I, which found itself after the war in serious fiscal trouble that was exacerbated in the post-war period, devastated by the Great Depression, and then fighting another world war short of the financial resources it needed. It was the debtor nation.

The United States was the rising star. It prospered after the First World War and then suffered through the Great Depression, but during the post-World War I period, gold flowed to America and as the country rebuilt its industrial base during the second World War, it became the obvious choice to replace Great Britain as the most powerful nation in the world. It was a creditor nation.

Steil shows over and over again that the United States overwhelms everyone (but Russia) not only by realizing its financial strength and wanting the number one position, but being the major creditor nation in the world with the resources to get its way, especially against Great Britain, who really had nothing to bargain with except its past glory.

Now, we have the United States as the debtor nation, the most recent world leader, and China, the creditor nation, which is now rising up to challenge the presumptive major world power. The United States is not in the same relative position that Great Britain was back in the 1940s, and so we cannot expect China to take over the number one spot, but Steil raises the shifting nature of who is "on top" and the role that financial strength or weakness plays in world power struggles.

Another example of this is what is going on over in Europe. The eurozone has its financial crisis. The eurozone is attempting to work things out. The relative strength in the "battles" that are going on goes to the major creditor nations: Germany, the Netherlands, and Finland. The weakness is experienced by the debtor nations: Greece, Italy, Portugal, and Spain. And, history shows that it is the creditor nations that ultimately have the power. Check out what Germany is doing.

A third point has to do with the intellectual leadership of the restructuring effort. Here Steil focuses on the two "leaders --, John Maynard Keynes, the "celebrity" economist from Great Britain, and Harry Dexter White, the Washington bureaucrat, with a Ph.D. in economics from Harvard but no real organizational title within the Treasury Department. Some person has to take the lead in such an enterprise. Harry White was "the man!"

Keynes was a brilliant speaker and a devastating debater. He was logical and precise. He could destroy others in verbal combat. Yet in the end, his impact, according to Steil, was negligible. For one, Keynes was pragmatic in the sense that he was always looking for a new way to get things done and his mental brilliance allowed him to produce a "solution" to whatever was currently being analyzed. This is a wonderful facility, but it leaves people confused when you are one place tonight and in another place tomorrow. Keynes is famous for his quote about the fact that the reason he changed his mind so often was that when the facts changed, he changed his mind. Furthermore, Keynes was poor when it came to "The lobbying for votes, the mobilization of supporters, the politics of the lunch and the dinner table" (Page 303).

Harry White, on the other hand, organized the whole effort beginning two years or so before July 1944, the pre-conference meeting the two weeks before the full conference, the conference itself, and the follow-up to the conference. He had his people all over the place. He placed Keynes in prominent spots, a respect due his station, but spots where he could do the least amount of damage, and he minimized the ability of anyone else to have a major impact on the outcome. In this, Harry White was "the Bretton Wood Conference," even though Secretary of the Treasury Henry Morgenthau, Jr. was the nominal head of the American contingent at the conference.

Finally, Steil shows how problematic it is to deal with all the different national interests. Even in a crisis, it is a wonder that anything ever gets done! National leaders must get their piece of the action so that they can go back home and tell their people that they were treated better than some other nations and they got this piece of the goodies and avoided giving up some other thing. No wonder the eurozone can't come to any resolution.

This is a very good book. It contains many historical lessons worth remembering. And it is very readable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.