"Russia is the first instance of a socialist economy in action … and it works!"
These were the words not of a Bolshevik revolutionary or Left Bank intellectual, but the American who wrote the rules of international finance for the 20th century: Harry Dexter White. White was the US representative at the Bretton Woods conference, birthplace of the World Bank and International Monetary Fund.
The story of this conference comes almost entirely from Benn Steil’s epic Battle for Bretton Woods. While a number of books on this subject have been written, this is the only sweeping history published after a number of important records behind the mystery of White’s Soviet partnership were declassified, rich with primary evidence ignored by previous writers.
The battle of Bretton Woods
The world in 1944 was marked by extreme economic imbalance: as the World War waned, the United States had emerged as both a geopolitical and financial superpower, controlling almost 80 percent all existing monetary gold. The Bretton Woods conference was organized to formalize the terms under which Americans would become creditors to the world at large.
The battle for Bretton Woods, named after the picturesque New Hampshire town in which the conference took place, was largely one between a nascent superpower and a declining empire. The tension emerges from the cognitive dissonance on part of Britain’s representative, John Maynard Keynes. On the one hand, the British were left to beg for even the most basic tenets of aid. On the other hand, they saw Bretton Woods as a discussion between two great equals, deciding the fate of the world.
The central problem concerned the relationship between creditor and debtor. Depleted of its gold reserves, Europe was highly indebted to its partner in the west. A debtor nation is ultimately bound by its budget constraint, and therefore it was necessary that the British export more than they imported for some period of time to settle their debt. A country in this position has two, and only two, choices: deflate or depreciate. That is, to achieve a trade surplus, the British could either regain competitiveness by decreasing the cost of their goods on the international market through deflation or it could increase the relative purchasing power of foreign consumers by depreciating its currency.
In a fixed exchange rate environment like the gold standard, the latter was not an option. This was a problem for Keynes, who had first-hand experience of the painful deflation Britain underwent after gold flew to the United States during the first World War. Keynes — like White — also hated the alternative of "competitive devaluation", where countries facing a budget constraint would devalue their currencies at will. Both saw this is a grave threat to free trade and monetary stability, the very institutions Bretton Woods was striving to protect.
For Keynes this meant the world needed to trust the creditor country to lend its reserves in trying times. Indeed, in his landmark treatise, The General Theory of Employment, Interest, and Money, Keynes blamed the American "propensity to hoard" the inflow of gold between 1929 and 1932, which exported its domestic deflation to debtor countries in Europe. The Achille’s heel of the old system, for Keynes, was then the asymmetry between borrower and lender: "The process of adjustment is compulsory for the debtor and voluntary for the creditor." Only one faced an imminent budget constraint.
Therefore Keynes wanted an international fund that would compel a creditor nation to lend its reserves and penalize it for running a persistent surplus, dividing the cost of adjustment between both parties.
White didn’t see it that way. Whatever the source of disagreement was, however, we know that it was prescriptive more than descriptive. Indeed, despite his allegiance with Soviet spies, White’s diagnosis of the global economy was, in Steil’s words, "thoroughly Keynesian." Not coincidentally, he was part of an administration that enacted historically unprecedented public spending projects with the aim of attaining full employment. However, his motives were markedly different from that of Keynes. While both wanted monetary stability, the American saw this as an opportunity to cement the dollar at the epicenter of monetary affairs and further advocate American interests.
Prime among these was the issue of free trade which tempted a "magical coincidence between far right and far left." The State Department, led by Cordell Hull, wanted a world free of all barriers to trade, such as tariffs and subsidies. This was at odds with the British system of imperial preference, which provided its exporters a captive market across the Empire and was biased against American firms. On the other hand, the Treasury Department, infected by the communist sympathies of its chief technocrat, saw the system of Imperial preference as one of the few things that made maintaining an empire financially worthwhile.
In similar vein to anti-imperial spirits in the Soviet Union, the socialists within the Roosevelt administration saw the British empire as a grotesque violation of democracy and self-determination. The tradition of anti-imperialism has a long history suspicious of exporters. Indeed, John Hobson, the Victorian-era economist fiercely critical of imperialism, saw empire as the natural evolution of capitalism – the perpetual accumulation of capital would no longer have any productive domestic application, forcing foreign investment by domestic capitalists:
When productive capacity grew faster than consumer demand, there was very soon an excess of this capacity and hence, there were few profitable domestic investment outlets. Foreign investment was the only answer. But, insofar as the same problem existed in every industrialized capitalist country, such foreign investment was possible only if non-capitalist countries could be "civilized", "Christianized", and "uplifted" — that is, if their traditional institutions could be forcefully destroyed, and the people coercively brought under the domain of the "invisible hand" of market capitalism. So, imperialism was the only answer.
Hobson would become very influential in the Marxist critique of capitalism and the resulting vicious cycle that White wanted to moderate.
That brings us to the most fascinating part of Steil’s story.
White was actually Red
The clearest observation of White’s ideology comes from an unpublished, previously overlooked, screed Steill found in Princeton University’s archives, titled "Political-Economic Int. of Future." In the essay (scattered with rose-tinted observations like "the trend in Russia seems to be toward greater freedom of religion. The constitution guarantees that right") White concludes that only a permanent union between the United States and its future cold combatant could quell the imperialism that wrought two lethal wars.
Throughout the essay, White not only saw a Soviet partnership in America’s material interest, but also sympathized with its grander cause. So strong was his support that he convinced Treasury Secretary Henry Morgenthau — against both British and American preference — to let the Soviets print American-sponsored currency in the new Germany. In return for this favor, the Russians unloaded almost 80 billion marks, more than eight times the American issue, into circulation. Ultimately redeemed by the Americans at the exchange rate set by White, this amounted to more than a $6 billion giveaway in today’s dollars. In other words, the US gave the Soviets twice as much in 1944 as it did to Israel last year.
White’s ideology was less impactful in the aftermath of Bretton Woods itself. While he was every bit as understanding of the Russians as he was distrustful of the British — cheerfully advocating a cheap, $10 billion dollar loan to the former and making the latter beg for a third as much — it wasn’t long before his history caught up with him. Suspected of being a Soviet spy, White had been under J. Edgar Hoover’s surveillance for months before Harry Truman intended to nominate him as the managing director of the IMF. Though Hoover submitted a report to the president just a day after he had made White an executive director, the political ramifications of the FBI report were enough for Truman to rescind his plan to put White in charge of the nascent.
It would be an embarrassment to admit to the world that the American who designed the international economy was a mole, but impossible to nominate any other American above White without raising an eyebrow. Instead, Truman pursued maybe the greatest acts of fake altruism in his lifetime claiming, in Steil’s words, "It would not be ‘proper,’ [he] had concluded with uncharacteristic fair-mindedness, ‘to have Americans as the heads of both bodies."
Indeed, one of White’s lasting legacies is the anachronism that is an American-led World Bank and European-led IMF.
If not for the fracas over his espionage, the White-led IMF could have had a profound impact on US-Soviet relations, and the most important geopolitical moment of both nations’ history. Instead, the dogged technocrat is a footnote in economic history. But an important one. As the heart and soul behind Bretton Woods, White outwitted Keynes in creating an unquestionably American monetary regime that persists to this day.