The focus of his work reflected the major trade and monetary issues of the time, into which he threw himself energetically. Competitive currency devaluations and their impact on global trade was an issue with which he concerned himself especially. He argued that a stabilisation in international monetary policy was required to increase foreign trade, which was an important factor in achieving the economic recovery that the Roosevelt Administration sought to bring about. This would require a new form of international monetary diplomacy. Competition between the Treasury and the State Department over control of this function was to open to White a huge opportunity.
Henry Morgenthau Jr. was a long-time friend and neighbour of FDR at his Hyde Park estate in upstate New York. He had no background in economics and, upon his appointment as Treasury Secretary in 1934, the prominent New York donor Gladys Straus quipped that Roosevelt had managed to find ‘the only Jew in the world who doesn't know a thing about money’.12 White rapidly made himself indispensable as the intellectual force behind Morgenthau's expanding power base, while Morgenthau served as a powerful patron for the ambitious White.
In 1935, Morgenthau despatched White on a trip to Europe to engage in fact-finding and exploratory talks on the matter of exchange rate stabilisation. This trip was to have great significance in Harry White's career, as his meetings with politicians, businessmen, bankers, civil servants and economists would help to position him later as the obvious candidate to coordinate and lead America's international negotiations on the post-war monetary system. It was also on this trip that he first met John Maynard Keynes, the famed British economist with whom he would later joust in the run-up to and during the 1944 Bretton Woods conference.
The Barbarous Relic
In contrast to Harry White, Maynard Keynes had a privileged upbringing. Born into an affluent academic family in Cambridge, his father Neville was a lecturer in moral sciences and a fellow of Pembroke College, while his mother, who had been educated at Newnham College, became the city's first female mayor. Educated at Eton, he had gone on to study mathematics at King's College Cambridge, where he was elected to a lifetime fellowship in 1908, at the age of 26. A liberal with a mischievous anti-establishment streak, he was a leading member of the Bloomsbury Set that included intellectuals and artists such as Leonard and Virginia Woolf, as well as Duncan Grant, Keynes’ one-time lover.
During WW1, Keynes served in the British Treasury and had a front row seat in the 1919 Paris Peace Conference, where the terms of the peace were hammered out. He quit in disgust three weeks before the Versailles Treaty was signed and went on to publish a highly critical account of those negotiations under the widely acclaimed title The Economic Consequences of the Peace. In this book, he painted withering portraits of the three leading figures of the conference – American President Woodrow Wilson, British Prime Minister David Lloyd George, and French Prime Minister Georges Clémenceau. Among Keynes’ key criticisms of Versailles was the high level of war reparations imposed. He had argued that, if the defeated Germany was ‘to be “milked”’, then she ‘must first of all not be ruined’.13 Indeed, popular resentment of the economic hardship that reparations imposed on the German population was later exploited by the Nazis in their rise to power in the 1930s.
Keynes had seen the question of reparations as being inextricably tied to the debts that the European Allies had taken on to finance the war. He had therefore proposed that the peace treaty include a financial package that would have linked the reparations paid by Germany to the level of repayments by the Allies to each other and to the US. The US had lent $12 billion to the Europeans during WW1, of which around $5 billion was owed by Great Britain and $4 billion by France. In turn, Britain was owed $11 billion by 17 countries, including some $3 billion due from France and $2.5 billion due from Russia, which had become uncollectible following the Bolshevik revolution in 1917.14 Understandably, the Americans were reluctant to take a write-down on their loans to the Allies and Woodrow Wilson dismissed Keynes’ proposal, insisting that reparations and war debts be treated as two separate matters.
Reparations and war debt, however, were not the greatest villains in the cast that Keynes held responsible for the global economic ills of the interwar period. The leading role, as his thinking developed through the 1920s, was reserved for gold.
The expansion of global trade during the 19th century had been underpinned by the fixing of the value of currencies against gold. Issuers of currency on the so-called gold standard committed themselves to holding reserves of physical gold against the paper money that they issued. This provided an assurance that the issuer would not erode the value of its currency by simply printing more notes. Expansion of the money supply, therefore, was restricted by the pace of new gold discoveries, which were relatively infrequent.15
Of course, in periods of distress such as times of war, governments can be tempted to expand the money supply by way of the printing presses in order to meet their obligations. Britain had last done this during the French Revolutionary War in 1797, when the threat of invasion had led to mass withdrawals of gold from the Bank of England. However, in the years 1815–1821, following Napoleon's defeat at Waterloo, the Bank had withdrawn around half the paper money in circulation, driving prices down by 50 percent, and restored the gold standard. Though those six years had witnessed riots and economic distress, Britain's monetary discipline was seen as having set sterling apart from all other currencies in Europe. This in turn was credited for the country's emergence as the world's leading economic power over the half-century that followed.16 As trade surpluses from Britain's lead in manufacturing exports generated excess capital searching for investments, London emerged from the 19th century as the banker to the world and sterling the pre-eminent global currency.
During the four years of WW1, European governments had incurred total war spending of around $200 billion, or roughly half of their aggregate GDP. In addition to borrowing from their own citizens and from overseas, they had raised taxes and printed more money. By the end of the war, the money supply in Britain had doubled, in France it had tripled, and in Germany it had quadrupled.17 In the early 1920s, in the face of social and fiscal pressures, Germany resorted to uncontrolled money printing, leading to massive hyperinflation that decimated the value of middle-class savings. Britain, still vested with the pride of a great imperial power, chose the opposite route and sought to restore the value of sterling to the pre-war level.
Before WW1, the British pound's exchange rate to the US dollar, fixed by the gold standard, had been $4.86. Having untethered itself from gold during the war, sterling's exchange rate had fallen to as low as $3.20. In 1920–1921, the Bank of England, led by its conservative governor Montagu Norman, chose to deflate the economy via high interest rates in order to reverse wartime inflation. Prices fell by 50 percent from their wartime highs and the pound recovered to $4.35 by the autumn of 1924. However, while the country rebounded from a recession in 1921, growth remained muted and the exchange rate struggled to recover to the 1914 level.18
Keynes, back in Cambridge after the war and having acquired celebrity status on account of the success of The Economic Consequences, became a prolific columnist writing on economic issues. He also dabbled in speculation on currencies and commodity prices. While the rest of the country was struggling with unemployment rates of around 10 percent in 1923, these pursuits provided him with a handsome living. The main target of his writings was the Bank of England and its stubborn quest to restore the old dollar parity. He argued eloquently and with acerbic wit that the Bank was mistaken in its belief that wages were sufficiently flexible to adjust as rapidly as prices,
