John Maynard Keynes and the Anglo-American Special Relationship: a Reinterpretation

See note(1)

The Conventional Wisdom

It is generally assumed that the economist J. M. Keynes was instrumental in establishing the post-war Anglo-American economic relationship. The argument is that, along with the US Assistant Secretary to the Treasury Harry Dexter White, Keynes created the International Monetary Fund and the International Bank for Reconstruction and Development (now called the World Bank) at the Bretton Woods Conference of 1944. The role of the Fund was to ensure the general maintenance of fixed exchange rates and currency convertibility in the post-war world economy while the Bank was to provide assistance for post-war reconstruction policies. These two financial organizations were to be paralleled in the commercial field by a body designed to ensure a gradual, co-ordinated international movement to non-discriminatory international trade. This agency finally emerged after Keynes’s death in the form of the GATT (General Agreement on Tariffs and Trade, now superseded by the World Trade Organization), established in 1948. It was accepted that neither the Bank nor the Fund would operate during the post-war transition to normal trade arrangements, a period which, it was thought, would last for about five years. During this time national governments would have recourse to discriminatory trade and exchange controls in order to protect their balance of payments. In the absence of such instruments it would be impossible to sustain the reconstruction policies based on industrial modernization, full employment and economic expansion which had become a political imperative for administrations throughout the world, in reaction against the desperate 1930s experience of depression and mass unemployment and deprivation.(2)

The story goes that Keynes became convinced that the way to rescue capitalism from failure was to encourage expansion through the construction of a framework for international cooperation. Full employment in the domestic economy would be guaranteed by an international order which made impossible the competitive currency devaluations and protectionism of the interwar years. The arrangements for this new dispensation could only be made by the Anglo-Americans, who were committed by history and their inheritance of an economic tradition rooted in the tradition of Adam Smith to economic liberalism – albeit a liberalism refurbished by the lessons of Keynes’ General Theory and the New Deal. During the pre-war years, when many had found their political homes in Berlin or Moscow, Keynes had found inspiration in Franklin Delano Roosevelt’s Washington. It was quite natural that as the war approached its conclusion the two victorious western powers should build on their successful economic cooperation, cemented by Lend-Lease, in the fight against Germany and Japan and work together in the creation of a new world order where the success of a reformed, liberal but social capitalism would be guaranteed. The synthesis of New Deal pragmatism, Keynes and Smith would bring lasting peace and prosperity to all under a continuing Anglo-American leadership guaranteed by the roles both the pound and the dollar played as major international trading and reserve currencies.(3)

The opening of the Bretton Woods era, it is claimed, came with Britain’s acceptance of a $3.75 billion loan, negotiated by a team under the leadership of Keynes, from the USA at the end of 1945. As a condition of this credit the British agreed to membership of the Bretton Woods system, to the adoption of non-discriminatory trading policies and to move to sterling convertibility for current transactions in July 1947, well before the end of the post-war transitionary period. There was no need for safeguards, it was said, because the size of the assistance from the USA would provide for the maintenance of a healthy level of reserves during the years of reconstruction.

Although these hopes proved unfounded and sterling convertibility had to be suspended after only six weeks, as a result of the world-wide shortage of dollars after 1945, Anglo-American collaboration in the Marshall Plan and in the 1950s ensured gradual progress towards the objectives of Bretton Woods. By 1954 sterling enjoyed de facto convertibility and formally reached that status in 1958. Despite the reverses of the early post-1945 period the world enjoyed two decades of currency stability, with the Americans ready to support sterling at the level fixed in 1949 (£1=$2.80). The structure crumbled only after November 1967, when sterling devaluation became unavoidable as a result of Britain’s economic weakness. It fell apart in 1971, with the devaluation of the dollar against gold, and was superseded by an era of floating exchange rates which has lasted to the present day. Nevertheless the IMF has continued to play a powerful role in international finance, intervening to assist nations suffering from foreign exchange crises in order to prevent them seeking salvation via the introduction of 1930s-style exchange restrictions.(4) At the same time the post-war march to trade liberalization has continued, its latest phase marked by cooperation between the British and the Americans in pursuing general acceptance of the Multilateral Investment Agreement designed to make illegal discrimination against multinational corporations by national governments on grounds of domestic policy (although Washington has achieved a number of significant exemptions for its own industry and agriculture).

So: international economic affairs since 1945 have been characterised by a special Anglo-American relationship, running in parallel with the strategic one based on collaboration in NATO and the UN, as well as in intelligence sharing and nuclear weapons policy. The ideological rationale for all this has been the defence of liberal capitalism (equated with freedom of speech and national self-determination) against the challenges presented by Communism and by radical third world regimes. Keynes’s name ranks high in the list of those responsible for the creation of this post-war international order, alongside those of Harry S. Truman, George Marshall, Winston Churchill and Ernest Bevin.(5)

All this represents a good, coherent narrative whose credibility has been enhanced by frequent repetition over the years. Whatever the official story, however, the evidence suggests that Keynes has been poorly served by historians and biographers, and that his position in the Anglo-American hall of fame has only been secured by a very considerable distortion of his own views and actions during and after the war. Of course it is true that Keynes was a supporter of the New Deal, that he was central to the wartime Anglo-American special relationship and that he wanted this to continue after the war. But the terms on which he wanted it to continue were very different indeed from those which ultimately prevailed. By the time of his death in the spring of 1946 he had come to recognize this and had developed profound misgivings about the entire project. To understand what Keynes really wanted and why he became so disillusioned we have to go back into the 1930s.

Keynes and Economic Nationalism, 1933-39

It is part of the orthodox story that Keynes started his career as a free trader, graduated to support for controls on foreign lending and for managed international monetary cooperation in the 1920s, embraced protectionism in the 1930s and rediscovered Adam Smith in the 1940s.(6) There is no doubt that Keynes’s views changed significantly between the publication of The Economic Consequences of the Peace in 1919 and the appearance of ‘National Self-Sufficiency’ in 1933. But from this point until the end his ideas reveal continuity.

