The Soviet spy, the birth of the IMF, and the 1940s roots of today's crisis

Crises are born from stranger places.

Although the spectacular collapse of the global economic was apparently sudden and unpredicted, it is a crisis that has been building since the structure of the global economy was put in place in the desperate days of the mid-1940s. I want to take a step back from the feverish debates taking place in the Eurozone and explore the roots of the crisis in the agreements reached at the end of the Second World War, and question the rather dubious credentials of the man who can be said to have emerged victorious from those negotiations.

In these days of Depression and the failure of the neoliberal economic model many eyes are cast back nostalgically to the 1930s and the work of Keynes is receiving a particularly rapid rehabilitation. Keynes is identified most strongly with his support for government involvement in the management of national economies. This was a lesson learned the hard way during the last global depression, and that was deliberately unpicked by intellectual and political strategies dating from the 1970s onwards. In contrast to George Osborne, Keynes focused on the national economy as a system. His idea of the multiplier effect expressed the way that government spending is not money wasted or added to a pile of debt, but rather generates further cycles of spending. It thus stimulates economic activity, supports livelihoods and generates further tax revenue.

But arguably Keynes’s contribution to the international economic system was at least as impressive. The design for what is sometimes rather pompously called the ‘global financial architecture’ ate away the last years of his life. I imagine him at Bretton Woods, arguing to defend the equality of nations against the threat of dollar imperialism: a struggle that ended in failure. It is perhaps too romantic to suggest that Keynes was heart-broken by his failure to win the debates, but within two years of the conference he was dead.

Keynes’s opponent at Bretton Woods was Harry Dexter White, the chief economic adviser of Treasury Secretary Henry Morgenthau.1 Our memory of policy towards the devastated countries of post-war Europe is of the US munificence of the Marshall Plan. The Morgenthau Plan is not so well remembered: its intent was to deconstruct the industrial infrastructure of Germany so that it could never again threaten the stability of Europe.2 Germany was to be returned to a peasant society. The chief author of this plan was Harry Dexter White. Those of us on the left have long assumed that Marshall investment was not motivated by compassion but by the fear of communism. How might it change our view if we were to find evidence that White may have been working for the Soviet Union?

There have long been rumours circulating to this effect, but a book published by former KGB officer Vassieliev produces fairly compelling evidence:

The most important member of the Silvermaster network and the most highly placed asset the Soviets possessed in the American government was Harry Dexter White, assistant secretary of the Treasury. More than two dozen KGB documents, spanning 1941 to 1948, spell out his assistance to Soviet intelligence.3

To put this into context we have to recall, first, that the US and Soviet Union were allies for most of the period that White worked for the US government. Secondly, wartime economies were heavily centrally controlled, and hence the ideological distance in terms of economic policy between US civil servants and their counterparts in the 1940s was considerably smaller than it became as the Cold War progressed.

More important in the context of our present situation is the role played by White at Bretton Woods, the conference held at the New Hampshire resort where the Allies debated the structure of the post-war global economy. As US Treasury Secretary, Morgenthau also chaired the Bretton Woods conference. As with his Plan for Europe, he saw the weakness of the US’s competitors as an opportunity to increase US power in the post-war world. The objective of the Bretton Woods negotiations was to put in place a structure that would achieve stability and fair competition between nations, but prevent the destructive consequences of the gold standard and the excessive competitive pressures of uncontrolled currency competition that had contributed to international tensions and eventually war.

White and Keynes were the chief negotiators for the US and UK and shared much understanding about how to design the new system. They agreed about the importance of maintaining some political control over exchange rates between national currencies, a compromise between fixed exchange rates and fully floating exchange rates that became known as the ‘pegged rate currency regime’. As White put it:

‘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.’4

The system of exchange rates free to move within a fixed band system achieved tremendous stability for nearly 30 years, until Nixon’s unilateral decision to cut the link between the dollar and gold in 1971.

This brings us to the crucial disagreement between the two economists: what would the world’s nations peg their national currencies to? White’s plan gave this role to the dollar, making it the world reserve currency; Keynes suggested the creation of a neutral trading currency he had called the ‘bancor’, or ‘bank gold’. This would achieve stability without limiting policy to the volume in circulation of one particular naturally occurring mineral. If the dollar became the peg currency then it would effectively enable the US to print money and buy up the world’s production in return. The link with gold prevented that in theory, but the link with gold would always be, as history proved, subject to the decision of the US President.

