Red White

Why a Founding Father of Postwar Capitalism Spied for the Soviets

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Special relationship: Keynes and White at an IMF meeting, Savannah, Georgia, 1946. (Getty)

In the wake of the 2008 financial crisis and the ensuing global economic downturn, it has become commonplace for politicians, pundits, and economists to invoke the memory of Bretton Woods. In July 1944, in the midst of World War II, representatives of 44 nations gathered in this remote New Hampshire town to create something that had never before existed: a global monetary system to be managed by an international body. The gold standard of the late nineteenth century, the organically formed foundation of the first great economic globalization, had collapsed during the previous world war. Efforts to revive it in the 1920s proved catastrophically unsuccessful. Economies and trade collapsed; cross-border tensions soared. In the 1930s, internationalists in the U.S. Treasury Department saw a powerful cause and effect and were determined to resolve the flaws in the international economic system once and for all. In the words of Harry Dexter White, a then little-known Treasury official who became the unlikely architect of the Bretton Woods system, it was time to build a "New Deal for a new world."

Working in parallel and in prickly collaboration with his British counterpart, the revolutionary economist John Maynard Keynes, White set out to create the economic foundations for a durable postwar global peace. Governments would be given more power over markets but fewer prerogatives to manipulate them for trade gains. Trade would in the future be harnessed to the service of political cooperation by ending shortages of gold and U.S. dollars. Speculators who stoked and profited from fears of such shortages would be shackled by strictures placed on the frenetic cross-border flows of capital. Interest rates would be set by government experts schooled in the powerful new discipline of macroeconomics, which Keynes had been instrumental in establishing. A newly created International Monetary Fund (IMF) would ensure that exchange rates were not manipulated for competitive advantage. Most important, budding dictators would never again be able to use barriers to trade and currency flows as tools of economic aggression, ruining their neighbors and fanning the flames of war.

Despite having never held any official title of importance, White had by 1944 achieved implausibly broad influence over U.S. foreign and economic policy. Grudgingly respected by colleagues at home and counterparts abroad for his gritty intelligence, attention to detail, relentless drive, and knack for framing policy, White made little effort to be liked. "He has not the faintest conception how to behave or observe the rules of civilized intercourse," Keynes groused. Arrogant and bullying, White was also nerve-ridden and insecure, always acutely conscious that his tenuous status in Washington depended wholly on his ability to keep Treasury Secretary Henry Morgenthau, a confidant of President Franklin Roosevelt with limited smarts, armed with actionable policies. White often made himself ill with stress before negotiations with Keynes, and then exploded during them. "We will try," White spat out during one particularly heated session, "to produce something which Your Highness can understand."

But as the chief architect of Bretton Woods, White outmaneuvered his far more brilliant British counterpart, distinguishing himself as an unrelenting nationalist who could extract every advantage out of the tectonic shift in geopolitical circumstances put in motion by World War II. White installed the groundwork for a dollar-centric postwar order antithetical to long-standing British interests, particularly as they related to the United Kingdom's collapsing colonial empire. Even White's closest colleagues were unaware, however, that his postwar vision involved a far more radical reordering of U.S. foreign policy, centered on the establishment of a close permanent alliance with the new rising European power -- the Soviet Union. And they most surely did not know that White was willing to use extraordinary means to bring it about.

Over the course of 11 years, beginning in the mid-1930s, White acted as a Soviet mole, giving the Soviets secret information and advice on how to negotiate with the Roosevelt administration and advocating for them during internal policy debates. White was arguably more important to Soviet intelligence than Alger Hiss, the U.S. State Department official who was the most famous spy of the early Cold War.

The truth about White's actions has been clear for at least 15 years now, yet historians remain deeply divided over his intentions and his legacy, puzzled by the chasm between White's public views on political economy, which were mainstream progressive and Keynesian, and his clandestine behavior on behalf of the Soviets. Until recently, the White case has resembled a murder mystery with witnesses and a weapon but no clear motive.

