Transcript
0:05 Hi, this is Steve Eisman and welcome to another episode of the Real Eisman Playbook. We have a variety of wonderful guests that we've had over the last year and a half. We've had economists, we've had analysts, we've had authors, and once in a while we get someone who's kind of a combination of all of those. Today's guest is Ben Steil, who is the director of international economics at the Council of Foreign Relations, and he's also an author of multiple books, three of which I've read, and we're going to talk about that. But Ben, welcome to the show.
0:38 >> Thanks for having me, Steve. >> So let's start with something mundane. >> Sure. >> Like the Fed. >> >> Something unimportant. From your seat, what do you think's happening? How much inflation pressure is there? You know, I got a I got a question from a viewer after the Fed raised rates, which I thought was actually kind of was a very interesting comment where the viewer basically said, "Isn't the problem just oil prices? And the Fed can't change oil prices, so it feels like the Fed is like that guy who has the hammer and everything is a nail."
1:17 >> That's right. >> And so that that's my intro to you. Take it away. >> Well, in indeed a lot of economists do make that argument. Certainly Kevin Hassett, who said the numbers were disappointing today, which is a major concession from him. >> day is that we're recording is October 14th, and it was bad inflation numbers. >> There were bad inflation numbers today, 3.7% which exceeded market expectations, which were 3.6%, but that that's significant when they when they do come in on the on the upside. Now, economists would say that if you've got the an oil shock that's temporary, it's you could treat it as a one-off.
2:00 >> Right. >> that would not feed into the wider price level, so you should quote-unquote look through it. and indeed the Fed had considered doing that for quite some time. but inflation's been persistent. It's clear that it's not coming down. Although we haven't seen any significant rise in longer-term inflation expectations, the Fed is genuinely concerned that if they don't move now and make it clear that they are dedicated to the 2% long-run target, that inflation expectations will become unmoored and it will make their job much harder in the future.
2:41 >> So don't delay because if you delay, the problem gets worse. >> That's right. And so we're in an interesting situation right now because as you know, the Fed meets at the end of the month. >> Yes. >> Kevin Warsh no doubt was praying for >> Praying. >> Praying. Well, it was on >> You got to pray for something. >> on a knife's edge. >> Yeah. >> for good inflation numbers >> it. >> He didn't get it. And this is going to cause him enormous grief in that meeting.
3:10 >> Pause there for a second. Because not everybody understands that the head of the Federal Reserve can't just do whatever he wants. >> He's he's just he's a committee. >> when you say that today's num- inflation numbers is going to cause grief for him in the meeting, elaborate on that. Like what do you mean by that? >> Well, there there looks now like there may well be a majority for hiking rates. >> This month? >> This month.
3:40 >> Which people were not anticipating. >> Well, that that's it. The futures markets have reevaluated it to today. And the last figure I saw before I came into the the showed that expectations had gone over 50% for a >> Right. But clearly 2 days ago they were below 50%. >> down about 36% I I believe. So that's material. The last thing Kevin Warsh wants is to be a dissenting vote in a committee he supposedly leads as chairman.
4:11 >> Mhm. >> but he also doesn't want to infuriate the man who appointed him, Donald Trump. >> Yes. >> So he's in he's in a in a >> hard spot. >> unenviable position. >> Yes. Yes. So if you were him >> You You know, Steve >> It's a cheap It's a cheap question, but I'll ask it anyway. If you were him, what would you do? >> you know, Steve. You know the old story about asking the old Irishman for the road to Dublin. He He says, "If I were you, I wouldn't start from here."
4:41 >> >> Okay. >> I wouldn't start from here. >> starting from there. Okay. Okay. So obviously he's in a hard spot. But let's let's >> He's in a very hard spot. >> Let's go even more big. >> Sure. >> He He came in and basically said, "I can't stand quantitative easing. Not not all of quantitative easing, but I think it was way overdone. The Fed now has a huge balance sheet of 6 and 1/2 to 7 trillion.
5:10 And I don't like this forward guidance stuff. >> Right. >> So I'm going to keep my mouth shut and let the rest of you ponder like like maybe we'll go back to the days of Greenspan where we had to where we were looking at his briefcases and how many papers were in it." What do you think about this that his philosophy? Forget about whether he should raise rates or not. As an economist, what what do you think about his philosophy of about quantitative easing and and and lack of forward guidance?
5:38 >> speaking, I'm not a big fan of his philosophy. >> Which part? >> Well, the conservative portfolio of questioning the the fact the constantly questioning the Fed's balance sheet and what distortions that could have on the economy. all the evidence we have right now is that the Fed is perfectly capable of controlling interest rates when we're well above the zero bound with quote and quote interest on reserves. The the interest that the Fed pays the banks to to park >> Right.
