A History of International Monetary Diplomacy, 1867 to the Present: The Rise of the Guardian State and Economic Sovereignty in a Globalizing World 9781138841154, 9781315732435

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A History of International Monetary Diplomacy, 1867 to the Present

This book is about how the rise of democracy has transformed economics over the past 150 years. As voting was expanded to the masses in the late 19th century, political leaders faced emergent pressures to deliver prosperity to their newly enfranchised populations. This led to the rise of the guardian state: a state whose prime directive was to protect economic growth and employment. Domestic economic goals now became sacrosanct, and if that meant a failure on the international stage to construct solutions to problems in monetary relations, so be it. The book traces the history of international monetary diplomacy during this long period to show how the guardian state has manifested itself, and how it has shaped the course of international monetary relations. Each of the most important international monetary conferences in history is scrutinized with respect to how nations sought to protect the prosperity within their national economies. The historical narratives give a bird’s-​eye view into how domestic political priorities have intruded on and shaped economic relations among nations. The book clearly demonstrates the advantages of an interdisciplinary understanding of how politics shapes economics. It will be invaluable reading for students and scholars of international economics, politics and economic history. Giulio M. Gallarotti is Professor of Government and member of the Faculty of the College of the Environment—​at Wesleyan University, USA. He is also Adjunct Professor of Political Science at Columbia University, USA, and was a Visiting Professor in the Department of Economic Theory at the University of Rome, Italy.

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Preventing the Next Financial Crisis Victor A. Beker Capital Theory and Political Economy Prices, Income Distribution and Stability Lefteris Tsoulfidis Value and Unequal Exchange in International Trade The Geography of Global Capitalist Exploitation Andrea Ricci Inflation, Unemployment and Capital Malformations Bernard Schmitt Edited and Translated in English by Alvaro Cencini and Xavier Bradley Democratic Economic Planning Robin Hahnel A History of International Monetary Diplomacy, 1867 to the Present The Rise of the Guardian State and Economic Sovereignty in a Globalizing World Giulio M. Gallarotti Markets in Their Place Context, Culture, Finance Edited by Russell Prince, Matthew Henry, Carolyn Morris, Aisling Gallagher and Stephen FitzHerbert China’s Belt and Road Initiative The Impact on Sub-​regional Southeast Asia Edited by Christian Ploberger, Soavapa Ngampamuan and Tao Song For more information about this series, please visit: https://​www.routledge. com/​Routledge-​Frontiers-​of-​Political-​Economy/​book-​series/​SE0345

A History of International Monetary Diplomacy, 1867 to the Present The Rise of the Guardian State and Economic Sovereignty in a Globalizing World Giulio M. Gallarotti

First published 2022 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an Informa business © 2022 Giulio M. Gallarotti The right of Giulio M. Gallarotti to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-​in-​Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-​in-​Publication Data A catalog record has been requested for this book ISBN: 978-​1-​138-​84115-​4 (hbk) ISBN: 978-​1-​032-​04169-​8 (pbk) ISBN: 978-​1-​315-​73243-​5 (ebk) Typeset in Bembo by Newgen Publishing UK

To my teachers, who have given me a truly great gift: the inspiration to learn. Thank you John Conybeare, Robert Doyle, Mario Fratti, Robert Jervis, John Ruggie, Robert Schapiro and William O. Shanahan.

Contents

List of figure  List of tables  About the author  Acknowledgments  Introduction 

viii ix x xi 1

1 The rise of the guardian state and structural change in the global political economy 

15

2 The 19th century conferences 

49

3 The interwar conferences: Genoa and London 

76

4 Mature guardianship: Bretton Woods 

103

5 Guardianship under monetary imperialism: the Smithsonian Conference 

129

6 Guardianship in the monetary feudalism of the nonsystem: monetary imperialism part two at Plaza and Louvre–and beyond 

149

7 Reflecting on a century of guardianship: patterns and implications 

170

Statistical appendix  Bibliography  Index 

195 196 207

Figure

7.1  Monetary Prisoner’s Dilemma game 

179

Tables

1 .1 1.2 1.3 1.4 1 .5 1.6 1.7 1.8 1.9 5.1 7.1

G-​7 Real per capita income, 1881–​2016  G-​7 Structure of business cycles, 1880–​1913  G-​7 Structure of business cycles, 1948–​2014  Comparison of the structure of business cycles, 1880–​1913 and 1948–​2014  G-​7 inflation, 1881–​2016  G-​7 Money supply, 1881–​2016  G-​7 Size of government, 1881–​2016  G-​7 Structure of fiscal deficits, 1881–​2016  G-​7 unemployment (%), 1881–​2016  U.S. balance of payments, 1970–​1971  Conventional leadership functions of monetary hegemons versus leadership functions of secondary monetary powers 

33 34 34 35 36 37 38 39 40 134 189

About the Author

Giulio M. Gallarotti is Professor of Government and member of the Faculty of the College of the Environment—​at Wesleyan University, USA. He is also Adjunct Professor of Political Science at Columbia University, USA (2018–​ present), and was a Visiting Professor in the Department of Economic Theory at the University of Rome, Italy (1994). He has published the following works: The Anatomy of an International Monetary Regime: The Classical Gold Standard 1880-​1914 (New York: Oxford University Press, 1995), The Power Curse: Influence and Illusion in World Politics (Boulder, CO: Lynne Rienner Publishers, 2010), Cosmopolitan Power in International Relations: A Synthesis of Realism, Neoliberalism, and Constructivism (New York: Cambridge University Press, 2010), Emerging Powers in International Politics: The BRICS and Soft Power (co-​ edited with Mathilde Chatin; London: Routledge, 2017) and Essays on Evolutions in the Study of Political Power (editor: London: Routledge, 2022). He has also published numerous articles in leading journals across five disciplines: economics, politics, law, history and business.