Speculation about White’s relationship with the Soviet secret services leads to questions about why Truman chose him to be the first Executive Director of the International Monetary Fund. It has been suggested that this might have been a protective strategy, moving White out of the administration. So while White's move to become first head of the IMF may seem incredible, in fact it sheltered him from national legal investigation in the US, and so protected the reputation of the Truman administration.

The piecing together of this jigsaw puzzle, a crucial piece of which has only come to light since the end of the Cold War, raises a series of fascinating questions. The first is what motivated Harry Dexter White to propel us into the post-war world of dollar-controlled capitalism. It seems rather a stretch to suggest that the Morgenthau Plan, heavily influenced by White, was a strategy to destabilise the societies of post-war Europe. It certainly had this effect, with votes for Communist parties soaring, especially in Italy, where only the intervention of the CIA prevented a Communist victory in the 1947 election.5

If his Morgenthau Plan was intended to ensure instability and social unrest in Europe, perhaps his Bretton Woods Plan was designed to achieve similar effects at a global scale? His success in massively enhancing the power of the dollar in the post-war world seems more obscure when viewed in terms of its potential benefit to the Soviet Union. Did he hope that the US would become massively indebted and that this would challenge the dominance of the capitalist system of which it was the heart? Did he underestimate the resilience of the free-market system, or is he still waiting to be proved right?

There are two problems with re-evaluating history in this way. First it is easy to forget the context. Both the Morgenthau Plan and the Bretton Woods agreement were drawn up before the Cold War; for example, it was originally envisaged that Russia would become a member of the IMF. Secondly, it is difficult to interpret the motivations and expectations of the players. If we are prepared to accept that White was attempting to further Russian interests, what would he have thought that meant? Building the inevitability of crises into the global financial system perhaps.

Poignantly, White may also have died of a broken heart. He suffered a heart attack shortly after giving evidence to McCarthy’s House Unamerican Activities Committee in August 1948, and died a few days later.

1. Information on White is taken from Boughton, M. (2004), ‘New Light on Harry Dexter White’, Journal of the History of Economic Thought, 26/2: 179-95.

2. The Morgenthau Plan, including the role of Harry Dexter White, was the subject of a programme in the Radio 4 Series Things We Forgot to Remember, broadcast on 7 June and available as a BBC podcast.

3. Haynes, J. E., Klehr, H. and Vassiliev, A. (2009), Spies: The Rise and Fall of the KGB in America (Yale University Press), p. 258.

4. Jones, B. D., Pascual, C. and Stedman, S. J. (2009), Power and Responsibility: Building International Order in an Era of Transnational Threats (Washington: Brookings Institution) p. 234.

5. See the interview with CIA operative F. Mark Wyatt in the CNN Cold War archive, who also identifies George Marshall as a key player in this operation.

The front cover of a 1953 edition of Time, asking what President Truman knew about Harry Dexter White.

Molly Scott Cato is Green MEP for the southwest of England, elected in May 2014. She has published widely, particularly on issues related to green economics. Molly was formerly Professor of Strategy and Sustainability at the University of Roehampton.

Photo: Justin Tallis/Getty Images
Show Hide image

What does our latest poll mean for the Labour leadership race?

Jeremy Corbyn is ahead among councillors - and looks ever more certain to become Labour's next leader. 

This morning the Labour History Research Unit at Anglia Ruskin University released its last set of polling data of Labour councillors in marginal constituencies’ prior to the election of the new leader.

It’s certainly a limited enough snapshot but in broad terms the data suggests four things. Firstly, that Jeremy Corbyn will win the leadership. Perhaps no great shock there at this point. But Corbyn’s slight lead in our poll of only two points or under above Yvette Cooper and Andy Burnham masks the fact that he has picked up over 11 per cent of councillors since June - whilst all other candidates have lost support here. Given his reputation as a centraliser, it is remarkable that Corbyn is also neck and neck with Andy Burnham as the candidate councillors believe ‘would be best for local government.’ If he’s just about won over this tough crowd it may indeed be game over.