‘National Self-Sufficiency’ argued that the post-WW1 international financial system was characterised by the prominence of footloose capital charging around the world in search of the highest rate of return. The result was anarchy. Under the restored gold standard, governments and central banks trying to prevent or halt a loss of monetary metal could only either push up interest rates, and thereby provoke high unemployment, or scramble competitively for foreign markets and pursue economic imperialism in order to achieve trade surpluses. The post-1919 system had generated deflation, had wrecked efforts to sustain international cooperation such as those of the 1929-31 Labour Government in Britain and had prevented the full exploitation of the wealth-creating potential afforded by technological progress. This was why Keynes argued that it was ‘ideas, hospitality, travel’ which were in themselves international but that goods should be ‘homespun whenever it is reasonably and conveniently possible’ and that ‘finance [should be] primarily national’. Accepting the inevitability of ‘a considerable degree of international specialisation’, Keynes nevertheless argued that modern mass-production could be conducted ‘with almost equal efficiency’ in ‘most climates or countries’. The time was ripe for a turn to national economic planning, which would generate employment through the cultivation of home industries, urban renewal and agricultural protection.(7)

‘National Self-Sufficiency’ has itself been the victim of misunderstanding. It was not a flirtation with ‘fascist or communist economics’.(8) It was not an aberration provoked by despair at the failure of the 1933 World Economic Conference to produce a co-ordinated global response to the Depression.(9) ‘National Self-Sufficency’ did not embrace the cause of complete economic isolationism. Both before and after the piece’s completion Keynes was vigorously proposing a plan for international expansion based on the creation of a gold-backed international currency issued by the Bank of International Settlements. The apparent contradiction can be resolved if we appreciate that by 1933 Keynes had already embarked on the search for a new political economy which argued that the test of capitalism’s success or failure was its ability to guarantee full employment of resources and an equitable distribution of wealth, and that these objectives could only be achieved by conscious State action. Since the national autonomy required for the pursuit of this new, socialised capitalism (or ‘liberal socialism’ as Keynes sometimes described it) was not compatible with membership of the current international economic order either the rules of the game had to be changed or nation-states had to contract out of it.(10)

When Keynes’s search for a new political economy was completed with the publication of the General Theory in 1936, it became clear that ‘National Self-Sufficiency’ did not represent an aberration. Once again Keynes rehearsed his criticisms of the prevailing international economic order. He complained that economists had played ‘a part disastrous to the latest act’ by urging deflation rather than the restoration of control over the bank rate via managed currency depreciation and the imposition of exchange controls. Their advice had been the opposite of what was required:

It is the policy of an autonomous rate of interest, unimpeded by international preoccupations, and of a national investment programme directed to an optimum level of domestic employment which is twice blessed in the sense that it helps ourselves and our neighbours at the same time.(11)

The struggle against the Slump and the international economic rivalry associated with it had to begin with economic nationalism. Once countries had individually embarked on full employment policies trade would no longer be a struggle to force goods on unwilling markets and restrict imports but a genuine exchange necessitated only by the imperative of paying for what each nation-state wanted to buy.

The achievement of a world where full employment and the peaceful commerce which would flow from it would be the norm was identified by Keynes in the General Theory as a ‘visionary hope’.(12) He concluded that its translation into reality would occur with the gradual dissemination of ideas, breaking down old orthodoxy and the resistance of vested interests. Given the decreasing susceptibility of most people over thirty the likelihood was that there would be a ‘certain interval’, while the younger generation of academics, civil servants and politicians advanced to seniority.(13)

Keynes and Wartime International Economic Policy

With the advent of war the opportunity came sooner than expected. The conflict required full mobilization of national resources. Domestic expansion and production for military use rather than for export generated a rapid depletion of Britain’s reserves, which were used to finance a steady stream of food, raw materials, munitions and capital goods from the United States above all. In order to facilitate the purchase of essentials (and to conserve shipping space) exchange controls were introduced on current and capital sterling transactions: the pound became an inconvertible currency for the first time since the Napoleonic wars. Meanwhile the need to finance military operations and bases abroad, together with the search for supplies of food and raw materials, led Britain to accumulate a mounting debt with traditional suppliers such as Argentina, and above all with the countries using sterling as an international trading and reserve currency, otherwise known as the sterling area, and confined for the most part to the Commonwealth and Empire (exceptions were Canada, outside the bloc, and Egypt, Iraq, Iceland and the Faroe Islands, inside it). The overall indebtedness reached £3,355 million at the end of the war as Britain’s sterling creditors took IOUs in the form of balances held in London.(14)

Exchange controls and sterling balances could not prevent the reserves sinking below danger level during 1941 and in order to maintain the flow of supplies across the Atlantic the United States and Britain established the Lend-Lease system. Under the Mutual Aid Agreement (February 1942) which governed the operation of Lend-Lease Britain would not need to pay cash for American goods. It was however agreed under Article VII of the Agreement that after the war there would be Anglo-American cooperation in the creation of a world economy characterised by non-discrimination in trade and currency policy.(15)

Article VII was the result of American pressure. The State Department above all held that trade and currency blocs stimulated international rivalry. For much of the period since taking up office in 1933 Secretary of State Cordell Hull had directed particular resentment at the bilateral practices of Nazi Germany (barter trade, in which nations swapped goods to a roughly equivalent level, any difference in value being made up in currency to be spent by the surplus country inside the economy of the debtor). Japanese economic imperialism and the Imperial Preference system under which goods produced and traded in the British Commonwealth and Empire were taxed at lower levels than those made outside it, also qualified for Hull’s disapproval. This hostility to discrimination had if anything been reinforced by Britain’s adoption of sterling inconvertibility and turn to bilateral trade and currency deals after 1940. In Washington it was believed that post-war peace could not be guaranteed in a world carved up into exclusive economic zones; once victory had been achieved international economic relations would require extensive liberalization, and planning towards the achievement of this objective could not begin too soon.(16)