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Acknowledgments

Like any project that is years in the making, this one has benefited from the generosity of many wonderful individuals. Paying homage to all would be impossible, but some have been especially kind in helping me complete this project. It may take a village to raise a child, but also to complete a book. I give many thanks to those special individuals in my village. I am especially grateful to Lawrence Broz, Barry Eichengreen, Jeff Frieden and Richard Grossman for comments on an earlier draft. I am also very grateful to my research assistants Shivani Kochhar, Hannah Scopicki and Alex Richwine. Manolis Kaparakis was helpful in assisting me in finding such fine research assistance, and Kristin McQueeney provided valuable technical support. I am most grateful to the excellent work done by the editors that helped guide this project through to production: Simon Holt, Andy Humphries, Laura Johnson, Emma Morley and Emily Kindleysides. Finally, I am grateful to the impressive copyediting skills of my wife Gemma. I am grateful to the following presses for granting me permission to reprint material: Taylor & Francis, Oxford University Press and University of Chicago Press.

Introduction

The Argument: This book is about the intersection of domestic and international politics. It is a rather simple story about how democracy has changed the world, but in a manner that has not garnered much attention from academics. While scholars and pundits have emphasized the redeeming political aspects of democracy, it has had a far greater impact than that alone, one that has seen a transformation in national economies and international economic relations. This book is about that transformation. It starts with the expansion of suffrage to groups lower on the socioeconomic ladder in the late 19th and early 20th centuries. The greater political power of these groups cast a preponderant shadow on political entrepreneurship in these expanding democratic systems for ever after. Now the masses had the power to deliver election victories to candidates for office. Hence, candidates for office had to deliver policies that accorded with the interests of these masses. In terms of economics, this meant protecting jobs and domestic growth: in other words, guarding national economic prosperity. In the past, politicians could turn a blind eye to economic recessions because those groups that were most affected (i.e. lower and middle classes) could not vote them out of office.The expanded suffrage now forced politicians to become fierce protectors of domestic economic prosperity, and hence we witnessed the rise of the guardian state. This had a tectonic impact on the future of macroeconomics in these nations. We now entered the age of greater inflation, bigger government, profligate government spending (i.e. deficit spending) and the new business cycle (i.e. the pathological avoidance of recessions). This tectonic shift in domestic economies was accompanied by a tectonic shift in international economic relations. With the rise of the guardian state, which fiercely pursued domestic economic prosperity, came a strongly defensive state posture that would protect domestic economic sovereignty as well. In other words, the new guardian state could never seriously sacrifice domestic economic objectives on the altar of international cooperation. Domestic economic goals now became the prime directive. Problems of international stability in economic relations among nations were addressed primarily through a filter of domestic economic priorities. Growth and employment became sacrosanct, and if that meant a failure in constructing solutions to problems in monetary

2 Introduction or trade relations, so be it. Unlike the preceding age of the 19th century, in this new age of the guardian state it was international stability that would have to be sacrificed on the altar of domestic economic prosperity. It is the contention of this book that the manifestations of the guardian state transformed relations in all major issue areas (trade, money, migration, investment and resources), but the author’s expertise only allows him to chronicle and evaluate its impact on international monetary relations. And this is undertaken through an analysis of the major cases of international monetary diplomacy over the last 150 years. While the present analysis is restricted to this issue area, it is the expectation of the author that much of the same patterns will be found in other realms of international economic relations. The course of monetary diplomacy, which has been an essential mirror into the monetary relations among nations throughout history, has demonstrated a charred landscape as a result of the advent of the guardian state. Time after time in the most important monetary negotiations in history, nations failed to construct sufficient cooperative solutions to the problems that plagued the international monetary system. The ability to deliver regimes or agreements that laid a sustainable path to stable monetary relations was compromised by nations protecting their domestic economic sovereignty. Indeed, nations were not willing to sacrifice domestic growth and employment for the purpose of carving out effective cooperative schemes. No state was ever fully willing to bear the costs of domestic adjustment, a necessary condition to create such schemes. The history of monetary diplomacy is a history of abject failure. In effect, the advent of the guardian state cast monetary diplomacy into a permanent Prisoner’s Dilemma game, with each nation looking to pass off the costs of international stability onto other nations, while it guarded its domestic economic priorities.1 As we moved into the 20th century and the guardian state consolidated itself, domestic politics increasingly shaped monetary relations. Monetary diplomacy was now largely configured by the fate of national economic performance.The 19th century Victorian system of tolerating domestic adjustment to stabilize international monetary outcomes was no longer viable. There was too much to lose politically from sacrificing domestic growth and employment on the altar of stable exchange rates and capital flows. Everyone in some measure took on a free-​riding posture in negotiations intended to deliver some set of sustainable rules setting parities and maintaining capital flows under stable exchange rates. The free-​riding posture manifested itself with nations seeking to let others bear a disproportionate share of the costs of the intended regime, while they attended to domestic economic objectives. The result cast nations into a Prisoner’s Dilemma game from thereon in, with varying equilibria depending on the constellation of outcomes in the monetary power structure. None of the major international monetary conferences throughout history could ever extricate itself from the challenges cast by this parochial posture that sought to preserve domestic economic sovereignty. The result was quite expected: they either failed miserably or delivered significantly flawed regimes.

