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 RRP£19.95/$29.95, 472 pages
The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It, by Peter Temin and David Vines, Princeton University Press, RRP£19.95/$29.95, 320 pages
With victory over Germany and Japan in sight, Franklin D. Roosevelt, Winston Churchill and their advisers gathered at Quebec City in September 1944 to discuss, among other topics, an extension of the multibillion-dollar US aid programme that had been Britain’s life support during the war. Churchill, tormented by Roosevelt’s cheerful evasiveness, lost his patience. “What do you want me to do, stand up and beg like Fala?” he growled, alluding to the president’s beloved Scottish terrier.
In The Battle of Bretton Woods, Benn Steil explains how two world wars in 31 years bled Britain dry, leaving it with minimal influence over the new international economic and monetary order established by US policy makers in the mid-1940s. The conference that created the International Monetary Fund, the World Bank and what is now the World Trade Organisation took place at a hotel in the New Hampshire mountain resort of Bretton Woods. Forty-four nations were represented but the US, owner of two-thirds of the world’s monetary gold, scripted the show from start to finish.
Steil’s book, engaging and entertaining, perceptive and instructive, is a triumph of economic and diplomatic history. Everything is here: political chicanery, bureaucratic skulduggery, espionage, hard economic detail and the acid humour of men making history under pressure.
Director of international economics at the New York-based Council on Foreign Relations, Steil illustrates the extreme imbalance between US and British financial power by telling the tales of two men as different from each other as bourbon from afternoon tea: Harry Dexter White and John Maynard Keynes. White, the Boston-born son of Lithuanian Jewish immigrants, was a high-ranking US Treasury official, gritty, hard-driven, short-tempered, insecure and rude. Keynes, born into an upper-middle class family of cultured intellectuals and educated at King’s College, Cambridge, was the world’s first celebrity economist. Leader of the British delegation at Bretton Woods, he displayed a tactless verbal brilliance that made him, for American tastes, too clever by half.
White’s aims, informally achieved even before the conference began in July 1944, were a global monetary system centred on the dollar and the transfer of financial and commercial authority from London to Washington. Keynes warned the UK government not to let the US exploit the war “as an opportunity for picking the eyes out of the British Empire” and complained that the UK Foreign Office was too inclined to yield to US demands: “If there was no one left to appease, the FO would feel out of a job altogether.”
But the truth was that Britain had next to no cards to play. At Bretton Woods, Keynes was reduced, Steil says, to “the status of an articulate annoyance ... As Stalin might have put it, how many divisions did King’s College have?”
The most shocking element of Steil’s story is that White, for all his efforts to promote US financial supremacy, was a supporter of the Soviet Union who for years supplied Moscow with sensitive US government material. Soviet intelligence viewed him as a valuable asset in a network of agents that spread throughout Washington.
In 1946 Harry Truman, FDR’s successor, was planning to appoint White as the IMF’s first managing director until J. Edgar Hoover, the FBI chief, brought White’s illegal activities to the president’s attention. Hauled to testify in 1948 before the House Un-American Activities Committee, White gave a robust, highly misleading defence of himself. The strain told: he died of a heart attack two days later.
In The Leaderless Economy, Peter Temin and David Vines extend the story that Steil concludes at Bretton Woods, charting the decline and fall of the US-dominated international order that it inaugurated. They contend that the world has not recovered from the banking crisis that erupted in 2008 largely because, unlike in the 1940s, no nation is powerful enough to guide the global economy towards prosperity and balance.
“The United States set the example for bank bailouts during the crisis itself, but then it vanished as a world economic leader,” Temin and Vines write. “Like Britain roughly a century earlier, America has become part of the problem, not the solution.”
What is needed, in their view, is a “hegemon” that, like the US after the second world war, makes nations co-operate for their own good. But China is unlikely to fill the shoes of the US, they say. Powerful political and industrial interests tie China to an investment strategy that emphasises export-oriented manufacturing instead of domestic demand. This in turn blocks the global rebalancing needed to sustain long-term growth.
Temin, professor emeritus of economics at the Massachusetts Institute of Technology, and Vines, economics professor at Balliol College, Oxford, make trenchant points about how European politicians, bureaucrats and bankers have contributed to the disorder. Governments launched Europe’s monetary union in 1999 confident that economic convergence between stronger and weaker euro nations would happen thanks to some benign, self-correcting process. In reality, imbalances grew as Germany piled up trade surpluses and lengthened its competitive lead over other countries, especially in the Mediterranean.
“Current efforts in Europe to deflate economies, particularly in southern Europe, are proving futile,” the authors warn. The world, they add, may even be in danger of repeating the post-1918 cycle of international debt disputes, austerity, unemployment, political radicalisation and war.
To save the euro, the authors recommend half a dozen steps including eurozone bonds, tax powers for eurozone-level authorities and German domestic expansion to reduce the export surplus of Europe’s largest economy. Clearly, these appeals risk falling on deaf ears in Berlin. It seems even less likely that the European Central Bank will heed the call to permit above-target inflation for a while to lift southern Europe’s economies.
The book is not without blemishes. An entire chapter is devoted to the tangential matter of Keynes’s testimony in 1930 to a UK parliamentary committee. A few factual errors stand out: Britain joined the European exchange rate mechanism in 1990, not 1988; there were 11, not 12, original members of the eurozone; and the Soviet Union disintegrated in 1991, not 1990. These mistakes aside, the book presents sensible arguments in favour of a rebalanced world economic system.
Tony Barber is the FT’s Europe editor