here.” But this approach ignored the way law, politics, and trade had evolved together in the industrialization process. To cut off trade “would completely change our Constitution, our relations to property, human liberty, our very conceptions of law.”19
Hull found a combination of support and rivalry in Roosevelt’s treasury secretary, Henry Morgenthau, who became Hull’s “frenemy” (to apply a contemporary term). While Morgenthau may not have been the smartest or most innovative policymaker among the New Dealers, he knew how to make the bureaucracy work in his favor. Mostly, he understood how he could sway Roosevelt and keep the president’s attention on issues he cared about. In the freewheeling atmosphere of the Roosevelt administration, where lines of authority meant less than a relationship to the president, Morgenthau’s genius shined.
Morgenthau wanted a role in the postwar period and saw the effort to rebuild global finance as a natural fit for the Treasury Department, in part because his trusted adviser, Harry Dexter White, had already begun work on the problem. White recognized that under “the gold standard, exchange rates were fixed, so that the balance of payments had to adjust through domestic deflation,” and domestic deflations had run amok in the early 1930s, eventually sinking into global depression.20 Keynes had shown how these deflationary recessions could become a vicious circle in which timid investors reinforced the very economic decline they feared. But how to prevent the gold standard from triggering a depression?
The obvious answer lay in getting rid of the gold standard. This would prevent nations from suffering “forced” deflations. Nations could simply devalue their currency anytime they got out of balance with their trading partners. Yet letting exchange rates fluctuate created two potential problems. First, it might discourage trade because merchants could never know for certain what the exchange rate would be—a phenomenon commonly known as “exchange risk.” International commerce had enough unknowns without adding the risk of profits evaporating because a country decided to suddenly depreciate its currency. The gold standard at least brought certainty to international trade.
Second, during the 1930s, American officials noted that as “many countries … played the game of artificially manipulating the exchange rates of their currencies in order to gain advantage in the international market place.” Countries would intentionally “depreciate their currencies in order to sell their exports more cheaply in external markets.” Global economics became a “kind of ‘beggar my neighbor’” game that led to a currency war “with everybody trying to depreciate against everybody else in order to gain trading advantage. This was a pretty chaotic system.”21 White tried to find a way to make exchange rates more flexible without letting them become capricious.
After some deliberation White struck on a solution that fit the general tenor of the New Deal. In place of the gold standard, he wanted an agency to actively manage, in the global interest, the world’s currencies. Initially called the International Stabilization Fund, this agency would act as an umpire for global finance. In the short term, it would have a reserve that it could use to provide loans for countries that found themselves (for whatever reason) temporarily low on foreign exchange. Thus, a country caught in a short-term crunch could avoid drastic measures to pay its foreign debts. In the long term, if a country suffered chronic deficits, the agency could give permission for a currency devaluation. Devaluations could happen, but not in the “beggar my neighbor” approach common in the interwar years.
By the spring of 1942 White gave Morgenthau a copy of his plan, titled “United Nations Stabilization Fund and a Bank for Reconstruction and Development of the United and Associated Nations.” In particular, Morgenthau appreciated that White’s plan shifted the postwar discussion from trade to finance—which meant that the Treasury could move into the heart of postwar policy. As White explained, “if the Treasury doesn’t initiate a conference on the subject it almost certainly will be initiated elsewhere, and it should be preeminently Treasury responsibility.”22
It worked. Roosevelt gave Morgenthau the green light to proceed, but wanted consensus within the administration before going to the Allies. Through the following months representatives from Treasury, State, Commerce, the Federal Reserve, and the Board of Economic Warfare worked out the details.23
Coincidentally, John Maynard Keynes had started work on a British plan to accomplish many of the same things entailed in White’s plan. He, too, sought an exchange rate regulated by an international agency. Yet his plan went well beyond White’s in that the International Clearing Union (his proposed agency) would have its own currency (the bancor) that it would substitute for gold. In simplest terms, Keynes proposed the construction of a central bank for the world, working something like the Federal Reserve, but with a global currency.
Under Keynes’ plan all global trade would be financed in bancor and serviced through the International Clearing Union. If a country ran too much of a trade deficit, the Clearing Union would penalize it by taxing it a small amount. But the same would be true for a country running perpetual surpluses: it, too, would be penalized. In the short term, deficit countries could make up their shortfall by borrowing from the surplus countries. As Keynes explained, “each country is allowed a certain margin of resources and a certain interval of time within which to effect a balance in its economic relations with the rest of the world.”24
Keynes’ plan for an International Clearing Union remained consistent with his ideas about domestic depressions. In each case, his diagnosis suggested that unused money (“liquidity traps” again) caused a vicious cycle of deflation, ending in a permanently depressed global economy. Within a domestic economy, government could force this money back into circulation through borrowing and spending. Keynes aimed to accomplish the same thing on the international level through the clearing union.
Most important for the British, at its creation the International Clearing Union would create accounts in bancor for its member countries proportionate to their participation in global trade. Thus, from the get-go each country would have, in essence, start-up capital with which to trade. As Keynes understood, the British would end World War II as they had the First World War, in desperate need of investment capital with which to buy products from the world (and especially America). The overall arrangement made perfect sense for the British, who, at war’s end, would be heavily in debt again to the United States and would have little gold to buy internationally. Indeed, the plan made sense for just about every country not the United States because just about every country (particularly in Europe) would be in the same position as the British.
Unfortunately for Keynes, both Harry Dexter White and Henry Morgenthau harbored resentments toward their British allies, stemming from the war debt crisis of the previous decade. In their view, Britain had abandoned the gold standard to welch on its debts and used its imperial system to block American exports during the worst part of the Depression. Both men saw their plan fatally wounding the British Empire in the name of a globally open economy.25 As a result, as Keynes and White brought their two plans together at Bretton Woods, New Hampshire, in the summer of 1944, Morgenthau’s stated claim—“We can accomplish [our] task only if we approach it not as bargainers but as partners”—was consistently undermined by White, who did his best to assert American over British interests whenever possible.26
For example, where Keynes wanted an International Clearing Union with its own money, White insisted on an International Monetary Fund (IMF) using only dollars and controlled largely by the United States. Keynes hoped to have extensive start-up capital provided to debtor countries at the end of the war; the IMF had relatively small reserves. Keynes wanted to penalize both trade surplus and deficit countries to achieve balance; White managed to see the burden fall largely upon deficit nations. Keynes sought to disconnect international trade entirely from the gold standard through use of the bancor; White managed to ensure all global trade used dollars. But here, White made a decision that troubled American policymaking for decades after the war. Making the dollar the global trading currency allowed the United States to, in essence, force
