Harry Dexter White was one of the chief architects of the Bretton Woods system, indeed the person most responsible for the conference itself. All throughout World War II, it was White working at Treasury directly under Secretary Morgenthau who set up all the predicate conditions for the dollar achieving global currency status. He argued that American servicemen should use the dollar and only the dollar as they spread across the globe, overvaluing each local currency so that local populations might find nothing but tradition to block acceptance of the US dollar upon its arrival. For the Axis countries, there was to be only a dollar until such time as they had been politically transformed likely long after the war was over.
White had completed a draft plan for the postwar monetary world in March 1942. It was revised and “polished” before being presented to Secretary Morgenthau on May 8 of that year. In his letter to the Secretary, he gave equal treatment to the specifics of his intended arrangements but was careful to note that none of it would do any good if it were to languish within politics. In other words, what he wanted done would have to be subordinated for a time to how it could get done. To White, the only way forward was an international monetary conference.
To even get that far, however, Treasury had domestic American politics to overcome. There was some debate as to protocol: should Morgenthau go directly to President Roosevelt with the idea, or approach Secretary of State Cordell Hull first. Having sat in that office for almost a decade by then, Secretary Hull was not accustomed to being circumvented. When asked his thoughts on how to proceed, White apparently said, “hit them both at the same time”, meaning to inform FDR and Secretary Hull simultaneously.
Morgenthau ultimately decided to deliver his policy draft to the President first, to which FDR responded (as Morgenthau predicted) in seeking Hull’s input. From the President’s perspective, this could not be only a Treasury idea as it would have to have significant development and ownership among State, the Federal Reserve, and even the Board of Economic Warfare.
According to the book, The Battle of Bretton Woods by Benn Steil, the first meeting to address the postwar monetary paradigm was held on May 25, 1942, and it did not go well from the start. State’s representatives at the meeting Leo Pasvolsky and Herbert Feis argued matters of protocol and turf, forcing Morgenthau to the position that rivalry was the chief danger. He responded by holding another meeting only with more friendly faces (to Treasury’s side). Among them was a White House economist, indeed the first ever White House economist, Lauchlin Currie.
Morgenthau’s invitation to Currie was particularly blunt, asking him directly, “want to get in a fight?” The Treasury Secretary told the economist that he was convinced the State Department was already against the conference because, “we’ve got an idea and State hasn’t, and they don’t want anybody else to have any ideas.”
Lauchlin Currie had ended up at the White House via Harvard and a series of policy papers and a book all published in the first half of the 1930’s. His ideas were set widely against prevailing opinion, even at such a “conservative” institution as Harvard was in those days. In a January 1932 memo, Currie, along with co-authors Paul Theodore Ellsworth (who was best known for pioneering what would become the IS-LM framework of understanding Keynes’ General Theory concepts) and, who else, Harry Dexter White, advocated “vigorous” open market operations at the Federal Reserve to expand the level of bank reserves. Even that was deemed by the authors likely insufficient to get the US out of the depression, so in addition Currie, White, and Ellsworth advocated aggressive fiscal action to go with it.
Beginning in 1933, Currie wrote several articles and in several publications that further clarified his expansionary positions, including the great monetary distinction between money and credit. He wrote in 1934, “The merit of the proposal here set forth lies, in the writer’s view, in the fact that it divorces the supply of money from the loaning of money.” From that he accused the modern (as separate from the classical) version of economics at that time for confusing money and credit via what he called “an historical accident.”
In his 1933 article Money, Gold, and Incomes in the United States, Currie, a devoted follower of quantity theory, computed the first velocity variable not of transactions or money, but rather from national income. He argued that monetary control should be literal, and that only credit is left to banking. That led to his 1934 book The Supply and Control of Money in the United States where Currie theorized an ideal, as he saw it, monetary regime for the American system. Because the government was, in his view, responsible for the depression due to “almost complete passivity and quiescence” that somehow led him to believe the monetary answer lay in total government control. It wasn’t the government so much he objected to, rather the impeded and constrained government.
