Misremembering Keynes

The postwar order that emerged from the Great Depression was as fragile as it was prosperous.

The Bretton Woods system of managed currencies and fixed exchange rates began at a 1936 meeting of the Allied powers. The immediate impetus for the gathering was geopolitical: Germany’s new Luftwaffe and its invasion of the Rhineland augured war, and goldbugs — whether they knew it or not — needed France’s government to stand.

So Roosevelt convened his allies, hoping to convince the British government to let Leon Blum’s newly elected socialist government devalue the franc.

The storied meeting’s long-term outcome is better known: the Tripartite Agreement to intervene in currency markets laid the groundwork for the Bretton Woods conference, and the new era of global economic governance that would persist until 1973.

The Tripartite Agreement marked a major policy shift, inaugurating a period when domestic goals — such as full employment and price stability — were relatively insulated from the interference of private investors.

Their speculation and skittishness had compromised governments’ ability to achieve these goals, so from henceforward the money market would be heavily managed by public officials.

The US government’s ability to steward this emerging order required not only an ideological revolution in Washington, but also an expansion of the state’s administrative capacity.

Eric Rauchway celebrates the effects of these changes in his new book, The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace.

Behind Closed Doors

Rauchway’s adulatory title suggests a single thread that unites the transformed state-economy relationship in the Roosevelt era: money.

The Money Makers argues that a group of intrepid pragmatists grappled with the vain prejudices of the international banking establishment during the Depression and won, and that it was this victory that led to the long and stable postwar boom.

If this summary reads like a therapeutic exercise in present-minded wish fulfillment, that’s because it is. Irked by the Obama administration’s stillborn stimulus, Rauchway wrote the book while immersed in the John Maynard Keynes archives as a visiting scholar at Oxford.

The Money Makers, however, all but ignores the importance of deficit spending and public works. Instead, its focus is the gold standard and the controversy surrounding the establishment of an exchange mechanism for global trade that was more flexible and more democratically controlled than it ever had been.

Rauchway’s story goes something like this: as the world entered a prolonged deflationary period following the 1929–1931 financial crisis, Roosevelt manipulated the price of the dollar, inducing inflation to raise commodity prices and farmers’ incomes.

The president ejected opponents of inflation — who were all bankers or, like Dean Acheson and Lewis Douglas, friends of bankers — from his circle of cabinet secretaries and informal advisers.

Then he shrewdly maneuvered Congress into passing the 1934 Gold Reserve Act, legalizing a number of administrative tools for currency manipulation that he went on to use to inflate prices, to restore domestic profitability and investment, and to stabilize global trade. Finally, Rauchway tells us, the International Monetary Fund and World Bank were established, and prosperity flourished.

The book’s dramatic sweep is the divisive politics of currency manipulation, and Rauchway’s sleuthing into the drawing rooms that sit atop the interlocking nexuses of state and finance certainly has its virtues.

We see the bilious disgust of James Warburg — the New York banker, son of a Federal Reserve Board member, and unofficial economic adviser in the orbit of the early FDR administration — when, panicked at the idea of currency values controlled by anyone outside his profession, he describes Roosevelt’s inflationary gold-buying plan as “completely communistic.”

We see the petulance of Federal Reserve Board Chairman Eugene Meyer, who resigned in 1933 to purchase the Washington Post for the sole purpose of, in his words, “fight[ing] the inflationary policies of Mr. Roosevelt and his crowd.”

And we see Acheson, who insists that “no reputable economist agreed with the milk farmer [George Warren] who was proposing” inflation. Much of the book’s work is exposing the alarmism of financiers.

True to form is the red-eyed argument one evening, when budget director Lewis Douglas, along with Warburg, yells at the president that if elected representatives were put in charge of monetary policy, it would be “the end of Western civilization.”

Rauchway’s interest in office intrigue yields some real historical gems. For example, one account of the Douglas-Warburg-Roosevelt argument comes from the diary of Celeste Jedel, economic adviser Raymond Moley’s secretary, whose fly-on-the-wall encounters with elite bureaucrats translates the language of high politics into a useful moral vocabulary.

During another debate between Moley, Roosevelt, Felix Frankfurter, and William Woodin about the banking sector’s health, Jedel recorded the president’s caucus declaring, “To hell with the system, if it is going to be preserved solely in the interest of those who have been hurt least by what has happened.”

In a similar vein, Rauchway reports how Henry Morgenthau explained the de facto results of Roosevelt’s monetary policy to Harry Truman: “We moved the financial capital from London and Wall Street right to my desk at the Treasury.”

Such revolutionary rhetoric is heartening, but misleading. When Rauchway declares that the postwar settlement fulfilled its promises, he misrepresents a number of crucial historical points, most especially the reasons for the end of the Depression, for mid-century economic stability, and for its disintegration in the 1970s.

