by Sylvia Nasar
From Europe, however, FDR’s upbeat vision of one world in which the major powers were focused on economic growth instead of expansionist aggression seemed far too rosy. On March 9, 1944, Gunnar Myrdal, the head of one of Sweden’s postwar planning commissions, delivered a considerably darker prognosis. The young economist had spent the early part of the war traveling through the American South reporting his classic study of race relations, An American Dilemma: The Negro Problem and Modern Democracy, before returning to his native Sweden—which had retained its status as a nonbelligerent nation despite having supplied the German war machine—in 1942.
Myrdal saw the future through a much darker glass. He feared that autarky, economic stagnation, and militarism—the very pathologies that had helped to breed the second global conflagration within a single generation—had not been defeated, despite four years of unprecedented effort, sacrifice, and suffering. The dream of a single world community—the United Nations—bound together by trade, convertible currencies, and international law was a dangerous illusion, he argued. Dismissing the “overoptimism” of American economists, he predicted that the present wartime boom would turn into a depression more severe than the Great Depression and mass unemployment. A depression in the United States would necessarily have repercussions for the whole world, especially for Sweden and other countries that depended on exports to pay for the imports they needed to survive as modern economies. Inevitably, economic chaos would produce an epidemic of strikes and civil unrest and fuel nationalist rivalries—just as similar economic conditions had done before the war. A general trend of militarism and autarky14 similar to that which had prevailed in the interwar period would continue. In particular, the world would inevitably break up into three great competing empires—Russian, British, and American—as the conflicting economic and political interests of the Big Three displaced the Allies’ common goal of defeating the Axis. In Myrdal’s global dystopia, the new imperialism would not only be oppressive but also inherently unstable.
This, of course, is the world of 1984. George Orwell, who completed his dystopian novel in 1948, pictured a world carved up into three empires—Oceania, Eurasia, and Eastasia—that are locked in a permanent Cold War. Too evenly matched to win or lose, the superpowers use external threats to justify totalitarian rule and economic stagnation. The hero—an everyman named Winston Smith, who “displays flashes of Churchillian courage”—learns that the “splitting up of the world into three great super-states was an event which could be and indeed was foreseen before the middle of the twentieth century.”15
• • •
Ironically, one who viewed the nightmare with satisfaction rather than fear was Stalin. FDR had returned from Tehran convinced that the Allied leaders shared a common interest, once the enemy was defeated, in creating a framework within which all countries could focus on economic growth. He had assured Americans that “All our allies have learned by experience—bitter experience that real development will not be possible if they are to be diverted from their purpose by repeated wars—or even threats of war.”16
In reality, Stalin was convinced that his capitalist allies were inherently incapable of cooperating for long and that once their common enemy was defeated, the drive for profits would soon set the United States and Britain at each other’s throats. In his mind, Anglo-American war was an “inevitability.”17 In that case, he could extract aid and territory from his allies while waiting for the coming crisis to provoke a war and drive their citizens into pseudo-political parties whose first loyalty was to Moscow.
Why did he ignore abundant evidence to the contrary? According to John Lewis Gaddis, the foremost American historian of the Cold War, Stalin was a genuine captive of Lenin’s primitive economic theory—a theory based on a false analogy between economic competition and warfare. Instead of FDR’s belief that growth in one country would benefit rather than harm its trading partners, Stalin was convinced that trade, like war, was a zero-sum game in which one side’s gain was the other’s loss. Indeed, Lenin had believed that war was merely a more aggressive form of economic competition.
In The General Theory, Keynes had expressed his belief that ideas matter: “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”18 Thanks in no small part to the ideas of Keynes, Hayek, and their followers, those in authority were neither mad nor in the thrall of barbaric relics. They were determined to avert such nightmares.
Chapter XIV
Past and Future: Keynes at Bretton Woods
Economic diseases are highly communicable. It follows therefore that the economic health of every country is a proper matter of concern to all its neighbors, near and distant.
—FDR, message to delegates at Breton Woods1
Keynes described his and Lydia’s crossing on the Queen Mary in mid-June 1944, barely two weeks before the international monetary conference at Bretton Woods, New Hampshire, as “a most peaceful and also a most busy time.”2 Traveling with Friedrich von Hayek’s, and now his, close friend Lionel Robbins and a dozen other British officials, Keynes presided over no fewer than thirteen shipboard meetings and had a major hand in writing two “boat drafts” on the two major institutions that were to administer postwar monetary arrangements: the International Monetary Fund and the World Bank.3 In his spare time, he lounged in his deck chair devouring books. Along with a new edition of Plato’s Republic and a life of his favorite essayist, Thomas Babington Macaulay, he read Hayek’s The Road to Serfdom.
