Harry Dexter White’s 1934 recommendations and the origins of Bretton Woods.

On taking office in March 1933, Franklin D. Roosevelt took the dollar off the gold standard. At his first press conference he was cagey about his actions, noting that the US still qualified as a gold standard country in some respects, though noting implicitly that it did not in others, and he stated further, “In other words, what you are coming to now really is a managed currency, the adequateness of which will depend on the conditions of the moment. It may expand one week and it may contract another week. That part is all off the record.” Asked if this were temporary or permanent, he replied, “It ought to be part of the permanent system [-] that is off the record – it ought to be part of the permanent system, so we don’t run into this thing again …”

Within a month or so these off-the-record comments became common understanding: the US gold standard was over. Americans had to turn in their gold in exchange for paper dollars. The dollar fell in value on international exchanges from its previously fixed value of $20.67 to an ounce of gold, and eventually, under the Gold Reserve Act of January 1934, settled legally – for the purposes of international exchange only – at $35 to an ounce.

On June 7, 1934, Harry Dexter White, then a professor at Lawrence College in Appleton, Wisconsin, received an invitation from Jacob Viner to work on the US Treasury’s “comprehensive survey of our monetary and banking legislation and institutions.” White accepted and in about three months wrote a report on monetary standards, examining the possibilities of various options and making recommendations.

White said the US faced a choice between a gold standard and a managed currency – i.e., between fixed and flexible exchange rates. A gold standard, he said, would be better for trade – stable exchange rates allowed traders to make contracts across borders with greater confidence. But, he said, any increased trade would be more than offset by the bad effects of a gold standard in an economic crisis, when capital would flee the country, obliging the government to tighten monetary policy so the dollar could remain on gold – thus making the crisis worse. Meanwhile, White said, a managed currency would give the US greater independence in its monetary policy (it wouldn’t be tied to every other country on gold) and would permit a domestic policy aimed at a stable cost of living.

You might think White could rest there having made the cast for a flexible exchange rate. But he went on:

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(Poetic) justice for DSK.

Gerard Depardieu will play Dominique Strauss-Kahn because

He is very French: arrogant, smug. He’s playable. I will do it, because I don’t like him.

I think there’s a terrific Gallic vindictiveness in that last line.

On the origin of Bretton Woods before the gold avalanche or the war.

The general line on the Bretton Woods system is that it originated as a result of the American desire to protect the massive gold holdings the US accumulated during the 1930s, or that it was supposed to prevent the competitive devaluations of the 1930s, or that it was the product of the war.¹

Still, it looks like the basic idea actually emerged from the US going off gold in 1933 and an attempt to figure out what it should do next. In 1934, Harry Dexter White noted you could derive benefits from a fixed exchange rate (easier trade) and from a flexible exchange rate (without having to worry about the exchange rate, you’d be free to use monetary policy to fight off a downturn).

But, White said,

There remains a further possibility in monetary standards. The independence of action with regard to domestic monetary policy may be combined with the maintenance of exchanges that do not fluctuate for long periods of time, perhaps not for several years.

This sounds to me like what became known as the adjustable peg: you derive some of the benefits of fixed exchanges (that’s the peg part) while holding out the possibility of changing the exchange rate in time of need (that’s the adjustable part).

(Having written this post I find James Boughton touched on the same idea on pp. 7-8, here.)

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¹Of course it is possible there were no competitive devaluations in the 1930s.

Reading the Bretton Woods debates.

As one Telegraph blog says,

Students of economic history are in for a treat. An official studying deep in the bowels of the US Treasury library has recently uncovered a prize of truly startling proportions – an 800 page plus transcript of the Bretton Woods conference in July 1944, the meeting of nations which established the foundations of today’s international monetary system. … Those who have seen it say it is hard to point to any outright revelation about the talks, in which for Britain, the economist John Maynard Keynes was a leading player. But the level of intellectual debate is said to have been extraordinarily impressive, with exactly the same arguments as to voting rights and undue Western influence at the IMF and World Bank as exist today. The Indian delegation is said to have been particularly outspoken, despite the fact that India was still then a colony of the UK.

It’s not actually surprising that the Indian delegation was outspoken; this was one of the UK’s complaints about the conference. The problem was that the UK owed India money, and India wanted to get paid. Of course what you read in the transcripts about the Indian debt conversations isn’t everything that went on – “These conversations were carefully stage-managed by Lord Keynes, Sir Jeremy Raisman, and Dr. White,” as one official of the UK Commonwealth office said after the conference.