Now we have one. The closest thing to a missing link between the official White and the secret White is an unpublished handwritten essay on yellow-lined notepaper that I found buried in a large folder of miscellaneous scribblings in White's archives at Princeton University. Apparently missed by his previous chroniclers, it provides a fascinating window onto the aspirations and mindset of this intellectually ambitious overachiever at the height of his power, in 1944.

In the essay, hazily titled "Political-Economic Int. of Future," White describes a postwar world in which the Soviet socialist model of economic organization, although not supplanting the American liberal capitalist one, would be ascendant. "In every case," he argues, "the change will be in the direction of increased [government] control over industry, and increased restrictions on the operations of competition and free enterprise." Whereas White believed in democracy and human rights, he consistently downplayed both the lack of individual liberty in the Soviet Union ("The trend in Russia seems to be toward greater freedom of religion. . . . The constitution of [the] USSR guarantees that right") and the Soviets' foreign political and military adventurism ("The policy pursued by present day Russia [is one] of not actively supporting [revolutionary socialist] movements in other countries").

In the essay, White argues that the West is hypocritical in its demonization of the Soviet Union. He urges the United States to draw the Soviets into a tight military alliance in order to deter renewed German and Japanese aggression. But such an alliance, White lamented, faced formidable obstacles: "rampant imperialism" in the United States, hiding under "a variety of patriotic cloaks"; the country's "very powerful Catholic hierarchy," which might "well find an alliance with Russia repugnant"; and groups "fearful that any alliance with a socialist country cannot but strengthen socialism and thereby weaken capitalism."

After sweeping away internal politics, religion, and foreign policy as honest sources of Western opposition to the Soviet Union, White concludes that the true foundation of the conflict must be economic ideology. "It is basically [the] opposition of capitalism to socialism," he writes. "Those who believe seriously in the superiority of capitalism over socialism" -- a group from which White apparently excluded himself -- "fear Russia as the source of socialist ideology." He then ends his essay with what, coming from the U.S. government's most important economic strategist, can only be described as an astounding conclusion: "Russia is the first instance of a socialist economy in action. And it works!"

It turns out that the chief designer of the postwar global capitalist financial architecture saw Soviet behavior through rose-colored glasses not simply because he believed that the Soviet Union was a vital U.S. ally but because he also believed passionately in the success of the bold Soviet experiment with socialism.

NO MERE FELLOW TRAVELER

White's admiration for the Soviet economic system is striking, coming from one of the most influential policy figures in 1940s Washington. Yet it was not out of keeping with the tenor of the times. White belonged to a generation of Russophile writers and public officials who had come of age intellectually between the two world wars, a period marked by political upheaval, the Great Depression, and the collapse of the international trade and monetary systems. The whole world order seemed to be in flux. To many observers, radical social, economic, and political change were inevitable. To some, the upheaval was also a call to action -- inside and outside the traditional confines of national politics.

As a young man, White had been a passionate supporter of Robert La Follette, the firebrand who ran as the Progressive Party's first presidential candidate in 1924; La Follette called for muscular government intervention in the U.S. economy and condemned American imperialism in Latin America. White had a long-standing fascination with Soviet economic planning, having decided in 1933, shortly after becoming an economics professor at what was then Lawrence College, in Wisconsin, to try to go to the Soviet Union to study its system. He was diverted from this plan only by an invitation to work on a monetary-reform study at the Treasury Department. Soon after his arrival in Washington in 1934, White enmeshed himself in a web of fellow travelers working for the Soviet underground. Eager for influence and dismissive of bureaucratic barriers to action, White began the sort of dangerous double life that attracted many of his Washington contemporaries in the 1930s and 1940s.