Introduction  3 The interwar conferences at Genoa and London had the unenviable task of trying to restore a working international monetary system in a world ravaged by war and economic depression. The circumstances ensconced nations all the more into a protective shell, unwilling to compromise domestic economic aspirations for the sake of building a regime. The dominant monetary power, the United States (U.S.), had a great many resources that might be used to launch a regime, but the administrations were still much too vulnerable to domestic political fallout from attempts at bearing the burden of leadership. Nations found themselves inextricably mired in Nash equilibriums (i.e. mutual defection on the part of all leading powers). Even the great purported success at Bretton Woods would prove a victim of this sovereign posture. No nation was willing to step up to reconstruct an international economy, except for the U.S. This case has been hailed as the archetype of benevolent hegemonic stabilization. But when we look closely at the fundamental agreements among nations, we see that the U.S. built a rather flimsy constitution, leaving itself and other nations many avenues of circumventing the rules and limiting the burden they bore to sustain the regime. This explains why the regime itself never really worked as it was intended, and even in its short effective life (1958–​1971) faced a great deal of turbulence. After the demise of Bretton Woods, international monetary relations took a pernicious turn. The U.S., as the dominant monetary power, shifted from a policy of regime support to one of extortion. The weakening state of the American economy and the nation’s international political burden in fighting the Cold War caused the U.S. to aggressively and unapologetically shape international rules so as to benefit themselves. In these iterations of the ongoing Prisoner’s Dilemma game, the U.S. placed itself squarely in the role of free rider (i.e. pursued its own parochial macroeconomic trajectories), while forcing other leading monetary powers to bear the costs of adjustment necessary to preserve exchange-​rate targets and investment flows. All three of the major international conferences after Bretton Woods (Smithsonian, Plaza and Louvre) were precisely such arrangements. And of course, as regimes built upon the abdication of hegemonic accommodations, they failed abruptly. The system that emerged after the failures of the Smithsonian agreement cast the world, with temporary interludes at Plaza and Louvre, into a non-​ system where no international regime governing monetary relations emerged. In fact, so daunting was the shadow of the guardian state that nations became resigned to the fact that international and national economic goals could never be fully integrated. After Louvre, nations basically agreed that they could not and should not attempt to build ambitious international monetary agreements. In a sense, over the past century and one half, democracy ultimately delivered what we could call an international paradox of cooperation. While democracy itself encourages nations to pursue their foreign relations in a fair and equitable manner, and hence cooperate with one another in creating sustainable regimes, the protective posture that democracy imparts onto its leaders indeed makes effective cooperation impossible. In the final analysis and in terms of

4 Introduction international monetary cooperation, short of monetary union with the hardest of rules, the best that can be hoped for are agreements which provide enough flexibility to allow nations to protect domestic economic priorities, while trying to preserve enough international stability to muddle along. In other words, the best we may be able to do are flawed arrangements that can deliver international and domestic economic outcomes that somewhat satisfice. The theoretical lessons of this book also cast monetary hegemony glaringly into the limelight. The track record of hegemonic behavior suggests that dominant monetary actors never lost sight of their own economic priorities in these diplomatic games. Hence, there was little evidence of benign or beneficent hegemony. If anything, the scarred landscape showed malign intention or at best parsimonious support. All nations were in the game for themselves. But the conventional belief that the world required a preponderant power to deliver a sustainable set of rules to order monetary relations proved not to be true. The true necessary condition for regime building was cooperation among leading actors. The cases demonstrate that void of such collective support, no single nation had the resources to stabilize unilaterally. In all such cases analyzed in this book, simple leadership could have delivered viable regimes if the leaders were able to get others to cooperate. Hence, it was never about the resources of dominant actors, but their ability to coax and convince others into joining a viable arrangement.

Introducing the book Rumors of the impending death of states and nationalism are greatly exaggerated. It is very easy to pen such platitudes in an era of rising nationalism and rightist politics in the developed world after the financial meltdown in the years following 2008. In fact, it might seem almost faddish to indulge in a recurring theme in modern historiography about the battle between markets and states for supremacy in the global political economy. The globalist pundits are prepared to inveigh against visions of an “archaic age” of nativism and empires whenever the times are favorable to their universalist rhymes. Globalists have embraced the rise of multinational corporations and other non-​state actors that have populated the international landscape with a new pluralistic demographic. The so-​called “new anarchy,” singing the familiar refrain from Vernon’s (1971) landmark work on sovereignty at bay from the early 1970s, has undermined what was a clear hierarchy in the international system headed by states and fueled by the fervor of patriotic sentiments (Cerny 2010). Like Hobbesian anarchy, the demography is much flatter now with non-​state actors challenging the primacy of states.The feeling has been buoyed with stories of a global information technology industry that has connected the world. The Davos meetings and monetary union in Europe have enhanced the volume of the choir evermore, so much so that some have even questioned the resilience of a national identity. Friedman’s (2005) Flat Earth captures this emphasis on the growing irrelevance of the geographic understandings of human identity. Globalization 3.0 has gone

Introduction  5 beyond the multinational challenge to the nation state and has compressed the hierarchy to include the average Joe who owns a modem. Indeed, the proposed nationalistic anomie mirrors a question that was coined by Reich (1990) in the 1990s “Who Is Us?”Yet the irredentism after the breakup of the Soviet Union, the backlash against globalization marshaled on the shoulders of the financial fallout after 2008 and the populist movements against inequality and capitalism have risen to drown out much of the neoliberal cacophony and replaced it with a resolute song which mirrors Kapstein’s (1991/​1992) response to Reich (1990) in the 1990s, but resonates strongly today, that is, “We Are Us.” For theses statists, it is still a world of nations, or at the very least civilizations (Huntington 1996). There is still purchase in the idea that people identify as collectives and those collectives have some territorial and administrative foundations. For them, the flat Earth had a brief half-​life before Trump’s “America First” and the rise of rightist populism in Europe restored the hierarchy. The debate between globalists and statists has very deep roots in history, which goes back to as far as the existence of religion. As religion itself carried the first seeds of a phenomenon that challenged the supremacy of human collectives, there was something universal that was greater than the earthly associations of mere mortals. And concomitantly, the battle between states and non-​state actors runs the gamut of history: ever since monarchs found themselves in a battle to control the wealth that circulated within and across their borders. This book is not for the purpose of tipping the scales in this debate. Only a person lost in obtusely intellectual orthodoxy would deny that both forces of disintegration and integration within human collectivities known as nation-​ states are powerful forces that have manifested themselves throughout history. And perhaps only an unreasonable person would argue that the battle will resolve itself anytime soon. Hence, we must admit that the battle has manifested itself in one way or another throughout recorded history and will rage on. Rather than looking at it as a conflict heading toward a resolution, perhaps a more useful possibility would be to look it as a reciprocal dynamic that feeds on itself. The interaction is one of challenge and response, with each phenomenon reacting to inroads made by the other.This would be closer to a bi-​evolutionary process where each feeds the growth of the other. It is an interesting, if strange, case of discordant symbiosis whereby an inherent tension in the relationship serves to reinforce the contesting parties. Ongoing challenges reap great rewards in the development of each of the competitors. Quite simply, where would markets be without the growth of powerful state apparti that support private property and trade. Obversely, how strong and sustainable would these strong state apparati be without the challenges that markets create against the authority of states. It may be the case that pathological Neoliberals and Realists have much more to bond over than what they think. Like the very interactions of markets and states, these visionaries are more frenemies than enemies. While this book does not inveigh against one side or the other, it seeks to underscore the proposition that sentiments for the collective have always existed and will always exist. But it is argued that in terms of the international