Shared in conjunction with Harry White, both of them at the time working at the US Treasury, Currie demanded that only government should control the quantity of all money and close money substitutes including demand deposits. He envisioned a government agency or several agencies that would all across the land buy and sell government securities in order to “precisely” expand and contract the level of deposits. Currie believed this was nothing like nationalizing the banking system because, again, money and credit were and are separate; only the functioning money supply within banking would be nationalized leaving banking otherwise undisturbed.
He correctly envisioned that most objections to his ideal system would be political, a fact that was realized in the New Deal era more than anyone might have imagined. But it also opened tremendous opportunity for those who saw the chaos as an opportunity not to be wasted. Currie would get his chance in 1934 after catching the attention of Marriner Eccles. When Eccles ascended to the Chair of the Federal Reserve Board, he brought Currie with him as his private secretary. That position at exactly that time in history allowed him to essentially draft the Banking Act of 1935 that set out the modern Federal Reserve System; which is why you can see Ben Bernanke/Janet Yellen in the positions he advocated seven decades before they did.
In a speech given by then-Chairman Bernanke to the Fourth ECB Central Banking Conference in November 2006, the Fed Chair noted the durability of a good part of Currie’s emphasis in modern monetary policy:
“In any case, the Federal Reserve began to pay more attention to money in the latter part of the 1930s. Central to these efforts was the Harvard economist Lauchlin Currie, whose 1934 treatise, The Supply and Control of Money in the United States, was among the first to provide a practical empirical definition of money. His definition, which included currency and demand deposits, corresponded closely to what we now call M1. Currie argued that collection of monetary data was necessary for the Federal Reserve to control the money supply, which in turn would facilitate the stabilization of the price level and of the economy more generally.”
With Currie’s contributions, as Bernanke credited, the Federal Reserve began in 1939 its first serious project on quantifying money and monetary statistics. By 1943, around the time White and Currie were reuniting to plan out what would become Bretton Woods (actually what would become the political battle over the plan deciding how the conference for the planning for Bretton Woods would go), the Federal Reserve published its first catalog on money and banking statistics.
Though measurement was a primary issue in the “ideal” monetary policy, there was just as much emphasis on politics. Currie often asked some variation of the question, “what good is precision if there is no legal authority or political will to use it?”
A good part of the Banking Act was devoted to politics by necessity. The Federal Reserve is solely an institution of Congress; it is not in the Constitution. By definition, the Fed is political. One of the causes he identified of the Great Depression was that, “America possesses one of the poorest, if not the poorest, monetary system of any great country.” It did not act as a “maladjustment-compensating factor” but rather a “maladjustment-intensifying factor” because of its contradictions. Currie identified, correctly, the hybrid system of, “the compromise of private creation of money with government control.” In his view, this vital and basic power must not be shared; therefore he had it destined to the enlightened few of “independent” government rather than the “imprecision” of the marketplace.
Up until that time, the Federal Reserve Act had given the Federal Reserve the mission to “accommodate the monetary and credit needs of commerce, agriculture, and industry.” Rather than a powerful institution of control and prestige, the central bank was a backwater instrument of the 19th century mechanics. Currie, along with Eccles, felt it necessary to deliver a broader mandate that would be specific enough to leave out political influence. Eccles wanted the Fed’s mandate changed to, “promote business stability and moderate fluctuations in production, employment, and prices.” In other words, he, like Currie, wanted the Fed out of the business of running nothing more than the seasonal flow of money from NYC to the interior and back again and into the business of running the whole economy (and doing so from only DC rather than in 12 districts).
Ironically, Currie and Eccles believed that this new mandate would, “resist political pressure for the use of its [the Fed’s] authority for purposes inconsistent with the maintenance of stability.” Currie expressly explained that such a mandate would actually strengthen the Fed since every Board action would be evaluated and judged by this objective; any attempt to interject partisanship into the monetary and economic affairs of the Fed would lead to impeachment of any Board member attempting it.
The new mandate did not, however, make it into the 1935 Act because of the strong objections from Senator Glass (despite, ironically, the heavy backing from Congressman Steagall). Senator Glass charged the mandate, “did violence to Jefferson democracy, since the effect of the change would be to give the central government too much power.” Senator Glass was right but also wrong, however, as Currie and Eccles were correct in that “too much power” would not be vested in the “central government” but in the independent body of the Federal Reserve Board – just as they wanted it. Glass was right only about what would be given not where it would be given.
