The Journey to Bretton Woods

by Maria Reinertsen
Sample translation from the Norwegian by David M. Smith

In the cold hour. Keynes’s great plan. The construction of the Queen Mary—Keynesianism in practice. The economic consequences of a weak character. The Brits are unsure what to do with the Europeans. D. H. Lawrence, Tony Blair, Bill Clinton and the use of heroes.
In the period between the wars, French, German, English and American boats competed for passengers looking to cross the Atlantic. Over time, the passenger profile had shifted away from immigrants on their way to America to tourists going to Europe—the most prosperous of those same immigrants and their children. In response, the ships made considerable strides in amenities and speed, with the Blue Riband going to the ship that held the record for fastest transatlantic crossing. Mauretania, from the British cruise line Cunard, held the top spot for over two decades, from 1907 to 1929. Then, the German passenger ship Bremen held the crown until 1933, when the Italian Rex took over, before being surpassed two years later by Normandie—a French masterwork of comfort and opulence. As a result, fewer and fewer passengers booked their passage on Cunard’s boats. The British line was in dire financial straits. They knew they needed a ship that was bigger, faster and more luxurious than even the French could dream up.
(Image caption: RMS Queen Mary under construction at John Brown and Company in Clydebank.)
The idea ought to have appealed to John Maynard Keynes, he who never let a crisis pass without putting together a wayward, visionary solution.
As a young economist after the First World War, Keynes fought for massive debt relief for the defeated Germans. During the Great Depression, he introduced the doctrine that the state ought to borrow and spend lots of money to kickstart the economy. When the Second World War began, Keynes advocated against taxes in favour of forced savings, which would be paid back to the citizens after the war. In 1941, he introduced the notion of an international monetary union, an idea that would prove no less difficult to realize than the Queen Mary itself.