According to Whittaker Chambers, a courier between Soviet intelligence agencies and their secret sources within the U.S. government, White's clandestine work began in 1935. An idealist who envisioned a future in which world affairs were managed by enlightened technocrats such as himself, White appeared to welcome the chance to hasten that future's coming by collaborating with secretive foot soldiers such as Chambers. White's official status in the U.S. government was beneath what he knew his talents merited, and he craved the recognition such operatives accorded him. Yet unlike Chambers, White would not take orders from Moscow. He worked on his own terms. He joined no underground movements. Working through intermediaries close to him, White secured official Treasury documents for Chambers, which, after Chambers photographed them in his Baltimore workshop, White returned through the same channels. White also prepared weekly or biweekly memos for Chambers summarizing what he considered useful information.

"There's no doubt that Harry was close to the Russians," White's Treasury Department colleague Edward Bernstein reflected decades after Bretton Woods. And "it was just like Harry to think he could give advice to everybody." But why would White have strayed so far beyond merely giving advice?

During World War II, a surprising number of U.S. officials provided covert assistance to the Soviets without considering themselves disloyal to the United States. "They were," in the reckoning of one famous confessed spy, Elizabeth Bentley, "a bunch of misguided idealists. They were doing it for something they believed was right. . . . They felt very strongly that we were allies with Russia, that Russia was bearing the brunt of the war, that she [Russia] must have every assistance, because the people from within the Government . . . were not giving her things that we should give her . . . [things] that we were giving to Britain and not to her. And they felt . . . it was their duty, actually, to get this stuff to Russia."

White had begun his efforts well before the war, however, in the years just after the Soviet Union secured U.S. diplomatic recognition, in 1933, and joined the League of Nations, in 1934. By all appearances, White believed that U.S. policy should and would move in the direction of deeper engagement with Moscow. His collaboration with Chambers allowed him to establish his bona fides with the still-mysterious foreign power years before any official opportunities would present themselves.

TO RUSSIA WITH LOVE

When such opportunities did finally arise, White took full advantage of them. The most notable of these came in early 1944, when the Treasury Department began planning a currency to be used in postwar occupied Germany. The British agreed that the occupation currency should be printed in the United States, but the Soviets demanded the right to print their own notes, using a duplicate set of American plates. This would, of course, allow them to print as much German money as they wished. Backing the Soviets' demands before his Treasury Department colleagues, White, according to one of his aides, argued that the United States "had not been doing enough for the Soviet Union all along and that if the Soviets profited as a result of this transaction we should be happy to give them this token of our appreciation of their efforts." The director of the Bureau of Engraving and Printing, Alvin Hall, was staunchly opposed to giving the Soviets the plates, which elicited a fierce rebuke from White. The Soviets, he insisted, "must be trusted to the same degree and to the same extent as the other allies."

Morgenthau had placed White in charge of such matters, and White ensured that the Soviets got the plates. The predictable result was that they printed a lot of currency. The Allies put into circulation a total of about 10.5 billion Allied marks between September 1944 and July 1945; the Soviets likely issued more than 78 billion. Much of this cash wound up being redeemed by the U.S. government at the fixed exchange rate advocated by White, resulting in the Soviets effectively raiding the U.S. Treasury for $300-$500 million, or roughly $4.0-$6.5 billion in today's dollars. White had wanted to give the Soviets a "token of our appreciation of their efforts," and this was indeed a generous one.

But did White's Soviet connections have any actual impact on the outcome at Bretton Woods? Although the broad "White Plan" for the IMF clearly bore no imprint of Soviet monetary thinking, as there was none to speak of, White was highly solicitous of the obstructionist Soviets at the conference itself -- more so than any of his American negotiating colleagues, and vastly more so than the Europeans, some of whom were angered by the effects of White's behavior. Concerned that the Soviet government might not ratify the conference agreements, White six months later proposed a low-interest U.S. reconstruction loan of $10 billion for the Soviet Union -- more than three times as much as what he advocated in transitional assistance for the United Kingdom. The fact that such a credit was not ultimately offered turned out to be one of the primary reasons the Soviet government decided against joining the IMF and the World Bank, as White had feared it would.

U.S. President Harry Truman initially planned to make White the first head of the IMF. Had White gotten the job, his pro-Soviet views might have become consequential in its operations. However, the primary reason that White did not become the institution's head -- and that no American has ever since become its head -- was the emerging revelations of White's activities on behalf of the Soviets.