But the transcripts are in fact terrific. In my view they do hold some revelations, or at least illuminating portions, to do with the discussion over convertibility – this is one of the areas where the Indian delegation is outspoken – and over the clauses defining the goals of the IMF.

Bretton Woods: not the gold standard.

In a WSJ op-ed called “Forty Years of Paper Money,” Detlev Schlichter, a supporter of the gold standard, begins thus:

Forty years ago today, U.S. President Richard Nixon closed the gold window and ushered in, for the first time in human history, a global system of unconstrained paper money under full control of the state.

Now, with that title, that lede, and Schlichter’s very stern opinions about paper money, you’d think that the paper money era began right then, forty years ago. But as Schlichter himself says in his very next sentence,

It is not that prior to August 15, 1971, there was a gold standard. Far from it. Most countries had severed any direct link between their currencies and gold many years earlier.

Right. So the shift to a paper money system didn’t begin with Nixon. And the monetary thing that existed before Nixon’s intervention – the monetary thing that was not, per Schlichter, a gold standard – the monetary thing that happened to go along with decades of global growth and prosperity, the monetary thing that goes wholly unmentioned in the op-ed, was the Bretton Woods system.

Knowing your parents well is important.

Me: Hey, want to watch this DVD about World War II?

11 y.o. son: Maybe.

Me: What do you mean, “maybe”? It’s World War II!

11 y.o. son: Is it the shooting part? Or the talking-and-making-peace part?

How a bill becomes a useful law.

Congressman Brent Spence of Kentucky on how to negotiate when approached with amendments to the Bretton Woods bill in 1945.

I wouldn’t agree to anything…. You see, if we accept something now it puts us just in the same position as if we hadn’t accepted it…. Every amendment we accept kind of weakens us. [W]e might say, ‘Well, we’ll accept them if that’s all the amendments.’ But if we are going to have to fight it out, we just as well fight it out on all of them.

Could someone explain this to the people in the White House, please?

(Emphasis added.)

“We have the history of international finance after the last war, handled by the ‘right people’ with the ‘right safeguards.’ What did we get?”

As a recent post on Metafilter points out, the well-known children’s author and sometime New Yorker cartoonist Syd Hoff had a radical alter ego, a Mr. Redfield who drew cartoons for the Daily Worker. Philip Nel has written about Hoff’s radicalism here and here; apparently, despite being a real-live Stalinist through and through—i.e., ticked at those who bailed on the party after the Hitler-Stalin pact—and a high-profile children’s author, Hoff never got blacklisted.

And his cartoons collected in The Ruling Clawss have a certain topical bite as critiques of what we’re now to call the one percent.

I came across Hoff in my own research because he illustrated a pamphlet supporting Bretton Woods titled Bretton Woods is No Mystery published by Pamphlet Press in 1945. The pamphlet’s author, Joseph Gaer, was a UC Berkeley lecturer who wrote extensively about religion, labor, and Western authors (including Bret Harte and Ambrose Bierce). At the time he wrote the pamphlet, Gaer was director of the CIO PAC; shortly before that he had been an assistant secretary of the Treasury and before that worked for the Farm Security Administration and the Federal Writers’ Project. He was also founder of Pamphlet Press, which (the back cover explains) worked “to find the area of agreement among all the progressive groups of our nation and unite them on the issues of their common concern”.

At the time of the pamphlet’s publication, the Treasury had embarked on a campaign to persuade Americans across the political spectrum to support the Bretton Woods Agreements and their adoption by Congress. Opposition came from the American Bankers Association and Senator Robert Taft (depicted by Hoff below).

So a Democratic administration put forward an international banking bill, and met well-funded opposition from the main banking trade group, opposition that persuaded the New York Times, the Wall Street Journal, Newsweek, and much of the major metropolitan newspapers that the bill was a bad idea.

Nowadays, a Democratic administration in such a position might well just give up. But the Roosevelt administration did not: it mobilized regional bankers, civic organizations, and labor groups on behalf of the bill, persuading them that it was vitally important to support Bretton Woods because (a) it was the first opportunity for Americans to show that in 1945, unlike in 1918, they would embrace international responsibilities and (b) it was a program for world prosperity and full employment.

