The second New Deal, The Dollar Triumphant
Whether and to what extent German economic nationalism was a cause for the American drive toward war, one point is certain that, even before official American entry into the war, one of America's principal war aims was to reconstruct an international monetary order.
A corollary aim was to replace economic nationalism and bilateralism by the Hullian kind of multilateral trading and quote, open door for American goods.
But the most insistent drive, and the particularly successful one, was to reconstruct an international monetary system.
This system in view was to resemble the gold exchange system of the 1920s quite closely.
Once again, all the major world's currencies were to abandon fluctuating and nationally
determined exchange rates on behalf of fixed parities with other currencies and of all
of them with gold.
Once again, there was to be no full-fledged or internal gold standard for any of these
nations while in theory all currencies were to be fixed in terms of one key currency which
which would form a gold exchange standard on which other nations could pyramid their
own supply of domestic money.
But there were two crucial differences from the 1920s.
One was that, while the key currency was to be the only currency redeemable in gold, there
was to be no further embarrassing possibility of internal redemption in gold.
Gold was only to be a method of international payments between central banks, and never
Over again, an actual money held by the public. In this way, the key currency, and the rest
of the world in response, could expand and inflate much further than in the 1920s, freed
as they were from the check of domestic redemption.
But the second difference was more politically far-reaching, for instead of two joint partner
Junior Key Currencies, the pound and the dollar, with the dollar as workhorse junior subaltern,
the only key currency now was to be the dollar, which was to be fixed at $35 to the gold ounce.
The pound had had it, and just as the United States was to use World War II to replace British
imperialism with its own far-flung empire, so in the monetary sphere the United States
was now to move in and take over, with the pound no less subordinate than all the other
major currencies.
It was truly a triumphant, quote, dollar imperialism, to parallel the imperial American thrust in
the political sphere.
As Secretary of the Treasury Henry Morgenthau Jr. was later to express it, the critical
and eminently successful objective was, quote, to move the financial center of the world,
And all this eminently was in keeping with the prophetic vision of Cordell Hull, the
man who, in the words of Gabrielle Colco, had quote, the basic responsibility for American
political and economic planning for the peace, end quote.
For Hull had urged upon Congress as far back as 1932 that America quote, gird itself, yield
World War II was the occasion for a new coalition to form behind the New Deal, a coalition which
reintegrated many conservative, quote, internationalists, financial interests, who had been thrown into
opposition by the domestic statism or economic nationalism of the earlier New Deal.
This reintegration of the entire conservative financial community was particularly true
in the field of international economic and monetary policy.
Here, Dr. Leo Paszwalski, a conservative economist who had broken with the New Deal
upon the scuttling of the London Economic Conference, returned to a crucial role as
Secretary Hull's special advisor on post-war planning.
Dean Acheson, also disaffected by the radical monetary measures of 1933 to 1934, was now
back as Assistant Secretary of State for Economic Affairs.
And when the ailing Cordell Hull retired in late 1944, he was replaced by Edward Statenius,
the son of a Morgan partner and himself former president of Morgan-oriented U.S. Steel.
Titinius chose, as his assistant secretary for economic affairs, the man who quickly
became the key official for post-war international economic planning, William L. Clayton, a former
leader of the anti-New Deal Liberty League and chairman and major partner of Anderson
Clayton & Company, the world's largest cotton export firm.
Clayton's major focus in post-war planning was to promote and encourage American exports,
with Cotton, not unnaturally, never out of the forefront of his concerns.
Even before American entry into the war, U.S. economic war aims were well-defined and rather
brutally simple.
They hinged on a determined assault upon the 1930 system of economic and monetary nationalism
so as to promote American exports, investments, and financial dealings overseas.
In short, the quote, open door for American commerce.
In the sphere of commercial policy, this took the form of pressure for reduction of tariffs
on American products and the elimination of quantitative import restrictions on those
products.
In the allied sphere of monetary policy, it meant the breakup of powerful nationalistic
currency blocks and the restoration of an international monetary order based on the
The dollar in which currencies would be convertible into each other at predictable and fixed parities
and there would be a minimum of national exchange controls over the purchase and use of foreign
currencies.
And even as the United States prepared to enter the war to save its ally, Great Britain,
it was preparing to bludgeon the British at a time of great peril to abandon their sterling
Block, which they had organized effectively after the Ottawa agreements of 1932.
World War II would presumably deal effectively with the German bilateral trade and currency
menace, but what about the problem of Great Britain?
John Maynard Lord Keynes long had led those British economists who had urged a policy
of All-Out Economic and Monetary Nationalism on behalf of inflation and full employment.
He had gone so far as to hail Roosevelt's torpedoing of the London Economic Conference
because the path was then cleared for economic nationalism.
Keynes' visit to Washington on behalf of the British government in the summer of 1941
now spread gloom about the British determination to continue their bilateral economic policies
After the War High State Department official J. Pierpont
Moffatt despaired that, quote, The future is clouding up rapidly and that despite the
war the Hitlerian commercial policy will probably be adopted by Great Britain, end quote.
The United States responded by putting the pressure on Great Britain at the Atlantic
Conference in August 1941.
