The Federalist Society

Book Review: Bretton Woods and Dumbarton Oaks: American Economic and Political Postwar Planning in the Summer of 1944 by Georg Schild

Financial Services & E-Commerce Newsletter - Volume 1, Issue 1, Fall 1996

December 1, 1996

John Pickering

Bretton Woods and Dumbarton Oaks: American Economic and Political Postwar Planning in the Summer of 1944
By Georg Schild
St. Martin's Press, 1995

When I was an undergraduate considering whether to pursue graduate studies in economics, I once asked someone about suggestions for a thesis topic in a subject like economics. The response was, "Well, you could take some historical event--say World War II--and pose a question, such as, `What would the global economy look like today if World War II had never taken place?' And then you write a thesis about it." That's when I decided to put aside the study of economics in favor of the more humble pursuit of law.

Other economics students persevered, unintimidated by the sometimes overwhelming scope of macroeconomic research. They'll spend years of their lives building models for other economists to tear apart. But in Bretton Woods and Dumbarton Oaks, Georg Schild tells the story of one economist who didn't just build models and answer historical hypotheticals. Instead, this economist attempted to construct the entire post-World War II international monetary system from scratch--and, to a significant extent, he succeeded. This economist was Harry Dexter White, special advisor to Secretary of the Treasury Henry Morgenthau, Jr. Just one week after the Japanese bombed Pearl Harbor, Morgenthau put White to work on an inter-Allied currency stabilization fund. White drew on his own ideas about an international fund which dated back to at least 1935, when he had worked on problems with currency exchange rates. By 1942, he had formed the plan which served as the basis for US policy throughout the war and which drove the US proposals at the Bretton Woods Conference in New Hampshire for what eventually became the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development. In the State Department, on the other hand, no single political scientist rose to the postwar planning challenge in the way that White did at Treasury. But this is not to say that the State Department wasn't working. It certainly was, and it began its postwar planning even earlier than Treasury, starting in late 1939 after Germany invaded Poland. Hundreds of committee meetings, thousands of position papers and plenty of department officials and outside specialists were involved in the planning behind the Dumbarton Oaks Conference, held at an estate in Washington, D.C., which led to the forming of the United Nations.

Schild reminds us that the early postwar planning efforts at Treasury and State are fully understandable when we take into account historical events leading up to 1940. The Treasury Department had learned a lesson from the prewar tariff system based on economic nationalism and the tendency of governments to devalue their currencies as a weapon in international trade. Treasury officials knew that free trade was beneficial because it made it possible for Americans to buy the products they wanted at lower prices, but they realized also that "American deflations, devaluations, and high protection are inimical to world order," as Chicago economist Henry C. Simons put it. The Treasury Department understandably (and admirably) wanted to use the war as an excuse to put the international economic house in order.

The State Department had even better reasons for early and effective postwar planning. The League of Nations had failed in its most important purpose--the prevention of World War II. And in the pre-Cold War days, when all the major participants still envisioned a postwar world dominated by several major powers, including the United States, Great Britain, the Soviet Union, China, and possibly France, some sort of international collective security organization including all of these powers seemed essential.

Schild does a valuable job of laying out the political background for the Bretton Woods and Dumbarton Oaks Conference, as well as the developing positions of the major participants. He places the conferences in the context of the emerging American rejection of isolationism. American support for US participation in a League-of-Nations-type of international peacekeeping organization jumped from 38% in May 1941 to a staggering 81% in April 1945. The shift from isolationism to internationalism during the war is so striking that it is almost surprising that the one-world government enthusiasts didn't get more support than they did. Schild uses this context to compare and contrast the two conferences, allowing him to draw some interesting comparisons between postwar economic planning and postwar security planning.

Bargaining with the Soviets

For example, Schild capably details the fascinating matter of US-Soviet bargaining surrounding the two conferences. As an initial matter, it is still not fully clear why the Soviets even participated in the conferences. While it is likely that Stalin saw some real potential for the collective security organization discussed at Dumbarton Oaks, the debate continues about what Stalin hoped to gain from the Bretton Woods Conference. Contemporary critics of Soviet motivations speculated that the Soviets simply saw any international monetary fund as a source for hard currency, and would join if it looked like a good bargain for them. Schild's reasoning is more nuanced and better explains why Stalin sent representative to both Bretton Woods and Dumbarton Oaks. Schild concludes that Stalin saw the potential in the two conferences for greatly increasing the international prestige of the Soviet Union. To sit as an "equal" at the bargaining table with Great Britain, whose Prime Minister Churchill had publicly advocated the overthrow of the Soviet government after the 1917 October Revolution, and the United States, who had only recognized the Soviet government's legitimacy in 1933, must have seemed an appealing proposition.