6 Introduction political economy a structural change occurred at the turn of the 20th century that made nationalist postures all the stronger and that this represented a major step-​level change in international and domestic politics. With the rise of mass suffrage, neither domestic nor international politics would ever be the same again. As the masses gained the right to vote, so did this electoral pressure lead leaders and politicians to be more responsive to these mass needs. Hence, with suffrage came the rise of the guardian state. While before the 20th century political leaders could be somewhat aloof to the conditions of economic growth and employment within their nations, they could no longer do so in the new age. In a sense suffrage empowered the rise of a prosperous society (i.e. a principal goal of national leaders became some minimum living standard for their populations), and in turn this led to the rise of the guardian state (i.e. state apparti that guarded national prosperity).2 This changed the macroeconomic landscape across democracies and set international economic relations into a new era.The guardian state launched the age of the new macroeconomy: larger government, deficit spending, higher inflation, greater growth, employment protection and the new business cycle (i.e. recessions were now rare). Concomitantly, international economic relations were placed upon a more pernicious track, with the new guardian state making international economic cooperation more difficult as a result of its need to protect domestic economic sovereignty. Surely, it would be too easy to follow these propositions with the logical conclusion that this turned states in a more nationalist or protectionist posture, hence positioning the arguments in this book in a particular academic niche in international political economy (i.e. pro-​mercantilist). And while a great deal of the policy manifestations of the guardian state would certainly be of a mercantilist nature, they certainly are not exclusively mercantilist. In fact, the guardian state has been equally perspicacious in seizing opportunities for growth and employment through greater liberalization, and in some cases with the rise of sovereign wealth funds and profit-​making central banking there has been a marketization of the state (Cerny 2010 and Frasher 2014). The argument in this book presents an alternative to traditional explanations of economics processes in which scholars have studied changes very narrowly and have conceived of them as independent from one another. While countless studies have talked about the changes in individual macroeconomic processes as well as changes in the various international economic relations across the past century, few have looked at these processes in a unifying light.3 In other words, much has been said about the trees, but far less has been said about the forest.This book looks at these processes and relations as comprising “economic plates.” According to the theory of plate tectonics, certain aggregations of the planet’s surface occupy singular substructures that move according to underlying geologic conditions. While looking at component parts of the whole plate individually is important in its own right, it is also important to understand how pervasive underlying forces shape the entire aggregate. So too in economics, economic processes and relations can be seen as occupying such plates themselves: that is, phenomena that are fundamentally linked so that they

Introduction  7 can be influenced in toto. Macroeconomic processes and international economic relations do occupy the same fundamental plate, and the plate has made significant shifts over the past century as a result of strong underlying forces in the form of changing orientations regarding people’s economic fates and governments’ relation with the market. In the same way as this book looks at major structural changes in the economic relations among advanced industrialized democracies, it looks at the major causal factor as emanating from a second-​image perspective (i.e. the level of domestic politics). This perspective looks at major political changes that all of these nations share with varying degrees, and these changes have caused a greater structural shift in their domestic economies as well as their economic relations. This level of analysis differs substantially from that which has prevailed in the study of international relations in the post-​war period, especially in recent years where global changes have been seen as emanating from a more structural perspective, that is, greater international forces rather than the cumulative effects of changes within the domestic societies of the individual nations.This structural perspective is a manifestation of the dominant paradigm in the study of international relations: Realism. The Realist perspective is strongly embedded in a structural perspective because it is premised on a vision that nations are black boxes and that they react rationally to the environments in which they find themselves. In this respect, greater trends in the global political economy emanate from reactions by similar actors. The individual processes within each nation do not manifest themselves in a greater constellation of relations. Although the power of a second-​image analysis of global relations has been highlighted since the late 1970s, still the dominant level of analysis in world politics has remained structural because Realism has retained its intellectual status (Katzenstein 1978, 1985 and Maliniak et al. 2012). In the study of international political economy specifically, structural theories based on hegemony have been the most prevalent explanations of economic systems since the 1970s. In this application, large nations enjoying political and economic primacy have been seen as crucial in guiding the international agenda. Each hegemon acts according to similar models of leadership based on motives that are determined by its position in the system rather than domestic processes dictating foreign policies. Moreover, levels of analysis have been quite neglected as launching points for teaching and scholarship, relative to issues based or paradigmatic analysis since levels analysis reached its heyday with the work of Graham Allison in the 1970s (Allison 1971 and Maliniak et al. 2012).4 In the new millennium, analysis of international politics has continued a structural legacy buttressed by the power of globalization. In this respect, scholars have looked even more at global systemic processes as dominant in dictating state actions in the international theater (Oatley 2011). But more recently the rise of rightist populism has sent shockwaves into both the popular press and scholarly circles. The agenda on the populist right has raised its head in a stark and visceral manner, causing domestic politics to come to the fore as an influential force in foreign policy.