6:14 >> money at the at the Fed. and the fact that the balance sheet is much much bigger than it was before say the great financial crisis is in no way a problem for the Fed in controlling inflation. Having said that, the one part of his agenda I do agree with is getting rid of quote and quote formal forward guidance. >> Okay, elaborate on that. Why? >> okay. a number of reasons. First, the empirical evidence is absolutely overwhelming that the Fed is not good at predicting the future. And we >> But by the way, nobody is.
6:53 Thank you. >> This is this is a >> >> very fair point. >> I will say that about myself. I am not very good at predicting the future. Neither are you. I think we I go out on a limb to say neither are you. >> And neither am I, but the Fed is it has been systematically worse than so-called blue chip private sector forecasters for many many decades now, including but according to the findings of Fed studies. So when the Fed when when people say that the Fed should provide forward guidance, they should tell us what they're planning to do in the future.
7:28 >> Yeah. >> That assumes that the Fed has good information about what the future will be. >> Right. >> And therefore they are helping us by telling us what they will do. >> Right. >> But if their information is not better than what we have and in fact their forecasting abilities are worse, you can imagine all sorts of problems arising from Fed officials telling us that I expect to vote for X or I expect to >> say. Because they lock themselves in.
7:59 >> themselves in. >> They they don't want to be >> See my my attitude about all this is this shouldn't be this complicated. If if if the if the inflation data is bad, they'll raise rates. And if the inflation data gets better, they won't. And so pontificating about it all the time is kind of a waste of time. >> I my personal opinion is that FOMC members love the rock star status. >> They do. They love to get on TV and talk about what they want.
8:26 >> to speak on at institutions like mine for example where they get a big educated audience who hang on their every word. >> Yeah. >> And particularly when the Fed chairman is being quiet, >> Right. >> their views are elevated. So they're very happy with this moment. >> Very easy to get on the front pages of the Wall Street Journal these days. >> Yeah. All right, let's move on. We got so much to cover. Let's talk about Scott Bessent.
8:57 >> There's another another guy with an on enviable position. >> Yeah, on enviable position. We're going to we're going to get to we're going to come to the deficit and and and interest rates in a bit. But I just want to first focus on Scott Bessent came out with this plan to which he called I think it's called Operation Twist where he goes out and the Treasury Department shorts, like sells short-term Treasuries and buys long-term Treasuries to the tune of 6 billion.
9:26 >> Which is the sort of thing he criticized his predecessor Janet Yellen for doing fiercely. >> Yes. Leave that aside. >> >> what I don't understand about it and maybe you do is the size of the federal deficit is 40 trillion. So coming So coming >> Going up $7 billion a day. >> Let's leave that aside. I'm just Let's just stick with 40 trillion, okay?
9:57 >> That's a big number. >> 40 trillion and you're trying to lower long-term rates by buying 6 billion. >> Yeah. >> What am I missing? Because it seems to me that's like bringing to a gun battle a butter knife. >> Com- com- We agreed, but what Bassant would say if he could talk to you away from the cameras is hey look, I'm just making a shot across the bows. I want to show the markets that if they mess with me and long-term rates get too high, I'm going to come out with heavy ammunition and I'm going to hit them when it where it really hurts, when they least expect it and it did not work.
10:41 >> Not even close. >> It's not even close. The first The first reaction from the market is oh my gosh, what what's up and we did see a brief >> a day. >> It lasted less than a day. Right. But when the markets realized hey, this is 0.016% of the >> Is that what it is? >> Yes. It's >> to use that. >> It's >> >> not >> of the of the deficit. >> of the per- percent of the of the treasury >> market. Right, the treasury market.
11:10 >> Right. So this is this is nothing on its own. And when they calculated what sort of ammunition Bassant could actually bring to the fight, they said this is 40 trillion is just overwhelming. It's just too big. So you can't you can't head fake this >> >> this market. And remember, Basant is not buying back long-dated Treasuries with cash. That's >> No, he's issuing debt to buy debt.
11:40 >> He's exactly. So, he's got to borrow more short-term to buy back >> long-term. Again, the exactly the sort of thing >> he criticized his predecessor for. you you I I I don't know if you remember the Japanese operation he he >> He lent them money. >> So, what Basant was very concerned that the Japanese were intervening in the currency markets in order to push up the yen, and he did not want the Japanese to be selling Treasuries in order to >> So, you So, instead of them selling Treasuries, he lent them money to buy the yen.
