The Road to Bretton Woods:Winston Churchill and Imperial Finance

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The Road to Bretton Woods:Winston Churchill and Imperial Finance
by Theodore A. WilsonProfessor of History, University of Kansas Churchill Symposium at Bretton Woods
BRETTON WOODS and the Mount Washington Hotel, July lst, 1944:

More than forty years ago this sprawling resort hotel, so lavishly appointed and brimming with life today, had been closed, its dining rooms and verandas emptied and windows shuttered, its superbly trained staff reduced to a mere remnant by military service and the lure of high-paid defense jobs elsewhere. Now, however, it was coming back to life. The war was clearly won. British-American-Canadian armies had stormed ashore in Normandy just three weeks earlier, Rome had been liberated on 4 June, Soviet forces were grinding forward into Poland, and high British and American officials were now openly suggesting a German collapse by September 1944, if not before.

The venerable Mount Washington had been selected to host the first major international conference of World War II. Representatives of forty-five countries, all of the "United and Associated Nations," were convening at Bretton Woods to discuss the creation of international financial mechanisms tint were expected, in the words of a recent historian of these matter's, to "usher in a new age of global collaboration ... an enduring peace and an ever-rising living standard."1 Bretton Woods had been chosen as the site of this meeting because of its secluded location in the midst of the huge White Mountain National Forest and because its normally refreshing mountain climate promised welcome relief to British and American officials who had spent the previous month struggling through preliminary negotiations in the oppressive heat and humidity of Washington and Atlantic City, N.J. The Mount Washington, hastily refurbished and readied for use with the assistance of a contingent of military police, was a superb site for an international conference of this magnitude. It was a self-contained community with its own power plant and a wide range of facilities, including that essential item, a stock market ticker tape. In the last days of June some 700 persons (200 for the United States alone) - including sixteen finance ministers, a gaggle of economists, hundreds of support staff, and seventy reporters - descended on Bretton Woods and, despite the complications caused by language and protocol problems, the Mount Washington (and the Twin Mountain House five miles away to which journalists were exiled) managed splendidly from all reports.2
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But if we turn from the splendors of the local setting to what brought John Maynard Keynes, Secretary of the Treasury Henry Morgenthau, Jr., Chinese Finance Minister H.H. Kung, and other worthies to Bretton Woods and then ask what the International Monetary Conference accomplished, we move onto terrain which historians have in recent years come to consider surprisingly uncertain, even obscure and treacherous.

That was not always the case. For some thirty years the results of the International Monetary Conference were almost always portrayed as grand achievements, and the "Bretton Woods system" was given credit for the maintenance of international financial stability and, often, that remarkable era of prosperity and growth enjoyed by the industrialized and industrializing nations. The conference at Bretton Woods itself appeared to demonstrate the remarkable power of Anglo-American friendship and mutual understanding, embodied in the concept of the "special relationship." How remarkably perceptions have changed. Not only has the "Bretton Woods system" collapsed, but perceptions about its origins and meaning are undergoing drastic alterations.3

Indeed, we are compelled to recognize that a discussion of Bretton Woods in the context of Winston Churchill's passionate regard for the future of the British Empire and Commonwealth produces a story shot through with irony. For Churchill and those British, Dominion and American statesmen who strove to create an Anglo-American "special relationship" founded on equality and the full understanding of shared purpose, Bretton Woods came to signify a different and far more pessimistic outcome to their herculean war- time efforts. It may not be too much to claim that it came to symbolize the "beginning of the end" for Britain as the pivot of empire and as a front rank player in the "great game" of nations.

Allow me to remind you - in brief compass yet without too great a compression and distortion of the historical record - of Britain's economic circumstances and the policies espoused by its sturdy, stubborn prime minister, Winston Churchill, as World War 11 entered its .decisive phase. From the days of its emergence as the first industrialized nation, Great Britain had relied upon a favorable balance of trade to support a population greatly in excess of that which the land area and natural resources of the British Isles would have permitted. At war's outbreak in 1939, weakened by some fifty years of declining industrial competitiveness, the disastrous effects of World War 1, and the economic debacles of the interwar period, Britain's balance of payments were moving inexorably toward deficit. Only the return from investments abroad, trade with the Commonwealth/Empire, and the "invisible" payments derived from London's role as banker, shipper, and insurer were keeping Britain in the black. Even before Winston Churchill's accession to power, the British government was drawing down its financial reserves at an alarming rate. Faced with a choice between husbanding Britain's dwindling resources - men, weapons, and especially foreign exchange credits - by waging limited war and accepting the likely prospect of a negotiated peace with Nazi Germany, or spending those same resources profligately in a desperate gamble to convince the United States that entering the war on Britain's side was a good risk, Churchill gambled on the American card. In notes for a speech to a secret session of the House of Commons on 20 June 1940, the Prime Minister pointed to "attitude of United States; nothing will stir them like fighting in England ... the heroic struggle of Britain best chance of bringing them in '. . . all depends upon our resolute bearing and holding out until Election issues are settled there ... if we can do so, I cannot doubt whole English-speaking world will be in line together."4 Those blunt sentiments.were what remained when one stripped away the Churchillian rhetoric, expressed in what was perhaps his most famous speech on 4 June 1,9,40: "We shall never surrender. And even, which I do not for a moment believe, this island ... were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British Fleet, would carry on the struggle until, in God's good time, the New World, with all its power and might, steps forth to the rescue and liberation of the Old."5

