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.

Getty
Show Hide image

Four times Owen Smith has made sexist comments

The Labour MP for Pontypridd and Jeremy Corbyn’s Labour leadership rival has been accused of misogynist remarks. Again.

2016

Wanting to “smash” Theresa May “back on her heels”

During a speech at a campaign event, Owen Smith blithely deployed some aggressive imagery about attacking the new Prime Minister. In doing so, he included the tired sexist trope beloved of the right wing press about Theresa May’s shoes – her “kitten heels” have long been a fascination of certain tabloids:

“I’ll be honest with you, it pained me that we didn’t have the strength and the power and the vitality to smash her back on her heels and argue that these our values, these are our people, this is our language that they are seeking to steal.”

When called out on his comments by Sky’s Sophy Ridge, Smith doubled down:

“They love a bit of rhetoric, don’t they? We need a bit more robust rhetoric in our politics, I’m very much in favour of that. You’ll be getting that from me, and I absolutely stand by those comments. It’s rhetoric, of course. I don’t literally want to smash Theresa May back, just to be clear. I’m not advocating violence in any way, shape or form.”

Your mole dug around to see whether this is a common phrase, but all it could find was “set back on one’s heels”, which simply means to be shocked by something. Nothing to do with “smashing”, and anyway, Smith, or somebody on his team, should be aware that invoking May’s “heels” is lazy sexism at best, and calling on your party to “smash” a woman (particularly when you’ve been in trouble for comments about violence against women before – see below) is more than casual misogyny.

Arguing that misogyny in Labour didn’t exist before Jeremy Corbyn

Smith recently told BBC News that the party’s nastier side only appeared nine months ago:

“I think Jeremy should take a little more responsibility for what’s going on in the Labour party. After all, we didn’t have this sort of abuse and intolerance, misogyny, antisemitism in the Labour party before Jeremy Corbyn became the leader.”

Luckily for Smith, he had never experienced misogyny in his party until the moment it became politically useful to him… Or perhaps, not being the prime target, he simply wasn’t paying enough attention before then?

2015

Telling Leanne Wood she was only invited on TV because of her “gender”

Before a general election TV debate for ITV Wales last year, Smith was caught on camera telling the Plaid Cymru leader that she only appeared on Question Time because she is a woman:

Wood: “Have you ever done Question Time, Owen?”

Smith: “Nope, they keep putting you on instead.”

Wood: “I think with party balance there’d be other people they’d be putting on instead of you, wouldn’t they, rather than me?”

Smith: “I think it helps. I think your gender helps as well.”

Wood: “Yeah.”

2010

Comparing the Lib Dems’ experience of coalition to domestic violence

In a tasteless analogy, Smith wrote this for WalesHome in the first year of the Tory/Lib Dem coalition:

“The Lib Dem dowry of a maybe-referendum on AV [the alternative vote system] will seem neither adequate reward nor sufficient defence when the Tories confess their taste for domestic violence on our schools, hospitals and welfare provision.

“Surely, the Liberals will file for divorce as soon as the bruises start to show through the make-up?”

But never fear! He did eventually issue a non-apology for his offensive comments, with the classic use of “if”:

“I apologise if anyone has been offended by the metaphorical reference in this article, which I will now be editing. The reference was in a phrase describing today's Tory and Liberal cuts to domestic spending on schools and welfare as metaphorical ‘domestic violence’.”

***

A one-off sexist gaffe is bad enough in a wannabe future Labour leader. But your mole sniffs a worrying pattern in this list that suggests Smith doesn’t have a huge amount of respect for women, when it comes to political rhetoric at least. And it won’t do him any electoral favours either – it makes his condemnation of Corbynite nastiness ring rather hollow.

I'm a mole, innit.