None of Currie, White, nor Eccles were thinking about any of this in terms of power, specifically, but rather precision. They believed total government control over the money supply would lead to stability of credit and banking in the marketplace. That would further deliver stability in prices and overall economy. And to do it, they would in parallel design the new “science” of monetarism and quantity theory.
As anyone with any basic, common sense engineering knows, any system so deliberate with such raw inflexibility is destined to operate successfully only within the narrowest of tolerances. Deviate just that much and there is no incorporated ability to adapt. The whole arrangement would follow upon only one factor; that by politics and by economic “science”, the economy would only be stable if economists were right in both economics and now “their” money. It was a possibility none of them ever contemplated, enshrined in the basis for the Banking Act of 1935, further augmented in the Treasury-Fed pact of 1951, that shifted the Fed permanently toward economic management. As Eccles wrote in 1937,
“The economics of the system as a whole differ profoundly from the economics of the individual; that what is economically wise behavior on part of a single individual may on occasion be suicidal if engaged in by all individuals collectively; that the income of the nation is but the counterpart of the expenditures of the nation. If we all restrict our expenditures, this means restricting our incomes, which in turn is followed by further restrictions in expenditures.”
The Fed would be thus ever forward devoted to socialism (small “s”). Further, the Fed would also be not merely Platonic in its aims for the perfect economic republic, stripped by legal right of politics so that it could be empowered into perfect science and precision, it would be god-like in its execution and delivery; it would have to be. The one thing missing from all of this is anyone, other than Senator Glass, asking, “what if we are wrong?”
The system they envisioned did not permit such flexibility, a fact that Bretton Woods was forced to confront from its earliest days. Convention assigns 1971 as the end of it, but in reality the US defaulted on its gold obligations eleven years before in the creation of the London Gold Pool. The origins of the eurodollar itself around 1955 was due almost entirely to the cracks in the global reserve system that neither Currie nor White ever foresaw. Theirs was a static system of perfect knowledge somehow supposed to be applicable through all time despite the constant change and innovation all around everywhere.
Furthermore, these enlightened few never seem to grasp that inflexible systems only become more inflexible as they are challenged; and they are always challenged. It seems a blindspot always attached to centralized socialism that human nature can be perfectly expressed as if these great scientists will respond in purely scientific fashion and correctly to each trial; it is more than the pretense of knowledge, it is the pretense that socialists actually seek only knowledge rather than power.
Indeed, as Ben Bernanke himself noted in that same 2006 speech, though Currie and White were long gone (both accused of being Communists, though it isn’t clear whether either ever was) M1 was too well before Nixon slammed the gold window shut:
“However, during the 1960s and 1970s, as researchers and policymakers struggled to understand the sharp increase in inflation, the view that nominal aggregates (including credit as well as monetary aggregates) are closely linked to spending growth and inflation gained ground. In 1966, the Federal Open Market Committee (FOMC) began to add a proviso to its policy directives that bank credit growth should not deviate significantly from projections; a similar proviso about money growth was added in 1970. In 1974, the FOMC began to specify “ranges of tolerance” for the growth of M1 and for the broader M2 monetary aggregate over the period that extended to the next meeting of the Committee.”
So much for precision. Congress responded in 1977 by amending the Federal Reserve Act to direct the Federal Reserve to “maintain long run growth of monetary and credit aggregates…so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Though it echoes Currie’s Depression-era recommendations as far as the socialism of the Fed, it defiles the manner in which he suggested it be done. Credit and money were now lumped together in, as Bernanke and modern economists call them, “aggregates”; thus stripping modern monetarism from its necessary nuance, the only matter that actually explained both the rise and fall of the economy before and after the Great Crash. Currie in the 1930’s foresaw a permanent institution dedicated to precise handling; the Fed by the 1960’s and the 1970’s rather didn’t care anymore about such exactitude, operating more so on a standard of “good enough.”
