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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The struggles of Huma Abedin

On the behind-the-scenes story of Hillary Clinton’s closest aide.

In a dreary campaign, it was a moment that shone: Hillary Clinton, on the road to the caucus in Iowa, stopping at a Mexican fast-food restaurant to eat and somehow passing unrecognised. Americans of all political persuasions gleefully speculated over what her order – a chicken burrito bowl with guacamole – revealed about her frame of mind, while supporters gloated that the grainy security-camera footage seemed to show Clinton with her wallet out, paying for her own lunch. Here was not the former first lady, senator and secretary of state, known to people all over the world. This was someone’s unassuming grandmother, getting some food with her colleagues.

It might be unheard of for Clinton to go unrecognised but, for the woman next to her at the till, blending into the background is part of the job. Huma Abedin, often referred to as Clinton’s “shadow” by the US media, is now the vice-chair of her presidential campaign. She was Clinton’s deputy chief of staff at the state department and has been a personal aide since the late 1990s.

Abedin first met Clinton in 1996 when she was 19 and an intern at the White House, assigned to the first lady’s office. She was born in Michigan in 1976 to an Indian father and a Pakistani mother. When Abedin was two, they moved from the US to Saudi Arabia. She returned when she was 18 to study at George Washington University in Washington, DC. Her father was an Islamic scholar who specialised in interfaith reconciliation – he died when she was 17 – and her mother is a professor of sociology.

While the role of “political body woman” may once have been a kind of modern maid, there to provide a close physical presence and to juggle the luggage and logistics, this is no longer the case. During almost 20 years at Clinton’s side, Abedin has advised her boss on everything from how to set up a fax machine – “Just pick up the phone and hang it up. And leave it hung up” – to policy on the Middle East. When thousands of Clinton’s emails were made public (because she had used a private, rather than a government, server for official communication), we glimpsed just how close they are. In an email from 2009, Clinton tells her aide: “Just knock on the door to the bedroom if it’s closed.”

Abedin shares something else with Clinton, outside of their professional ties. They are both political wives who have weathered their husbands’ scandals. In what felt like a Lewinsky affair for the digital age, in 2011, Abedin’s congressman husband, Anthony Weiner, resigned from office after it emerged that he had shared pictures of his genitals with strangers on social media. A second similar scandal then destroyed his attempt to be elected mayor of New York in 2013. In an ironic twist, it was Bill Clinton who officiated at Abedin’s and Weiner’s wedding in 2010. At the time, Hillary is reported to have said: “I have one daughter. But if I had a second daughter, it would [be] Huma.” Like her boss, Abedin stood by her husband and now Weiner is a house husband, caring for their four-year-old son, Jordan, while his wife is on the road.

Ellie Foreman-Peck

A documentary filmed during Weiner’s abortive mayoral campaign has just been released in the US. Weiner shows Abedin at her husband’s side, curtailing his more chaotic tendencies, always flawless with her red lipstick in place. Speaking to the New York Observer in 2007, three years before their marriage, Weiner said of his future wife: “This notion that Senator Clinton is a cool customer – I mean, I don’t dispute it, but the coolest customer in that whole operation is Huma . . . In fact, I think there’s some dispute as to whether Huma’s actually human.” In the film, watching her preternatural calm under extraordinary pressure, you can see what he means.

In recent months, Abedin’s role has changed. She is still to be found at Clinton’s side – as the burrito photo showed – but she is gradually taking a more visible role in the organisation overall, as they pivot away from the primaries to focus on the national race. She meets with potential donors and endorsers on Clinton’s behalf and sets strategy. When a running mate is chosen, you can be sure that Abedin will have had her say on who it is. There’s a grim symmetry to the way politics looks in the US now: on one side, the Republican candidate Donald Trump is calling for a ban on Muslims entering the country; on the other, the presumptive Democratic nominee Hillary Clinton relies ever more on her long-time Muslim-American staffer.

Years before Trump, notable Republicans were trying to make unpleasant capital out of Abedin’s background. In 2012, Tea Party supporters alleged that she was linked to the Muslim Brotherhood and its attempt to gain access “to top Obama officials”. In her rare interviews, Abedin has spoken of how hurtful these baseless statements were to her family – her mother still lives in Saudi Arabia. Later, the senator and former Republican presidential candidate John McCain spoke up for her, saying that Abedin represented “what is best about America”.

Whether senior figures in his party would do the same now remains to be seen.

Caroline Crampton is web editor of the New Statesman.

This article first appeared in the 26 May 2016 issue of the New Statesman, The Brexit odd squad