8 Introduction

Methodology and theoretical contributions The methodology selected for assessing the impact of the guardian state on monetary diplomacy is principally that of historical case study. Given the fact that such methodologies are often limited in their inferential power (i.e. representativeness) due to low-​n settings and sampling constraints, the very best one may aspire to is descriptive power given the richness of detail in the analysis of the relationship between the principal variables, that is, theory illuminated by history or descriptive inference (King, Keohane and Verba 1994; Gerring 1994; and George and Bennett 2005). But several things about the case studies in this book raise the inferential value of the analyses. First, the cases selected represent the most important diplomatic conferences on monetary issues in the world between 1867 and the present. In fact they represent the most widespread encounters in terms of geographic participation.5 These represent case studies on a variety of monetary issues, with a variety of participants in a variety of historical periods. Hence, the sources of observation are varied and many. More specifically, there are enough cross-​unit reference points to at least diminish the inferential “boundedness” normally present in the case-study method. Second, the importance of the conferences makes them an especially important laboratory to assess the role and influence of the guardian state on diplomatic outcomes. Such great encounters carry such large consequences for the participants that one would expect to see the mobilization of the entirety of the diplomatic force of each participant.This is akin to judging the quality of a team based on how they perform in the “big games.” In such games, we get a clear sense of the relative impact of all the forces brought to bear on the contests. Indeed, it is in such encounters that we expect important processes to leave a large footprint. In this respect, the inferential power of the cases is enhanced by a special importance based on crucial-case logic: cases that are especially robust statements about relationships among variables.Third, these conferences tended to be encounters in which all or almost all leading economic powers took place. This produces outcomes that represent a convergence of international power brokers, and thus produces a good glimpse into phenomena which influenced global relations on a large scale (Eckstein 1975; Gerring 2004, p. 347; and King, Keohane and Verba 1994, pp. 209–​212). Fourth, the processes that link the guarding state to diplomatic outcomes are carefully traced using thick description. This detailed “process-​tracing” raises the inferential power of the theory given the careful scrutiny of the modes of interaction among the principal variables that is undertaken across the different cases. As Eckstein (1975, p. 122) avers, carefully done case studies can make up in analytical “depth” what they lack in observational frequency. Van Evera (1996, pp. 65, 66) underscores how even a with single case study “process tracing often offers strong tests of a theory” and Gerring (2004, p. 343) suggests that such details can be methodologically “hierarchical” in yielding important inferential observations (Eckstein 1975, p. 122; Mahoney 2015; King, Keohane

Introduction  9 and Verba 1994, pp. 85, 86; Collier et al. 2010; and George and Bennett 2005, pp. 205–​232). Fifth, the analysis is one of structured-​focused comparison in evaluating the impact of the guardian state on diplomatic outcomes. Such a congruence in the analysis of the relevant variables across cases also enhances the inferential value in conducting case studies (George and McKeown 1985; George and Bennett 2005, pp. 181–​204; and King, Keohane and Verba 1994, p. 45). Moreover, it should be noted that it is the purpose of this analysis to trace the manifestation of a guardian orientation on monetary diplomacy across the modern period of history: from 1867 to the present. It is not the purpose of this analysis to discover historical nuances or revise prevailing historical interpretations of the cases scrutinized. It is for this reason that this study uses principally secondary texts to understand the history of the guardian state and the prosperous society in the context of monetary diplomacy.6 It is more important to understand the precise path of events that led to a prosperous society than to uncover nuances in diplomatic or monetary history. In this respect, the emphasis is on capturing the precision of the existing historical chronicle rather than changing the chronical. This analysis looks very specifically at the footprint of the guardian state on monetary diplomacy. Clearly it is not the only systematic and non-​systematic force bearing on diplomatic outcomes and monetary relations throughout history, but there is value in looking only at one footprint. First, it helps us understand the very particular anatomy of how the guardian policy orientation impacts the monetary relations. That in itself has both theoretical and normative value, as it is most certainly likely that such a broad policy orientation has had important effects on all economic relations throughout modern history. This makes the footprint all the more important to study as a formative force in the evolution of the modern international political economy. While the greater part of this book only assesses the impact of the guardian state on monetary diplomatic outcomes, it is the contention of the author that the guardian state has left its imprint on all major international economic relations. In this respect, the problem of the intertwining of cases and theory development is mitigated by the general application of the logic of the guardian state to all major international economic issues.7 Second, to use a medical analogy, no single disease can be fully isolated and cured independently of the specific physiology of the patient. All other factors about how a human body works must be taken into account when considering how a disease infects the host. In some cases, the physiology of a person makes a disease a non-​factor. For example, people with strong specific and innate antibodies are far less susceptible to the more serious effects of certain pathogens. Conversely, even a modest number of pathogens could seriously affect a person with few countervailing antibodies. And of course there are an innumerable amount of other physiological factors that determine the resistance to specific diseases: age, blood pressure, all the elements in a comprehensive metabolic

10 Introduction panel, etc. The footprint of the guardian state, in this respect, can also shed light on other factors that shape monetary relations. How the guardian orientation of decision-​makers interacts with other factors tells us not only more about the orientation itself, but also sheds light on the other formative processes with which it interacts. In some cases, they reinforce one another, and in others they may conflict. In this respect, the analytical vehicle of the guardian state can serve as a reagent in clarifying the interaction of forces leading to specific diplomatic outcomes; hence, we can get a better glimpse of how different purported drivers of monetary relations across the levels of analysis function in shaping the very issue itself. Data in Chapter 1 look at the most democratic nations across the period 1880 to the present, hence bringing up a question of selection on the dependent variables of interest. There is however variation in the dependent and independent variables of interest longitudinally (growing democratization and policies which guard growth and employment); hence, the problem of selecting on the dependent variable (looking only at leading democracies) is mitigated. This is because the level of democratization changed as enfranchisement expanded across this long time period. And with this change we see changes in the robustness of a guardian policy orientation. The analysis is longitudinal over a number of nations, so there is a comparative aspect as well. A more robust causal statement could be made by looking at the cross-​sectional macroeconomic performance of both democracies and autocracies across this period. Problems of data availability, however, restrict the analysis to leading democracies because the macroeconomic variables of interest are only available for these nations for such a long time span. Also, reliability is not perfect even for the data of these nations, and it is quite unreliable for other nations ruled by autocratic regimes. Hence, the best we can do if we want to look at such a long period is to restrict our analysis to similar nations in terms of governance. Of course, an analysis could look at different types of nations in a more contemporary period, but it would not be viable for anything before World War II. Notwithstanding, the present selection nonetheless limits the inferential power of this analysis, but even so, at a minimum this analysis would serve a methodological function of what King, Verba and Keohane call “a plausibility probe” (King, Keohane and Verba 1994, p. 209). Moreover, this book provides normative value-​added to the historical and theoretical analyses. One major consequence of the guardian orientation on the part of decision-​makers is to generate a tendency toward mercantilism in many policy contexts, but not necessarily always.To the extent that it does so robustly and in some cases in extremum, it is important to understand ways of limiting the more deleterious manifestations of the guardian disposition (i.e. avoiding trade wars and beggar-​thy-​neighbor practices that are ultimately pernicious). This is not to propose a vindication of unrestrained market economies, but only to explore ways of maintaining some stability in economic relations that are not mutually destructive yet not sacrificial of domestic growth and employment for the sake of the sanctity of some sort of international free-​market regime. On