That was once again the standard by which these economists in the 1930’s were initially seeking to overcome. Currie has observed that one of the most pernicious feedbacks of the Great Depression collapse was in the quest for liquidity itself. Writing, “One of the most disastrous developments in the whole depression was the scramble for liquidity on the part of thousands of individual banks and by their very scramble effectively precluding the possibility of liquidity”, he correctly observed the modern notion of liquidity; it isn’t contained in the monetary “aggregates” of money stock but in the action of individual financial actors to either supply it or deny it. Liquidity is an action that lies beyond any of the M’s.
This process does not just apply in the simple monetary factors of the Depression era; in fact, this was again observed in 2007 and 2008 in many other places that the inflexible, independent Fed never bothered to look. From credit default swaps to repo collateral, liquidity was impaired in such a way that no matter what mainstream or “extraordinary” policy the Federal Reserve undertook it made no difference whatsoever. The Fed failed on every count because it was institutionally incapable of success in any world except one that remains static for all history; “good enough” wasn’t even close.
Princeton economist Stephen Goldfeld deemed the monetary mystery of the Great Inflation the case of the “missing money.” As noted above, the Congressional power under the 1977 amendment to the Federal Reserve Act amounted to nothing because the adoption of targeting “aggregates” was not in any way an actual constraint, mostly because the economy is not obliged by monetary policy targets in the way that monetary theory believed. That statutory regime change was not imposed upon the monetary scientists at the Fed; far from it, the political influence was originated by them to tie more into their control. They never bothered to ask, “what if we are wrong?”
The stagflation of that period left no mistake about that question. In a way, that shows just how much better the 1970’s were than the 2010’s (actually the whole of the 21st century). It is often said and written that though we might experience stagnation now, it is at least absent the huge consumer price increases of the “missing money” age. This is false; the declaration simply assumes that the stagnation portion is equal between now and then, leaving the lack of “inflation” now the deciding factor. The stagnation we currently experience is far more nefarious and challenging, leaving the economy far worse off not just in outlook but more so in how to get out of it.
In the 1970’s, there was no argument as to what was wrong; that much was clear. Debate centered on how to stop inflation, not whether there was inflation in the first place. In the 2010’s, economists won’t even admit there is a problem, and spend all their time and effort trying to convince everyone that there isn’t. By every economic measure, the economy now is far, far worse than even the worst of the Great Inflation in the late 1970’s. From GDP to individual economic accounts, including the labor statistics, there is every reason to want to go back to the 1970’s than stay here. From cyclical peak to cyclical peak, 1973 to 1980, the BLS’ index of total hours worked increased by 12.1%, or 1.93% annualized. From 2007 to the latest update for Q1 2016, total hours worked barely increased at all, up just 1.31% total, or 0.15% annualized.
There may have been inflation at that time to erode wages and wreak downstream economic havoc, but at least the economy was producing at its most basic level. In this economy, the lack of basic production is taken for success by economists that are so inflexible that they force themselves to see the world entirely upside down. Monetary independence was never a virtue, it was the removal of all accountability as is the common theme of all socialism. When a small group of people are handed the unshakable ability to determine what is “good for you” it isn’t long before they determine everything they do is “good for you” even if they have to alter the standards for judgment. They couldn’t do it in the 1970’s, but now they can because the depth of disorder is more opaque and complex, reflective of the evolution of money itself.
Lauchlin Currie and Harry Dexter White saw the inherent flaw in a hybrid monetary system, part government control, part marketplace genesis, and determined to resolve it by imposing total government. What they actually did was foist a narrowed gaze upon the government agencies that believed in the socialist principle. All monetary policy from that time until now has been spent on “proving” its preconceptions about what it could do rather than asking the only relevant question, “what if we are wrong?”
Only once in recent history did the Fed actually confront such doubt, in June 2003, but only for the briefest of moments. As Bernanke’s speech just three years later showed, such doubt never lingered; his major theme was to suggest that monetary policy had learned from all its mistakes and the constant change. That obviously wasn’t true, proved beyond all doubt just nine months later, and still isn’t to this day; all the FOMC learned was that no matter how much it fails time and again, and how much words are warped beyond all actual meaning (recovery, money, stimulus), political independence is all that ever mattered or ever will. Not for the economy, of course, but the socialist principle that people can’t ever be trusted with it even if the central bank regularly removes a decade or two of healthy progress. And it didn’t even prevent another crash.