Lord Hankey agonized with somewhat less zeal in July, 1940: "How are we going to pay for it all? I suppose one hopes all the time that the United States, whether they come into the war or not, will find some means of helping us make our resources go further than they other- wise would. But if you ask me how, I am jiggered if I know."6 Between September 1939 and late 1940, Britain's foreign exchange reserves plummeted, with a projection of total bankruptcy by early 1942.

Even more significant for the longterm economic vitality of Britain and the Empire/Commonwealth, British external investments - the stake in 'other nations which had yielded "invisible earnings" of critical importance in the interwar years to the task of balancing Britain's account - were largely sold off. To purchase the raw materials and other goods essential to the "total war" policy which the Churchill government espoused, Britain was thus forced to deplete precisely those sources of national wealth necessary for realization of such a future as romantics like Winston Churchill took as an article of faith - the continuation of the British Empire and of British global leadership in the postwar era.
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President Franklin D. Roosevelt's magical expedient of "Lend- Lease" brought an end to the unchecked destruction by Britain of the nation's bone and sinew, underwriting Allied purchases of weapons and other war materiel and services in the United States. But the Lend-Lease Act, which, FDR claimed, got "rid of the silly, foolish old dollar sign," did not promise to repair the damage sustained during those years when Britain fought alone. It appears that Churchill came to believe that his "great and good friend," President Roosevelt, would find a way to compensate Britain for its sacrifices in the common cause. The concept of "pooling," which in theory put the total resources of each nation into a common pool to be used for prosecution of the war and was officially accepted by both Washington and London even before Pearl Harbor, greatly encouraged Churchill in this belief. "This makes us no longer a client receiving help from a generous patron, but two comrades fighting for life side by side," he observed in February, 1942.7

After Pearl Harbor sealed the, Anglo-American alliance for which Churchill worked through 1940 and 1941, as Ray Callahan has noted, "with patience and a subtlety hitherto unsuspected," the efforts to make most efficient use of Allied resources did further, largely unanticipated injury to Britain's economic position.8 It made sense for the British and Commonwealth forces, closer to the battlefront, to contribute a larger proportion of their manpower to combat, especially while the United States was struggling to raise and train a modern fighting force. Because of the shipping crisis of 1941-43, it also made sense for Britain to forego importation of all but essential items and to concentrate on production of munitions and other types of war material. As a result, whole areas of the intricate trade network Britain had woven over two centuries - including parts of the Empire and Commonwealth - were perforce supplied by the United States. Whether that would continue was an uncertain proposition. The British position was that its special commercial and financial relationships with the Commonwealth/Empire - the so-called Ottawa Preference System - had to be maintained for a time after war's end. The Churchill government feared that, unless Britain was given the wherewithal and sufficient time after war's end to reestablish prewar trade links, financial disaster would ensue.

The American view of Britain's situation was effectively conveyed by Assistant Secretary of State Adolf A. Berle, a highly reputed economist who was openly hostile to Britain. Berle commented in October, 1940: "The matter of handling the British ... requires some thought. In the World War we came so into the English camp that we became virtually an adjunct to the British War Machine. They kept that position after the war was over, and the result of that was that we got not one single thing that we really desired in the ensuing peace. This time it seems to me that the thing should be the other way around. We have the ultimate strength. We also have the ultimate consistency of principle. We are the inevitable economic center of the regime which will emerge - unless, of course, we all go under ... At all events, it suggests that we should remember Pershing's famous refusal to fritter his army away in small detachments."9 Many British officials (though not Winston. Churchill) took such avowals as proof that the United States was determined to displace Britain and establish its own global economic hegemony.

