Bretton Woods, Embedded Liberalism & Post-War International Political Economy

1. Bretton Woods, Embedded Liberalism & Post-War International Political Economy

3. Polanyi & The Double Movement • For a century the dynamics of modern society was governed by a double movement: the market expanded continuously but this movement was met by a countermovement checking the expansion in definite directions. Vital though this countermovement was for the protection of society, in the last analysis it was incompatible with the self-regulation of the market, and thus with the market system itself’ (p. 136) • Both of these forces - ‘economic liberalism’ on one hand ‘social protection’ on the other; rooted in different institutions, different social forces (pp 138-9).

4. From The Gold Standard … • Gold standard was important because it sought to put into practice, on an international scale, the liberal myth (as Polanyi saw it) of the self-regulating market. See e.g. Eichengreen Globalising Capital, ch. 2. • ‘the organisation of world commodity markets, world capital markets, world currency markets under the aegis of the gold standard gave unparalleled momentum to the mechanism of markets’(Polanyi 79-80)

5. … To Embedded Liberalism • ‘it will become possible to tolerate willingly that other nations shape their domestic institutions according to their inclinations, thus transcending the pernicious nineteenth century dogma of the necessary uniformity of domestic regimes within the orbit of world economy’ (p. 262). • Following Polanyi, Ruggie has characterised the post WW2 establishment of a regulated international economic order – which was instigated at Bretton Woods – as the era of ‘Embedded liberalism’. • a conscious desire to ‘re-embed’ (international) economic relations in their social and political context from which they became dangerously ‘disembedded’.

6. Realist Explanation of Bretton Woods • One highly significant factor in Bretton Woods order was the hegemonic position of the US, and the geo-political context of Cold War. Eichengreen & Kenen, e.g. (p. 5), point to the centrality of US ability and willingness to make side-payments and apply sanctions in making the institutions operate effectively, combining rigidity and flexibility.

7. Embedded Liberalism (Ruggie 1982) • See Helleiner, Strange, p. 33 of module booklet • Pegged exchange rate regime (fixed, but adjustable in the case of ‘fundamental disequilibrium’). • gold @ $35/ounce anchored pegged exchange rate. • Capital controls (of speculative flows) • Commitment to convertibility (to do without official exchange controls over financial transfers – capital movements – not complete de-control, but reduced official controls). • Open, liberal world market economy. • Planned multilateral liberal trading order – ITO (GATT).

8. A Managed World Economy • As Polanyi had predicted in 1944, the post war world the market system would no longer be self-regulating. • Not a new Gold Standard but adjustable & pegged exchange rates, capital controls, and managed international monetary relations. • A ‘more conscious effort international management’ of the world economy (Strange 1994: 53) • ‘for the first time in history the governments of the leading economies had agreed on a set of rules, on a system of collective management’ (p. 55)

9. A New Political Economic Orthodoxy • Ruggie – “the fusion of power with legitimate social purpose” • As Keynes put it ‘What used to be a heresy is now endorsed as orthodox’ (Helleiner, States and the Re-Emergence of Global Finance 1994, p 25) • US Treasury Department Secretary Harry White told the Bretton Woods conference he wished to ‘drive the usurious money-lenders from the temple of international finance’(Helleiner, 1994 p 4) • Benjamin Cohen’s excellent website on the Bretton Woods regime: http://www.polsci.ucsb.edu/faculty/cohen/recent/bretton.html

10. How Bretton Woods was supposed to work • Assumed (wrongly) • Temporary credit would be enough to see world economy through the transition from war to peace • Major currencies would be in roughly equal demand • Balance of Payments imbalances would be temporary, not structural (resulting from trade, account, not financial flows). • all proved wide of the mark.

11. How Bretton Woods’ actual operation differed • Underestimated scale of problem of post-war reconstruction. • US unilaterally lent UK $4.5bn (Burnham’s piece, module document p. 33). • Marshall plan – Cold War context. • Massive $ credit to Europe & Japan (dollar Shortage). • USA, not IMF, effectively bank-rolling the system. • Difficulties in achieving convertibility – not ‘til 1958.

12. The interaction of international context and domestic policies. • An international political economic context which facilitated domestic economic policy autonomy • One crucial feature of the regulated Bretton Woods international economic order was capital controls.

13. The Embedded Liberal ‘compromise’ controls on trade and financial flows allowed governments to: • pursue full employment without seriously violating international rules. • tailor their fiscal and monetary policies to domestic needs, take welfare-state initiatives, and still meet the objective and obligations embodied in the post-war institutions, including the commitment to liberalize their trade and payments • A Keynesian economic policy agenda

14. The Post-War Economic Boom • no accident that this international economic order co-incided with the ‘Golden Age’ of capitalism. • In 25 years after 1945, advanced industrial democracies grew twice as fast as they ever have before or since. • stability provided ‘embedded liberal’ international context was important, • role the U.S.– through Marshall Plan, and payments deficits. • Dollars provided much-needed liquidity within the international system. • Other factors contributed to post-war growth. Sustained economic growth fuelled by technology transfer, private demand and productivity growth.

15. Bretton Woods – later evolutions. • ‘the success of postwar institutions in fostering trade and financial liberalization also opened up individual economies, which made it more difficult for governments to reconcile their international obligations with their domestic policy objectives.’ (Kenen & Eichengreen 1994: 7) • ‘the dismantling of controls on trade and payments, the GATT rounds of tariff cuts, and the increase of capital mobility resulting from the restoration of convertibility rendered economies more open to flows of goods and capital. Hence, the external constraint became tighter, sharpening the conflict between internal and external objectives.’ (p. 28)

16. Conclusions • Bretton Woods and the ‘embedded liberal compromise’ it institutionalised/transformed the Post war world economy. • A novel level of political management of international economic relations • Changed the interaction between the domestic and the international in the realm of political economy. • Yet liberalising commitments meant it contained the seeds of its own demise ... as happened in the 60s and 70s.