'In Washington Lord Halifax once whispered to Lord Keynes, "it's true they have the money bags but we have all the brains".' So went a piece of clever doggerel from the 1940s, neatly framing how Britain's emissaries saw their country's financial plight during the Second World War. Halifax having been one of many in the British political establishment who had failed to persuade the Americans to loosen their purse-strings, the brilliant John Maynard Keynes was dispatched to the front lines in Washington in the hope that, if brains were to be the key to British solvency, he might have more success.
Keynes' financial negotiations with the Americans were important not just to Britain in the 1940s, but to the world long after. The American-dictated terms of the famous 1944 Bretton Woods accords, which enthroned the US dollar as the 'new gold' atop the global monetary system, were part of the price Britain paid for American aid. When former prime minister Gordon Brown in 2008 called for 'a new Bretton Woods' to rectify the flaws in the current global financial and monetary architecture, it is unlikely he understood to what extent the terms of the original Bretton Woods were determined by power and personal diplomacy rather than good ideas.
At the time of Bretton Woods no one grasped Britain's dire financial circumstances and needs more acutely than Keynes. On the eve of the First World War the ratio of British debt to gross domestic product had been a mere 29 per cent; by the end of the Second World War it had soared to 240 per cent. A nation that had in the 1920s controlled a quarter of the earth's territory and population was, in Keynes' words, facing a 'financial Dunkirk'.
Keynes recognised that British freedom to engineer new postwar social and economic policies was 'impossible without further American assistance'. The country's room for maneuver was painfully limited: 'The Americans are strong enough to offer inducements to many or most of our friends to walk out on us.' Yet he also warned his government of the need 'to [guard] against the present emergency being used as an opportunity for picking out the eyes of the British Empire' and to prevent Britain 'becoming a satellite of the United States'. There were 'quarters in the United States', he observed, 'intending to use the grant of postwar credits to us as an opportunity for imposing ... the American conception of the international economic system'.
The world's first international celebrity economist, Keynes had an effortless facility with words that might also have made him a master diplomat. Yet he was frequently less concerned with converting opponents than with cornering them logically and humiliating them. On his first official trip to Washington a quarter of a century earlier during the First World War, a begging mission in September 1917, Keynes quickly made his mark with everyone of importance. He was, the British ambassador told his wife, 'too offensive for words'. His financial deputy called him 'rude, dogmatic, and disobliging'.
In this regard little would change during the next world war. Keynes returned to Washington in an official capacity in 1941, with Britain now facing its financial disaster, charged with negotiating the most favourable Lend-Lease terms possible. He made an immediate impression on President Roosevelt's treasury secretary, Henry Morgenthau, who, unlike Keynes, was never known for his razor sharp wit or mental celerity. 'He's one of those fellows that just knows all the answers, you see', Morgenthau groused. From that point on the US administration was on guard not to give ground to the wily, condescending Englishman.
'That man is a menace to international relations', came one observation – not from an American interlocutor, but from a British war cabinet adviser, the future Nobel economist James Meade, who considered Keynes 'God'. 'The lobbying for votes, the mobilization of supporters, the politics of the lunch and the dinner table were not arts in which Keynes excelled', observed his treasury colleague Paul Bareau.
Keynes jousted with Morgenthau's deputy, Harry Dexter White, for two years over the terms of what would become the Bretton Woods agreements, blasting White's World Bank scheme as 'the work of a lunatic, or . . . some sort of bad joke'. For his part, White dismissed Keynes' scheme for a new international reserve currency, 'bancor', as a hopeless effort to '[tie] up the dollar to a phoney international unit'. 'What absolute Bedlam these discussions are!', a British participant in an October 1943 negotiation with the US Treasury observed: Without any agenda or any prepared idea of what is going to be discussed [Keynes and White] go for each other in a strident duet of discord, which after a crescendo of abuse on either side leads up to a chaotic adjournment ... Keynes was 'storming and raging ...' 'This is intolerable!', he shouted. 'It is yet another Talmud.' ...'We will try,' White spat back, 'to produce something which Your Highness can understand'.
Keynes' private and public views on the Bretton Woods monetary scheme were very different. In 1942 he dismissed the American blueprint disdainfully as 'not much more than a version of the gold standard', which he had years earlier famously condemned as a barbarous relic. Yet, after failing to bring the Americans around to his own ideas, he embraced publicly what he could not change privately: 'If I have any authority to pronounce on what is and what is not the essence and meaning of a gold standard', he told the House of Lords in 1944, 'I should say that this plan is the exact opposite of it'.
The Faustian bargain Keynes struck with the US treasury in order for Britain to survive the war financially would lead to the collapse of sterling's international role and accelerate the unravelling of the British Empire over the course of the two years immediately following Germany's surrender. Yet Keynes lashed out at British opponents of the American terms with the same vitriol he would have mustered for anyone who had supported them had he himself not, in the end, been in a position to claim paternity of the new global monetary system christened at Bretton Woods.
'A section of the Socialists', he wrote to Lord Halifax on New Year's Day 1946, in one of his more colourful rants, 'thought they detected too definite a smell of laissez-faire ... in the American conception of international affairs'. They were angered because Britain would be deprived of the protectionist tools of state economic control, which is what their 'Jewish economic advisers (who, like so many Jews, are either Nazi or Communist at heart ...) were hankering after'.