Mutual suspicion enveloped the effort to sort out wartime and postwar economic arrangements as Americans and British representatives were thrown together. Churchill had established cordial relations with President Roosevelt at the Atlantic Conference in August,1941, but the convoluted negotiations over British implementation of Article VII of the Atlantic Charter, the so-called "consideration" for U.S. Lend-Lease, proved poisonous at lower levels. Postponement was the result. Only in autumn, 1943 did the views of the financial policymakers - John Maynard Keynes on the British side and Harry Dexter White of the U.S. Treasury - come into focus. At that time, Keynes sketched his plans for ensuring stability and expanding trade in the postwar era. He proposed adoption of a new medium of currency, the "bancor," and establishment of an ambitious Anglo- American-dominated international banking mechanism, the International Clearing Union. Keynes also was determined to ignore the American pressure for acceptance of Article VII unless the United States agreed to dramatic reductions in its tariffs on agricultural and other goods. The American reaction to the Keynes proposal was dismissive. The Treasury and the State Department were principally interested to obtain a British commitment to the immediate abolition of the Imperial Preference System, total convertibility of sterling, and the drawing down of Britain's wartime currency balances. Thus, influential advisers on both sides of the Atlantic were convinced that the two English-speaking nations were on a collision course.

It must be said that Winston Churchill paid little attention to the doomsayers. He persisted in the belief that President Roosevelt understood and sympathized with Britain's plight - and that a way would be found to provide a desperately-needed respite for the battered and weary inhabitants of that "sceptred isle, this green and verdant land, this England," which he so loved. One must also acknowledge that Churchill betrayed little interest in post-war issues. "Winston's mind had a stop in it at the end of the war," his Foreign Secretary and longtime adviser Anthony Eden commented.10 Subordinates were constantly frustrated at the Prime Minister's stubborn opposition to consideration of plans for dealing with the serious problems certain to confront the nation after war's end. He resisted any and all efforts to anticipate these problems as unwarranted diversions from the principal task: winning the war.

It may be, if you will forgive a speculative probing of the Churchill psyche, that Winston Churchill did not wish to think about postwar matters because he realized intuitively that the world he knew and so deeply loved - that essentially Victorian admiration for the panoply and presence of British power and enthusiasm for the "imperial idea" - could not, like Humpty Dumpty, be put together again. If ever one doubted that Winston Churchill was a true romantic, his dogged, emotionally charged efforts on behalf of the British Empire and Commonwealth in the form he knew and admired provided convincing evidence of that fact. His oft-repeated statement that he had not become "the King's first minister",to preside over the demise of the British Empire usually is treated as ironic, but it perhaps is appropriately seen as an exercise in wish-fulfillment. Winston Churchill wished to see Britain rise from the travail of war to reclaim its leader- ship of that noble, even mystically-ordained concert of peoples, the Commonwealth and Empire; and to be capable of exerting decisive military power and political authority in Europe after Nazi Germany was defeated. That fervent desire, along with his wishful faith in the generous nature of the American people and the ability of FDR to work political miracles, proved to be a potent combination in the determination of British policy at a critical juncture.
Whether such psychoanalysis is valid, we do know that Churchill found the stuff of wartime budgets and imperial finance both boring and generally incomprehensible. He confessed to his young assistant, John Colville, that he had not given any thought to the balance of payments and like matters for twenty years (since his service as Chancellor of the Exchequer), "and I am certainly too old to master such questions now." Lord Halifax wrote to Eden in January 1942, enclosing various memos on Lend-Lease he had dispatched to the Prime Minister: "I don't suppose Winston will read any of the telegrams, and I don't think he will apply his mind to it! He is, as you know, pretty bored with anything except the actual war."11

As a result, Churchill relied heavily upon two individuals who, by reason of personal regard and reputed expertise, dominated British policymaking on the eve of Bretton Woods. his intimate friend and scientific adviser, Sir Frederick Lindemann; and the renowned economist who headed the British delegation to Bretton Woods, John Maynard Keynes. With regard to the two pivotal issues - a Lend-Lease settlement with the Americans, and negotiations over the structure and scope of postwar international financial arrangements - Lindemann and Keynes played key roles. not least because each possessed an outsize ego - possibly matching that of the Prime Minister himself - and because each was confident that he had devised solutions which would not only solve Britain's short-run financial woes (Lindemann) and ensure Britain's return to economic health and the strengthening of the Empire and Commonwealth (Keynes). Churchill's acceptance of the Bretton Woods settlement was, one historian has recently noted, "a product of John Maynard Keynes' vanity" and of the persistence of Lord Cherwell (Lindemann) in pushing the need for cooperation with the United States whatever the potential costs.12