12:18 >> He told them to go to the Fed and use a certain Fed facility. >> -huh. >> And he declared victory because the operation did push up the yen. >> Right. >> But, fascinating coda here. A month later, the Japanese released statistics on their foreign securities holdings, and what we learned was that the Fed that the Ministry of Japanese Ministry of Finance had intervened in the currency markets to the tune of about $99 billion, and they had sold $88 billion worth of foreign securities all or almost all of them >> Treasuries.
13:00 >> presumably US Treasuries in order to do it. >> it. >> So, Basant's logic did not work. The Japanese did in the end clearly sell Treasuries in order to buy yen. >> All right, let's switch topics. We we've only covered small things so far. let's talk about I'm very curious. You're an economist. I am not. the US federal deficit and >> Currently running about of >> 6% of GDP annually. So, my question for you is First, I'm going to ask you what's your position about the the threat of the debt and of the US debt to the to the overall economy and the Treasury market, but I I want to preface it by saying you know, people who are call them doomsayers about the US federal deficit, and there are many people and and they're very respectable.
13:59 What what I say about them is I don't have a strong opinion on this topic. All I know is that you guys have been making this argument for 40 years. Cuz I remember Pete Peterson in the '90s making literally every single sentence that Ray Dalio utters now, Pete Peterson was uttering in the '90s. >> Yeah. >> And when you make an argument for 40 years and you've been wrong for 40 years, there's got to be a reason why you were wrong for 40 years. So, that's how I want to preface. Take it away.
14:31 >> Yeah, so you know, the the the best way I've heard the US dollar described as the winner of an ugly dog contest. >> Right. >> That you you can only compare this particular dog to the rest of the dogs that are out there in the competition. >> everybody knows, when in currency every every when you trade currency, you're always trading it relative to other currency. >> There it is. That that's right. So, it's not clear if you if you're losing faith in the dollar whether the United States would, for example, have to inflate away its debt, what you're going to move into.
15:07 >> Right. >> >> What's your alternative? >> Right. So, broadly speaking, major central banks around the world have been answering that question over the past 20 years. They have not, broadly speaking, sold dollars for other currencies, but they have >> buying gold. >> gold >> Yes. >> Okay. and do you know historically gold has been the foundation of global financial markets. You go back to the late 19th century and the the top currencies leading currency is sterling >> By the way, just to interrupt for a second, there was a movie I saw long time ago. It was like a Sherlock Holmes It was a Sherlock Holmes movie.
15:49 And what it what the the the story basically was that all the gold of all the major countries was in New York >> Mhm. >> in this huge vault. >> Yeah. >> And >> York Fed >> at the New York Fed and each country had its own like storage storage unit. And so whenever they whenever there was trade, they would move it from one locker to another locker. And the the the the great thing about the movie was Sherlock Holmes got called in because they opened the door one day and there was no gold.
16:21 >> >> And they freaked out. And so the I'll just finish the story. The the the what had happened was the bad guys had built an alternative floor just on top of the floor. And so that it was it looked exactly the same except no gold, which gave them a lot of time to pull the gold out. That was But I just thought it was fascinating. All the gold was in one spot and they were just moving the gold from one room one locker to another.
16:45 >> Right. And historically that's the way it's been done. That's the way the Bank of England did it in the 19th century. But as I was saying, to go back to the late 19th century and the leading currencies in the world of sterling, the Deutschmark, the French franc, the US dollar were all more or less credible vouchers for gold. >> Right. >> so fast forward to the end of the Second World War and now the US dollar was the only credible voucher for gold.
17:12 >> Cuz we were the only country left standing. Basically. The only economy left standing. >> We had about 60% of the world's monetary gold reserves. Over time, we we cut that link, as you know, Nixon closed the gold window in 1971. Having said that, countries have learned that during a crisis gold is approximately as good, some could argue better, than the US dollar because gold tends to do well during during times of stress.
17:44 >> Right. >> And so the the Chinese and the Russians in particular have been building up their gold stocks. They've been moving them to safe locations, re-domesticating it. As you know, the even the Dutch recently repatriated their gold holdings from the New York Fed. and one of the benefits that that has is that as you know, the US has been very aggressive in recent years with dollar-based financial sanctions. In other words, if you cross us on a foreign policy initiative, we will cut you off from the dollar-based financial >> Like Iran, for example.
18:29 >> Absolutely. So, countries are learning that they need alternative vehicles for storing their their their sovereign >> Outside of the dollar. >> Outside of the dollar. But where do you go? >> Right. So, only gold. >> Well, yeah, I mean, we could go through them all. Now, the euro the euro has >> Please. Please. So, we don't need You All we need to say is the euro, we can move on. >> So, going >> Chinese the Chinese yuan?
