Economics and Finance, History, What I'm Reading

What I’m Reading: The Battle of Bretton Woods

More entertaining than you’d think.

I tried to read this book once before but put it down; it just didn’t hold my interest, though not for any justifiable reasons. The main reason was that it was history, and at the time I thought I knew history, and felt it was irrelevant. Now, already in sort of a history mood after reading through Japan’s, I gave it another shot.

In brief, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (2013) tells the story of how the United States clenched control of the world’s geopolitical and financial order. We’re taught that the U.S. more or less defaulted to the position of sole superpower after the destruction World War II wreaked on the other powers. That’s somewhat correct, but this book details how international financial conditions allowed that to happen, and how the U.S. government took advantage of this unparalleled opportunity.

I’m not going to go into the technical details that Benn Steil explains in the book because, while they are interesting (to me at any rate), they’re not what make this book so gripping. (To put it briefly, technically the book is about the Bretton Woods conference, which established the IMF and World Bank and set up a system of fixed exchange rates based on the dollar, which was tied to gold. Said system is no longer with us, as the dollar is no longer tied to gold and exchange rates float freely, which is why how far your dollar goes in Europe, for example, changes from day to day and minute to minute.) No, this book is good because of all the House of Cards-style political wrangling, the two protagonists at its center, and the fantastic writing pushing along the story.

Steil is very fortunate to have–or smart to choose–two incredibly interesting (for the given setting, anyway) characters at the center of his drama. One is Harry Dexter White, a U.S. Treasury official, a Jewish, Lithuanian-born economist who pushes for U.S. dominance but privately wishes for better relations with the USSR and socialism, and in fact, as is later revealed, is the highest-ranking government official to be associated with the Soviet underground. At the other end of the pond is John Maynard Keynes, familiar to anyone who’s taken econ 2, celebrity economist–in fact, one of the main reasons the press even paid attention to Bretton Woods at the time was because he was there–who was not the greatest diplomat had a tendency to explode in meetings, as the book documents multiple times. He also has this rap.

Keynes and White battle each other over exchange rates, the gold standard, etc. in the context of the broader struggle between a falling superpower, Britain, and a rising one, the U.S. It becomes difficult to understate the near-animosity America had for its “ally” Britain. In the words of a British historian,

“In the 1940s…the Americans had some reason to regard the British as a lot of toffee-nosed bastards who oppressed half the world and had a sinister talent for getting other people to do their fighting for them.”

A quarter of the world…but who’s counting 🙂

“Congress was spontaneously more generous toward China than toward England, perhaps because no one envisaged China as a postwar rival for power or commerce.”

(lol.) And geopolitics were so different at the time that White could imagine some kind of U.S.-Soviet alliance that would rule the postwar world–if he could push America in the right direction.

The central narrative is that rather than simply be handed the reins of superpower status (however that works), the U.S. government actively took advantage of Britain’s sudden weakness due to World War II. To pay and equip for the war, Britain relied enormously on funds and imports from the U.S., draining its gold reserves (as trade imbalances were still settled in gold) and pushing it towards depreciating its currency or a harsh economic correction. As we know Britain wanted the U.S. to join in on the fighting, as did FDR, but Americans wanted no part of it. This led FDR to settle for Lend-Lease, or “Lend-Spend, Lend-Lease–whatever you call it,” which was not some gift to Britain but was agreed to after heavy scrutiny of Britain’s financial situation to make sure they really needed it, and after it became a bit clearer that Hitler might actually beat them.

This sort of wrangling for benefits becomes a recurring pattern. After Lend-Lease, the U.S. and British governments start thinking out an arrangement to avoid the trade wars and economic debacles that led to the war in the first place. They largely hammered out the details in advance, a system of fixed exchange rates with a “stabilization fund” to support it (what became the IMF), with the conference at Bretton Woods in New Hampshire, attended by 44 nations, to be mainly for show–a show that the U.S. ran, with White revising key details behind the scenes, the most important of which was establishing the dollar as the reserve currency, essentially putting it in place for gold in the international system. (Not that America totally upended the conference; it’s just that it had all the votes of Latin America behind it, and most countries knew it was not wise to tick off the bigger economy.) But Keynes, always thinking Americans to be quaint and good-willed towards the Brits, didn’t know about this until he arrived back in England.

Another important element of this drama is that Britain didn’t organically lose its empire–America sought to destroy it, and was in position to do so. U.S. officials wanted to get rid of “imperial preference,” or Britain’s special trading privileges with its colonies, and wanted independence for India. FDR’s New Dealers were actively pushing for a New Deal for the world.

“I had no idea England was broke. I will go over there and make a couple of talks and take over the British Empire.” – FDR

Britain in fact needed a loan from the U.S. after the war to help pay its huge debts, or risk economic catastrophe. Keynes tried to secure one on good terms but came up short on returning to England; the loan was only fully paid off in 2006.

The U.S. of course would change its tune on whether to weaken or to bolster Britain after the ’40s, when the rivalry with the Soviets became the overarching geopolitical framework. As for whether China could do the same thing to the U.S. that the U.S. did to Britain, Steil argues it’s unlikely. China’s reserve holdings are largely denominated in dollars; the U.S. pays its bills with a currency that it prints; and even with a large debt, there is incredibly large demand for new issues of that debt.

Of course, financial crises and wars could change all that. “Dollars sent to China for merchandise came back overnight in the form of low-interest loans, and were then quickly recycled through the U.S. financial system to create more cheap credit”–giving us 2007-08; “No force acted to reverse the growing Chinese trade surpluses or U.S. deficits”, as would have happened under the gold standard or now-collapsed Bretton Woods system. Floating rates have their advantages, but we have to live with some of their consequences, too. We might “muddle on” with this, Steil says, or we might create a better, more enduring system with a Bretton Woods II.

So the book certainly has its relevance to today, but I’m not sure that’s its strongest selling point. It’s rife with good quotes and interesting stories, like the funny/facepalm moment when a New Hampshire local mistakes the Chinese delegation hiking in the woods for Japanese spies and shoos them off the trail with his shotgun. And frankly the writing is so clear and engaging that Steil could’ve written about basket weaving and still got me into it, and it made the economics much easier to read. I like this book because it’s just good storytelling. If you have to skim over the financial mechanics and can get over reading about a bunch of old white men (and a few old men from non-white countries), I’d say definitely give this book a shot.


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