Introduction  11 the other hand, guardian states may indeed assume some equilibrium that casts relations in too unstrained a manner (i.e. with fewer safeguards against domestic unemployment in specific sectors). In this case, decision-​makers would want to contemplate and develop weapons against the advent of too liberal an economic order. The analysis in Chapter 1 on the rise and impact of the guardian state on the macroeconomies of leading democracies is principally quantitative. Although a quantitative method of analysis has not been selected for evaluating the diplomatic outcomes from the monetary conferences in this particular study, the theoretical logic here is sufficiently specified and its historical manifestations are sufficiently “traced” such that testable hypotheses can be generated and quantitative measures could be constructed to represent the relevant variables, thus creating possibilities for extensive empirical evaluation of the impact of the guardian state. In Chapter 1, a quantitative analysis of the impact of the guardian state on the macroeconomies of seven leading democracies from 1880 to 2012 is undertaken. Since I am interested in doing a temporally extended analysis of the guardian state, this method produces more compelling data because the nations selected are nations whose macroeconomic data were most reliable (but of course never perfectly reliable as we know of any long series that runs from the 19th century). Also these were the best managed economies, which means we would expect that macroeconomic policy was sufficiently effective to respond to important political exigencies, a necessary condition for a prosperous imperative to function. This book leaves it to other researchers to do a fuller statistical analysis over a shorter period of time, which would include non-​democracies as well.The period after World War II yields more reliable data for a larger sample of nations. Moreover, the mode of analysis scrutinizes tables of macroeconomic data and does not do econometric tests on the data. Since the data represent time series, doing econometric analysis on strictly levels of the data could be fraught with distortions due to problems of heteroskedasticity and non-​ stationarities that plague time series tests. But to minimize such problems, data transformations would have to be done to the series (taking first differences or logs of first differences), but these transformations distort the data also. Therefore, even tests done by expert econometricians would be questionable from an inferential perspective. We leave such ventures to social scientists and statisticians who specialize in dealing with these forms of analysis.8 With respect to international relations theory the contributions of this book bring the domestic level of analysis squarely back into the fore of foreign policy analysis. This level of analysis has been continually trounced by newer visions because it represented a traditional platform into foreign policy, that is, old style institutional foreign policy analysis. In fact, international relations studies were long subsumed under general studies of political science and government. More elegant and purely theoretical constructions in other levels such as structural theories and decision-​making theories left the domestic level lagging. Institutional approaches that were nicely compatible with domestic politics were increasingly displaced by formal modeling and quantitative approaches.

12 Introduction But domestic politics over the past decade has gained renewed attention. This may be a natural function of the political upheaval of right wing populism in the late teens of the 21st century. Indeed, many of the elegant theories of world systems and sophisticated theories of decisional making failed miserably in explaining the power of popular political movements that made domestic political priorities disrupt international regimes. It was neither the individual decision-​makers nor dominant structural factors that have been driving foreign policy in this period. Rather it has been the preponderance of the political voice of disgruntled majorities across nations. Neither the hegemony of the U.S. nor the perspicacity of leading politicians could stave off the assault on these regimes. Studying the flow of domestic politics has been the game in this period. This study aims to shine an analytical light on the domestic level through an analysis of the manifestations of these processes (in this case the public’s demand for prosperity within their nations) in a particular issue over the course of more than 100 years. In a more specific context, this book fills a gap in the history of monetary relations. The study of the history of monetary relations has been somewhat split between political analysts and scientists who have approached the subject with a monocausal vision, or historians and economists who have more broadly delved into the subject without the kind of inductive political depth that contributes extensively to the development of IR theory. In the first case, the theoretical contributions are limited because the scope of theoretical engagement is somewhat reductionist. In the latter case, the practitioners are not principally concerned with political science, so the engagement with IR theory is limited due to the lack of significant attention.9 This study tries to conjoin the detailed chronicling of monetary diplomacy with significant inferential statements about IR theories broadly considered.While the mode of analysis in this study is analytically reductionist within the domestic level of analysis (i.e. focused on manifestations of popular domestic pressures), the analysis also serves as foil for assessing the relative power of various causal factors across the levels of analysis. Hence, it does not propose a purely monocausal explanation of diplomatic outcomes. While I believe these domestic pressures were highly influential in driving monetary diplomacy across time, I also admit that they were not the only game in town and that other factors could be equally, if not more, compelling across the cases considered. While I believe that my horse is a fast one, I am interested in the entire race. Hence, this book uses a particular lens to throw light on the power of relative factors affecting the ebbs and flow of monetary diplomacy. Finally, the theoretical contributions in this book add a greater specificity to a very important explanation of the course of monetary relations over the past with respect to the rise of embedded liberalism as a dominant policy orientation. Essentially, the guardian state has functioned in a policy space founded on an embedded liberal orientation. Polanyi ([1944]1957) in his landmark book The Great Transformation first identified fundamental changes in policy orientations from the 19th to the 20th century. Ruggie (1982) followed up

Introduction  13 with an application to specific foreign economic policy orientations after World War I. Polanyi introduced a panoply of factors as building blocks of the emergent embedded policy orientation that transformed liberal political economies across the world from arrangements founded on strict market principles to those that fused markets and social purpose. But in Polanyi, the process by which these factors translated into the actual policymaking is rather murky. The premise is that somehow changes in norms and institutions led to change among elites. This book proposes a well-​specified idea of how the rise of social pressures for the role of the state as an economic guardian turned into policy outcomes and state behavior. It contemplates a process by which the rise in political agency among the most vulnerable economic groups in society led to pressures in democratic systems for political entrepreneurs to deliver prosperity in order to win elections. Also this book goes beyond both authors by looking at the manifestations of this guardian process within a more detailed context of the mirco-​developments in monetary diplomacy over a century and one-​ half. And in doing so it gives a far clearer picture of the impact of a guardian ideology, and this picture carries more implications for other issue areas.

