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Behind the scenes at Bretton Woods

Council on Foreign Relations’ Benn Steil’s new book, ‘The Battle Of Bretton Woods,’ illustrates how the United States and Britain approached the formation of the International Monetary Fund (IMF) and the World Bank (WB). By focusing on the negotiators, John Maynard Keynes from Britain, and Henry Dexter White from the United States, the book brings to life the backroom negotiations and diplomacy between the two nations. In an exclusive interview with Gateway House’s Akshay Mathur, Steil explains how Keynes and White designed the two institutions and how the design contrasts with the geoeconomic situation today.

Q. You have written about how the competitive devaluation of currencies by countries and the imperial trading hegemony was the primary motivation for designing the IMF and World Bank. Can you explain?

President Franklin Roosevelt’s Treasury Department was convinced that the currency and trade wars of the early 1930s had not only set back the U.S. economic recovery from the Depression but had created the atmosphere of misery and anger that paved the path to World War II.  They were determined to end competitive devaluation of currencies (against the U.S. dollar, of course) and trade discrimination (against U.S. exports, of course), and in particular Britain’s imperial trade preference regime.  The IMF was to be the institution that would oversee the new arrangement.

Q. Why did H.D. White (United States) approach the design of the IMF as solving a “trade issue” while J.M. Keynes (Britain) approached the design of IMF as solving a “currency issue”?

Both Keynes and White approached the issue of reviving multilateral trade after the war as a currency issue, rather than a trade issue.  This was partly because they believed that currency stabilisation was a less politically sensitive initiative than trade barrier removal.  Keynes had been fascinated with currency and monetary issues from the earliest point in his career, with the publication of Indian Currency and Finance.  White, for his part, saw the U.S. dollar as a tool of U.S. geopolitical and economic power, and sought to make it the IMF’s only gold-equivalent currency.

Q. Keynes’ first academic paper was on India, “Recent Economic Events in India”, and so was his first book, “Indian Currency and Finance”. How did that shape his intellectual thinking? What would he say about India’s current economic status?

Two broad themes emerged that would become constants in Keynes’ thinking.

The first was that progress in global monetary reform consisted in the progressive diminution of the role of gold. Those who insisted that a reserve currency need take the form of a physical commodity were misguidedly backing “a relic of a time when governments were less trustworthy in these matters than they are now, and when it was the fashion to imitate uncritically the system which had been established in England and had seemed to work so well during the second quarter of the nineteenth century.”

Today, of course, popular debate is often heated over whether governments are insufficiently trustworthy in monetary matters or, alternatively, overly hidebound in their response to financial market breakdowns.

If “gold is at last deposed from its despotic control over us and reduced to the position of a constitutional monarch,” Keynes pronounced with his trademark acerbic wit, “a new chapter of history will have opened. Man will have made another step forward in the attainment of self-government.”

The second theme was that London was the natural hub upon which global monetary reform could and should be built. Half the world’s trade at the time was financed by British credit, owing to the global reach of the empire and the reliably gold-backed pound sterling. London had thereby long thrived as the epicenter of world banking.

Unfortunately for Britain, however, World War I changed everything – for the worse, of course.

Keynes was an Anglo-Saxonophile of the first order, so if he were alive today he would no doubt have his wits trained on curing the troubles of the UK, U.S., and – particularly given his lifelong obsession with currency conundra – the eurozone.  Post-imperial India would probably not have held much fascination for him.

Q. What were the concerns and positions of the Indian delegation at the Bretton Woods conference?

The Indian delegation was a source of humiliation for Britain at Bretton Woods, as they were insistent that the United States – and the new IMF – do something to settle Britain’s massive war debts to India, which took the form of so-called blocked Sterling balances in London (that is, sterling which could not be converted).  At $12 billion, Britain’s Indian debt alone was 50% greater than the entire proposed IMF capitalisation.  Behind the scenes at Bretton Woods, one could see the empire collapsing; India showed not the slightest deference towards Britain.

Q. The United States strongly advocated that all countries peg their currencies to the dollar. How do you see that position in the current context given that they are now persuading the Chinese to delink the Yuan peg to the dollar? How will the U.S. react to the rise of the Renminbi as the new global currency?

The United States has always supported whatever exchange rate arrangement would give it a more competitive dollar.  In the 1940s, that was fixed exchange rates, as all the market pressure on the dollar was upward.  In 1998, U.S. Treasury Secretary Robert Rubin praised China for maintaining its fixed exchange rate regime when all the pressure on the renminbi was down; now, of course, that pressure is up, so the United States supports floating exchange rates.

The U.S. government’s attitude towards the rise of the renminbi as a global currency can best be described as insouciance.  There is little recognition that it is happening or that it will be consequential for the United States.

Q. Would the International Clearing Bank suggested by J.M. Keynes be successful if implemented today?

Since the United States will not cooperate in the creating of such a bank, it cannot happen. It’s that simple.

Q. Developing nations and civil society organisations have been demanding a reform of the IMF since the 1970s. What elements would you redesign to make it a fair and representative institution?

Obviously more weight to GDP would give China a vastly greater say – and to a much lesser extent Brazil, Turkey, Indonesia, India, and Russia.  The United States has every incentive to support a greater GDP weighting, because it would actually increase U.S. voting strength at the expense of Europe and others.

Benn Steil is Senior Fellow and Director of International Economics, Council on Foreign Relations. You can read more on the book, here.

This interview was exclusively conducted for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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