18:56 >> Or RMB? >> RMB, that's not That's not going to happen. >> No, what we we we did see a sort of test case earlier in the year, quite fascinating. The Chinese have been building an alternative settlement international currency settlement system. it's called SIPS. >> Okay. >> which is trying to compete with the huge international system called Swift. >> Swift. >> Right. And what we did see was that early on in the Iran crisis when Iran closed the straight that there was a shift in payments from Swift to SIPS. Why? The Iranians were as you know tolling the straight.
19:36 >> Right. >> They demanded to be paid in Chinese RMB or cryptocurrency. >> Right. >> So these transactions moved out of Swift, out of the US dollar into RMB. But when Donald Trump announced the ceasefire unfortunately that didn't last terribly long, but when he announced it you saw it go exactly. So it's not >> So bottom line. >> Yeah. >> There's no alternative at this point to the dollar other than gold.
20:07 Countries have diversified. Well where you know, what what is your view of the doomsday Ray Dalio scenario about the deficit and then rates are going to soar because no one's going to want to buy treasuries etc. >> Well it is a serious question. If we had Scott Bassent here what his defense would be is you know, hold on stop blaming us for this. They we're just in some ways a temporary victim of our own success. >> Meaning?
20:35 >> The economy is doing so great here. AI is exploding and there's a huge demand for capital. And that's >> That's true. >> That is true. That is true. That's pushing up treasury rates which interestingly enough feeds through into the entire global economy. So we So we are competing with AI infrastructure and the treasury is competing with with governments around the world for global >> investment. So, in rates are being pushed up everywhere, particularly in countries that, are in a very poor fiscal situation. You and I, before we we we started the podcast, we're talking briefly about France.
21:25 >> We're getting to that. >> Right. >> We'll get to that now. >> >> All right. So, to finish it, so do you you don't think Do you think we're going >> is ugly. >> The trajectory is ugly because of cuz there's a crowding out effect because of AI >> Well, yeah. And there's no longer any serious willingness in Congress or or in the executive branch to address >> cut anything. >> I mean, you and I are old enough to remember Obama and the Simpson Bowles Commission. There was one serious effort to get a bipartisan solution. They didn't quite get the majority they needed, but Obama could have embraced it. Instead, he ran away from it. That was the last serious attempt. Now, what do we have? We have the Treasury Secretary telling us not to worry at all, that we're going to quote and quote grow our way out of it.
22:16 And the numbers don't bear them out. >> I agree with that. Let's turn to France. So there are riots going on. That's That's not the political That's a political topic. But, their problem, it seems to me, is kind of our problem in that they have very large deficits. They have no political will whatsoever to deal with them. In fact, just as an example, Marine Le Pen, who could be the next president of France, has said she wants to reduce the retirement age from 62 years to 60 years, which is crazy.
22:52 >> We have our own crazies here. >> Granted. >> >> We're just talking about France now. The difference is nobody needs to own French bonds. >> Exactly, right. >> Nobody does. I mean if you're a bank anywhere on planet Earth and you're doing overnight repos, you're doing overnight repos with treasuries. There's There's no alternative. If you're a big massive institution like the you know Norway sovereign you know sovereign wealth fund and you want to own 5-year 10-year debt, you're only owning US treasuries.
23:31 >> And there there there is no Eurozone >> >> sovereign debt market, right? German bonds are in effect the closest thing we have to >> So like I said, no one on planet Earth wakes up any morning and says, "I got to own French sovereign bonds." So what does that mean for France in your view? >> Well, they are even more than we competing for interest rate sensitive investors around the world. So for many decades we were in an extremely privileged situation what the French called the exorbitant privilege where our borrowers were mainly sovereign institutions like central banks that bought treasuries on reflex just as part part of their normal reserve >> even think about it. They didn't even think about whatever the market rate was.
24:25 >> They took it. >> it. So you go back 20 years and 76% of the market were what we would call rate insensitive investors. That was a wonderful situation for us. >> And when you say rate insensitive investors, meaning they would buy treasuries whatever the price was that day. >> That's right. So mostly central banks. >> Right. >> Right. >> Okay. That figure is now down to 43%. >> Okay. >> So then this is a big problem for us.
