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order had become fundamental to American postwar planning. In testimony before Congress, Hull explained that “when the day of victory comes, we and other nations will have before us a choice … as it was in 1918.” On the one hand, the world could choose “extreme nationalism, growing rivalries, jealousies and hatreds”; or it could choose “increased international cooperation in a wide variety of fields” and a chance at peace. “Of the various necessary fields of international collaboration one of the most essential is the field of economic life.” In what became almost a mantra in the postwar period, Hull said, “The political and social instability caused by economic distress is a fertile breeding ground of agitators and dictators, ready to plunge the peoples over whom they seize control into adventure and war.” Avoiding this outcome required “mutual willingness to cooperate in the fundamental business of earning a living.”¹⁵

      Hull had placed his analytic eggs in the basket of economic determinism. Of course, on the surface, this did not distinguish his views from Roosevelt and the rest of the New Dealers. They, too, saw the political consequences of economic downturns. “Democracy has disappeared in several other great nations,” Roosevelt argued, “not because the people of those nations disliked democracy, but because they had grown tired of unemployment and insecurity.” After “seeing their children hungry while they sat helpless in the face of government confusion” they eventually settled for the security offered by authoritarian leaders such as Hitler.¹⁶

      For Hull, however, the causal flow moved from the international to the domestic. Democracy had disappeared in other nations because the people in those nations sought a way to assert nationalist claims on the international stage. The collapse of an open economic system after World War I had left Germany and Japan, for example, in economic distress. As the Council of Foreign Relations explained in one of its Studies of American Interests, “high and discriminatory tariffs and colonial quotas were already limiting the possibilities of Japanese trade expansion by 1935.” The Japanese acted in a predictable way. “People in extreme economic distress have [often] turned to some new form of authoritative government.”¹⁷

      In fairness, “I do not mean, of course, that flourishing international commerce is of itself a guarantee of peaceful international relations,” Hull explained.¹⁸ Still, he assumed that economic breakdown did more than provoke armed conflict; it produced distinctly illiberal regimes within countries cut off from the global market. As Dean Acheson (Hull’s assistant secretary of state) explained, “If you wish to control the entire trade and income of the United States … you could probably fix it so that everything produced here would be consumed here.” But this approach ignored the way law, politics, and trade had evolved together in the industrialization process. To cut off trade “would completely change our Constitution, our relations to property, human liberty, our very conceptions of law.”¹⁹

      Hull found a combination of support and rivalry in Roosevelt’s treasury secretary, Henry Morgenthau, who became Hull’s “frenemy” (to apply a contemporary term). While Morgenthau may not have been the smartest or most innovative policymaker among the New Dealers, he knew how to make the bureaucracy work in his favor. Mostly, he understood how he could sway Roosevelt and keep the president’s attention on issues he cared about. In the freewheeling atmosphere of the Roosevelt administration, where lines of authority meant less than a relationship to the president, Morgenthau’s genius shined.

      Morgenthau wanted a role in the postwar period and saw the effort to rebuild global finance as a natural fit for the Treasury Department, in part because his trusted adviser, Harry Dexter White, had already begun work on the problem. White recognized that under “the gold standard, exchange rates were fixed, so that the balance of payments had to adjust through domestic deflation,” and domestic deflations had run amok in the early 1930s, eventually sinking into global depression.²⁰ Keynes had shown how these deflationary recessions could become a vicious circle in which timid investors reinforced the very economic decline they feared. But how to prevent the gold standard from triggering a depression?

      The obvious answer lay in getting rid of the gold standard. This would prevent nations from suffering “forced” deflations. Nations could simply devalue their currency anytime they got out of balance with their trading partners. Yet letting exchange rates fluctuate created two potential problems. First, it might discourage trade because merchants could never know for certain what the exchange rate would be—a phenomenon commonly known as “exchange risk.” International commerce had enough unknowns without adding the risk of profits evaporating because a country decided to suddenly depreciate its currency. The gold standard at least brought certainty to international trade.

      Second, during the 1930s, American officials noted that as “many countries … played the game of artificially manipulating the exchange rates of their currencies in order to gain advantage in the international market place.” Countries would intentionally “depreciate their currencies in order to sell their exports more cheaply in external markets.” Global economics became a “kind of ‘beggar my neighbor’” game that led to a currency war “with everybody trying to depreciate against everybody else in order to gain trading advantage. This was a pretty chaotic system.”²¹ White tried to find a way to make exchange rates more flexible without letting them become capricious.

      After some deliberation White struck on a solution that fit the general tenor of the New Deal. In place of the gold standard, he wanted an agency to actively manage, in the global interest, the world’s currencies. Initially called the International Stabilization Fund, this agency would act as an umpire for global finance. In the short term, it would have a reserve that it could use to provide loans for countries that found themselves (for whatever reason) temporarily low on foreign exchange. Thus, a country caught in a short-term crunch could avoid drastic measures to pay its foreign debts. In the long term, if a country suffered chronic deficits, the agency could give permission for a currency devaluation. Devaluations could happen, but not in the “beggar my neighbor” approach common in the interwar years.

      By the spring of 1942 White gave Morgenthau a copy of his plan, titled “United Nations Stabilization Fund and a Bank for Reconstruction and Development of the United and Associated Nations.” In particular, Morgenthau appreciated that White’s plan shifted the postwar discussion from trade to finance—which meant that the Treasury could move into the heart of postwar policy. As White explained, “if the Treasury doesn’t initiate a conference on the subject it almost certainly will be initiated elsewhere, and it should be preeminently Treasury responsibility.”²²

      It worked. Roosevelt gave Morgenthau the green light to proceed, but wanted consensus within the administration before going to the Allies. Through the following months representatives from Treasury, State, Commerce, the Federal Reserve, and the Board of Economic Warfare worked out the details.²³

      Coincidentally, John Maynard Keynes had started work on a British plan to accomplish many of the same things entailed in White’s plan. He, too, sought an exchange rate regulated by an international agency. Yet his plan went well beyond White’s in that the International Clearing Union (his proposed agency) would have its own currency (the bancor) that it would substitute for gold. In simplest terms, Keynes proposed the construction of a central bank for the world, working something like the Federal Reserve, but with a global currency.

      Under Keynes’ plan all global trade would be financed in bancor and serviced through the International Clearing Union. If a country ran too much of a trade deficit, the Clearing Union would penalize it by taxing it a small amount. But the same would be true for a country running perpetual surpluses: it, too, would be penalized. In the short term, deficit countries could make up their shortfall by borrowing from the surplus countries. As Keynes explained, “each country is allowed a certain margin of resources and a certain interval of time within which to effect a balance in its economic relations with the rest of the world.”²⁴

      Keynes’ plan for an International Clearing Union remained consistent with his ideas about domestic depressions. In each case, his diagnosis suggested that unused money (“liquidity traps” again) caused a vicious cycle of deflation, ending in a permanently depressed global economy. Within a domestic economy, government could force this money back into circulation

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