Who is the man….SCHACHT!

I’ve just been re-reading the end of Robert Skidelsky’s biography of Keynes. Here’s something interesting. Skidelsky frames the debates in Whitehall about British proposals for the post-war economic settlement and about the negotiations with the USA as being between two key groups, whom he defines as the multilateralists and the Schachtians. Schachtian, of course, is a reference to German central banker Hjalmar Schacht.

The element of Schacht’s long and variable career that was meant was his work as Reichsbank director for Hitler, during which he established a network of bilateral trade and payments clearing agreements centred on Germany as a substitute for the collapsed multilateral trading system, that also had the major advantage of conserving Germany’s very limited reserves of foreign exchange and gold. The Schachtian position was that the UK would come out of the war desperately short of reserves – this was common ground – and that given the political constellation there probably wouldn’t be a successful international settlement – this definitely wasn’t – and therefore the UK needed some other solution. They argued that any solution involving capital controls would ruin the City of London, and more tariffs would wreck industry, so the answer was to go bilateral within a sterling clearing network a bit like Hitler’s. An important feature of a clearing agreement is that it tends to force trade into balance, modulo whatever credit the two parties agree to provide each other.

The multilateralists wanted to dilute the conflict between the UK and the US in a wider global solution, and differed on whether it was more important to preserve free trade in the sense of not having tariffs, or whether protectionism was a price worth paying for a workable financial setup. The issue everyone was dancing around was that whatever solution would need to be acceptable to the Americans, and the American position was self-contradictory. Our problem was that we needed the money; theirs that their conditions for paying it out were mutually exclusive. The US wanted free trade (although not for things it wanted to protect like agriculture), but that implied either substantial currency flexibility or the US supplying the rest of the world with liquidity. The US wanted stable currencies, but those implied either US financing or else either concessions on trade, or clearing restrictions that amounted to concessions on trade. And the US wanted multilateral payments without bilateral clearing, but that implied either US financing, floating currencies, or concessions on trade. It was a preview, really, of the famous open economy trilemma.

An important point was that different bits of the US government cared about different elements of the problem. The State Department cared passionately about free trade but not so much about currencies or payments. The US Treasury cared intensely about currencies and was willing to give ground on trade. Both of these were relatively open to paying into the system. Congress didn’t really care about free trade or currencies, in fact some of it was actively hostile to free trade and formed an alliance with the Vice-Presidency and the Department of Agriculture against it, but it did very much want to limit how much money the US had to chip in.

On the British side, an important feature of the Schachtian vs Multilateralist debate was that the two camps cut across everything else in British politics. The multilateralist camp included hardcore classical liberals like Lionel Robbins of LSE, for whom free trade was really the only issue that mattered. It included people who wanted a multilateral solution because it promised enough international liquidity for the UK to stand off American demands to break up the sterling area and demand unilateral free trade. It included European and world federalists who saw Bretton Woods as a step towards world integration. It included Keynes, who wanted a multilateral solution at this stage because it promised a managed world economy.

On the other hand, the Schachtian camp included imperialists who wanted to break with the US and create a separate imperial economic unit, radical left-wing voices who wanted to do something similar as an exit from world capitalism (and perhaps a prelude to inviting the USSR to join), and some proto-Europeans who wanted to build on the fact many of the European allies were sterling-area countries. Roughly, the Treasury came down on the multilateral side and the Bank of England on the Schachtian.

One way of reading British history since then is that the multilateralists won, but were repeatedly disappointed by their partners’ commitment to multilateralism. What we might call Bretton Woods version 1.0 never really took off precisely because the US didn’t want to finance it until the emerging Cold War forced them to relaunch it with both more European integration and more US money. Later, although the Schachtians were some of the loudest voices against joining the EEC, some of the most influential voices inside government were those of multilateralists who hoped for a worldwide free trade area via GATT and via the special relationship. But this never happened, because nobody (especially not the US) wanted it that much. It did, however, leave a rhetorical legacy of arguments against the European project that seek to characterise it as a Schachtian/protectionist exercise contrasted to world multilateralism.

The interesting thing here is that Schachtian thinking didn’t go away. It continued to exist under the ice of the multilateral hegemony, for example in the late 1970s protectionist turn of left-wing economic thinking that enduringly shaped people like Jeremy Corbyn and John McDonnell. And it shapes the Brexit camp’s understanding of trade, however much they protest their liberal multilateralism. Boris Johnson arrives on a shiny boat with a delegation of dignitaries and signs for a handful of big ticket contracts under a “deal” with a named country. It’s all very Schachtian; very different from the reality of many, many individual transactions between thousands of firms. It’s bilateral, it’s politicised, and it’s heavily biased to big ticket contracts for big business. After all, one of the multilateral criticisms of Schachtianism was precisely that it was part of the so-called managerial revolution.

Somehow, we ended up with multilateralism in charge and trying to justify itself in Schachtian terms against a Schachtian insurgency that justifies itself in multilateral ones.