If you work in risk management or economics, there is a reasonable chance that you juggle between the 'important' and the 'urgent' and that you interact a great deal with colleagues, counterparts and peers.
I recently reviewed the book 'The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White and the Making of a New World Order' by Benn Steil for the journal 'Central Banking'.
The context of the book is the economic negotiations between the US and the UK in the lead up to the Bretton Woods conference and the establishment of the IMF. From the perspective of Keynes and the UK, it provides a fascinating account of how the 'important' prevailed over the 'urgent' and how not to negotiate. But the book is more than just that it becomes at times nearly a thriller. Harry Dexter White was Keynes' US counterpart and it turns out he was also spying for the USSR.
If you are interested you can read my review here or below.
Book notes: The Battle of Bretton Woods: John
Maynard Keynes, Harry Dexter White and the Making of a New World Order
A fascinating account of the Bretton
Woods conference from the point of view of its two main players: John Maynard
Keynes and Harry Dexter White
Author: Isaac Alfon
Benn Steil, The Battle of
Bretton Woods: John Maynard Keynes, Harry Dexter White and the Making of a New
World Order, Princeton University Press, 2013, 472 pages
Benn Steil’s book provides a
fascinating account of the developments leading up to the Bretton Woods
conference and its immediate aftermath, from the point of view of the two main
characters involved: John Maynard Keynes and Harry Dexter White. The book is
based on extensive archive work, so often the participants speak for
themselves, which makes for interesting reading.
It is striking that the US Secretary
of the Treasury, Henry Morgenthau, instructed White in December 1941 to
“provide the basis for post-war international monetary arrangements” when
victory in the Second World War was still not even in sight, even if the
underlying intention was to shift the centre of world finance from London to
Wall Street. If that foresight about the next steps had become the norm,
perhaps today’s geopolitical landscape would also look different.
The book evidences the challenge of
being the ideal economist: in Keynes’ own words, “a mathematician, historian,
statesman and diplomat”. Despite his academic achievements, Keynes’ record as
an economic diplomat is poor and he was described by other UK officials as a
“menace to international relations” and “too offensive for words”. Modern
central bankers are likely to share with Keynes an involvement in international
negotiations. Keynes’ track record provides a few ideas of how or how not to
conduct them.
First, understand your principal
strategic priorities. One of the main challenges is identifying what is
important and what is urgent for your organisation and prioritising accordingly.
At that time, the important issue for everyone (not just the UK) was a new
system of exchange rates that brought stability, avoided competitive
devaluations prevailing before the Second World War and supported international
trade. The urgent issue for the UK was indebtedness and the need for short-term
finance at a reasonable cost with no political conditions. Keynes’ focus on the
important is certainly appropriate. However, as documented in the book, a
solution to Britain’s urgent issue, indebtedness, could have been available
from US bankers and others and it is surprising Keynes stopped a consideration
of this ‘alternative’. As Steil tells us, British prime minister Winston
Churchill’s objective for the war was to survive it: the urgent. Not surprising
then that, as Steil also notes, there is only one reference to Keynes in
Churchill’s five-volume history of the war.
Second, while understanding the logic
of your position is a must, fully sharing that with your counterparts may not
be in your interest as it may reveal a weakness. One example is Keynes’ clear
articulation to the Americans of the necessity of post-war British trade
discrimination.
Third, understand your counterparty’s
perspective and vision. Steil is clear from his research that the US
administration saw the UK as a rival for economic and political power. However,
there does not seem to be recognition in the British sources quoted that this
might be driving the US negotiating positions. In fact, the opposite may be
true: Keynes associates the behaviour of Americans to a supposed lack of
understanding that, for example, the lend-lease arrangements put in place to
finance the war would have devastating effects on Britain after the war.
Fourth, look after your counterparty.
It is easy to make this personal but this is a wider point. Steil notes that
“Keynes’s lack of humility appears to have prodded [US president Franklin]
Theodore Roosevelt’s advisers to tighten their demands, lest they be caught out
by clever arguments down the road”. And fifth, provide accurate progress
reports, in particular when your position is weak from the beginning. Steil
identifies, for example, the contrast between the gap in the US and UK
positions in the lead-up to Bretton Woods and Keynes’ progress reports.
White is unlikely to be as familiar
as Keynes, unless one has an interest in spying and the Cold War. White’s
progression to the US Treasury is far from straightforward and for most of his
time at the Treasury he was a temporary civil servant. The Treasury seemed his
natural home given his “mind for economic policy” and “flair for converting
economic theory into administrative practice”. Steil sees him as an “idealist
who envisioned a future in which world affairs were managed by enlightened
technocrats”. It might not be unreasonable to guess that his admiration for the
Soviet revolution led to “freelance diplomacy” and evolved over time into
spying for the Soviets.
In terms of economics, both White and
Keynes share the overall objective of monetary and currency stability. The
important differences lie in the role of gold and the US dollar, and the
governance of the International Monetary Fund (IMF). The latter reflected the
different positions of the UK (a debtor) and the US (a creditor). Not
surprisingly, Keynes wanted less power for the IMF and more discretion to
member countries and White pushed in the opposite direction. White also turns
out to be a skilful tactician who developed a team and carefully orchestrated the
negotiations leading up to the conference and at the conference, to
successfully enshrine the US dollar as the reserve currency in a system of
fixed exchange rates.
Steil highlights how the views of the
US and UK on related issues have changed over time: pegging currencies to the
US dollar (US, against then), sharing the cost of adjustments as a result of
trade imbalances (US, against then), the necessity of preferential trade
treatment (Britain, in favour then). This is a very practical reminder of what Greg
Mankiw has described as the difference between economics as a science and an
engineering/problem-solving discipline.
The book ends with a chapter where
Steil seeks to draw conclusions for today’s market conditions. He brings in
Milton Freedman’s views in favour of floating exchange rates and, overall, I
have sympathy with the argument that governments should focus on wealth
creation, rather than endless negotiations. It is difficult to challenge
Steil’s doubts that another “grand design” would fail to solve the current
trade imbalances unless the US and China agree about the need for action.
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