That it hasn’t worked that way lately is more a reflection on what happened to Bretton Woods since 1971 than how and why it was created; at the time the Roosevelt administration meant it to save international capitalism, and lined up a coalition of bankers, businessmen, civic-minded middle-class professionals, and unions behind the idea that international capitalism should be saved.

(Which is the subject of this talk.)

“What if?” and “so what?”

Further on the counterfactual issue: we always advise doctoral students and indeed each other that historians should be able to give an elevator pitch for any new project, and that this pitch should always answer the “so what?” question—i.e., you’re writing about the history of the glass-bead game of the Pacific islanders in the 1940s; so what?

“So what?” is of course always a challenge requiring you to counterfactualize twice over: it demands you to say (a) “but for” this event or phenomenon, x important thing would not have occurred and also (b) at a meta or historiographical level, “but for” my research, we cannot understand y important thing.

Believe me, I always worry about these things myself. Writing as I am about Bretton Woods, I get people saying either “That’s great!” and beaming, as if at a slow-learning child who has managed to write his name, or else looking dumbfounded completely. Why Bretton Woods, you can see them thinking—when you can’t see them thinking, what’s Bretton Woods?

Usually the answer has to do with the purported goals of the system—freer trade and stronger, better distributed economic growth—both of which were realized in the quarter-century or so that the system actually operated. But the connection between Bretton Woods and those trends is not easy to pick out of the data.

I think it’s more important to say, Bretton Woods was the first major opportunity to get the US to sign on to an international system in the post-1945 world. To have failed at the first hurdle—to have permitted Robert Taft and his ilk to scuttle the initial effort—would have increased the perception that isolationism still dominated the American temper, or at least the US Congress, and would have shaken the foundations of the whole postwar international project. So it was important to adopt Bretton Woods simply to set a pattern of postwar international cooperation; otherwise (note counterfactual) the forces of isolation would have been emboldened and strengthened.

Which raises a question: why did the Roosevelt administration decide to do Bretton Woods first? It was complicated, and difficult to explain. Perhaps Keynes’s answer was right: that it was precisely the intrinsic dullness of Bretton Woods that made it an ideal initial effort. “This is such a boring subject that no public enthusiasm can be roused by discussing the details, whilst it would be frightfully dangerous to be open to the challenge of sabotaging the first international scheme. Anyone with isolationist origins will think twice before doing so.” But this turned out to be an incorrect prediction; there was considerable opposition to overcome.

Keynes’s conference and Morgenthau’s dream.

Both the American and British chief delegates to the Bretton Woods conference were tall bald men, but there the similarity between them came to an end, and even in respect of their height they stood differently. Henry Morgenthau, Jr., hung on his own frame like a picture crookedly strung on a hook, while John Maynard Keynes wore his stature as comfortably as his tailored suits. Although Keynes was the older man, his powerful new ideas made Morgenthau look ever more like a relic. As Secretary of the Treasury since 1934, Morgenthau had helped engineer the New Deal. But as Keynesianism swept the policymaking landscape, Morgenthau became more old-fashioned, insisting that whatever Keynes might claim about deficit spending, the government ought to try a balanced budget—though between the Depression and the Second World War Morgenthau never presided over one. A cruelly witty Cambridge first who indulged his refined tastes in champagne, men, and women, Keynes enjoyed the comforts of the English upper class. Morgenthau was a relative outsider in America: a Jew who attended a state university but failed to graduate and instead became a farmer. It was only because he really took his farm seriously that he enjoyed a rapport with his Dutchess County neighbor, Franklin Roosevelt.

War on terror floating exchange rates.

So as I read this, a Bretton-Woods–style system of stable exchange rates would be a potent weapon in the war on terror. You identify the countries harboring problematic insurgencies, set your adjustable peg high enough that insurrections can’t operate effectively, and watch the rebellion wither! Is there any problem FDR’s policies can’t help us solve?

Actually, rhetoric like this — pinning hopes for world peace to the Bretton Woods system of stable exchange rates, and thus freer trade and capital flows — was not at all uncommon. As one participant later recollected,

Peace was seen as linked with world prosperity, and prosperity, with free trade, free capital movements, and stable exchange rates.

He goes on to admit, “Although the causality was ambiguous….”¹

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¹Raymond F. Mikesell, “The Bretton Wood Debates: A Memoir,” Essays in International Finance no. 192 (March 1994), International Finance Section, Department of Economics, Princeton University, 4.

Dean Acheson: funnier than you’d think.

Which may not be a high bar to clear, but still. From Present at the Creation, p. 71.