In contrast to his more doctrinaire disciples, Keynes was a genius capable of holding two opposing truths in his mind: “Morally and philosophically,” he wrote in a long letter to Hayek, “I find myself in agreement with virtually the whole of it; and not only in agreement but deeply moved agreement.” Hayek might not have succeeded in drawing “the line between freedom and planning satisfactorily,”4 and therefore might not be a useful guide through the “middle way” of actual policy making, but he was articulating values that Keynes considered essential “for living a good life.”5 Robbins mused that Keynes, “so radical in outlook in matters purely intellectual, in matters of culture he is a true Burkean conservative.”6
Keynes went on to say that Hayek was too quick to dismiss the possibility that some planning was compatible with freedom, particularly if the planning was done by those who shared their values: “Dangerous acts can be done safely in a community which thinks and feels rightly which would be the way to hell if they were executed by those who think and feel wrongly.”7 He meant that a war economy run by Churchill or FDR was unlikely to lead to a totalitarian state, even though ones run by Stalin and Hitler had.
• • •
Keynes and Lydia were whisked to the White Mountains of New Hampshire by private train. The Mount Washington Hotel in Bretton Woods was a turn-of-the-century grande dame meant to recall grande dames such as the Hotel Majestic in Paris, where Keynes had been at the end of the last war—only with 350 rooms, private baths, a ballroom, an indoor pool, and a palm court with Tiffany windows. But the slightly seedy resort, long past her prime, was hardly prepared for the onslaught of 730 delegates from forty-four Allied countries. “The taps run all day, the windows do not close or open, the pipes mend and un-mend and nobody can get anywhere,” Lydia wrote to her mother-in-law. They were installed in an enormous suite next to Secretary of the Treasury Henry Morgenthau. Unlike the voyage over, the conference was “a madhouse,” Lydia observed, “with most people working more than humanly possible.”8
FDR had issued the invitations to the conference, and Morgenthau acted as titular host, but the principal architects, planners, and parliamentarians were his aide Harry Dexter White and Keynes. The principals came with different ideas, divergent interests, and, in many cases, hidden agendas. The hotel was crawling with spies. Delegates had no authority to bind their governments. But the organizers recognized that they must guarantee an economic recovery and that no recovery could take
place without cooperation. The framers shared the determination expressed by FDR in his State of the Union address not to repeat the mistakes made after World War I, and to take a global, multilateral, “United Nations” approach. The very fact of the conference reflected a radical redefinition—and enlargement—of government’s responsibilities. Just as Washington, London, and Paris now accepted responsibility for keeping employment high at home, virtually every government in the West accepted some measure of responsibility for keeping employment high in their trading partners’ economies too.
The precise features of the new order reflected a shared view of what had gone wrong the last time and a conviction that getting things right had ramifications that were more than economic. FDR, Churchill, and Keynes and his American disciples believed that economic pathologies—inflation and unemployment—had produced Fascism and fatally weakened many democracies. They believed with equal conviction that the breakup of the pre–World War I global economy—produced by the frantic beggar-thy-neighbor attempts of each nation to insulate itself from the worldwide economic crisis—and the accompanying decline in world trade were partly responsible for world war. Economic rivalry might lead to war. As Cordell Hull, the American secretary of state, put it: “[Un]hampered trade dovetailed with peace; high tariffs, trade barriers and unfair economic competition with war . . . If we could get a freer flow of trade . . . so that one country would not be deadly jealous of another and the living standards of all countries might rise . . . we might have a reasonable chance of lasting peace.”9
The great innovation of the 1920s and 1930s—the economics of the whole developed by Fisher, Keynes, and, to a lesser extent, Schumpeter and Hayek—taught that what was good for one nation might easily be bad for all. Devaluing one’s currency, erecting trade barriers, and clamping controls on capital outflows might be effective for reducing balance-of-payment deficits, stopping the outflow of gold, and pumping up government revenues. But if everybody adopted the same tactics, the eventual result would be universal impoverishment and unemployment. In the 1930s, world trade fell by half, and trading continued mostly within currency blocs like the pound sterling bloc within the British Empire, the Soviet sphere, and the bilateral trading bloc designed by Hitler’s economics minister, Dr. Hjalmar Schacht. It was now commonly acknowledged that keeping free enterprise functioning globally required the visible hand of government. In a way, biographer Robert Skidelsky points out, the new arrangement devised by White and Keynes was Keynesianism applied globally.
The purpose of the Bretton Woods conference was to revive world trade and stabilize currencies and to deal with war debts and frozen credit markets. The war had left much of the world dramatically poorer, and countries had to be able to earn their way back to prosperity. In the broadest sense, salvage meant rebuilding and reconstruction, moving back toward pre-1913 globalization, but without reviving the pre–World War I assumption that the economic machinery worked automatically. For the West, it meant learning from the past in order to avoid the mistakes of the interwar era—the very lesson that Marxists claimed capitalists could not learn—and restoring lost moral and material credibility. Economic stability was a key to political stability, and economic growth was a necessary if not sufficient condition for the long-run survival of the West. Modern societies could not survive if the ingenious mechanism malfunctioned or broke down, any more than great cities could survive without electricity or trains.