Ideological faith in the benefits of liberal capitalism was reinforced by pragmatism. How could the United States maintain full employment once the high level of demand generated by war had passed away? Never strongly influenced by Keynesian economics (unlike the US Treasury), the State Department joined forces with financial and business lobbies (such as the National Association of Manufacturers) who argued that the United States would require access to overseas markets currently restricted by tariffs, preferences, import controls, and currency inconvertibility.(17) It all meant that, despite deep misgivings, the British had no choice but to embark on detailed conversations with the United States aimed at planning for a post-war international order based on the principles of Article VII. In consequence Anglo-American Lend-Lease arrangements were paralleled throughout the period 1942-45 by negotiations whose purpose was the creation of institutions designed to guarantee peacetime international non-discrimination in trade and currency policy. These culminated in the 1944 Bretton Woods conference, followed in 1945 by the US Loan to Britain and the publication of a jointly agreed paper, ‘Proposals for Consideration by an International Conference on Trade and Employment’, intended to facilitate the establishment of an International Trade Organization, a commercial counterpart to the International Monetary Fund.

Bretton Woods

There is no need to repeat the story of these conversations, which has been told many times.(18) What does need to be established, however, is that Keynes’s attitude to their trajectory has been seriously misrepresented. It is generally acknowledged that Keynes shared the British misgivings about Article VII and its implementation but gradually overcame them and embarked on enthusiastic cooperation with the Americans.(19) This is a misleading oversimplification. His initial reaction to Article VII was that it was a piece of dangerous and reactionary nonsense whose translation into policy would deprive Britain of the ability to protect its post-war balance of payments from a crippling deficit. The final version did at least provide reassuring words about ‘the expansion, by appropriate domestic and international measures, of production, employment, and the exchange and consumption of goods.'(20) Keynes was willing to go along with this rather than risk a split with the Americans at a crucial stage of the war. But he spent the rest of his life fighting against the liberal interpretation of Article VII and attempting to substitute for it a framework which would allow governments to preserve the autonomy identified both in ‘National Self-Sufficiency’ and in the General Theory as essential to the maintenance of full employment.

But how?

The question was, how to achieve this? During the 1930s the German Reichsminister of Economics, Hjalmar Schacht, had pioneered the bilateral solution to the problem of maintaining full employment in the face of pressure on the balance of payments. His policies had allowed Germany to purchase what it really needed (mainly food and raw material supplies) and could not produce at home at all – or could do so only at massive expense – in return for guaranteed export markets. Keynes accepted that Schacht and his successor, Walter Funk, had used bilateralism to promote Nazi economic domination of central and eastern Europe. But the fundamental concept had been sound because it allowed international exchange to return ‘to what it always should have been, a means of trading goods against goods’ whereas laissez-faire had forced debtors into deflation and had undermined peaceful international commerce.(21)

Keynes accepted that the Schachtian route might represent a feasible strategy for the protection of Britain’s external finances during the post-war transition period. All the machinery was in place by the end of 1941 and there was no reason why it could not be kept for at least five years after the war. But the likely consequences disturbed Keynes. Would it be possible, in the immediate post-war period, to drive exports to a level which would provide potential suppliers with an incentive to trade? There was a risk of long-term economic conflict with the United States. It followed that there would be little chance of assistance from this source – even though the capital goods and many of the raw materials essential for reconstruction could only be found here and would have to be paid for in dollars; and to embark on an isolationist policy without any attempt at an alternative would not be conducive to post-war international cooperation.(22)

What was the alternative? Whatever it was it had to reconcile the non-discriminatory bias and internationalism of Washington with national freedom to pursue full employment policies. Keynes suggested the ‘Clearing Union’, a massive international bank with huge liquid resources which would allow countries to carry on with domestic expansion even if the balance of payments was in the red. Debtor states would be provided with generous overdraft facilities; creditors would be placed under pressure to reflate, to lower tariffs, and possibly even to revalue their currencies in order to attract imports. The Clearing Union would be the means by which the ‘visionary hope’ glimpsed in the General Theory would be fulfilled.(23)

The internationalism of the Clearing Union and the isolationism of the Schachtian strategy make the two schemes appear to be binary opposites. Certainly this is how they seemed to Keynes’s friend and biographer Roy Harrod. Harrod was by inclination more sympathetic to economic liberalism than Keynes and sometime late in 1941 or in early 1942 (Harrod is imprecise about the date) he

ran into him [Keynes]…in a Treasury corridor; he was leaning against a door-post. ‘You must give up the bilateralist approach,’ I said, and come down on the American side.’ ‘No,’ he said, ‘I must pursue both lines of thought…..both.’ His expression was enigmatic. He seemed to be transfixed with a curious immobility that was unlike him.(24)

On one level Harrod was correct. The two approaches did conflict when it came to their impact on global reconstruction policy. But Keynes was not starting from a global perspective. For him it remained axiomatic that no new world economic order would be tolerable unless it was founded on national freedom to follow interest rate and investment policies which would produce full employment. This is why he had to pursue both internationalism and bilateralism. If the former was not hedged around with a whole series of safeguards against the disastrous consequences of laissez-faire then the latter course would have to be pursued, even if this meant the rejection of Article VII in favour of discrimination and comprehensive trade and exchange controls.(25)

Increasing dependence upon the USA

As the war progressed so Britain’s financial dependence on the United States increased. Exports collapsed by the start of 1945 to 30% of their value in 1938. The gold and foreign currency reserves, having come close to exhaustion in April 1941, mounted under the impact of American military expenditures in Britain towards the respectable figure of £500 million.(26) Lend-lease and the accumulation of sterling balances helped Britain to mobilize its resources more efficiently than any other belligerent in World War Two. But Lend-Lease was for the duration only and the sterling balances could not just be unilaterally wiped out by Britain on the close of hostilities. There was no disguising the fact that without substantial, almost immediate, American aid in peacetime, domestic living standards would be likely to drop below wartime levels. So, in practice, from 1943-45 Keynes devoted most of his energies to the pursuit of internationalism. But the bilateralistic option was never forgotten and remained as an alternative strategy to be followed in the event that isolationist or reactionary economic forces triumphed in the United States.