Truman nominated White to be the first American executive director of the IMF on January 23, 1946, intending to nominate him for the top job of managing director shortly thereafter. Truman did not know that White had by that time been under FBI surveillance for two months, suspected of being a Soviet spy. Two weeks later, the FBI director, J. Edgar Hoover, sent a report to the president describing White as "a valuable adjunct to an underground Soviet espionage organization" and accusing him of placing Soviet intelligence assets inside the U.S. government. Hoover warned that if White's activities became public, it could endanger the IMF. But the Senate Committee on Banking and Currency, unaware of the allegations, had approved White's nomination to become the fund's U.S. executive director on February 5, the day after Hoover's report was delivered.

In light of Hoover's report, Secretary of State James Byrnes wanted Truman to withdraw the nomination; Treasury Secretary Frederick Vinson wanted White out of government altogether. Truman did not trust Hoover but realized that he had a potential scandal on his hands. He decided to stick with White as an IMF executive director, a huge step down from managing director. But nominating another American to a post above White's would have raised eyebrows, since the White House would have had to explain why the fund's chief architect had been passed over.

The following month, Vinson met with Keynes, now the British governor of both the IMF and the World Bank. He said that Truman had decided not to put White's name forward for the IMF's top job and would instead back an American for the World Bank post in order to secure "the confidence of the American investment market." It would not be "proper," the administration had concluded with uncharacteristic fair-mindedness, "to have Americans as the heads of both bodies."

The United States' allies were more than happy to oblige, and a Belgian, Camille Gutt, became the first head of the IMF, while an American, Eugene Meyer, became the first head of the World Bank. The United States almost surely could have put an American in charge of the IMF after Gutt left, in 1951, but by that time, the fund's role had been supplanted by the Marshall Plan, and Washington was satisfied with its control of the World Bank's top post.

It is unclear what White knew or suspected about the FBI's investigations. In any event, his tenure at the fund was short; he resigned in the spring of 1947. After 13 years in Washington, he was despondent over the state of U.S.-Soviet relations and disillusioned with a "Democratic Party [that] can no longer fight for peace and a better America." He threw his enthusiastic backing behind Henry Wallace's Progressive Party presidential run in 1948. Wallace had fallen out with Truman, whom he had served as commerce secretary, over his administration's hardening stance toward the Soviets. Along with many prominent thinkers on both sides of the Atlantic at the time, Wallace believed that the 1917 Russian Revolution had been a seminal event in the history of the human struggle for freedom. An improbable Wallace victory would have returned White to political life as treasury secretary -- assuming, that is, that White's accusers did not gain the upper hand.

"MY CREED IS THE AMERICAN CREED"

In the summer of 1948, Bentley and Chambers publicly accused White of spying for the Soviets, a charge White chose to deny vigorously before the House Un-American Activities Committee (HUAC). On the morning of August 13, White entered the packed committee room with cameras flashing. Facing the committee from behind a bevy of microphones, he raised his right hand and took the required oath. In an opening statement, he set out to establish himself as a loyal American in the progressive tradition:

My creed is the American creed. I believe in freedom of religion, freedom of speech, freedom of thought, freedom of the press, freedom of criticism, and freedom of movement. I believe in the goal of equality of opportunity. . . . I believe in the freedom of choice of one's representatives in government, untrammeled by machine guns, secret police, or a police state. I am opposed to arbitrary and unwarranted use of power or authority from whatever source or against any individual or group. . . . I consider these principles sacred. I regard them as the basic fabric of our American way of life, and I believe in them as living realities, and not as mere words on paper. . . . I am ready for any questions you may wish to ask.

The gallery broke into applause; as far as the audience was concerned, White was on friendly turf. The committee had by this time earned a reputation for unseemly grandstanding, and White played this to his advantage. Despite his well-earned reputation for prickliness, he mostly avoided confrontation with his accusers. A 35-year-old freshman Republican congressman named Richard Nixon, hoping to set White up for a perjury charge, prodded him to state categorically that he had never met Chambers. But White would not take the bait, replying only that he did not "recollect" having met Chambers.