Plan of the book The book is composed of seven chapters. Chapter 1 analyzes the rise of the guardian state and how it changed the macroeconomic landscape across nations. Chapters 2–​6 analyze the manifestations of the guardian state in the major monetary conferences of the modern period. Chapter 2 analyzes the monetary conferences of 1867, 1878, 1881 and 1892. Chapter 3 analyzes the interwar conferences at Genoa in 1922 and London in 1933. Chapter 4 analyzes Bretton Woods. Chapter 5 looks at the Smithsonian Agreement of 1971. Chapter 6 analyzes the negotiations leading to the Plaza Accord of 1985 and Louvre Accords of 1987, as well as the years beyond. Chapter 7 presents theoretical implications generated by the case studies.

Notes 1 The Prisoner’s Dilemma scenario (inspired by cases where district attorneys present suspected criminal partners with incentives to betray one another and turn state’s evidence on each other) is a game-​theoretic strategic situation in which actors face a challenge in cooperating to deliver some favorable group outcome. The challenge inheres in an incentive structure that encourages each of the actors in the game to take advantage of the good will of other actors who are willing to cooperate to provide some collective good. Given the incentives that actors face, each is encouraged to free ride on the cooperation of others. The hope for each actor is that others will stand up and bear the costs of delivering the public good, while it sits back and enjoys the public good provided by the cooperating actors without bearing any of the costs itself. But the dilemma here is that each actor faces the same incentives to free ride, and hence these games will often end up where everybody defects and no public good is delivered. This outcome (called the Nash equilibrium after John Nash) is to

14 Introduction everybody’s disadvantage. In the context of monetary diplomacy, nations at the major negotiations in history faced a continuing incentive to limit the sacrifices they would make in their domestic economies, while hoping that some other nations would stand up and make enough sacrifices to create a stable international monetary regime. An especially good and generally accessible explanation of the Prisoner’s Dilemma can be found in Axelrod (1984). 2 Since electoral politics drives the guardian state, it is certainly the case that such a phenomenon will function more strongly in democracies. Be that as it may, it is also the case that the rise of a connected world places great pressure on autocrats to deliver the bacon as well. Hence, this argument pertains, albeit unevenly, to regimes across the globe today. 3 Most economists that have considered a broad range of macroeconomic changes have tended to look at economic changes as autonomous. See, for example, Meltzer and Robinson (1989). 4 Domestic level analysis in international political economy (IPE) has nonetheless been vigorous, even if not dominant in the past 50 years. I refer the readers to Choudoin et al. (2015) for a fuller chronicle of tension between structural and domestic level explanations in IPE. 5 These monetary negotiations are the following: the International Monetary Conferences of 1867, 1878, 1881 and 1892; the Genoa Conference in 1922; the London Conference in 1933, the Bretton Woods negotiations in the 1940s, the Smithsonian negotiations in the 1970s and the Louvre and Plaza negotiations in the 1980s with an extended analysis into their aftermath. 6 I have relied largely on primary sources in the form of government documents in the period before 1914 because few secondary sources exist on the monetary conferences of 1867, 1878, 1882 and 1892. I have used both primary and secondary evidence in a somewhat less skewed proportion in the case studies after 1892. 7 On this issue of intertwining, see Mahoney (2015). While this book will not delve into the pervasiveness of guardianship across issues in international political economy, a brief survey has been presented in Gallarotti (2000). 8 On these methodological issues of causality and variable selection bias, see King, Keohane and Verba (1994, pp. 129–​149). An excellent source of historical macroeconomic data that is most worthy of inspection is provided in Bordo and Meissner (2017). 9 Examples of the former are Odell (1982), Block (1982) and Gowa (1983); and examples of the latter are Kindleberger (1973) and James (1996).

1  The rise of the guardian state and structural change in the global political economy

All economic systems are in some important way endogenous, that is, economic relations are embedded in some greater constellation of social relations.1 Hence, understanding the nature of and changes in economic relations cannot be done in full measure by studying the economic outcomes in and of themselves alone. High growth may be as much a result of “a will to grow” than of technological shocks, human capital formation or cyclical changes in inventories. While the proximate cause may be deficit spending, a high disposition toward growth (because a society’s values are directed toward maintaining employment) may in fact be the catalyst for government spending. Such values may also throw economic outcomes into a more inflationary path. Economic outcomes are just one dimension of social outcomes, which in turn are driven by prevailing beliefs and ideas about what particular goals societies aspire to and/​or the thought processes which condition behavior among the mass of economic actors in those societies. Within the greater study of social science, both sociologists and political scientists have elaborately discussed the link between ideas and economic actions. The idea of looking at the relationship between economics and ideas goes as far back as the Marxian link between prevailing class ideologies and the economic landscape. Sociologists such as Parsons and Smelser (1984) have explored this nexus as the integration of social and economic theory. Political scientists Krasner (1983) and Haas (1992) have talked about epistemic communities and regimes: that is, actual outcomes are explained by rules or norms which decision-​makers and larger groups of individuals adhere to. Economists have explored the microeconomic foundations of macroeconomics by assessing the broader economic manifestations of decision-​making under uncertainty, adaptive behavior, self-​fulfilling forecasts and rational expectations.2 In terms of economic outcomes, significant discussion of the link between ideologies and economics has come under the rubric of the cultural foundations of economic growth and development.3 Ideas, alone, however, are insufficient to determine economic outcomes. They require the help of politics. Ideas invariably impact the operation of political markets, which themselves reinforce the influence of prevailing economic ideologies. While ideologies can carry autonomous influence, they must ultimately be politically reinforced if they are to significantly shape policy