Secondly, the £3 registered supporter experiment is viewed as a damaging one by many within the party. With almost six in ten councillors thinking it should be ‘scrapped ahead of any future contest’ compared to just over one in four seeing it as a positive, there may well be clamour to reform this model going forward. Whether Corbyn will want to challenge the legitimacy of a reasonable proportion of his backers is one thing, but he would likely have some support in doing so if others were to press the issue.

Thirdly, on whatever mandate Corbyn is elected the good news for him is that key councillors clearly back Corbynomics. His plan to create a regulated and publicly-run service to deliver energy supplies is backed by 78 per cent of councillors who either “strongly agree” or “agree” with the policy, while 77 per cent support nationalising the railway network as soon as practicable. Introducing a 50p top rate of income tax is backed by 79 per cent of councillors, while 73 per cent agree with a “mansion tax” on homes worth over £2million. Most of those individually poll well amongst the electorate, though the 75 per cent of councillors who think scrapping tuition fees would aid the Labour vote in their constituency are out of kilter with the only one in six members of the general public who support that measure.

But lastly, perhaps most crucially, the rub is that less than two in ten councillors surveyed think Jeremy Corbyn will win the 2020 General Election. Even amongst councillors pledging to vote for Corbyn that figure tops out at six in ten.

Our data aside, Corbyn’s medium term challenge will clearly be enormous, as they would be for any new leader. For one, Labour’s current core vote just doesn’t turnout in enough numbers – not only in terms of voting for Labour, but at all. In 2010 and 2015 Labour’s most successful demographics were the semi-/low skilled working class (40 per cent to 31 per cent over the Tories in 2010, 41 per cent to 27 per cent in 2015) and ethnic minorities (60 per cent to 16 per cent in 2010, 65 per cent to 23 per cent in 2015). Turnout for both these groups is at least one in ten less than the national average, and barely bobs over one voter in two generally.  

Instead, in 2015 the most likely people to vote were men over the age of 55 (79 per cent), the middle class (75 per cent), or property owners (77 per cent). And so Jon Cruddas’ reviews’ conclusion that Labour has fallen behind on the average Prospector vote – those who ‘vote pragmatically for whichever party they think will improve their financial circumstances’ – has much resonance. The grey middle class might not be the sexiest of demographics, but they often decide elections. Miliband may have gained 12 per cent more 18-24 year olds (turnout 43 per cent) in 2015 than five years earlier, but the fact that he managed to do 8 per cent worse than Gordon Brown’s 2010 performance with the crucial over 65s (turnout 78 per cent) put the final chisel in the Edstone.

Perhaps if you give young voters a “radical alternative” they really will turn out – though worth recording that turnout amongst under 25s at the ‘real choice’ election of 1979 was the lowest either side of the majority Labour governments of 1966 and 1997 – but there are no guarantees. All this is a challenge for Labour per se however, not just Corbyn.

For the bookies’ favourite himself there are some specific complications. Big ticket policies like People’s Quantitative Easing have been queried by fellow leadership candidates (to declare an interest, while I am a Kendallite, I wrote a report arguing for a much truncated, one-off form of People’s QE in 2012), though it is just about backed by councillors in our survey. Corbyn’s foreign policy choices of threatening to leave NATO (rejected by two thirds of councillors) and scrapping Trident (rejected by a third) are also likely to be controversial. And the sum total of a left leaning agenda – as Ed Miliband discovered – is often less than its constituent parts. If Jeremy Corbyn is going to become the first opposition leader since 1906 to gain a full parliamentary majority whilst pledging to raise the top rate of income tax, he’s got a lot of work to do.

But our survey suggests that he’ll get the time to do it. If our data suggests Corbyn is at present unlikely to be Prime Minister, for all the talk of an early coup against him, he looks in a strong position to at least contest that election. And that remains an astonishing rise.

Richard Carr is a Lecturer in History at the Labour History Research Unit (LHRU), Anglia Ruskin University. The LHRU has today released new polling data on the Labour leadership. The views expressed in this article are not necessarily those of the LHRU, the kind councillors of all parties who took time to answer the survey, or Anglia Ruskin University.

Our Partners