As I scanned Virginia Woolf’s diary for notes about Keynes from this time period, I happened upon her account of a bomb raid. On Friday, August 16th, 1940, the sirens were running non-stop. Virginia and Leonard had gone out when they were caught off guard by a raid. They sought cover under a tree: “The sound was like someone sawing in the air just above us…Hum and saw and buzz all around us.” They lay flat against the ground; the bombs caused the windows of the house to shake. “Will it drop I asked? If so, we shall be broken together.” And I think to myself, that’s some romance for adults: flat on your belly in the garden, then back inside to make dinner, count the money and rationing coupons, try and get some work done.
I am constantly distracted by these kinds of thoughts the whole time I’m writing. So I leave the house, away from the washing machine that is always ready to be emptied or filled, walk down to a cafe, simply to be distracted by all the attempts at togetherness at these places where people have gone to unwind, attempts that misfire because you’re either too little or too old, the juice tastes funny and someone’s older sister won’t cut it out and they’re out of Danishes and open-faced prawn sandwiches. The grownups, and those whose legs are long enough for the barstools, making a game attempt at joie de vivre. All this I find easier to enter into than, say, 1930s’ finance policy. But in Greece, the old people don’t go to cafes, they stand in breadlines, the cradle of European civilisation now reminding us of a 3rd world country. Spaniards with master’s degrees are coming to Norway to pick strawberries, serve fast food in Dombås. These are the new clients of the IMF.
For happiness isn’t just a function of your personality. It has been statistically proven that it is a function of your annual income, and the difference between that and your neighbour’s income. Rich nations are happier than poor ones, the rich are happier than the poor within the same country, and when incomes fall, so does happiness. Thus, the way in which the international community handles (or doesn’t handle) state debt crises matters to each and every one of us.
So when Keynes, one year after Virginia and Leonard Woolf sought cover from the bombers, took a few days off to write a plan for the post-war world economy, the two events were interconnected. To put it even more explicitly: If someone in 1917 or 1929, or indeed, 1932 had written these notes, and the ideas had been followed to the letter, Virginia and Leonard may not have had to lie under the spruce, comforting themselves with the thought that at least they’d die together.
The result of Keynes’s brief writing sabbatical was soon known in His Majesty’s Treasury as the Keynes Plan. Keynes began by describing how Britain, with its confrontational trade policy, quotas and tariff barriers, could keep from going bankrupt after the war. But, he wrote, there was a better option: “the international solution.”
It went like this: Instead of hoarding gold bars deep inside the vaults of their central banks, countries should put trade surpluses into an account in what he called the Clearing Union. The beauty of this is that the Union would be free to loan money from this account to other countries. Kind of like where, instead of stuffing bills under the mattress, you put your money in a bank that can then loan it out to others.
I have written of how work on the Clearing Union began as a way to counter German propaganda. But a good deal of the motivation also had to do with trade policy. In return for financial support during the war, the Americans demanded that Britain open up the Commonwealth to their goods.
This is usually what international economic negotiations are about: tariff barriers, import quotas, capital flows and the rules, or lack thereof, governing currency trading. The Keynes Plan went further than this: It said that currency exchange rates should also be subject to international rules, because they affect other countries. In the same way, there should be systems to help countries who are having trouble paying their bills as crises spread from country to country.
But Keynes went even further than that. He also wanted some mechanism to force countries with a chronic surplus to invest the money back into the rest of the world. Just as a normal bank loans out the money you deposit, Keynes’s bank would lend from the accounts of countries running a surplus in order to facilitate growth elsewhere. But while commercial banks paid interest on deposits, the Keynes Bank would take a fee on accounts running big surpluses. The bank could therefore put pressure on these countries to increase the exchange rate or domestic spending. The latter would also make export commodities more expensive in the following way:
Germany builds roads, which increases the demand for engineers and road workers. Their wages go up. The engineer demands more light-roast hand-brewed coffee, the demand for baristas grows, their wages go up. Lured by the promise of higher wages, car mechanics go back to school to become baristas and engineers. Volkswagen has to increase its wages to retain its workforce, the price of German cars rises, and German exports become more expensive on the world market; the demand for Citroën and Chevrolet increases, as do exports for the French and Americans.
When Keynes recommended this plan to his colleagues, it was not only out of concern for the world economy. The Keynes Plan would also secure Britain’s position as an economic power after the war. The idea was that the surplus countries would amass balances in the Keynes Bank that would feel so secure that America would hold off on demanding repayment of Britain’s war debts.
The plan would also dilute America’s influence in another way. Keynes introduced an alternative to the dollar as the world’s major savings currency. The surpluses and deficits for each country would be calculated in the Keynes Bank’s own currency: the bancor, as he called it in his first draft. This new supranational currency would once and for all drive a stake through the hegemony of pound, dollar and gold. No one would be obligated to spend gold reserves in exchange for bancors; no longer could countries exploit a trade surplus in exchange for those sought-after gold bars.
It is striking, this contrast between the war and the paragraphs and subparagraphs of this detailed plan for a peacetime world economy. And at this point I must be looking perplexed enough to draw the attention of the two guys at the table next to me at the cafe where I’ve gone with my books. When I tell them what’s got me so confused, they start to talk about survival strategies in concentration camps. For some of the Jews, talking about the society of tomorrow, discussing how it would be organised down to the smallest detail, was the only way to endure. One of the guys brought up prisoners in Morocco, how two men endured years of captivity by whispering from one dungeon to the other through the air ducts. In these conversations, the two prisoners conjured up a life for themselves outside of captivity—going to restaurants, exercising—in a kind of willed madness, a madness that kept them from giving up hope.
Are those first drafts of what would one day become the International Monetary Fund Keynes’s whispering through the air duct, a fantasy to keep warm by? This would explain why he allows himself to get carried away to the extent he does. In his notes, there are no limits to what the Keynes Bank can secure: funding for dams in underdeveloped countries, the reconstruction of Europe, an international police force, and a fund to stabilise the prices of essential raw materials.
The dark hour is at an end. A new day dawning. On the boat, this meant being awakened by the commands barked at the German prisoners of war.

