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.

Irene Clennell Go Fund Me handout
Show Hide image

6 times the Home Office broke up British families in the name of immigration

Irene Clennell came to the UK in 1988, married a British man and had a family. In 2017, she was deported. 

Irene Clennell first arrived in London in 1988, before the Home Office’s younger staff members were even born. Soon after, she married a British man called John, and received indefinite leave to remain. They made their home in County Durham. They have two children and one grandchild. 

Now, though, Clennell is in Singapore, after being detained and forcibly deported on the orders of the British government

Her crime? She spent periods of time back in Singapore caring for her ailing parents, enough to invalidate her indefinite leave to remain. It seems the Home Office decided her parents took too long to die.

Clennell’s case matters – and not just because her husband last heard from her sobbing on a plane. Her family is the latest to be torn apart by the government’s stringent immigration rules. 

As well as an inflexible approach to the amount of time spent in the UK, the rules demand that British citizens must earn £18,600 a year to bring over a non-EU spouse – a rule that discriminates against women, who are more likely to work part-time for less pay, and those living in lower-paid regions of the country. 

With EU nationals facing an uncertain future, and the government desperate to meet immigration reduction targets, this inflexible approach matters. Here are some of the families that have felt the consequences:  

1. The father who can’t see his son

Toni Stew, from Worcester, met her husband Mohamed El Faramawi in Sharm el-Sheikh, Egypt. But this was no holiday romance – they got married six years later, and have a young son.

But because Stew works part time, in order to care for her son, she does not earn enough to sponsor her husband’s move to the UK

El Faramawi has only met his son a few times since the birth 17 months earlier.

2. A couple trying to look after their parents

Kevin Draper, from Bristol, met his wife Mae, originally from the Philippines, through friends in Hong Kong. In 1995 they settled in the UK, but then a job came up in Dubai. 

In 2011, sad news summoned Kevin home – he needed to care for his mother, who had Alzheimer’s. Meanwhile, Mae’s mother passed away, and she went to support her family in the Philippines.

She was advised to apply for a UK visitor visa, and finally received one in 2013 after two failed attempts. Having been reunited with her husband and daughter, she decided to apply for a spouse visa. But in 2014 she was told that in order to do that, she would have to return to the Philippines, and the process could take another two years.

3. A British father who was made redundant

Dominic James met his wife, an American named Katy, in 2005. After they married a year later, she managed to join him in Edinburgh for three years.

They moved out to Seattle, where they had a daughter, but the couple always intended to return to the UK. James managed to get a transfer from his employer to the Edinburgh office, but was made redundant shortly afterwards.

Despite Katy’s work experience in the UK, her visa application was denied because James, now self-employed, did not earn enough to meet the minimum income requirement rules. (The Home Office eventually granted Katy 30 months longer to stay).

4. A mother who thought the UK was home

Beverley Boothe arrived in the UK in 1979 as a teenager, to join her parents who had emigrated from Jamaica in the 1960s. 

According to Boothe, she received indefinite leave to remain in 1980. At some point in the next three decades, she lost the passport with the original stamp in it. But she assumed the Home Office had a record of her application.

It turns out they didn’t – records are only kept for 15 years from the date of the “last action”. Boothe, a criminology graduate, gave the Home Office her fingerprints and information about her family. Just before Christmas 2013, she was ordered to go to Jamaica or face deportation.

Not only did Boothe have no close family to return to, she had her own children in the UK. Although they all have British fathers, her youngest daughters were unable to obtain passports because of her status.

5. A father facing separation from his wife… and parents 

In 2012 AJ, an American, moved with his father to South Shields, Tyneside, when he went to join his new wife. There, AJ met Lian Papay, and fell in love. The couple discovered they were expecting, and married in 2013.

But Lian did not earn enough to sponsor AJ, and so her husband is forced to rely on short-term visas. Ironically, when AJ flys back to the United States, he leaves not only his wife and son, but his father and stepmother.  

6. A woman who wanted to care for her father-in-law

Gary Walsh, a Falklands war veteran, married his wife Xia Zhao, an accountant, more than 16 years ago and has two adolescent children. 

The family lived in Malaysia, but flew to the UK after hearing Gary’s elderly father was unwell. 

Xia Zhao came on a one-year visa, but after discovering how ill her father-in-law was, applied to stay and work so the family could care for him. Her application was refused, and she was advised to apply instead from China in a process that could take years. 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.