Under Secretary of State Sumner Welles insisted that the British agree to remove discrimination
against American exports and abolish their policies of autarky, exchange controls and
imperial preference blocks.
Prime Minister Churchill tartly refused, but the United States was scarcely prepared to
abandon its crucial aim of breaking down the Sterling block.
As President Roosevelt privately told his son Elliot at the Atlantic Conference,
It's something that's not generally known, but the British bankers and German bankers
have had world trade pretty well sewn up in their pockets for a long time.
Well now, that's not so good for American trade, is it?
If in the past, German and British economic interests have operated to exclude us from
World Trade, kept our merchant shipping closed down, closed us out of this or that market,
and now Germany and Britain are at war, what should we do?"
The signing of Lend-Lease Agreements was the ideal time for ringing concessions from the
British, but Britain consented to sign the agreements Article 7, which merely involved
a vague commitment to the elimination of discriminatory treatment in international trade, only after
intense pressure by the United States.
The agreement was signed at the end of February 1942, and in return the State Department pledged
to the British that the US would pursue a policy of economic expansion and full employment
after the war.
Even after these conditions, however, Britain soon maintained that the Lend-Lease Agreement
To Cordell Hull, however, the agreement on Article 7 was decisive and constituted, quote,
a long step toward the fulfillment, after the war, of the economic principles for which
I had been fighting for half a century."
The United States also insisted that other nations receiving lend-lease sign a virtually
identical commitment to multilateralism after the war.
In his first major public address in nearly a year, Hull, in July 1942, could now look
forward confidently that, quote,
Leadership toward a new system of international relationships in trade and other economic affairs will devolve very largely upon the United States because of our great economic strength.
We should assume this leadership, and the responsibility that goes with it, primarily for reasons of pure national self-interest."
In the post-war planning for economic affairs, the State Department was in charge of commercial
and trade policies, while the Treasury conducted the planning in the areas of money and finance.
In charge of post-war international financial planning for the Treasury was the economist
Harry Dexter White.
In early 1942, White presented his first plan, which was to be one of the two major foundations
of the Post-War Monetary System.
White's proposal was of course within the framework of American post-war economic objectives.
The countries of the world were to join a stabilization fund totaling $5 billion, which
would lend funds at short-term to deficit countries to iron out temporary balance of
payments difficulties.
But in return for this provision of greater liquidity and short-term aid to deficit countries,
Exchange rates of currencies were to be fixed in relation to the dollar and hence to gold
with the gold price to be set at $35 an ounce, and exchange controls were to be abandoned
by the various nations.
While the White Plan envisioned a substantial amount of inflation to provide greater currency
liquidity, the British responded with a Keynes Plan that was far more inflationary.
By this time, Lord Keynes had abandoned economic and monetary nationalism for Britain under
severe American pressure, and his aim was to salvage as much domestic inflation and cheap
money for Britain as he could possibly induce America to accept.
The Keynes Plan envisioned an International Clearing Union, or ICU, which, in return for
agreeing to stable exchange rates between currencies and the abandonment of exchange
and Change Control provided a huge loan fund to its members of $26 billion.
The Keynes Plan, moreover, provided for a new international monetary unit, the quote
Bancor, which could be issued by the ICU in such large amounts as to provide almost unchecked
room for inflation, even in a country with a large deficit in its balance of payments.
The nations would consult with each other about correcting balance of payments disequilibria
through altering their exchange rates.
The Keynes Plan, furthermore, provided automatic access to the Fund of Liquidity with none
of the embarrassing requirements, as included in the White Plan, for deficit countries to
cease creating deficits by inflating their currency.
Whereas the White Plan authorized the Stabilization Fund to require deficit countries to cease
Place Inflating in Return for Fund Loans, The Keynes Plan envisioned that inflation
would proceed unchecked with all the burden of necessary adjustments to be placed on the
hard-money creditor countries who would be expected to inflate faster themselves in order
not to gain currency from the deficit nations.
The White Plan was stringently attacked by the conservative nationalists and inflationists
in Britain, particularly G.R. Boothby, Lord Beaverbrook, The Times of London and The Economist.
The Keynes Plan was attacked by conservatives in the United States, as was even the White
Plan for interfering with market forces and for automatic extension of credit to deficit
countries.
Critical of the White Plan were the Guarantee Survey of the Guarantee Trust Company and
the American Bankers Association.
Furthermore, the New York Times and New York Herald Tribune called for return to the classical
gold standard and attacked the large measure of governmental financial planning envisioned
by both the Keynes and White proposals.
After negotiating during 1943 and into the spring of 1944, the United States and Britain
hammered out a compromise of the White and Keynes plans in April 1944.
The Compromise was adopted by a World Economic Conference in July at Bretton Woods, New Hampshire.
It was Bretton Woods that was to provide the monetary framework for the post-war world.
The Compromise established an International Monetary Fund, or IMF, as the stabilization
mechanism.
Its total funds were fixed at $8.8 billion, far closer to the White than to the Keynes
prescriptions.
Its balance of IMF international control as against domestic autonomy lay between the
White and Keynes plans, leaving the whole problem highly fuzzy.