But Stalin was looking for more than good international public relations. Once the Soviet Union had been recognized as a major world power--one of the Big Four of the US, the Soviet Union, Great Britain, and China--it set to work through its conference delegations to shape the postwar economic and security structures to its own advantage. At Dumbarton Oaks, the major dispute was over the voting arrangements for the United Nations Security Council. (None of the major participants objected to the General Assembly/Security Council system in principle.) The Soviets insisted from the very beginning that each permanent member of the Security Council have a veto in all council decisions. That system would allow the Security Council, they argued, to control its own military force, perhaps even an international air corps. With an assured veto of any council decision, no major power would be threatened. The opposing argument was that if the permanent members had an absolute veto right, they would effectively be outside the rules by which all the smaller nations had to play. Great Britain proposed a system under which any permanent council member involved in a conflict would not be allowed to vote on matters pertaining to that conflict. In developing its own position, the US had to bear in mind how the Senate would react to a proposal that might be interpreted as taking away from Congress' exclusive right to declare war under Article I, Section 8 of the Constitution.

The dispute over council voting was so severe that Dumbarton Oaks ended without resolution. The Soviets had even upped the ante when the US had announced its agreement with the British position. To avoid being the only communist kid on the UN block, the Soviet Union demanded a seat in the UN General Assembly not only for itself, but for each of its sixteen republics. Schild speculates that this demand was never anything more than a negotiating tactic, and the Soviets didn't press it after the conference, although they did end up with three seats. The voting dispute was finally resolved by Roosevelt, Stalin and Churchill meeting together at the Yalta Conference. The final resolution called for any permanent council member involved in a dispute to abstain from voting on whether or not to bring the conflict before the council for discussion. But each member would retain its veto power over any action the council might otherwise decide to take.

At Bretton Woods, the dispute was over the size of the Soviet quota in the monetary fund. (Member nations could borrow other nation's currencies--especially US dollars--from the fund up to their quota limit in exchange for a host of restrictions on their ability to devalue their own currency and otherwise destabilize international trade systems.) The initial American proposal was to give the US a $2.93 billion quota, Great Britain a $1.25 billion quota, the Soviets $763 million, and China somewhat less. The Soviet delegation drew a line on the quota issue from which it never backed down--if Great Britain were to have a $1.25 billion quota, then the Soviet Union must have at least $1.2 billion. According to Schild, the only sensible explanation for this Soviet insistence was the Soviet's sense of national pride--their prewar trade volumes certainly didn't justify such a large quota. On the other had, the actual amount of money at issue was relatively small, even in 1944. The US eventually gave in to the Soviets on their $1.2 billion demand in exchange for Soviet concessions, including a willingness to require that fifty percent of each nation's contributions to the fund be made in gold (the Soviets had earlier insisted on twenty-five percent).

The Soviet insistence on the $1.2 billion quota is particularly intriguing in light of the fact that the Soviet Union never joined the IMF. (Russia finally joined in 1992 after the break up of the Soviet Union.) Coupling that historical quandary with the fact that Harry Dexter White, the man who personally oversaw most of the planning behind the IMF, was accused of spying for the Soviets during the war, one might pursue some interesting theories about secret conspiracies and agendas. But it is characteristic of Schild's entire book that he completely avoids analysis of these questions. Instead, he favors straightforward narrative history relying on open, believable sources. The disadvantage of this approach is that it tends to lack excitement; there are no startling revelations or strikingly novel theories awaiting the reader. The upside to Schild's stick-to-the-facts mentality, of course, is that his final product is informative, credible and likely to be a useful reference tool for a long time to come.

The Cold War

Schild also includes a final chapter evaluating the results of the Bretton Woods and Dumbarton Oaks conferences in light of the ensuing Cold War. In one sense, both conferences were failures. The Soviets never joined the IMF, and both the IMF and the International Bank for Reconstruction and Development quickly proved woefully undercapitalized to fulfill their mission of helping to rebuild Europe. That task was left to the Marshall Plan. The IMF's exchange-rate stabilizing system never had much of a chance to work, as the British pound wasn't made fully convertible until 1958, and the US went off the gold standard in 1971, effectively ending the system and leading to freely fluctuating exchange rates. As for Dumbarton Oaks, Schild notes that the participants had designed a security system ideal for the pre-World War II world of a handful of powerful nations in need of collective security arrangements. But after World War II, the bi-polar nature of the Cold War quickly became evident, and the Security Council veto arrangement worked out at Yalta effectively crippled the council in all too many conflicts.

Yet, in another sense, both conferences were successful, at least in terms of what they may have helped to prevent. Despite recent political glances toward protectionism, the US has not returned to the Smoot-Hawley mentality of economic nationalism, and free trade has thrived globally in the latter half of the twentieth century, raising people's standards of living almost everywhere. Exchange rates have certainly had (what else?) their ups and downs, but the temptation for governments to wield their power over the currency as an international weapon is not quite as great as it once was. As for the United Nations Security Council, Schild notes, as have others, that it finally began, however fitfully, to fulfill some of its functions with the end of the Cold War--such as sorting out the good from the bad in a world full of border disputes and civil wars. In any case, Schild's book usefully organizes and details the background information necessary to begin making such judgments.

*John Pickering is an associate with the law firm of Balch & Bingham in Birmingham, Alabama.

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