Twenty Two Days that Changed the World

First published in a Review of The Summit by Ed Conway, Little, Brown, 27 August, 2014

In this carefully researched book, Ed Conway tells a gripping human tale about the July 1944 Bretton Woods Conference - “the biggest battle of the Second World War – fought behind closed doors”. He provides remarkable insights into the personal, geopolitical and intellectual dynamics that played out that summer within the confines of the Mount Washington Hotel, nestled within New Hampshire’s Bretton Woods.

His story of how 730 delegates from 44 nations worked together to build the post-war international monetary system is a highly readable account of a gathering that was to transform the global economy. Pivotal to the success of the conference was President Roosevelt’s and Keynes’s determination to bar Wall St. and the City of London from participating in preparations for the conference; and to deny the private finance sector (with one exception) access to the conference proceedings. After the catastrophic economic failures of the 1930s Haute Finance was to be denied a role in the construction of the post-war international economic order.  

The book details the well-known tensions that arose both before and after the conference between the US Treasury’s Harry Dexter White and John Maynard Keynes, representing Britain. As importantly Conway reveals “the surprising influence of China, Brazil and India” but also the significant role that Russia played at Bretton Woods. Conway is the first to consult Russian Finance Ministry archives on the part played by the Soviets at Bretton Woods; files made available to researchers at the end of the Cold War but never before used.

Conway explores the controversy surrounding Harry Dexter White’s supposed collusion with the Soviet authorities during the negotiations. He shares a growing consensus that as late as 1946

“the general opinion in Washington was that ‘Stalin has been our best friend’…In other words, there simply  was not during this period the stigma attached to  dealing with the Soviets that developed over the following years…White simply viewed his interactions with the Russians as a means of carrying out broader American foreign policy – without having to go through the odious State Department.” (p.162)

 The Bretton Woods conference is often relegated in importance to the summits held at Yalta and Potsdam. Conway writes that:

"For some reason, while it remains one of economics’ few household names, Bretton Woods is frequently ignored in accounts of the period.”

He puts this learning loss down to the ease with which “international monetary economics” is viewed as “esoteric and irrelevant”.

I am not so sure. The careful work undertaken by delegates from 44 nations over twenty two days in July, 1944 laid the foundations of an international monetary system that regulated capital flows across borders, and restrained Wall St and the private banking system. This, Conway writes:

“permitted the longest period of stability and economic growth in history….The incidence of financial crises was lower than ever before. Fewer banks failed.Imbalances..were smaller. Over the same period, inflation was low and the income gap between the rich and the poor remained narrow.

 “There is no such thing as a perfect economic system; but based on its performance, many economists still argue that Bretton Woods was as close as   the global economy has ever come to it.” (p.xix)

It is the management of capital flows and restraints on bankers that explains why the history of Bretton Woods is such anathema to the finance sector and its friends in the economics profession.  “Seventy years on” writes Conway “there is still so much left to be discovered” about the ideas that shaped this great conference, and the post-war world.

The stable system that was the outcome of the 1944 deliberations was subsequently to be overturned by those whose interests were deliberately not represented at Bretton Woods – the private finance sector. Only one banker was invited to be present. He was Ned Brown, president of the First National Bank of Chicago, and the only banker that President Roosevelt trusted.

“What was to be laid down at the Mount Washington [hotel] …would represent one of the biggest structural challenges to international finance in modern history.  Happily for [Harry Dexter] White, Brown was so focused on plotting the downfall of his New York rivals that he would put up little meaningful resistance.”   (p.209)

But while Brown did little to resist the changes, Wall St. worked hard both before and after the conference to subvert the scheme and international financial architecture that would make “the International Monetary Fund, not J.P Morgan, Chase or Brown Brothers the central port of call when a country faced an economic crisis.” (p.296) (For those hostile to the role of the IMF in international financial crises, this is a salutary reminder of the alternative that prevailed before Bretton Woods.)

Conway documents an incident involving Wall St. that took place a few months before the conference was scheduled. It is reveals how determined bankers were to subvert the monetary system that was to be the outcome of the conference.  Britain’s representative in Washington was contacted with a mischievous offer: “they would loan Britain $3 billion on generous terms provided it agreed to ditch [Keynes’s] monetary plan entirely….”

Given Britain’s dire and exhausted financial position at the end of the war, the proposal might well have been acted upon.  But the then Lord John Maynard Keynes “stamped it down, warning that there would be ‘a great many’ strings attached to the loan, and that ‘the wise and prudent course is to run with the US Treasury  rather than with its disgruntled critics’.” (p.297)

Bretton Woods' critics were a little more than ‘disgruntled’. They were horrified. At the end of the conference, Wall St promptly began a campaign to persuade Congress and the American public not to allow Bretton Woods to go ahead. In a sign of how different times were then, how few elected representatives had been captured, and how weak was the Street’s influence, bankers “met with a wall of apathy” from both Congressional representatives and Main Street.

Conway’s book is a fine, bold and balanced history of a momentous event in economic policy-making - one that leaves this reader keen to know more. I do however, have one minor bone to pick, a matter of contention not so much with Conway, as with much of the economics profession, and for which Conway cannot therefore be blamed. It is his description of

“fractional reserve banking – the system of finance that prevails to this day – [and that allows bankers] to issue credit (in other words to lend cash) without necessarily holding that money in their balance sheets.” (p.62)

It is doubtful that any developed banking system has operated on the basis of ‘fractional reserves” and of lending out cash – even though this is what is argued in most economic textbooks.  What is almost certain is that no banking system has provided credit on the basis of ‘fractional reserves’ since the founding of the Bank of England in 1694. For, as the Bank of England explained carefully in its recent Quarterly Bulletin Q1 2014 (Money Creation in the Modern Economy):

“In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks.”

In other words, reserves are created by the central bank as a consequence of private bank lending, and not as a ‘fractional’ basis for lending. 

While Sky journalist Ed Conway’s view of banking and money creation is skewed by the perverse teachings of professional economists, it has not inhibited his grasp of the scale of the achievement of those 730 delegates at the climax of a terrible war. Led by Keynes, Roosevelt, Morgenthau and White, they tackled the great summit of Bretton Woods and successfully fought and won the most ferocious engagement of that War – the battle against global financial interests.