Unlike the British thinkers who championed free trade in the 1840s, neither Keynes nor Fisher (nor Schumpeter nor Hayek) believed in an automatic tendency toward peace and progress such as had been cheerily assumed by so many in the Belle Epoque. Governments had to intervene; international cooperation was required. No system was spontaneously generated or self-regulating, as had been taken for granted before 1914. It would require the sole remaining superpower in the West and the once powerful but now humbled European empires to create one. The alternative was unthinkable. White suggested that failure would lead once more to war: “The absence of a high degree of economic collaboration among the leading nations will . . . inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale.”10
In other words, White and Keynes shared the fears of George Orwell, Gunnar Myrdal, Schumpeter, Hayek, and many others, but they were neither slaves to economic determinism nor radically distrustful of government. They were not prepared to believe that governments could not now be convinced to avert both depression and war by establishing a common framework for cooperation. They believed that democratic governments could learn from past mistakes and rejected both the Marxist notion of historical necessity and the traditional presumption of Great Power rivalry. They certainly did not share Stalin’s conviction that war was part of capitalism’s DNA.
The real test, of course, was not only whether the West could learn from history but whether, with the help of its ingenious mechanism, the West would draw the right lessons.
• • •
In 1944 England was fighting for her life at any cost, even if it meant losing much of its empire, cooperating with the Soviet Union, and playing second fiddle to an increasingly assertive United States. All British visions of the postwar world, except for a tiny band of Communists, had in common the overwhelming priority of keeping the Americans engaged in Europe.
At the end of World War I, the United States was already the world’s biggest and richest economy, but not a superpower. At the end of World War II, it was the sole superpower. As successive American administrations were to learn, greater wealth and power turned out to involve more rather than less interdependence. At the end of World War I, Woodrow Wilson’s argument for America’s continued engagement in European affairs fell on deaf ears. In 1944 the argument that the world had to be made safe for the United States no longer seemed far-fetched. Pearl Harbor had shattered, once and for all, the American illusion that two oceans could protect it from foreign security threats.
According to historian John Gaddis, Roosevelt’s wartime priorities were supporting the Allies, since the United States could not defeat Japan and Nazi Germany alone; winning their cooperation in shaping postwar settlements, since no lasting peace was possible without Soviet participation; insuring a multilateral approach to security; and preventing another Great Depression. Finally, because the United States was a democracy and politicians had to defer to popular opinion, Roosevelt was committed to convincing the American people that a return to prewar isolationism was unthinkable.
At the Hotel Majestic in Paris in 1919, Keynes had been one of hundreds of technical advisors with little hope of being heard and still less hope of shaping the outcome. At the Mount Washington Hotel in 1944, he was a pooh-bah, to use Lydia’s favorite expression. The Allies had learned from experience. They now assumed that peace depended on economic revival. In 1918 that presumption had been shared by only a few—Schumpeter, Keynes, and Fisher among them—but hardly by the leaders of the victorious nations or their electorates.
Britain’s bankrupt status and financial dependence on the United States meant that the Americans would largely determine the outcome while putting on an appearance of cooperation. On their side, although Treasury Secretary Morgenthau was nominally in charge, Harry Dexter White, his deputy, was the only one “who knows the complete matter” and “who can prevent a vote on anything he doesn’t want voted on.”11 White orchestrated everything from press conferences to having transcripts typed and distributed.
Keynes, typically, took little trouble to disguise the fact that he was ramming his views down the throats of the banking committee that he chaired. Morgenthau had to go around to Keynes’s suite and “ask him would he please go slow and talk louder and have his papers in better arrangement.”12 Skidelsky points out that if Keynes was not inclusive, he was at least efficient, and that his haste in rushing through the agenda reflected exhaustion and a growing determination to get away as soon as possible. Keynes gave
the final speech at the banquet, his arrival prompting the entire meeting to stand up, silently, until he made his way to the dais and sat down.
• • •
“The Soviet Union is a coming country, Britain is a going country,” Harry White told Keynes at one point in their long and difficult negotiations.13 As Skidelsky points out, Keynes was sometimes puzzled by White’s obsession with Russia and often outraged by his hostility to Britain. What he did not apparently suspect was that his most influential American disciples—and, more often than not, adversaries at the negotiating table—were passing government secrets to the Soviet Union and helping the Soviets to spy on him and other delegates. Among the gaggle of government economists White brought with him to Bretton Woods were a dozen or more employees of the Treasury’s Monetary Research Division who were members of the “Silvermaster ring” of agents for the KGB.
The wartime alliance, Soviet heroism and sacrifice in defeating Germany, and the role of European Communists in the resistance all explain why the first revelations that the Soviets had set up a large-scale espionage operation seemed at first incredible, and later so shocking. Most disturbing was the Soviets’ reliance on a fifth column of American citizens so reminiscent of the highly successful Nazi strategy of relying on a network of sympathizers in Europe. The newly burnished image of the Soviet Union explains not only why FDR and Truman were slow to accept that World War II would be followed by a Cold War, but also what now seems unfathomable: how some of the brightest and best were willing to serve as spies, agents of influence, and apologists for a foreign regime and why most, apparently, had no regrets. They did what they did for the sake of “mankind.”