Struggle with Washington

Keynes’s efforts to secure an acceptable form of economic internationalism involved him in a constant, and ultimately a losing, struggle with Washington. The first casualty was the Clearing Union. Both before and during the Bretton Woods conference Keynes fought hard for his scheme but the size of the American liability in the Union had made it unacceptable to Washington.(27) It had been estimated that the Clearing Union would require at least $26 billion (£4.5 billion, equivalent to 54% of the British GNP in 1945).(28) Nevertheless Keynes’s ideas had taken root in the US Treasury, where Harry Dexter White proposed the less ambitious International Monetary Fund as an alternative. The Fund was to have only $8 billion to assist in the maintenance of currency convertibility but its modest resources were backed up with provisions which permitted exchange-rate variation in cases of chronic payments’ disequilibria, exchange controls on capital movements, the imposition of quantitative import restrictions by debtors and discrimination against persistent creditors (the scarce currency clause). In addition, it was agreed that members were to be relieved from the obligation of non-discrimination in currency policy during the post-war transition period, when it was accepted that they would be likely to run substantial deficits which could not be covered by the Fund. Indeed, it was agreed that the Fund would not be operative during the transition period. Keynes and the British bowed to American pressure, somewhat mollified by the concessions involved in the scarce currency and transition period provisions.

Keynes had hoped that the Clearing Union would provide Britain with aid during the transition period. The success of the Bretton Woods conference and the Union’s defeat had undermined this plan but in the spring of 1945, accepting that it would be easier for Britain if Bretton Woods were to be rejected, he proposed a new scheme with the same objective.(29) The relevant paper, ‘Overseas Financial Policy in Stage III’ (Stage III was intended to cover the period up to 1945-50, Stages I and II having been the phases of Lend-Lease assistance covering, respectively the wars against Germany and Japan and then Japan only), called for a US grant of $3 billion and a loan of $5 billion. The grant was intended to help Britain settle with its sterling area creditors on the basis of a three-part deal: in each case a portion of the balances was to be funded, a portion written off and a portion released to provide convertible exchange for current transactions. The loan was to bolster the British reserves during reconstruction. The incentive for Washington, argued Keynes, was that such help would make it unnecessary for Britain to make use of all the safeguards available to it in the transition period. It would be feasible to move towards fulfilment of Article VII not in five years but within one year of receiving the injection of dollars. With aid on so grand a scale it would be possible to move within a year to a limited form of convertibility, namely sterling area resident convertibility for current transactions. Non-resident convertibility, which would have meant allowing Britain’s non-sterling area creditors access to hard currency for current transactions, was not contemplated during the transition period and exchange controls on capital movements were to be retained indefinitely.(30)

Labour Treasury Minister in the 1970s, Edmund Dell, has argued that the scheme involved an ill-judged return to laissez-faire on the part of Keynes.(31) This is simply untrue. Quite apart from all the safeguards built into the provisions for convertibility Keynes continued to advocate the planning of foreign trade. He believed that attempts to return to a free import policy would be undesirable and inconceivable in the post-war world. Countries should be permitted to employ a range of permanent trade controls, including quantitative regulation of imports, bulk purchase, state trading and bilateral agreements where both parties wanted them. These measures would be necessary to protect the balance of payments and foster the expansion of new industries (like oil refining) and new investment in old ones such as iron and steel. He accepted that these restrictions would be non-discriminatory in due course, dependent on the progress of international talks and above all on US tariff and domestic macroeconomic policy.(32) In both currency and commercial policy Keynes’s goal was the construction of a managed international economy which would facilitate and not retard national planning and full employment policies.

The Keynesian Order Frustrated, 1945-46

The attempt to use ‘Overseas Financial Policy in Stage III’ as a trigger mechanism for the creation of a Keynesian world failed. Despite the defeat of the Clearing Union proposal Keynes had come to believe that under the patronage of President Roosevelt, New Dealers had gained the upper hand in Washington over the economic liberals of the State Department. In particular he had struck up good, albeit sometimes rather tempestuous working relations with Henry Morgenthau Jr, the US Treasury Secretary, and Harry Dexter White. (33) Hull’s influence had been in eclipse and on his resignation in 1944 he was replaced by the more Anglophile Edward Stettinius. The negotiations for Lend-Lease in Stage II, held in Washington in the autumn of 1944, had not been easy but their outcome had been favourable to British interests.(34) It all encouraged Keynes to believe that there would be a favourable reaction to his master-plan. These expectations were to be disappointed. Roosevelt’s death in April 1945 was followed by a change of personnel and philosophy. The new President, Harry S. Truman, was inexperienced and insecure. To bolster his position he by-passed the New Dealers and turned to figures from the old Democratic Party core. Foreign economic policy negotiations were taken over by Assistant Secretary Will Clayton, a liberal in the Hullian tradition. Morgenthau left the Treasury and the post of Secretary was taken by Fred Vinson, a fiscally conservative mid-Western machine politician. White’s influence began to diminish (after the end of the war he came under suspicion of being a Soviet agent).(35)

Power shift

The abrupt termination of Lend-Lease after the Japanese surrender in August 1945 was a sign of how power had shifted in the American administration. Britain’s external financial position was left completely exposed and the reconstruction policies of the new Labour Government (regarded with some suspicion in Washington) were plunged into crisis. Keynes, still confident he could secure American aid, persuaded the Cabinet to let him head a mission to Washington to negotiate a slightly scaled down version of his proposals in ‘Overseas Financial Policy in Stage III’, having substituted a request for a low interest bearing loan or grant of $5 billion (or if possible $6 billion) for the original grant-and-loan combination of $8 billion. Parliamentary approval of Bretton Woods would be tied to a successful outcome.

