A History of Money and Banking in the United States: The Colonial Era to World War II (69 page)

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International Monetary System

was now to move in and take over, with the pound no less subordinate than all the other major currencies. It was truly a triumphant “dollar imperialism” to parallel the imperial American thrust in the political sphere. As Secretary of the Treasury Henry Morgenthau, Jr., was later to express it, the critical and eminently successful objective was “to move the financial center of the world” from London to the United States Treasury.53

And all this eminently was in keeping with the prophetic vision of Cordell Hull, the man who, in the words of Gabriel Kolko, had “the basic responsibility for American political and economic planning for the peace.” For Hull had urged upon Congress as far back as 1932 that America “gird itself, yield to the law of manifest destiny, and go forward as the supreme world factor economically and morally.”54

World War II was the occasion for a new coalition to form behind the New Deal, a coalition which reintegrated many conservative “internationalist” financial interests who had been thrown into opposition by the domestic statism or economic nationalism of the earlier New Deal. This reintegration of the entire conservative financial community was particularly true in the field of international economic and monetary policy.

Here, Dr. Leo Pasvolsky, a conservative economist who had broken with the New Deal upon the scuttling of the London Economic Conference, returned to a crucial role as Secretary Hull’s special adviser on postwar planning. Dean Acheson, also disaffected by the radical monetary measures of 1933–34, was now back as assistant secretary of state for economic affairs. And when the ailing Cordell Hull retired in late 1944, he was replaced by Edward Stettinius, the son of a Morgan partner and himself former president of Morgan-oriented U.S. Steel. Stettinius chose as his assistant secretary for economic affairs the 53Richard Gardner,
Sterling-Dollar Diplomacy
, p. 76.

54Smith, “American Foreign Relations, 1920–1942,” p. 252; Gabriel Kolko,
The Politics of War: The World and United States Foreign Policy,
1943–1945
(New York: Random House, 1968), pp. 243–44.

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A History of Money and Banking in the United States:
The Colonial Era to World War II

man who quickly became the key official for postwar international economic planning, William L. Clayton, a former leader of the anti–New Deal Liberty League, and chairman and major partner of Anderson, Clayton and Company, the world’s largest cotton export firm. Clayton’s major focus in postwar planning was to promote and encourage American exports—

with cotton, not unnaturally, never out of the forefront of his concerns.55

Even before American entry into the war, U.S. economic war aims were well-defined and rather brutally simple: they hinged on a determined assault upon the 1930s system of economic and monetary nationalism, so as to promote American exports, investments, and financial dealings overseas—in short, the

“Open Door” for American commerce. In the sphere of commercial policy, this took the form of pressure for reduction of tariffs on American products, and the elimination of quantitative import restrictions on those products. In the allied sphere of monetary policy, it meant the breakup of powerful nationalistic currency blocs, and the restoration of an international monetary order based on the dollar in which currencies would be convertible into each other at predictable and fixed parities and there would be a minimum of national exchange controls over the purchase and use of foreign currencies.

And even as the United States prepared to enter the war to save its ally, Great Britain, it was preparing to bludgeon the British at a time of great peril to abandon their sterling bloc, which they had organized effectively after the Ottawa Agreements of 1932. World War II would presumably deal effectively with the German bilateral trade and currency menace; but what about the problem of Great Britain?

John Maynard Lord Keynes long had led those British economists who had urged a policy of all-out economic and monetary 55Kolko,
The Politics of War,
pp. 264, 485ff.; Lloyd C. Gardner,
Architects
of Illusion: Men and Ideas in American Foreign Policy, 1941–1949
(Chicago: Quadrangle Books, 1970), pp. 113–38.

The New Deal and the

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International Monetary System

nationalism on behalf of inflation and full employment. He had gone so far as to hail Roosevelt’s torpedoing of the London Economic Conference because the path was then cleared for economic nationalism. Keynes’s visit to Washington on behalf of the British government in the summer of 1941 now spread gloom about the British determination to continue their bilateral economic policies after the war. High State Department official J. Pierrepont Moffat despaired that “the future is cloud-ing up rapidly and that despite the war the Hitlerian commercial policy will probably be adopted by Great Britain.”56

The United States responded by putting the pressure on Great Britain at the Atlantic Conference in August 1941. Undersecretary of State Sumner Welles insisted that the British agree to remove discrimination against American exports, and abolish their policies of autarchy, exchange controls, and Imperial Preference blocs.57 Prime Minister Churchill tartly refused, but the United States was scarcely prepared to abandon its crucial aim of breaking down the sterling bloc. As President Roosevelt privately told his son Elliott at the Atlantic Conference: It’s something that’s not generally known, but British bankers and German bankers have had world trade pretty well sewn up in their pockets for a long time. . . . Well, now, that’s not so good for American trade, is it? . . . If in the past German and British economic interests have operated to exclude us from world trade, kept our merchant shipping closed down, closed us out of this or that market, and now Germany and Britain are at war, what should we do?58

The signing of Lend-Lease agreements was the ideal time for wringing concessions from the British, but Britain consented to 56Lloyd Gardner, “New Deal, New Frontiers,” p. 120.

57Richard Gardner,
Sterling-Dollar Diplomacy
, pp. 42ff.; Lloyd Gardner,
New Deal Diplomacy
, pp. 275-80.

58Smith, “American Foreign Relations, 1920–1942,” p. 252; Kolko,
The
Politics of War
, pp. 248-49.

