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June 15, 2014 7:22 pm
The Summit: The Biggest Battle of the Second World War – Fought Behind Closed Doors, by Ed Conway, Little, Brown, RRP£25
It is 70 years since the summit that created the International Monetary Fund. It is doubtful there will be much celebration on the streets of Athens, Dublin or Lisbon – all places that in recent years have faced harsh cuts imposed by the IMF in exchange for its cash. Yet their recourse to the fund would be a painful irony for those who sat round the table at the Bretton Woods conference.
In his gripping account of an exhausting three weeks in 1944, during which the IMF and the World Bank came into being, Ed Conway, economics editor for Sky News, tells how the participants set out to rid the global economy of the types of dangerous imbalances that lie at the root of the eurozone’s current predicament.
Conway explains how the delegations that travelled to the ramshackle Mount Washington hotel in New Hampshire put aside considerable professional and personal differences to try to create a more stable global economic order. With the second world war still raging, the hope was that this new order would prevent further conflicts by giving countries around the world a better chance to prosper through trade.
Bretton Woods was also an attempt to replace the tyranny of the gold standard. This system, branded a “barbarous relic” by John Maynard Keynes, the superstar British economist who led his country’s delegation at the summit, often left its less competitive members with little choice other than to undertake disastrous economic policies.
In the decades that followed the first world war, the gold standard – like the eurozone – forced weaker members to pursue deflationary policies, which enforced austerity and contributed to mass unemployment, in order to become more competitive. Among those subjected to this harsh medicine was Germany, where the policies played into the hands of political extremists.
The US and the UK, the dominant economic powers at the time, agreed that a new monetary order was needed. But there was a big snag. The UK party, led by Keynes, and the US, headed by Harry Dexter White, had very different ideas about what it should look like.
America’s dominant role in global trade in the 1920s meant it was less exposed to the worst aspects of the gold standard. Washington wanted the new regime to look similar to the old one. The UK – which, according to Conway, began to recover from the Great Depression only after it ditched bullion in 1931 – pushed for something completely different.
And while White wanted an IMF that would lend only on punitive terms, Keynes thought of it more as an “economic health spa” than the “accident and emergency room” the Americans wanted. The British economist insisted there was no stigma attached to borrowing from the fund. Any governments that had to call on it for help would be in no doubt which side won.
The differences in opinion were hardly helped by the fact that Keynes and White could hardly bear to be in the same room. The British economist was a socialite who moved in the highest circles of the intellectual establishment; White, who was born on the wrong side of the tracks in Boston, was prickly and a family man.
Fascinatingly, The Summit reveals that they did have at least one thing in common: both harboured dark secrets. Keynes was seriously ill, and there were suspicions that White was spying for the Russians.
What was agreed at Bretton Woods was for countries to tie the value of their currencies not to gold but to the US dollar, which was then, as it is now, the dominant global currency. Though the system was more flexible than the gold standard, enabling countries to devalue rather than impose austerity, it nonetheless eventually unravelled in the early 1970s.
What is left today is a free-for-all, described by Conway as a “hodge podge” of floating and fixed exchange rates. But while his compelling account of the process that created the dollar peg reveals many flaws – both personal and intellectual – in the thinking of those in the room, it also serves as a homage to their ambition.
In his inaugural statement to the delegates, Franklin Roosevelt, US president, described commerce as “the lifeblood of a free society”.
He added: “We must see to it that the arteries which carry that bloodstream are not clogged again, as they have been in the past, by artificial barriers created through senseless economic rivalries.”
While the reach of the architects of Bretton Woods ultimately exceeded their grasp, the rise in the popularity of anti-establishment, nationalistic parties at last month’s European Parliament elections are a reminder of why such lofty aims are important.
The writer is the FT’s eurozone economy correspondent
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