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.

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.


Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  


India Bourke is an environment writer and editorial assistant at the New Statesman.