The story of the talks is well known. The British party ran into a tide of economic liberalism and conservative isolationism.(36) Although discussions on commercial policy proceeded relatively smoothly, Keynes’s financial scheme foundered. At one point, overcome with exhaustion and frustration, he considered abandoning the exercise: ‘we had better pack up and go home’, he told one of his Treasury team.(37) In return for an interest-bearing loan of just $3.75 billion, plus $650 million to finance Lend-Lease supplies in the pipeline, Britain was forced to accept not only resident but also non-resident sterling convertibility for current transactions. Despite protests from the delegation, convertibility was to become operational one year after the President’s signature of the Financial Agreement. Britain was denied access to its transitionary rights covering sterling transactions by non-sterling countries and only narrowly fought off American efforts to deprive it of the right to leave the Fund during the whole of the period covered by the loan (55 years) and to invoke the scarce currency clause. There was to be no separate cover for the sterling balances – a bad omen for efforts at reducing them, since Britain would have little to offer their holders, who would be aware that before long they would be able to enjoy the right of convertibility for current transactions. Given the decentralised nature of capital controls throughout the sterling area and the world-wide need for dollars to finance reconstruction all this was likely to put a time-bomb under the British reserves.(38)

Although the Government accepted the terms and recommended Parliamentary approval of the loan and of Bretton Woods, it did so without any enthusiasm. There was a good deal of criticism in the press and in both Houses of Parliament. Keynes himself spoke in support of the agreement; and it may be asked why, if it fell so short of what he had aimed for, he was prepared to do this. There were a number of reasons. First of all he believed that the dollars would make life somewhat easier for the population at a time when many were hoping for a little relief from the austerity of the war years. Secondly, he did not see how the Government’s reconstruction policy could be carried out in the absence of American support. He told the editor of the New Statesman, his old friend Kingsley Martin, of his determination that the current Labour Government should not go the same way as the Ramsay MacDonald administration, overwhelmed by an external financial crisis.(39) Thirdly, he felt that if Britain tried to make the Financial Agreement work it was likely that further, more generous American aid would be forthcoming in the case of failure. If the country embraced the bilateral alternative immediately, however, having made no attempt at the implementation of Article VII, there no chance of sympathy from Washington and every likelihood of a trade war instead.(40) In private Keynes knew that bilateralism remained an option – but it was best held in reserve against the failure of the US Congress to ratify the loan. At that point, as he told the Permanent Secretary to the Treasury Sir Edward Bridges in February 1946,

we should at once set about a reinvigorated and reformed sterling area, which would primarily consider its interests alone, but would invite a considerable part of the rest of the world, including north-west Europe, either to join it or to become linked to it by suitable payments agreements. At the same time, we should, of course be cutting off all dollar imports that we could……(41)

Fourthly, he did not think that the loan agreement’s prospects would be particularly good unless the Government and the Bank of England took his advice and made some tough decisions, the former about overseas military expenditure, the latter about the sterling balances (Keynes wanted to block for five years all sterling balances accumulated before 31 December 1946). Keynes was not short of self-confidence in his ability to defeat entrenched financial and military opposition, notwithstanding poor health, and early in 1946 he started a campaign on both fronts, with the help of a sympathetic Chancellor in Hugh Dalton.(42) Finally, although as he frankly admitted in his speech to the House of Lords, the Financial Agreement did not fulfil the hopes he had held at the start of the negotiations and put the finishing touches to his design for an expansionary world economy, it went some of the way: ‘We are attempting a great step forward towards the goal of international economic order amidst national diversities of policies.'(43) Despite the disappointments, therefore, he still believed, on the basis of the commercial policy talks as much as on the basis of the Financial Agreement, that the forces sympathetic to his view of the world would gain the upper hand in the United States.

Disillusionment did not take long to arrive. Britain had approved membership of the Bretton Woods institutions when the loan had passed through both Houses of Parliament. On 19 February Keynes was appointed British Governor both of the Fund and of the International Bank for Reconstruction and Development and the following month went to Savannah, in Georgia, USA, for the inaugural meeting of the Governors of the two organizations. The truth about this episode has been treated with some economy by historians, and it is only by piecing together evidence from a number of different sources that we can approach it. There has never been any argument about Keynes’s extreme unhappiness at the outcome of the Savannah meeting. He had wanted the headquarters of the Fund to be located in New York; under American pressure it was decided that the site should be in Washington. Keynes argued unavailingly that this would undermine the independence of the institution and make it vulnerable to political pressure. Additionally Keynes believed that the Executive Directors of the Fund should be part-time, selected from the highest echelons of member countries’ Treasuries and Finance Ministries. The Americans however insisted on full-time Executive Directors remunerated by highly generous tax-free salaries. Vinson succeeded in railroading all of this through the meeting, having organized support from what Keynes called ‘a pathetic procession of stooges’,(44) composed mainly of the Chinese and Latin American delegations.