Wanna bet?

Will Clayton claimed he did not work harder to thwart the Smoot-Hawley act because he thought the Republicans were “not stupid enough” to pass it.¹

¹Gregory Fossedal, Our Finest Hour (Hoover Institution Press, 1993), 59.

Subtlety was ever his strong suit.

Some cutesy references are too heavy-handed even for Oliver Stone. In the early reports on Wall Street: Money Never Sleeps, the villain was a character named—no, just read it for yourself:

The film will center on young Jacob Moore (Shia Labeouf) who acquires the assistance of former Wall Street mogul Gordon Gekko (Michael Douglas) — who happens to be the estranged father of his girlfriend Winnie (Carey Mulligan) — in trying to bring down hedge fund manager Bretton Woods (Josh Brolin) who he blames for the suspicious death of of his mentor (Frank Langella).

In the currently reported version of the cast, this character’s name has changed to Bretton James.

Thanks to a colleague for the tip.

The middle, against the world.

H.R. 3314, “to provide for the participation of the United States in the International Monetary Fund and the International Bank for Reconstruction and Development,” better known as the Bretton Woods Agreements Act, passed the 79th House on June 7, 1945, by a vote of 345-18, and the Senate on July 19, by a vote of 61-16, and was signed into law by Harry Truman on July 31, becoming Public Law 171, cited at 59 Stat. 512.

Lost in translation.

In Potsdam for a workshop recently, I took the opportunity to tour the site of the 1945 conference that marked the end of the last war and the beginning of the next (cold) one.  Schloss Cecilienhof is a fake-Tudor mansion that the Emperor built during the Great War (yes, when the Germans were fighting the Tudors’ successors).  Ex-Crown Princess Cecilie fled the palace in 1945, when the Red Army was threatening to batter down the doors.  The Soviets then turned the sprawling complex into a field hospital.

The Allied leaders had wanted to hold the first post-European war conference in Berlin, but there were few places left standing after the onslaught of Allied bombing and Soviet invasion. Schloss Cecilienhof was the closest venue capable of housing the Allied leaders and staff in style, so the Soviet casualties were moved out, and Truman, Stalin, and Churchill moved in.  (Halfway through the conference, the British electorate decided to replace Churchill with Clement Attlee, so you can find pictures of both flavors of the Big Three.)

According to the tour guide, 70 percent of the visitors to this site are Japanese, because, he said, this was where Truman made the decision to “launch nuclear attacks,” and they feel the need to make a pilgrimage.  I was struck by the difference in phrasing – in my experience, Americans always talk about the decision to “drop the bomb.” Launching nuclear attacks sounds so much more aggressive, and even downright un-American.

I also wondered what sort of curriculum in Japan might persuade thousands of Japanese to traverse the globe to visit an old palace where Truman received a telegram saying, yes, this bomb really works.  As Bart Bernstein has shown,* there was no “decision” to use the bombs, and Truman never even signed a direct order.  Yet, the Japanese are there, snapping pictures, and taking the opportunity to buy snow globes of the Big Three (with Churchill, of course) in the gift shop.

As a Cold War nerd, I must admit that I now have a hankering to visit Yalta. And, of course, Bretton Woods.

*“Truman and the A-Bomb,” Journal of Military History, 62:3.

Talk about the adjustable peg, man!

“Theoretically, Bretton Woods is an international pool of the goodwill of nations subscribing to the agreement.”

Vodpod videos no longer available.

Which translates roughly as, “Nobody on the news desk here knows what the hell it is.”

For an oldie (from four years ago! the Internet is no longer young!) on what Bretton Woods was about, see below, originally from here.

And think.

Edward M. Bernstein, the man who supposedly added the words “and Development” to “International Bank for Reconstruction and Development,” talking to an interviewer, Stanley Black, about his good fortune in life; he got hired right out of graduate school to tenure at North Carolina State in 1930, the midst of the Great Depression.

Bernstein: No, I didn’t start at the bottom. To tell you the truth, although my wife doesn’t like me to say it, all my life I’ve been overappreciated, overhonored, and overpaid. Everywhere I went I got to the top of the scale very fast.

S.B.: It helps to have the talent with words, and writing.

Bernstein: Maybe, oh yes, there’s nothing like being able to write. Being able to write is a remarkable gift. There’s none better, if you can also think.

I really like that caveat. Though the exchange is also nice for Black’s Steve-Martinish interposition.