On the one hand, national access to the fund was not to be automatic, but on the other,
the fund could no longer require corrective domestic economic policies of its members.
On the question of exchange rates, the Americans yielded to the British insistence on allowing
The compromise provided that each country could be free to make a 10% change in its exchange rates and that larger changes could be made to correct, quote, fundamental disequilibria, in short, that a chronically deficit country could devalue its currency rather than check its own inflation.
Furthermore, the US yielded again in allowing creditor countries to suffer by permitting
deficit countries to impose exchange controls on, quote, scarce currencies.
This meant, in effect, that the major European countries, whose currencies would be fixed
at existing, highly overvalued rates in relation to the dollar, would thus be permitted to
to enter the IMF with chronically overvalued currencies and then impose exchange controls
on, quote, scarce, undervalued dollars.
But despite these extensive concessions, there was no, quote, bankor.
The dollar, fixed at $35 per gold ounce, was now to be firmly established as the key currency
base of a new world monetary order.
Besides, for the dollar to be undervalued and other major currencies to be overvalued greatly spurs American exports, which was one of the basic aims of the entire operation.
U.S. Ambassador to Britain, John G. Winant, recorded the perceptive hostility to the Bretton Woods agreements by the majority of the directors of the Bank of England.
For these men saw, quote, that if the plan is adopted, financial control will leave London
and sterling exchange will be replaced by dollar exchange, end quote.
The proposed International Monetary Fund ran into a storm of conservative opposition in
the United States from the opposite pole of the hostility of the British nationalists.
The American attack on the IMF was essentially launched by two major groups, conservative
Eastern bankers and Midwestern isolationists.
Among the bankers, the American Bankers Association, or ABA, attacked the unsound and inflationary
policy of allowing debtor countries to control access to international funds.
And W. Randolph Burgess, president of the ABA, denounced the provision for debtor rationing
of quote, scarce currencies as an abomination.
The New York Times urged rejection of the IMF and proposed making loans to Britain in
exchange for the abolition of exchange controls and quantitative restrictions on imports.
Another banker's group came up with a quote, key currency proposal as a substitute for
Bretton Woods.
This key currency plan was proposed by economist John H. Williams, vice president of the Federal
The Federal Reserve Bank of New York, and was endorsed by Leon Frazier, president of the First National Bank of New York, and by Winthrop W. Aldrich, head of the Chase National Bank.
It envisioned a bilateral pound-dollar stabilization, fueled by a large transitional American loan, or even grant, to Great Britain.
Thus, the key currency people were ready to abandon temporarily not only the classical gold standard, but even an international monetary order, and to stay temporarily in a modified version of the world of the 1930s.
The Midwestern isolationist critics of the IMF were led by Senator Robert A. Taft, Republican from Ohio, who charged that while the bulk of the valuable hard money placed in the fund would be American dollars,
The dollars would be subject to international control by the fund authorities and therefore
by the debtor countries.
The debtor countries could then still continue exchange controls and sterling block practices.
Here Taft failed to realize that formal and informal structures in the Bretton Woods design
would ensure effective United States control of both the IMF and the international bank.
The administration countered the critics of Bretton Woods with a massive propaganda campaign,
which was able to drive the agreement through Congress by mid-July 1945.
It emphasized that the U.S. government would have effective control, at least of its own
representatives in the fund.
It played up, in what proved to be gross exaggeration, the favorable aspects of the various ambiguous
Revisions, insisting that debtor access to the fund would not be automatic, that exchange
controls would be removed, and that exchange rates would be stabilized.
It pushed heavily the vague idea that the fund was crucial to post-war international
cooperation to keep the peace.
Particularly interesting was the argument of Will Clayton and others that Bretton Woods
would facilitate the general commercial policy of eliminating trade discrimination and barriers
Against American Exports.
This argument was put particularly boldly by Treasury Secretary Morgenthau in a speech
to Detroit industrialists.
Morgenthau promised that the Bretton Woods Agreement would lead to a world trade freed
from exchange controls and appreciated currencies, and that this would greatly increase the exports
of American automobiles.
Since the fund would begin operations the following year by accepting the existing grossly
It is perhaps understandable, then, that not only the major farm, labor and New Deal liberal
organizations pushed for Bretton Woods, but that the large majority of industrial and financial
American approval in mid-1945 was followed after lengthy soul-searching by the approval
of Great Britain at the end of the year.
By the end of its existence, therefore, the Second New Deal had established the triumphant
dollar as the base of a new international monetary order.
The dollar had displaced the pound, and within a general political framework in which the
American Empire had replaced the British.
Looking forward perceptively to the post-war world in January 1945, Lamar Fleming Jr.,
president of Anderson Clayton & Company, wrote to his longtime colleague Will Clayton that
the, quote, British Empire and British international influence is a myth already, end quote.
The United States would soon become the British protector against the emerging Russian land
mass, prophesied Fleming, and this would mean, quote, the absorption into the American Empire
of the parts of the British Empire which we will be willing to accept, end quote.
As the New Deal came to a close, the triumphant United States stood ready to reap its fruits
on a Worldwide Scale.