24:54 Because the more debt we issue, the more interest rate sensitive investors we have to attract into the market to buy our debt. >> Yes. So, what happens is you you get an accelerationist effect on the rise in in interest rates. >> Okay. >> Because the profile of our investors is getting worse and worse >> Okay. >> as the deficit gets worse. >> the US. What about France? >> Well, France is in an even uglier position because virtually all of their investors are interest rate sensitive.
25:35 >> like I said before, nobody wakes up any day and says, "I'm I'm just going to buy French bonds." >> have to convince us that they're going to compensate us enough. You know, we've we you and I grew up calling the US Treasuries a risk-free asset. >> is going to call French government bonds a risk-free asset. We look at French government bonds like we would look at corporate bonds, for example.
26:06 >> All right. So, before we turn to your books, is there anything on planet Earth that you're very focused on that you'd like to talk about? >> Well, you know, at the Council on Foreign Relations, the world always gives us good material to work with. >> I don't think you need to be at the Council on Foreign Relations to get the material. >> Right. So, you you and I have talked about the the things that I am follow on a day-to-day basis. We've talked about inflation and the Fed and monetary policy, the debt.
26:38 We've talked about the international currency markets and how the RMB compares with the US dollar, what's motivating flows in and out of and so my my more popular recent books before before that I used to write more academic books, but starting with Bretton Woods was looking historically about how these markets that we talk about today developed. But over the course of writing these books, I keep became more fascinated with the the history itself.
27:15 >> Yes. >> The whole idea >> very it became very clear as I started to read your books. >> Okay, so let's talk about your book. >> Let's talk about your last book cuz your last book in some ways this is going to be a very funny thing to say is a horror story in a way. So, you wrote a book about Henry Wallace >> called The World That Wasn't. >> The World That Wasn't, who was the Vice President of the United States in the third term of Franklin Delano Roosevelt.
27:45 >> Mhm. >> And FDR basically woke up one morning, I'm I'm exaggerating, and decided that he did not want Henry Wallace, we'll talk about why, to be his Vice President anymore. And so, he looked around and he made Harry Truman his Vice President. And because of that, Harry Truman became President of the United States and not Henry Wallace. >> And the rest is history. >> is history as we always like to say. And the horror novel part of the story, it was which is which is the one I want to talk about, is that if that had not happened Henry Wallace would have become President of the United States.
28:18 >> Right. >> And so, let's talk about why that would have been a horror story. >> Well, Oliver Stone, as you you may remember, has argued the the opposite. >> Yes, Oliver Stone can rot in hell as far as I'm concerned. Okay. So, you know I looked it up. I I asked AI something. I said how many people died under communist regimes in the 20th century? And the answer was 100 million. >> Mhm. >> And I And I was thinking to myself when 100 million people die that kind of tells you that maybe the ideology behind those deaths is not so good.
29:01 >> Right. >> So, that's why I say to hell with all of the stone. >> but Henry Wallace didn't quite grasp that. >> Yeah, so what Let's Let's back Who was Henry Wallace? >> So, Henry Wallace was a a a great agricultural geneticist. >> Yes. He loved corn. >> He loved corn and the corn you and I eat today. He was from Iowa. >> so, it have from Iowa farm, you know, modest nobility we would say. His His family was very well known in Iowa because his grandfather created a an agricultural journal called >> Almost like almost like a almost like a farmer's almanac type thing.
29:46 >> Yeah, but I would >> the Wallace's almanac. >> Right. Remember Remember in the late 19th century about 40% of Americans worked >> on farms. >> on farms. >> Right. >> And so, it with that publication, Wallace's Farmer, was like Barron's was to the financial markets in the '80s. >> farmer read this publication. >> Right. Just like every every banker read Barron's. Yeah. And Wallace started doing sophisticated experiments on hybridization of corn in the 1920s.
30:17 >> corn better. >> He He made corn much better. The corn we eat today derives from his experiments. He created a company that was eventually sold to DuPont >> for a billion dollars. >> Yeah, and 1999. >> died. >> Well after Well after he died. But he he died a wealthy man from that company. But FDR decided to make him his first term agriculture >> Secretary of Agriculture. >> And there there was certainly a plausible argument that there were Wallace was >> he's Mr. Corn.
30:46 >> He's Mr. Corn. He certainly revolutionized agricultural policy in the United States. The massive farm subsidies we pay today, that began in the 1930s under Henry Wallace. >> We could live without it, but okay. >> of his his policies in the '30s were a lot whackier than farm subsidies. For example, >> pay paying farmers not just to stop growing in order to boost prices, but to rip up millions of acres of planted cotton and to prematurely kill 6 million hogs. Again, under the logic that you >> Yeah, just kill THEM NOW.