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A History of Money and Banking in the United States:
The Colonial Era to World War II

sign the agreement’s Article VII—which merely involved a vague commitment to the elimination of discriminatory treatment in international trade—only after intense pressure by the United States. The agreement was signed at the end of February 1942, and in return the State Department pledged to the British that the U.S. would pursue a policy of economic expansion and full employment after the war. Even under these conditions, however, Britain soon maintained that the Lend-Lease Agreement committed it to virtually nothing. To Cordell Hull, however, the agreement on Article VII was decisive and constituted

“a long step toward the fulfillment, after the war, of the economic principles for which I had been fighting for half a century.” The United States also insisted that other nations receiving Lend-Lease sign a virtually identical commitment to multilateralism after the war. In his first major public address in nearly a year, Hull, in July 1942, could now look forward confidently that

leadership toward a new system of international relationships in trade and other economic affairs will devolve very largely upon the United States because of our great economic strength. We should assume this leadership, and the responsibility that goes with it, primarily for reasons of pure national self-interest.59

In the postwar planning for economic affairs, the State Department was in charge of commercial and trade policies, while the Treasury conducted the planning in the areas of money and finance. In charge of postwar international financial planning for the Treasury was the economist Harry Dexter White. In early 1942, White presented his first plan, which was to be one of the two major foundations of the postwar monetary system. White’s proposal was of course within the framework of American postwar economic objectives. The countries of the world were to join a Stabilization Fund, totaling $5 billion, which would lend funds at short term to deficit countries to 59Ibid., pp. 249–51.

The New Deal and the

481

International Monetary System

iron out temporary balance-of-payments difficulties. But in return for this provision of greater liquidity and short-term aid to deficit countries, exchange rates of currencies were to be fixed, in relation to the dollar and hence to gold, with the gold price to be set at $35 an ounce, and exchange controls were to be abandoned by the various nations.

While the White Plan envisioned a substantial amount of inflation to provide greater currency liquidity, the British responded with a Keynes Plan that was far more inflationary.

By this time, Lord Keynes had abandoned economic and monetary nationalism for Britain under severe American pressure, and his aim was to salvage as much domestic inflation and cheap money for Britain as he could possibly induce America to accept. The Keynes Plan envisioned an International Clearing Union (ICU), which, in return for agreeing to stable exchange rates between currencies and the abandonment of exchange control, provided a huge loan fund to its members of $26 billion. The Keynes Plan, moreover, provided for a new international monetary unit, the “bancor,” which could be issued by the ICU in such large amounts as to provide almost unchecked room for inflation, even in a country with a large deficit in its balance of payments. The nations would consult with each other about correcting balance-of-payments disequilibria, through altering their exchange rates. The Keynes Plan, furthermore, provided automatic access to the fund of liquidity, with none of the embarrassing requirements, as included in the White Plan, for deficit countries to cease creating deficits by inflating their currency. Whereas the White Plan authorized the Stabilization Fund to require deficit countries to cease inflating in return for fund loans, the Keynes Plan envisioned that inflation would proceed unchecked, with all the burden of necessary adjustments to be placed on the hard-money, creditor countries, who would be expected to inflate faster themselves, in order not to gain currency from the deficit nations.

The White Plan was stringently attacked by the conservative nationalists and inflationists in Britain, particularly G.R. Boothby,
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A History of Money and Banking in the United States:
The Colonial Era to World War II

Lord Beaverbrook, the
Times
of London
,
and the
Economist
. The Keynes Plan was attacked by conservatives in the United States, as was even the White Plan for interfering with market forces, and for automatic extension of credit to deficit countries. Critical of the White Plan were the Guaranty Survey of the Guaranty Trust Company and the American Bankers Association; furthermore, the
New York Times
and
New York Herald Tribune
called for return to the classical gold standard, and attacked the large measure of governmental financial planning envisioned by both the Keynes and White proposals.60

After negotiating during 1943 and into the spring of 1944, the United States and Britain hammered out a compromise of the White and Keynes plans in April 1944. The compromise was adopted by a world economic conference in July at Bretton Woods, New Hampshire; it was Bretton Woods that was to provide the monetary framework for the postwar world.61

The compromise established an International Monetary Fund (IMF) as the stabilization mechanism; its total funds were fixed at $8.8 billion, far closer to the White than to the Keynes prescriptions. Its balance of IMF international control as against domestic autonomy lay between the White and Keynes plans, leaving the whole problem highly fuzzy. On the one hand, national access to the fund was
not
to be automatic; but on the other, the fund could no longer require corrective domestic economic policies of its members. On the question of exchange rates, the Americans yielded to the British insistence on allowing room for domestic inflation even at the expense of stable exchange rates. The compromise provided that each country could be free to make a 10-percent change in its exchange rate, 60Richard Gardner,
Sterling-Dollar Diplomacy
, pp. 71ff., 95–99.

61We do not deal here with the other institution established at Bretton Woods—the International Bank for Reconstruction and Development—

which, in contrast to the International Monetary Fund, comes under commercial and financial, rather than monetary, policy.

The New Deal and the

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International Monetary System

and that larger changes could be made to correct “fundamental disequilibria”; in short, that a chronically deficit country could devalue its currency rather than check its own inflation. Furthermore, the U.S. yielded again in allowing creditor countries to suffer by permitting deficit countries to impose exchange controls on “scarce currencies.” This meant in effect that the major European countries, whose currencies would be fixed at existing highly overvalued rates in relation to the dollar, would thus be permitted to enter the IMF with chronically overvalued currencies and then impose exchange controls on “scarce,” undervalued dollars. But despite these extensive concessions, there was no “bancor”; the dollar, fixed at $35 per gold ounce was now to be firmly established as the key currency base of a new world monetary order. Besides, for the dollar to be undervalued and other major currencies to be overvalued greatly spurs American exports, which was one of the basic aims of the entire operation. U.S. Ambassador to Britain John G. Winant recorded the perceptive hostility to the Bretton Woods Agreement by the majority of the directors of the Bank of England; for these men saw “that if the plan is adopted financial control will leave London and sterling exchange will be replaced by dollar exchange.”62