The Anglo-American disagreement on the staffing and location of the Fund reflected a fundamental difference of philosophy. The Americans wanted an institution whose operations would reflect the imperatives of their own foreign economic policy: in other words its role was to exercise constant pressure on members in the direction of currency convertibility, fixed exchange rates and non-discrimination in trade.(45) Drawings on the Fund were to be subject to inspection so that countries in need of foreign exchange did not break away from the objectives of Article VII. This was why the Fund had to be staffed by full-time officials and centred in Washington. Keynes on the other hand had believed that the Fund’s deliberations would always be led by national policy programmes rather than the other way around. It followed that he envisaged a neutral organization which would allow the automatic use of drawing rights and meet to consider changes in exchange rates – occasions which he did thought would be infrequent.(46) The main source for most accounts of the Savannah meeting and its aftermath is Harrod’s biography. Here, Keynes’s anger with the Americans is made clear enough. He considered their conduct a brazen abuse of power exercised in a reactionary cause. The New Dealers had been defeated and in consequence the prospects for international cooperation were grim; ‘I came to Savannah expecting to meet the world, and all I met was a tyrant.'(47) After an uneventful voyage home (Keynes’s health would not allow him to fly by now) he wrote a memorandum on the proceedings for the Cabinet. The first draft was ‘sharply critical'(48) of American policy but after reflection he relented and concluded that whatever the difficulties there was still no way of creating a better world which did not involve collaboration between London and Washington.(49)

The real story

The real story is significantly and interestingly different. The witness is George Bolton, of the Bank of England, who was one of the party which had accompanied Keynes to Savannah. Writing in The Banker in November 1972 Bolton recalled that Keynes had not had a peaceful journey home. He had spent most of the time

preparing an article for publication condemning American policy with extraordinary ferocity and passionately recommending H.M. Government to refuse to ratify the Fund and Bank agreement; such action would automatically have frustrated the U.S. and Canadian Loan Agreements….(50)

Bolton pointed out the consequences would have been explosive. Keynes had by now achieved a position of enormous public influence. His recommendations would in all likelihood have appeared persuasive to the Cabinet. The loan agreement would have been frustrated. Yet Britain needed the money as well as access to the resources of the Fund. Accordingly Bolton and Ernest Rowe-Dutton of the Treasury spent most of the journey trying, in the end successfully, to talk Keynes out of taking such a radical step. The document was destroyed. All that emerged was the paper eventually seen by the Cabinet, which was vetted and approved by Rowe-Dutton.(51) The document was cool and described the outcome of Savannah as ‘discouraging to our previous efforts and a doubtful augury for the efficient working of the new institution.'(52) But it did not advocate withdrawal from the Fund and argued that the delegation left ‘convinced that we shall be making a great mistake if we do not treat our participation in these institutions seriously and give them of our best.’

A few weeks later Keynes died of a heart attack.

The second piece of evidence comes from Harrod himself. In September 1949 Richard Kahn sent Harrod the letter he had received from Keynes over three years before. In passing it on Kahn lamented the common belief that ‘Maynard’s concepts must be judged quite independently of the way in which they are handled’ and suggested that it was ‘only fair’ to indicate that he was ‘feeling rather pessimistic’ at the time of his death.(55) But Keynes’s letter to Kahn never appeared in the book, for reasons which it is possible to deduce from Harrod’s reply. Harrod wrote that the section dealing with Savannah had been ‘one gigantic snag’. He told Kahn of his belief that ‘the American behaviour at Savannah’ had been ‘the immediate cause’ of Keynes’s death. He had made Kahn’s point, namely Keynes’s belief that not just the framework of institutions but ‘how they are worked’ was important, in the text. However he had ‘softened’ this section ‘a little’ out of an awareness that it might need ‘watering down in the interests of present A-A (Anglo-American) relations’. This had not satisfied the Treasury and he had been visited by Rowe-Dutton, who had made ‘a number of requests for changes or excisions’. Harrod had fallen in with all of these. Now he had learned that there were other points which would have to be raised with Sir Edward Bridges and Ministers.(56) In short, Harrod was himself inclined to play down the intensity of Keynes’s disagreements with the Americans although intellectual honesty had compelled him to recognize that the existence of these could not be ignored. But his self-censorship had not gone far enough for the authorities who wanted more changes to the manuscript. All of this means that Harrod’s version, certainly of Savannah and maybe of the loan negotiations, cannot be accepted as a full one – and points to the existence of highly sensitive material which has never entered the public domain. (57)

If public or even merely Cabinet-level knowledge of Keynes’s disillusionment was likely to have had explosive consequences in 1946, the results might have been hardly have been less dramatic in 1949. In April Britain signed the North Atlantic Treaty. On September 18 (ironically the day before the date of Harrod’s letter) Britain devalued the pound from £1=$4.03 to £1=$2.80. The Chancellor and Foreign Secretary (Stafford Cripps and Ernest Bevin) were in Washington at the time and the whole operation was predicated on the assumption that a sterling-dollar realignment would form the basis of a lasting Anglo-American economic partnership.(58) The maintenance of the ‘special relationship’ with the United States was the Labour Government’s major priority. In these circumstances, therefore, public revelation of Keynes’s misgivings was an extremely delicate matter whose impact had to be minimised.

Conclusion: Will the real John Maynard Keynes please stand up?

The story that emerged was that Keynes had been unhappy at Savannah but that he had passed through a moment of temporary despair and remained an advocate of cooperation with the Americans until his death. This impression is reinforced by the Harrod biography’s emphasis on Keynes’s apparent reversion to liberal economic ideas, albeit modified in the light of his own work, in the last two years of his life. Other commentators (most recently Donald Moggridge who does not even quote any of the report which the Cabinet did finally see) have followed this line. Yet it is a great oversimplification. The narrative ignores or dismisses on the flimsiest of grounds the likelihood that Keynes had to be leant on to prevent him from denouncing Bretton Woods and quite possibly taking Britain on a different trajectory from the one actually followed after World War Two. The final pessimism of Keynes to which Kahn referred is not discussed in any depth by Moggridge and not mentioned at all by Harrod. Instead Harrod’s concluding pages merely attribute vague anxieties to his subject. These concern British opportunism and financial recklessness and, to a lesser degree, American ‘benevolent paternalism’.(59) But such sentiments have more to do with Harrod’s own Are these Hardships really Necessary?(60) than with what Keynes actually said in his last weeks. In short the available evidence simply does not support a conventional wisdom which, in denying the consistency of Keynes’s ideas from the time he wrote ‘National Self-Sufficiency’ underplays the extent of his economic radicalism and ignores his determination to keep the bilateral alternative to international collaboration afloat because even in the straitened circumstances of 1945-46 this was a better course than returning to laissez-faire.