The Queen Mary, too, began as a dream borne of desperation. But for two long years, she served only as proof of the deep rut in which the interwar world economy found itself.
The construction of what would be the world’s largest passenger ship commenced at the shipyard of John Brown and Company in Clydebank, Scotland in December 1930. One year later, when the hull was close to being finished, the work was halted. Two weeks before Christmas, the workers were sent home.
The global economic crisis that began with the US stock market crash in the autumn of 1929 had reached Britain’s shores. The UK economy, having been on a poor footing ever since the Great War, quickly fell prey. Unemployment skyrocketed. Revenues from British passenger ships that crossed the Atlantic were halved. And Cunard’s shipbuilding came to a standstill as funds from its shareholders dried up. For two years, Hull Number 534 lay abandoned at the shipyard.
Then the state stepped in. Finance Minister Neville Chamberlain offered the liner a hefty loan at an extra low interest rate, provided that Cunard merge with the White Star Line, another large British line in poor financial health. The agreement was finalised in late winter 1934, and the shipyards came back to life.
At this time, John Maynard Keynes was at Cambridge, grappling with the classical economic theory that he had been steeped in at university, and which held that the market economy would right itself into equilibrium in the wake of major crises. As the British state footed the bill for Hull Number 534’s completion, Keynes was developing a new understanding of the economy, one that showed how the market, instead of setting things right, could get stuck in an equilibrium in which large parts of the labour force went unemployed.
The Queen Mary was launched on 26 September 1934, and it would take a further 18 months before she was completely finished. An enclosed promenade deck, shops, a library, swimming pools for both tourist class and first class, nurseries in all classes. Telephone, bath and sofa suites in the first class cabins. In addition, Cunard hired a number of artists to decorate the ship in Art Deco style. The art should be elegant and inviting, but not overly challenging; and so, the liner had to refuse the wall decor it had commissioned from Duncan Grant, Keynes’s former lover. Keynes unsuccessfully lobbied the chairman to get the decision reversed, but spent most of the time poring over reviews and defending his book that had just been published.
For while the final touches were being applied to the Queen Mary, his theoretical justification of the state loan to Cunard was launched into the world. In February 1936, John Maynard Keynes’s The General Theory of Employment, Interest and Money was released.
I’m probably not the first student of economics whose first encounter with this book was decidedly rough. You open it expecting to be gripped by groundbreaking economic theory; instead, you encounter endless discussions of the choice of units of measurements in the analysis and the definition of savings and income.
Even economic professionals have tended to agree that it is a baffling read. Discussing the book in 1946, the economist Paul Samuelson called it badly-written, poorly organised, arrogant, bad-tempered, and ill-suited for the classroom: “When it finally is mastered, we find its analysis to be obvious and at the same time new. In short, it is a work of genius.” One reason for the book’s confusing presentation, writes Keynes’s biographer Robert Skidelsky, is that it reflects Keynes’s own path from established theory to new ideas. He puts pen to paper before his thoughts have fully solidified.
But if there’s one thing that most politicians on the right and left know about Keynes, it is that Keynes allows the state to spend money during hard times—lots of it, if necessary—in order to get the wheels of the economy turning again. Even better, according to Keynes, is when the money is put into useful investments—centres for the arts, for instance, or to finish the Queen Mary, get passengers moving across the Atlantic again, and get out in front of the competition. To do that, Cunard needed to enlist the help of artists.
One of the artists was Doris Zinkeisen, who decorated the ship’s most sumptuous restaurant, the Verandah Grill. She equipped the balustrade and stair steps with lights that changed colours in time with the music. Along the walls she painted a procession, which like many artworks at that time, was inspired by commedia dell’arte: first a clown beating a drum, then a man (possibly two) in a donkey costume, a monkey in a ballerina skirt, a Harlequin, a circus tamer getting a tiger to jump through a hoop, a snake charmer with bare breasts, a poodle balancing on a ball, another clown aping the tamer by having a small pig with black patches jump through a white hoop, the ringmaster in a top hat holding a whip, and behind them all, a figure with his face painted white, a black cape and a pointed hat, his face narrow and deformed, a skull or a mask.
The perfect backdrop, in other words, for the high life in the mid-1930s.
By the summer of 1944, the GIs had overtaken the Verandah Grill. The murals were covered in charts and posters, fastened with thumbtacks that made holes in the paintings.
Zinkeisen herself had spent the war years in London. During the Blitz, she worked at a hospital in the morning and painted her impressions in the afternoon. The Queen Mary also fell under new routines. One of them was the Captain’s speech as soon as the ship was out in the offing and the escorting naval ships had departed:
“Enemy forces will be at work, and the Hun will try every device in his power to bring the ‘Queen’ to harm. Submarines will trail us and aircraft will harass us,” said Captain Gordon Illingworth in October 1943, ordering everyone to think about the ship’s safety during the passage. “You and I are not indispensible to the successful prosecution of this war, but the ship is.”
The ship means everything. The individual passenger, nothing. Keynes had to have shaken his head. 25 years previous, he was a young British advisor at the conference where the peace treaty ending the Great War had been concluded. The lesson he took home from Versailles was how the individual personality at the negotiating table could alter the course of history.