Part of the trouble comes from Keynes’s appearance in the book. Rauchway admits to a fascination with Keynes, yet downplays the economist’s central arguments. As Robert Skideslky has argued — and as The General Theory itself made clear — Keynes’s unique contribution to liberal economic thought was his warning about the limits of monetary policy as a tool of economic management.

This is clearly evident today, as central banks set interest rates near zero, yet capitalists refuse to marshal these extra funds to generate employment. Predicting this, Keynes argued that when investors fail to promote adequate growth, the government must step in and spend their savings for them.

Rauchway brushes off Keynes’s warning, prioritizing Roosevelt’s monetary policies over his fiscal interventions. He acknowledges that congressional conservatism and a commitment to balanced budgets limited recovery during the Depression but insists that activist monetary policy was key to ending the slump. This conclusion defangs the lessons of history.

Indeed, “if Roosevelt’s fiscal policies did not have sufficient effect, [but] his monetary policies did,” as Rauchway argues, then presumably the last eight years of quantitative easing would have resulted in a much stronger recovery.

Indeed, it was unionized war production, not monetary expansion, that put money in American workers’ pockets, conclusively ending the slump. Rauchway understates how important war mobilization was in bringing a truly Keynesian fiscal policy to the United States.

Rauchway’s narrative of postwar economic growth and stability is also incomplete. Shortly after Morgenthau’s dramatic statement about the shifting power dynamics in the world of finance, the whole apparatus was given right back to the bankers — quite literally, as Eugene Meyer assumed control of the World Bank in June 1946.

A fiscally conservative US Congress ratified banker control when it refused to finance the International Monetary Fund, which was founded to allocate foreign currency reserves between trading partners on the basis of social need, not investor preference.

Under Keynes and Treasury Undersecretary Harry Dexter White’s original plan, a country in need of foreign currency would simply be granted the cash.

“The Articles of Agreement flatly stated that a country ‘shall be entitled’ to buy currency from the IMF,” historian and economist Barry Eichengreen explains, and “initially it was unclear whether the Fund had legal authority to make borrowing subject to conditions.”

But congressional timidity and jealousy forced the IMF to turn to Wall Street for funds. The result was an international monetary regime founded not on the needs of industrial economies but on the economic prejudices of private investors.

And when the IMF’s board of executive directors succumbed to pressure from US finance and established a policy of setting conditions on access to credit tranches, profitability once again superseded social welfare as the international monetary system’s governing logic.

Rauchway’s epilogue sidesteps this massive shift by hastily surveying the legacy of the Bretton Woods institutions. “By the middle of the 1950s . . . the Fund began to operate in earnest,” he declares. “And the world economy fared better than it ever had before.”

But it wasn’t the compromised IMF and World Bank that underwrote the tremendous economic growth of the Western-bloc countries in the postwar decades: it was secure markets for US exports with Marshall Grant aid to finance them, and Cold War military spending in Korea, Europe, and Vietnam.

Moreover, this initial compromise led directly to the regime’s demise by the early 1970s. The contradictions were too great: the old system of fixed exchange rates simply wasn’t compatible with increased capital mobility, which was becoming a condition of profitability for US multinationals.

Indeed, the real test of the postwar regime would have been whether the Nixon, Ford, or Carter administrations could adjust to the decline of European and Japanese export markets without declaring class war.

Facing record numbers of plant closures, they could have protected workers’ livelihoods in a variety of ways, including with capital controls or central economic planning, nationalizing distressed industries, or returning to protectionist policies. The US rust belt illustrates that none of these options were taken seriously.

Instead, the United States inaugurated a system of floating exchange rates that gave private investors tremendous power over national governments. Investor prerogatives came to shape the short-term volume and direction of trade and employment, and the terms and conditions of investment.

In the past forty years, the IMF has become the largest impediment to the continuation of some of the most basic achievements of the twentieth century — working-class victories such as guaranteed pensions, collective bargaining, and public ownership of infrastructure and utilities.

Any adequate reappraisal of the social-democratic moment of world history should at the very least ask how this subversion could have happened.

But Rauchway doesn’t even recognize that it did. When he insists, “even with the demise of the Bretton Woods exchange-rate regime the major shift made in the Roosevelt era persisted,” one wonders exactly what he means.

The Money Makers focuses on the moral and intellectual courage of the New Dealers, but obscures how the historic projects represented by Roosevelt and Keynes were left unfinished, and therefore profoundly contradictory.

Rather than a story about the broad — and halting — trends of state expansion that supported global economic development, Rauchway has written a social drama about the bureaucratic and intellectual relationships on which those decisions turned.

It is an attempt to persuade readers that the reconciliation between American capitalism and modern money was the New Deal’s great success. However, this arrangement left the postwar order as fragile as it was prosperous. If we hope to understand why the boom ended, we should at least understand what it was.