The real story, as opposed to the conventional narrative, is that Keynes was looking for a world in which every nation could pursue its own New Deal. During the war he thought that he could find this through Anglo-American partnership. The events of 1945-46 led to the failure of his enterprise. Talked out of advocating an alternative strategy he died a frustrated man. He was posthumously enrolled into support for an Anglo-American relationship which turned out to be quite different from what he had envisaged.

It is of course true that Washington’s search for a world based on Article VII was backed by more financial generosity after 1947-48. The Marshall Plan, launched as it became clear that Britain’s experiment in convertibility was doomed given the world-wide demand for dollars, replaced Bretton Woods as the chosen method of reaching multilateralism. It tolerated anti-dollar discrimination on the part of participating nations – as long as they co-operated in the creation of a unified liberal capitalist western Europe committed to economic and strategic partnership with the Americans. For the British the extra dollars were welcome but inadequate, given the Plan’s failure to assist with continuing hard currency shortage in the sterling area as a whole. Having returned to wartime sterling arrangements on the suspension of convertibility the British were only prepared to offer decontrol of foreign trade and exchange policy if the United States underwrote the sterling area gold and dollar reserves.(61)

The regionalism and pragmatism of the Marshall Plan notwithstanding, Anglo-American economic discussions of 1947-50 merely re-rehearsed the dialectic between London’s search for liquidity and Washington’s pressure for liberalization which had characterised Keynes’s last years. Although the British thought they had negotiated a special understanding with the Americans following devaluation in September 1949, the United States never really embraced international Keynesianism. When sterling moved back to convertibility in the 1950s it was not against the background of a global New Deal. Although the international context was expansionary this was caused by healthy terms of trade between the developed and the under-developed world and by an increase in the availability of dollars generated by American overseas military expenditure and direct investment abroad.(62)

The post-war Anglo-American economic relationship took an unbalanced form, seen right at the start in the liberalism of the Financial Agreement and in Washington’s hijacking of the International Monetary Fund. It reflected no Keynesian vision but merely American power and British weakness. These truths have been largely obliterated because even when evidence for them became available historians have been too ready to follow the agenda set, not altogether willingly, by Roy Harrod in the circumstances of British strategic and economic dependence on the United States during the late 1940s. The willingness to accept what is in fact a myth has contributed to a watering down of the Keynesian legacy and, in practical terms, to an unnecessary narrowing of the policy choices available to national governments today, at another time of international economic crisis. With the cold war over there are now no excuses, if there ever were any, for historians to refrain from helping the real John Maynard Keynes to stand up.