31:22 >> WILBUR? >> >> SO, THE logic was that if we have less supply, the price goes up. >> in his defense, economics was still kind of in its infancy. So, people didn't really understand completely how prices worked. >> this is pretty simple. If you're running a firm, you know that when you calculate what your profit's going to be, >> Yeah. >> you multiply the price of your product and the number of products you're going to sell.
31:50 >> Right. >> If you smash your products so you you can't sell them, obviously you make no revenue whatsoever. Okay. >> But at the end of FDR's second term, he's looking for a new vice president. >> he look He who He >> John Nance Garner was a conservative >> Well, the the Democratic Party at the time was a very uncomfortable coalition between northern liberals and southern conservatives. So, Garner was a southern conservative.
32:22 >> >> FDR wasn't chomping at the the bit to to run again, and he made very clear, "This is not going to be like '32 where the party's going to force a vice president on me. I'm going to say who the vice president is." >> So, he chose Wallace. >> He chose Wallace. As I discuss in the book, the evidence pretty clear that Wallace was not his first choice. He was his third choice, but he did he did like Wallace personally, even though as you know, Wallace did some pretty wacky things in the in the '30s as agriculture secretary. he appointing a Russian mystic Nicholas Roerich to lead a seed foraging expedition in Central >> Sounds like he found the reincarnation of Rasputin.
33:06 >> Absolutely. So, Wallace actually wanted to recreate the legendary Shambhala in Central Asia. I mean, he had all sorts of wacky ambitions. >> Okay. >> But Roosevelt really thought he could control Wallace. And the important thing to Roosevelt about Wallace was that he was {quote} and {quote} an internationalist. >> Okay. >> And at the time when we were preparing for the possibility exactly >> Right. He wanted internationally. He didn't want isolationist. >> And Wallace was certainly a committed internationalist.
33:37 >> Okay. >> And he was defending the left flank in the party. Roosevelt was no longer Mr. New Deal. >> Okay. >> he was running the war going to run the war. >> vice president. >> That's right. >> And this is where things start to get little fellow Russian fellow traveler situation. He wasn't a spy. >> No, he was >> Definitely not a spy. >> He was not a spy. >> But he was elaborate on like what what the your concerns in the book were about Wallace.
34:06 >> concerns. There were huge concerns within the the the DNC. >> But you're sitting here and all these people in the book are dead. So, I'm going to ask you. >> I'm their backup. >> Yes, you're the backup plan. >> So, Wallace was no communist. He was no ideological communist. That's for sure. But he had great regard for Soviet economic planning. and during the early 1940s, he started making public speeches praising Soviet quote-unquote economic democracy.
34:40 >> >> Now, as you can imagine, this really scared off the DNC leadership, which was mostly on the conservative wing of the party. >> Now, so fast forward to late 1943, they expect FDR to run again cuz the war is obviously still going. >> he's very sickly. >> And he's very sick. >> He's very sick. He had his heart issue, massive heart failure, just a heart failure. >> Right. >> Apparently, people said that that those people that who hadn't seen him in a few years and then saw him at that time were in shock.
35:14 >> They were they were they were shocked. >> Yeah. >> but none of them could look FDR in the face and say, "Look, you got to get rid of Wallace because you're not going to survive a fourth term and we can't have that nut case as president." So, but they did convince him that Wallace was an electoral liability and could cost him millions of votes in key electoral districts. FDR still liked Wallace personally very much and he could just not bring himself to look Wallace in the eye and say, "You're gone." but >> But he he let other people do it.
35:50 >> He let other people do it. emissaries went to Wallace and made it clear, "Look, you're off the ticket. that's the end of it. The boss wants you out." Wallace refused to go unless FDR told him to his face that he had to go. So, long story short, we had a wild open convention for vice president, Democratic convention in in summer of 1944. >> Right. >> And Wallace was leading after the first ballot. Truman was not widely known within the party.
36:26 >> very unknown. >> Right, FDR didn't know him well. >> Right. >> FDR just >> met him like once >> Yeah. >> before that. >> He considered him broadly inoffensive, but FDR wound up endorsing four separate candidates in four separate ways. It was just >> Chaos. >> Yes. >> So, let me ask this cuz you talk about this in the book. What would have happened? Cuz the way you I mean you describe it and you also describe it in your book about the Marshall Plan.
36:54 Truman becomes president. The war ends. The Cold War starts. And Truman basically leads us into the Cold War. >> Correct. >> Let's do a counterfactual. >> Right. >> Wallace wins the vice president's nomination in in the for the fourth term. FDR dies. And Henry Wallace becomes president of the United States. >> Right. >> How is American history different? >> So, I mean go back to the various crises we were dealing with in late '45 and 1946. The Soviets invade Manchuria in August of '44.
