Tags: US | Steil | Rubin | Bretton Woods

Benn Steil Explains Bretton Woods

By    |   Monday, 15 Apr 2013 02:39 PM

Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations at the Council on Foreign Relations (CFR), recently gave a presentation on his new book, “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White and the Making of a New World Order.”

He was introduced by former Treasury Secretary Robert Rubin, co-chairman of the CFR, who is now described by Wiki as “engaged actively as a founder of The Hamilton Project, an economic policy think tank which produces research and proposals on how to create a growing economy that benefits more Americans.”

Presumably that means “more Americans than Bob Rubin,” because in his tenure at the Clinton White House and Treasury, Rubin was notorious for looking after his clients at Goldman Sachs and later at Citigroup when he moved there while the ink was still wet on legislation to enable the bank to carry out the business plan devised by Sandy Weill, the same Sandy Weill who now calls for the largest banks to be broken up. When the propriety of his move was questioned, Rubin said he was taking a “belt and suspenders” approach to the ethics by taking his counsel along with him to Citi.

Rubin cited an academic journal, International Finance, which was founded by Steil, as the source Alan Greenspan has said would be read by the four people who could understand Greenspan’s work.

Steil is always entertaining and informative, and the circumstances of the founding of the International Monetary Fund (IMF) and World Bank at Bretton Woods in 1944 are pertinent today as the world financial system struggles to cope with an ongoing financial crisis now centered in the European Union.

Under the Bretton Woods system, currencies would be exchanged at fixed rates, and the IMF would provide temporary assistance to maintain the fixed rates, while countries whose currencies were overvalued or undervalued made needed adjustments in their terms of trade.

Steil reports that during the 1930s, currency wars were a “great obsession” of the Roosevelt administration and its Treasury Secretary, Henry Morgenthau, and Harry Dexter White was Morgenthau’s man on this issue. The administration very much wanted to put a stop to competitive depreciations against the U.S. dollar.

Fast forward to the present and Steil notes that the United States is badgering China to stop pegging its currency to the dollar, again to protect the competitive posture of the dollar, notwithstanding the insistence by the Treasury that the United States maintains a “strong dollar” policy. (I recall that during an earlier episode in the argument with China over currency policy, then-Treasury Secretary John Snow stated that when he referred to the strong dollar, this was not a reference to its exchange value. Perhaps he meant that when folded over, the dollar could be used as a coaster on which to place cold drinks.)

Another key objective of the Roosevelt administration was to take advantage of the weakness of the United Kingdom and its pound sterling as World War II was ending to establish the dollar as the leading currency for world trade and move the world financial capital from London to New York.

White asserted that the United Kingdom would take advantage of the situation if it could, but the advantage was with the United States. Steil referred to measures the United States took to tie war aid to Britain to an agreement to free the British colonies from their special relationship to Britain, opening them to trade with the United States based in dollars. Steil said the United States treated both China and Soviet Russia more generously than did Britain, whose economy was collapsing because it was running out of dollars. The Americans provided short-term relief in return for Britain conceding its leadership role in international trade and finance.

Steil presented the key characters as rivals in the negotiations leading to the Bretton Woods agreement. White completed his doctoral studies relatively late in the backwater state of Wisconsin and was brought to Washington temporarily to work on a project and didn’t have a formal post at the Treasury until 1945. However, he had the ear of Morgenthau, who Steil described as not very bright, and Morgenthau in turn was the principal advisor to FDR on currency matters.

Keynes was known as one of the first “celebrity economists,” and he clashed personally with White, accusing White of creating a “Talmud” at Bretton Woods, while White rejoined that the king would be able to understand it. Keynes understood that the United Kingdom was in danger of becoming a “satellite” of the backwater.

Steil suggests that other diplomats could have gotten a better deal than Keynes did, and he faults Keynes for turning down $3 billion that U.S. banks were willing to lend to the United Kingdom, because Keynes had succumbed to the appeal of being one of the fathers of the new system.

No discussion of White would be complete without consideration of his role as a mole for Soviet intelligence, and he could have done the Russians greater service as a possible Treasury Secretary had Soviet sympathizer Henry Wallace been elected president. Steil found an obscure essay by White from 1944 extolling the Soviet system, in words similar to Lincoln Steffens, that he had seen a system that works.

However, Steil notes that while White passed information to the Soviets, he did not take order from them or from anyone else.

Of course, the Bretton Woods system broke down in 1971 when the United States could no longer convert dollars to gold, so the system lasted only about a quarter century.

Now the United States is an advocate of floating exchange rates and is flooding the world with dollars in an effort to stimulate growth, while emerging countries, led by Brazil, accuse the United States of using the status of the dollar as a reserve currency to promote American exports.

Critics contend that this policy is unsustainable and speculate that whenever the United States is forced to unwind its policy of buying government and agency securities to prop up the international banking system, the dollar will collapse and be replaced by some other currency or basket of currencies.

The late economist Herbert Stein used to say that if something can’t go on forever, it stops. For the time being, the American authorities take comfort in the fact that the euro is in even worse shape than the dollar is.

Steil’s work helps to put this debate into historical perspective, and his role at the CFR ensures that he will be an influential participant in this intense policy debate.

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Robert-Feinberg
Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations at the Council on Foreign Relations (CFR), recently gave a presentation on his new book, “The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White and the Making of a New World Order.”
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Monday, 15 Apr 2013 02:39 PM
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