Wednesday 30 October 2013

Negotiating - Practical Lessons from the Creation of the IMF

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
Source: Central Banking Journal | 12 Aug 2013
Categories: Governance
Topics: Bretton Woods

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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