37:28 they rape and pillage for months and months and months until the Truman administration convinced them to get out. >> Mhm. >> so, there was significant pressure from the Truman administration. Of course, we did still have significant forces >> way, my favorite quote during the whole Cold War is when Molotov is in is is in the White House talking to Truman. >> Yes. >> And Truman's yelling at him. >> Yeah. >> And and Molotov >> to be spoken to that >> Molotov says, "No one's ever Basically, no one's ever spoken to me that way."
38:01 Which was a huge lie because Stalin ripped him a new one every time. So, and sent his wife to Siberia. How much worse can you get? So, I just always thought that was funny that that Molotov said to Truman, "You I've never been spoken to that way." >> by a foreigner. >> Yeah, by an American. >> Right. So, if Wallace had been president in this counterfactual, of course we can't prove, but we we know from the sort of things that he was he was saying at the time that the there would be no pressure to on the Soviets to get out of Man- Manchuria.
38:33 >> No pressure. >> The the we would probably would have given away South Korea, Hokkaido, the the Dardanelles, the Turkish Straits, Greece. >> He was a basically a friend of Stalin until years later he started to realize that maybe he wasn't right. >> Yes, that's a that's a long for fast forward, which we can get into if we have the time, but we know that the the key events in the early Cold War, the Truman Doctrine, for example, Wallace opposed, the Marshall Plan, Wallace opposed, the creation of West Germany, Wallace opposed, NATO, I could go on and on and on.
39:13 >> It would have been bad. >> It would have been bad. >> bad. All right, let's move to your book about Bretton Woods. You like fellow Soviet fellow books about Soviet fellow travelers. >> The dark hero of that book is Harry Dexter White, the US Treasury official who, interestingly enough, would have become Treasury Secretary if Wallace had become president. And Harry Dexter White was a major Soviet fellow traveler. >> So let's talk about what was Bretton Woods? Right. Why is it as as a historic event, it's a very important event. What was that all about? And then to tell us a little bit about this The point person from the Treasury Department was this guy Harry Dexter White, who was a Soviet fellow traveler.
39:56 Yeah. Tell us about what Bretton Woods >> So Harry Dexter White was basically a bureauc- bureaucratic temp at Treasury in the early 1930s. He first came into the Treasury on a temporary appointment, a research appointment in 1933. But when Mark Henry Morgenthau became Treasury Secretary in 34, he quickly realized that Harry Dexter White was terribly useful to him. The guy was a font of ideas on everything from international economic policy to to foreign policy, but nobody knew who he was. So Henry Henry >> guy in the stacks who you found out actually is really smart.
40:37 >> Exactly. And Henry Wallace was just a gentleman apple farmer and neighbor of FDR's from Hyde Park. >> Right. >> Knew nothing about economics. But Harry Dexter White did know about money and going through his archives at Princeton, I found fascinating documents. For example, one in 1936 where he lays out the idea of an international conference where he, Harry Dexter White, that nobody >> ever heard of >> best the British Empire.
41:08 >> Right. >> And manages to create a new world order >> So before you get to what Bretton Woods was, I just want everybody to know that the US was represented at the Bretton Woods negotiations, which you're going to talk about, by Harry Dexter White. But the UK >> Very unofficial. Yes, he did >> But he was the one who did the work. >> Oh, absolutely. Scripted it like a Kabuki play. >> But the the UK was led by no slouch, John Maynard Keynes.
41:38 >> Keynes, yes. >> Maybe the greatest economist ever. >> Absolutely. >> So what was Bretton Woods about? Like what was the problem and what what were they trying to deal with? >> So at least according to Harry Dexter White, who was the brainchild behind this as I said going back into the 30s, the argument was that the the Axis powers had been involved in economic aggression. And the currency wars of the early 1930s, the trade wars that developed were what ultimately led to the Second World War. So, the argument was >> I don't know about that, but okay.
42:19 >> Exactly. This This This was their argument for relevance. >> argument. >> That was his argument, which Morgenthau was happy to champion because it made him, Henry Morgenthau, more important. So, the argument was that after the war, we need to rebuild the international economic system such that economic aggression could no longer take place. >> Okay. >> So, during the war, the Treasury planned for this international conference. The British were naturally very suspicious of it, and Harry Dexter White and John Maynard Keynes spent 2 years in very tense, often quite violent, negotiations about what this new financial order would be.