THE JOURNEY TO BRETTON WOODS (Reisen til Bretton Woods) by Maria Reinertsen
Sample translation from the Norwegian by David M. Smith

(from Part III)
It seems like a dream: up elevators, through endless walkways, past an indoor waterfall, still more corridors, doors gliding open and shut, before finally, the man is standing in front of me, the man with no name, no face. He says I can refer to him as a “high-ranking official.” Actually, he represents one of the most powerful countries in the IMF, and he’s telling me about his attempts to reform the organization and the obstacles he faces from the most powerful country of all, the United States, which can block anything meaningful. After this encounter, new corridors, new elevators, past the indoor waterfall, yet another door, yet another high-ranking official. This one has a name: Peter Gakunu, an envoy of the powerless. Gakunu represents 19 African countries on the IMF Executive Board, 19 countries with one place at the table and under three percent of the votes. “This is an institution that is very hard to change,” he tells me.
And through all the day’s events, the ceaseless murmur of falling water. Indeed, there’s a lake in here as well. No, make that two. Two small oceans in the building, as though the World Bank and IMF have never completely disembarked from the Queen Mary, but are on the same perpetual ocean voyage. And in a way, that’s not far off the mark. 70 years later, the institutions remain stuck in the same division of powers that was negotiated on that Wednesday in the middle of the Atlantic in the summer of 1944.
And strangely enough, the European delegates who sailed zigzag over the ocean that week, most of them having lost their homelands and economies to the German occupiers—those very delegates are more important to understanding who decides what in the IMF today than the high-ranking officials I met on this slightly absurd, but otherwise very real summer day in Washington, 2006.

Summer, 1944: After a quick breakfast in the officers’ mess, the day’s first meeting commences in the library upon the Queen Mary.
“The meetings began Monday morning and for the most part took up every day of the journey up until 7 in the evening, interrupted only by brief lunch breaks,” writes Wilhelm Keilhau in his report to the Norwegian government from Bretton Woods. The long meetings were “led with great verve by Lord Keynes,” he writes. Far from Bolton’s acerbic comments about uneventful meetings and Beyen and Boël’s incessant squabbling, Keilhaus’s report leaves the impression of concentrated energy and productive cooperation.
The Norwegian is right that they laid down new proposals for a “great many clauses.” The assertion that Keynes led the meeting from morning until evening is also correct—in any case for late risers who use the term “morning” loosely. But what Keilhaus’s report leaves out is that he himself wasn’t even present at half of the meetings, a fact confirmed by the British minutes. This Wednesday, the Allies weren’t invited inside until a quarter past noon.
So why does Keilhau brag about being at meetings from morning to evening? In reality, he was free to stretch out on the sun deck while the British embarked upon the journey’s diplomatic main course: Keynes’s blueprint for the World Bank.