One does not have to sympathise with the colour of Keynes' self-defence to ask whether anyone could actually have achieved a better result for Britain. There is a strong case to be made that the choice of diplomat did indeed matter. Immediate postwar history showed that Britain got nothing out of Bretton Woods that it could not have got on better terms many years later. What Britain actually needed in 1945 was short-term financing at reasonable cost with few geopolitical strings attached and possibly a lower exchange rate. Keynes had wilfully pursued neither.
Regarding the sterling convertibility conditions, which had been widely condemned on the left and the right in Britain, Keynes insisted the American loan could never have been secured without accepting them. But it was Keynes himself who had, prior to departing for the United States to negotiate its terms in September 1945, convinced the British government that the loan terms he would end up endorsing in Washington amounted to debt bondage and a moral affront – 'an outrageous crown and conclusion of all that has happened'.
Regarding the exchange rate, Keynes rejected devaluation repeatedly. 'We can sell anything we can produce [at the current exchange rate]', he insisted, and 'you can't imagine anything more foolish than to be trying to sell those exports at quite unnecessarily low prices'. James Meade and others argued compellingly that Keynes was logically and empirically wrong. White himself had told the Senate Banking Committee just before Keynes' Washington mission that he expected Britain to devalue and that this undercut its case for large-scale transitional assistance.
As for financing, leading American bankers, who were staunchly opposed to the IMF, which they viewed as a government-run competitor, had in May 1944 dangled just this prospect before the British in return for their non-co-operation with the US treasury. Keynes dismissed them with characteristic disdain. That he chose to push on with Bretton Woods and then the American loan, in spite of what he had said privately many times were misguided economic principles and wretched terms for Britain, suggests more than a touch of personal pride and concern for his place in history.
A career diplomat, or indeed anyone less invested in having his name attached to a new monetary system, would have aggressively sought out crisis financing on more conventional terms than those imposed by the Americans through Bretton Woods. The British Treasury official Sir Richard ('Otto') Clarke reflected years later that 'The simplest plan, which had much to commend it ... but for which nobody could have persuaded Keynes, was to abandon the concept of a Grand Design' and negotiate smaller loans from the Export-Import Bank, Canada, and elsewhere: We could easily have said [to the Americans] 'We are willing to sign the Bretton Woods Agreement ... but we are not willing to accept any prior commitments at all until we see how the new world develops ... In fact events by 1947 showed that the multilateral theologians' concepts of the course of events had been utterly wrong.' Keynes' relations with Washington went from bad to worse in the autumn of 1945. Pleading for postwar transitional aid, he repeatedly infuriated Morgenthau's successor, Judge Fred Vinson, with badly aimed barbs about American lawyers and British gold.
What if Britain's monetary reserves should improve? Keynes was asked during the negotiations. Who knows, Britain might unexpectedly find 'gold hidden in a cave'.
'Gold in a cave!', Keynes enthused sarcastically. 'Put that down in the agreement. We accept that!'
Vinson seethed. The American loan terms became progressively harsher as the negotiations dragged on over weeks and weeks, eating into Britain's transitional rights under Bretton Woods to manage its trade and currency in the immediate postwar period. At the inaugural IMF and World Bank meetings in Savannah, Georgia the following March Keynes again angered Vinson by warning the assembled dignitaries against the possibility of some 'malicious fairy' turning the fund and the bank into 'politicians'.
'I don't mind being called malicious', Vinson muttered, 'but I do mind being called a fairy.'
Keynes struggled over many years to adapt to the strange circumstance of people, specifically denizens of Washington, DC, who could not be swayed by his superior command of facts and logic. As a diplomat he frequently compounded the problems of the bad hands he was dealt by playing them ineptly. This was at least partly to do with his legacy. His place in the Bretton Woods pantheon was critical to it. The psychological price he paid for his persistence was bouts of a Stockholm syndrome variant, whereby he would persuade himself – and, with his unmatched rhetorical skills, the political class in London – that the American government, for all its intolerable legalism and defiance of reason, truly meant well and would do the right thing by Britain in the end.
Yet the Americans never deviated from their hardline geopolitical terms – at least until 1947, a year after Keynes' death, when President Truman's team reshuffled the diplomatic deck in an effort to prevent a Soviet-driven Communist takeover of Western Europe. The centrepiece of the effort was the Marshall Plan, which Keynes had been characteristically prescient in anticipating. Six years earlier he had concluded that Washington would, after the war, be compelled 'to mitigate her task [of rectifying the global dollar shortage] by making large presents for the reconstruction of Europe'. Keynes' wartime diplomatic sojourns, however, suggest he would never have been the right man to secure Britain's share of such gifts.
In our times a 'new Bretton Woods' would require China (now the world's largest international creditor nation) and the US (its largest international debtor) to forge a deal the way the US and Britain did during the 1940s. But China is not in nearly as strong a position as the US in the 1940s and the US is not in nearly as weak a position as Britain in the 1940s.
China's stock of dollar-denominated monetary reserves are, at about $2 trillion, so large that it cannot afford to precipitate a collapse of the dollar. And the US, unlike Britain in the 1940s, still mints the currency in which it sells its debt to the world. China, therefore, currently has no credible means of compelling the US to concede its privileged place in global monetary affairs.
Only a diplomatic own-goal could achieve this.
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