43:11 >> And what was the final result? >> Well, so we created the IMF, which was a US-dominated institution. The World Bank as well. The United States was the only country that had veto power in both, but most importantly, the dollar-based international financial system that we know and love today >> No one loves. >> >> is >> was created there. >> pretty much created by Harry Dexter White, who who's >> Okay. So, let me let me ask you a simple question. This This man, Harry Dexter White, was a Soviet fellow traveler.
43:48 >> He He was He was not, again like Wallace, not an ideological communist, certainly not an agent. He didn't take direct orders from Moscow, but he was absolutely working in their interest. >> but what interest Here's my question. You're talking about creating an economic global economic system that's basically really a Western system. Like why do the Soviets care about Harry Dexter White? >> Because Harry Dexter White was very influential within the government. He was pursuing policies which were very much to their advantage. I can go through Well, for example, Henry Morgenthau put walla Harry Dexter White in charge of creating the occupation currency for Germany.
44:34 >> Okay. >> at the end of the war. The Obviously, this was a a sensitive issue, you know, we we made plates, currency plates, we had to keep them under very high security. The Soviets said, "Great. Give us Give us the plates and we'll mint our own currency." Obviously, US officials were appalled at that idea and said, "Of course, that's ridiculous." >> plates away. >> But to again to make a long story short, Harry Dexter White argued against them.
45:06 >> He wanted to give them the plates. >> lied to push General Marshall out of this debate. We did give the Soviets the plates. >> Really? >> And yes, they printed up enormous numbers of occupation marks. These were eventually cashed in in Washington at the exchange rate established by Harry Dexter White, effectively raiding the Treasury for in today's dollars about eight billion dollars.
45:36 >> Which basically went to the Soviet Union. >> Exactly. So, that's the sort of stuff he was doing. But much more importantly, there were a lot of officials in the Treasury and the Commerce Department who were either Soviet assets or Soviet agent active Soviet agents. Harry Dexter White protected them and so he was >> Did he know that they were agents? >> Almost certainly, yes. In many cases, we know that he knew because under the Freedom of Freedom of Information Act request I made to the FBI, they gave me 13,000 pages on on White, among which I found 18 Soviet intelligence cables that were intercepted and decrypted by US military intelligence identifying White under his various code names and describing his activities on on their behalf.
46:27 >> Okay. All right, let's go to the third book, last book that I read, which is about the Marshall Plan. >> Marshall Plan. >> So, I'm embarrassed to say, I think there are probably viewers who don't even know what the Marshall Plan is. it was once one of the most important things that ever happened on planet Earth. >> Yes. >> So, tell everybody like what was the Marshall What was the Marshall Plan? >> So, the reason I wrote that book is when I was writing up the epilogue material for Bretton Woods, you know, what actually happened after the the war, I naturally covered the the Marshall Plan because it basically took over the responsibilities that the IMF and the World Bank were supposed to have for rehabilitating the war-torn countries, particularly >> could not.
47:13 >> They could not. They were Most people don't realize that the IMF and the World Bank were largely mothballed and not just the '40s but throughout the '50s, and that role was played instead by the Marshall Plan. >> Okay. >> So, this was really a shift in American strategy towards the post-war era. Under FDR was the so-called one-world vision that we were going to continue cooperating with the Soviets in the post-war world. This is where people like Harry Dexter White and Henry Wallace become important. By the time we get into 1947 and the Marshall Plan under Harry Truman, we have the so-called two-world vision in which there is the free world led by the United States and the Soviet Union.
47:58 >> block. >> Right. So, the Marshall Plan was meant to rehabilitate the countries that would become our future alliance allies as quickly as possible. Interestingly enough, not to lock ourselves into Europe, but so that we could extricate ourselves. But, it didn't turn out that way. >> No, it did not. >> The Europeans insisted on security guarantees, so NATO went hand-in-hand with the Marshall >> So, I I think most people don't realize, I mean I mean, they probably don't even think about it anymore. I mean, after World War II, most of Europe was just devastated. Just completely devastated.
48:35 So, if if there had been no Marshall Plan, God knows what would have happened to Europe. >> Well, the and this this is this is the thing that Stalin realized that the United States disengaging from Europe was the perfect opportunity for him to pro- promote chaos, anarchy, complete dissolution of society in Western Europe so that he could expand >> the iron block into Western Europe. >> Exactly.
49:06 >> Okay. All right. This was great. Thank you. >> Great talking to you, Steve. >> And I and I very much enjoyed your books. Thank you. >> Thank you for having me. >> This podcast is for informational purposes only and does not constitute investment advice. The host and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial advisor before making any investment decisions.
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