White was directed to a list of names; suspected Soviet spies had blue checks next to them. "Red checks would be more appropriate," White offered acerbically. He won rounds of applause and laughter, to the annoyance of the committee members. But White's bravado performance masked the fact that he was under enormous stress. The following day, he boarded a train bound for his summer home in New Hampshire. En route, he suffered terrible chest pains. The next day, local doctors diagnosed a severe heart attack; nothing could be done. The following evening, White was dead.

Conspiracy stories began to circulate almost immediately. White had been liquidated by Soviet intelligence. His death had been elaborately faked. He had fled to Uruguay. None of the tales had the slimmest reed of evidence to back it up. HUAC naturally came in for harsh media criticism in the wake of White's fatal heart attack, as the strain of the hearings appeared to be the proximate cause. Still, on the surface at least, the case was over. But more was to emerge.

On January 25, 1950, Hiss was sentenced to five years in prison for perjury. Truman, who had publicly attacked the espionage investigations, now conceded in private that "the SOB . . . is guilty as hell." Key to the case against Hiss were papers that Chambers had squirreled away in early 1938 as a "life preserver" in preparation for his defection from the Soviet underground. The next day, Nixon revealed on the floor of the House that he had in his possession "copies of eight pages of documents in the handwriting of Mr. White which Mr. Chambers turned over to the Justice Department." The original documents composed a four-page, double-sided memorandum, written in White's hand on yellow-lined paper, with material dated from January 10 to February 15, 1938, that had been part of Chambers' life preserver. Handwriting analysis by the FBI and what was then the Veterans Administration confirmed White's authorship.

The memo is a mixture of concise information and commentary on Treasury and State Department positions related to foreign policy and military matters. It covers European economic and political developments, including details of private discussions between the U.S. ambassador to France and French political leaders over their intentions toward the Soviet Union and Germany. The memo also outlines possible U.S. actions against Japan, such as a trade embargo or an asset freeze, and describes Japan's military protection of its oil storage facilities. White also revealed personal directives from the president to the treasury secretary, making clear that he was recording confidential information: at one point, the memo states explicitly that the Treasury Department's economic warfare plan for Japan, called for by the president, "remains unknown outside of Treasury."

THE PERFECT BUREAUCRAT

The enormous discord within the government over the White and Hiss cases stemmed at least in part from the fact that U.S. counterintelligence officials actually knew much more about the systematic nature of Soviet espionage than they chose to share with the White House. Incredibly, their trove of striking evidence would remain unknown to the public until half a century after the end of World War II.

Following the outbreak of the war in 1939, the United States began collecting copies of all cables going into and out of the country, as was standard wartime practice around the world. The complex Soviet cable cipher was theoretically unbreakable. But after examining thousands of cables, American code crackers working on the top-secret Venona project were able to identify a procedural mistake in the ciphering that made the code vulnerable to cracking. By the time they successfully decoded their first message, however, it was 1946 and the war was over. Yet what they found was still important and unexpected: copious evidence of an ongoing, ambitious Soviet espionage operation within the United States.

The code cracking took place over decades, and the first Venona cable identifying White as a Soviet mole was not known to the FBI until late 1950. In total, 18 deciphered cables refer to White, by various code names, all dated between March 16, 1944, and January 8, 1946. The cables reveal that Moscow was particularly interested in gleaning information from White during the 1945 San Francisco conference that produced the UN Charter, a conference at which White served as a technical adviser to the U.S. delegation.

The KGB officer Vladimir Pravdin cabled Moscow from San Francisco reporting that White had told him, among other things, that Truman and then Secretary of State Edward Stettinius wanted "to achieve the success of the conference at any price" and that the United States would agree to grant the Soviets veto power at the UN. Another 1945 cable describes White advising an American go-between with the Soviets that Moscow could secure more favorable loan terms from Washington than it had been seeking; yet another, dated the same day, provides corroborating evidence for allegations that White used his position to secure U.S. government appointments for other Soviet sympathizers.