The road to Bretton Woods thus takes the observer past vistas of Britain's prewar and wartime economic decline; the circumstances of American and British national politics, relations - real and wished- for - between the two great English-speaking countries and their respective leaders; and Winston Churchill's romantic attachment to the British Empire and Commonwealth. The events of June and July 1944 ushered in a postwar international financial environment radically different from the Anglo-American consortium assumed by Keynes, Lindemann and Churchill. The institutions created at Bretton Woods reflected the American vision of this postwar world. The International Bank for Reconstruction and Development and the International Monetary Fund were international in name only: for the United States, as the largest contributor, largely dictated the approach taken to reconstruction of a war-torn world. Harry Dexter White later acknowledged that the Bank and Fund reflected "the operation of power politics rather than of international cooperation - except that the power employed is financial instead of military and political."13 Perhaps more important, the amount pledged for Europe's (and Britain's) reconstruction was far smaller than Keynes had calculated as being required. When Washington, in the changed circumstances occasioned by an inexperienced new president succeeding FDR, welshed on Roosevelt's promise to continue Lend- Lease aid to Britain during the period between Nazi Germany's collapse and the final defeat of Japan, the economic house of cards sustaining Britain came tumbling down.

With this background, we may better understand why several recent studies of the events of 1944 and Anglo-American economic relations generally have concluded that, as one bluntly states, at Bretton Woods "London negotiated an agreement that had in it the seeds of the Empire's financial destruction."14

For those of us here today who view that outcome as a tragedy, is Winston Churchill to bear the blame? To the extent that he trusted blindly in the letter and spirit of an Anglo-American wartime alliance and the "special relationship" he enjoyed with President Roosevelt, yes. To the extent that he failed to monitor the unrealistic predictions by top advisers of British domination of their American counterparts in financial negotiations such as Bretton Woods, yes. But could Winston Churchill have reversed forty years of Britain's economic decline by actions taken during the stress of a struggle for the nation's very survival? That asks far more of the man, or the mythological figure he has become, than even he would claim was possible.

FOOTNOTES

1. Randall B. Woods, A Changing of the Guard: Multilaterism and Internationalism in Anglo-American Relations, 1941-1946 (Chapel Hill, N.C., University of North Carolina Press, to be published, 1989), p. VI.- 58.
2. One British delegate did comment disparagingly about the quality of service at "this bucolic spa" but, otherwise, comments were glowing.
3. See, for example, the work by Randall Woods cited earlier and also Fred L. Block, The Origins of International Economic Disorder (New York, 1977); Alfred E. Eckes, Jr., A Search for Solvency: Bretton Woods and the International Monetary System, 1941-1971 (Austin, Tx., 1975); and Armand Van Dormael, Bretton Woods: Birth of a Monetary System (London, 1978).
4. Winston S. Churchill, Secret Session Speeches (comp. by Charles Eade). London, 1946, p. 15. See also D.C. Watt, Succeeding John Bull: America in Britain's Place (Cambridge, 1984).
5. Winston S. Churchill, History of the Second World War (6 vols., Boston: Houghton Mifflin, 1948-51), 111, P. 118.
6. Hankey to Lothian, 26 July, 1940, F.O. 800/398, U.S./40/16, Public Records Office, United Kingdom.
7. Draft Message, WSC to FDR, February 5, 1942, PREM 4/17/3, PRO.
8. Raymond Callahan, Churchill: Retreat From Empire (Wilmington, Del.: Scholarly Resources, 1984), p. 93.
9. Adolf A. Berle, Jr., Navigating the Rapids, 1918-1971: From the Papers of Adolf A. Berle, ed. by Beatrice B. Berle and Travis B. Jacobs (New York: Harcourt Brace Jovanovich, 1973), p. 232.
10. Anthony Eden, Memoirs: The Reckoning. (Boston: Houghton Mifflin, 1965), p. 405.
11. John Colville, The Fringes of Power: 10 Downing Street Diaries, 1939-1955 (New York: W.W. Norton, 1985), p. 346; Lord Halifax to Anthony Eden, II January, 1942, Halifax Papers, Churchill College Archives, Cambridge University.
12. Woods, Changing of the Guard, VI-3.
13. Quoted in Lloyd Garder, Economic Aspects of New Deal Diplomacy (Madison, Wis.: University of Wisconsin Press, 1964), p. 290.
14. Woods, Changing of the Guard, VI-3.
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