Notes

1. Dr Scott Newton teaches Modern History at the University of Wales in Cardiff. His most recent book is Profits of Peace: the Political Economy of Anglo-German Appeasement (Clarendon, Oxford, 1996).
2. See R. F. Harrod, The Life of John Maynard Keynes (London: Penguin, 1972), chapters 12 -16; Armand Van Dormael, Bretton Woods: Birth of a Monetary System (London: Macmillan, 1978).
3. R. N. Gardner, Sterling-Dollar Diplomacy in Current Perspective: the Origins and Prospects of our International Economic Order (New York: Columbia University Press, 1980).
4. Alan P. Dobson, The Politics of the Anglo-American Special Relationship (Sussex: Wheatsheaf Books, 1988); Brian Tew, The Evolution of the International Monetary System since 1945 (London: Hutchinson, 1977); A. G. Kenwood and A. L. Lougheed, The Growth of the International Economy 1820-1990 (London: Longman, 1994); Sidney Pollard, The International Economy since 1945 (London, 1997). The mythology surrounding ‘the Bretton Woods system’ is discussed in Alan S. Milward, The Reconstruction of Western Europe 1945-51 (London: Methuen, 1984), pp. 43-51.
5. The argument that the special relationship endures today is made, albeit from a perspective highly critical of Anglo-American post-war relations, by Mark Curtis in The Great Deception: Anglo-American Power and World Order (London: Pluto Press, 1996).
6. See for example Harrod, pp. 720-22. Harrod was Keynes’s first scholarly biographer and his coverage of the period 1939-46 is still the most detailed of all accounts. Although Harrod’s work was first published in 1951 it remains very influential. Donald Moggridge’s Maynard Keynes: an Economist‘s Biography (London: Routledge, 1992) does not challenge Harrod on Keynes’s last years. However Moggridge does note that Harrod had made a ‘general attempt to make Keynes’s views conform to his own’ (Moggridge, p. 573).
7. J. M. Keynes, ‘National Self-Sufficiency, Collected Works of J. M. Keynes (hereafter CW), edited by Donald Moggridge, XXI, pp. 233-46. The Collected Works (hereafter CW) were published by Macmillan (London) between 1971-1989.
8. That this is such a flirtation is the view of Robert Skidelsky, John Maynard Keynes, Volume II, The Economist as Saviour (London: Macmillan, 1992), pp. 476-79.
9. Harrod, pp. 526-27.
10. See Keynes, ‘National Self-Sufficiency’, pp. 233-46. Keynes’s advocacy of ‘liberal socialism’ can be found in, for example, his exchange with Kingsley Martin in CW XXI, p. 508.
11. J. M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1973 edition) p. 349.
12. Keynes, ibid. p. 383
13. Keynes, ibid. p. 384
14. Gardner, p. 168
15. These conversations are related in Gardner, chapters III-IV and Dobson, chapter 2.
16. See Gardner, pp. 12-22.
17. Fred Block, The Origins of International Monetary Disorder: a Study of United States International Monetary Policy from World War Two to the Present (Berkeley: University of California Press, 1977), pp. 32-42; Gardner, p. 197
18. As well as the accounts provided by Gardner and Dobson there is plenty of material in Harrod, chapter 13, Block, chapter 3, Van Dormael, passim,, and Moggridge, chapter 28. The whole subject is covered in L. S. Pressnell, External Economic Policy since the War, Volume I. The Post-War Financial Settlement (London: HMSO, 1987).
19. This is Harrod’s interpretation; and it has more to do with his outlook than with Keynes’s – a point made by Robert Skidelsky when discussing the Harrod biography in the introduction to his own John Maynard Keynes Volume I. Hopes Betrayed 1883-1920 (London: Macmillan, 1983).
20. Quoted in Moggridge, p. 667.
21. Keynes, ‘Post-War Currency Policy’, memorandum of 8 September 1944, CW XXV, pp. 21-33.
22. Moggridge, p. 667.
23. The successive drafts of the Clearing Union scheme, from September 1941 until May 1942, can be found in CW XXV, passim.
24. Harrod, p. 622.
25. See for example Randall Bennett Woods, A Changing of the Guard: Anglo-American Relations 1940-1946 (Chapel Hill: University of North Carolina Press, 1990), pp. 48-49.
26. Keynes, ‘The Present Overseas Financial Position of U. K.’, memorandum of 13 August 1945, CW XXIV, p. 404
27. Stanley W. Black, A Levite Among the Priests: Edward M. Bernstein and the Origins of the Bretton Woods System (Boulder: Westview Press, 1991), pp. 37-39.
28. For the respective overdraft facilities of the Clearing Union and the Fund see Gardner, p. 87. The GNP figure is taken from C. H. Feinstein, National Income, Expenditure and Output of the United Kingdom 1855-1965 (Cambridge: Cambridge University Press, 1972), Tables 1 and 10.
29. Keynes, letter to Bob Brand of 24 April 1945, CW XXIV, p. 315.
30. The full text of this paper can be found in CW XXIV, 256-295. The first draft was produced on 18 March 1945. It went to the Cabinet on 15 May.
31. Edmund Dell, The Chancellors (London: Harper Collins, 1996), p. 54.
32. Keynes, ‘Article VII Conversations and Commercial Policy’, memorandum of 12 June 1944, CW XXVI, pp. 304-11.
33. For Keynes’s relations with White see Harrod, p. 660; for Keynes and Morgenthau see Moggridge, pp. 656-67.
34. See Sir Richard Clarke, Anglo-American Collaboration in War and Peace (Oxford: Oxford University Press, 1982), pp. 36-38; Keynes, ‘The Washington Negotiations for Lend-Lease in Stage II’, memorandum of 12 December 1944, CW XXIV, pp. 192-223.
35. Block, pp. 55-57; p. 233, footnote 23.
36. See for example Block, pp. 62-69.
37. Moggridge, p. 809.
38. The full text of the Anglo-American Financial Agreement is reproduced in Gardner, pp. 389-92.
39. Keynes to Kingsley Martin, letter of 3 January 1946, CW XXVIII, pp. 217-20
40. Public Record Office T247/47, memorandum by Keynes to Sir Edward Bridges on ‘Will Congress approve the Loan and what do we do if it doesn’t’, 12 February 1946.
41. Ibid.
42. Moggridge, pp. 825-28.
43. See CW XXIV, p. 621. The full text of Keynes’s speech to the House of Lords, given on 18 December 1945, can be found on pp 605-24.
44. Keynes, memorandum on ‘The Savannah Conference on the Bretton Woods Final Act, 29 March 1946, CW XXVI, p. 222. The document is fully reproduced on pp. 220-38.
45. Raymond F. Mikesell, The Bretton Woods Debates: a Memoir (Princeton: Essays in International Finance no. 192, March 1944), p. 52.
46. Mikesell, pp. 52-53; Harrod, pp. 749-52.
47. Harrod, p. 757
48. Harrod, p. 758
49. Ibid.
50. Sir George Bolton, ‘Where the Critics are as wrong as Keynes was’, The Banker, November 1972, p.1387.
51. Lord Kahn, ‘Historical Origins of the International Monetary Fund’, in A. P. Thirlwall (ed), Keynes and International Monetary Relations (New York: St. Martin’s Press, 1975), p. 29.
52. Keynes, ‘The Savannah Conference on the Bretton Woods Final Act’, memorandum of 29 march 1946, CW XXVI, p. 227.
53. Moggridge, p. 834.
54. Letter from Keynes to Richard Kahn, 13 March 1946, R. F. Kahn papers (hereafter RFK), 13/39/5, Modern Archive Centre, King’s College, Cambridge.
55. Kahn’s accompanying letter is at RFK/13/39/3, Modern Archive Centre, King’s College, Cambridge. It is dated 15 September 1949.
56. RFK/13/39/1, Harrod to Keynes, 19 September 1949, Modern Archive Centre, King’s College, Cambridge.
57. There appear to be no surviving copies of the memorandum which Bolton and Rowe-Dutton persuaded Keynes to destroy (assuming Bolton’s story to be true) in the archives of the Bank of England and the Treasury. Nor does the guide to Sir Edward Bridges’s papers in the Public Records Office, London (PRO T273) mention files relating to Harrod’s biography of Keynes. Meanwhile the catalogues of Roy Harrod’s papers, which are held at the British Library and at the University of Chiba Sholha Dai, Icthiwawa City, Chiba, Japan, do not refer to papers and correspondence concerning The Life of John Maynard Keynes.
58. See Scott Newton, ‘The 1949 Sterling Crisis and British Policy towards European Integration’, Review of International Studies, 11 (1985), pp. 169-182.
59. Harrod, pp. 758-59.
60. Roy Harrod, Are these Hardships really Necessary? (London: Rupert Hart-Davis, 1947)
61. Scott Newton, ‘Britain, the Sterling Area, and European Integration’, Journal of Imperial and Commonwealth History, XXIII (3), 1985, 163-182.
62. Scott Newton, ‘The Sterling Crisis of 1947 and the British Response to the Marshall Plan’, Economic History Review, Second Series, XXVII (3) 1984, 391-408