Pravdin had been in San Francisco working undercover as a Soviet journalist, and what White knew of Pravdin's primary occupation is unclear. But White was certainly aware that what he was telling Pravdin was not meant for the press. White's defenders have pointed to such ambiguities to argue that he might not have known that he was sharing secrets directly with Soviet intelligence. But KGB files first seen by Western scholars in the 1990s record another Soviet mole in the U.S. government telling a Soviet intelligence operative that White "knows where his info goes, which is precisely why he transmits it in the first place."

White's handlers clearly sought to provide White with a degree of plausible deniability, but the Venona cables leave little doubt that he was well aware of where his information was headed and that he realized that the stakes of the game were very high. A deciphered portion of one cable reports the following: "As regards the technique of further work with us [White] said his wife was . . . ready for any self-sacrifice." The cable also states that White "himself did not think about his personal security, but a [security] compromise . . . would lead to a political scandal and . . . therefore he would have to be very cautious."

In 1953, Chambers wrote that White's "role as a Soviet agent was second in importance only to that of Alger Hiss -- if, indeed, it was second." White, he said, had been "the perfect bureaucrat," rising under the radar to a position where he was able "to shape U.S. Government policy in the Soviet government's interest." Reviewing the Venona cables over 50 years after Chambers and Bentley made their startling espionage claims, a U.S. Senate commission led by Daniel Patrick Moynihan, then a Democratic senator from New York, concluded in 1997 that White's complicity in espionage "seems settled."

RIGHT ABOUT THE IMF, WRONG ABOUT THE WORLD

White himself struggled mightily in his last years to reconcile his belief in a dollar-centric, global free-trade architecture with his belief in a Soviet socialist economic model that had no use for it. In August 1945, according to testimony given nine years later by the journalist Jonathan Mitchell before the Senate Internal Security Subcommittee, a gloomy White told Mitchell that the system of government-controlled trading that had emerged during the war would continue into the postwar period, owing to a lack of dollars and gold, which would oblige governments to maintain tight controls on cross-border private trade. The IMF would fail to rectify this problem, White stated -- a stunning viewpoint for a man who could rightfully claim the fund's paternity. The United States, White continued, would, with its huge domestic market, be able to carry on a system of private enterprise for five to ten years but could not ultimately survive as a capitalist island in a world of state trading. According to Mitchell, White lavished praise on the most recent book by the British socialist Harold Laski, Faith, Reason, and Civilization, which argued that the Soviet Union had created a new economic system that would replace capitalism. Mitchell testified that White had called Laski's work "the most profound book which had been written in our lifetime" and one that "had foreseen with such uncanny accuracy and depth the way in which the world was going."

That proved to be nonsense, of course. But White was right about the IMF. Truman's State Department effectively mothballed the fund, dismissing the assumptions that had underwritten White's earlier belief in it: that Soviet cooperation would continue into the postwar period; that Germany's economic collapse could be safely, and indeed profitably, managed; that the British Empire could be peaceably dismantled; and that short-term IMF credits would be sufficient to reestablish global trade. These assumptions had been based on "misconceptions of the state of the world around us," Dean Acheson, Truman's final secretary of state, later reflected, "both in anticipating postwar conditions and in recognizing what they actually were when we came face to face with them. . . . Only slowly did it dawn upon us that the whole world structure and order that we had inherited from the nineteenth century was gone and that the struggle to replace it would be directed from two bitterly opposed and ideologically irreconcilable power centers."

The Truman administration's economic response to the collapse of White's vision would become what remains to this day a touchstone of bold and enlightened U.S. diplomacy: the Marshall Plan. As for the IMF, it was only after the demise of the Bretton Woods fixed-exchange-rate system in the 1970s, ironically, that it would come to play a central role in an emerging U.S.-led global economic order -- an order very different from the one White had envisioned.

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