16  The rise of the guardian state and, consequently, outcomes. If politicians do not face incentives to translate prevailing ideas into law or policy, then the ideas themselves will cast no institutional shadow and therefore have less of an impact on economic outcomes. Fundamentally, there must be no serious impediments to the supply of and demand for economic outcomes consistent with prevailing ideas. On the supply side, policymakers must be able to supply the kinds of policies that are demanded by society at large. Supply must be competitive (i.e. society should have a choice among potential suppliers, in other words a democratic supply of government output), otherwise policies may be restricted. This does not mean the existence of perfect political markets, only that supply and demand for economic outcomes remain unimpaired. In fact, once supply and demand effects are translated into some definitive electoral imperative regarding economic outcomes, we would expect the regime in power or coming into power to use the state’s monopoly over policy to effect the desired outcomes. Obviously, democracy would appear to be the system of government most conducive to political markets that reinforce prevailing ideologies since such a system exhibits the fewest impediments to the smooth functioning of political demand and supply.4 The demanders of these economic outcomes will be organized groups. These groups may manifest their political activity as a class, some alliance of specific classes or a more amorphous group (i.e. that has no visible class identity) that is animated by specific issues or goals.5 The policies may reflect complete victory by one group (e.g. the classical Marxist outcome of the dominant ideas in society being the ideas of the dominant class) or a compromise among competing groups. In this way the state apparatus (i.e. the institutional manifestations of these policy orientations) can serve specific functions in the service of political interest groups: to assure the primacy of the interests of one specific group, assure the primacy of the interests of an alliance of groups against other alliances or specific groups or perform a harmonizing function for the political struggle by providing points of convergence for the major competing groups. In summary, ideas and politics do not exist independently of one another. Rather than forming disparate processes that somehow converge to impact on policy styles and economic outcomes, the two represent a set of forces that are systematically linked, and prevailing policy styles and consequent economic outcomes are manifestations of this systematic relation.

Market society and the night watchman state: the 19th century and the classical liberal consensus Karl Polanyi in The Great Transformation (1957, p. 250) called the 19th century a “market society” with respect to prevailing economic ideologies of the time. The market society, for Polanyi, resulted from the intersection of two institutions that dominated the 19th century: the liberal state and a self-​ regulating market economy. The liberal state represented decision-​ makers

The rise of the guardian state  17 who were driven by principles of economic liberalism, and as a consequence supported the institutions necessary to maintain a market economy. This “conventional wisdom” of the 19th century, as Galbraith (1970, p. 38) referred to it, was very much steeped in a classical and neoclassical vision of economics with respect to its faith in markets. As long as some level of competition could be maintained, the market was capable of providing sufficient wealth without systematic intervention by states. This reflected a deep faith in the ability of supply and demand forces, working through a healthy price mechanism, to clear markets and restore equilibrium. Since there were no fundamental flaws in the competitive market mechanism, it was not something anybody needed to manage on a large scale. Instead, concerns were much more of a microeconomic nature. While the macroeconomy was self-​sufficient and could autonomously produce desirable outcomes, it was not always the case that each component of the economy shared the same luxury. Sometimes specific sectors did not function efficiently, either because of a lack of competition or because of stochastic bottlenecks. In such cases there were pockets of allocative inefficiency that required tinkering. In other words, macroeconomic outcomes were neither targeted nor even conceived as a goal of policy, rather the emphasis was on preserving the foundations of a competitive economy. The economic role of the state that emerged in this period was consistent with this micro-​concern with the economy: like the night watchman, the state was in the business of preventing localized disturbances (e.g. antitrust) to the system, but not involved in ongoing management of the economy.6 If markets were capable of providing economic welfare, and markets were not seriously impaired, then the prevailing classical liberal consensus dictated a rather passive vision of macroeconomic outcomes. More precisely, the liberal ideology dictated a high level of tolerance of macroeconomic variations. Prices, employment and growth were merely residual properties of a system over which there was no, and should not be, political control. Like the weather, certain inclement outcomes (recession) were to be accepted, with the hope that fairer conditions (i.e. prosperity) would soon follow. As Hawtrey (1932, p. 300) put it, in 19th century society “the trade cycle was accepted with a spirit of fatalism.” That such toleration existed meant that political markets for macroeconomic outcomes which provided prosperity were significantly underdeveloped. Essentially, this period was marked by a disjuncture between politics and economics, and this meant that no strong economic electoral imperative emerged. On the demand side, toleration dampened the demand for prosperity. This ideological toleration interacted with factors defining the level of democratic development in the industrially advanced world to restrain demand even more. Potential demanders of prosperity in the 19th century were fewer. Groups (in this case economic classes) which bore the main economic burden of recession were not as politically empowered as they would become in the 20th century. Labor parties were not strong in national legislatures, the political strength of unions was underdeveloped and restricted suffrage meant that lower income

18  The rise of the guardian state groups especially burdened by unemployment and recession did not yet have the political power to realize their preferences.7 On the supply side, since politicians were very much part of their age ideologically, there was an autonomous incentive not to intervene in the macroeconomy to relieve the economic burdens of recession and poverty. Pre-​ Keynesian ideas of economics were prevalent among politicians and their economic functionaries in government. There was no independent philosophical lexicon among these elites to themselves try and manage the macroeconomy. The macroeconomic detachment of government was an ideological legacy long developed in human history. There were few alternatives. This underdeveloped political market for prosperity meant that the state did not have to intervene heavily in the economy. Consequently, it was not necessary for the state to fully develop the political levers necessary to manage the macroeconomy (i.e., controlling the money supply and manipulating the budget). This had significant consequences for the state’s relation to the macroeconomy. For one, there was no need to monopolize the money supply. Second, the budget was not heavily politicized with respect to managing the economy. In this period it would be generous to call the management of the money supply in the industrially developed world even semi-​public. Central banks as a rule did not have monopoly over note issue and the political control over the operations of these banks was far underdeveloped compared to the 20th century. Central banks had strong profit motives given that they were publicly owned and the shareholders had strong expectations in that direction. The private nature of central banking even reinforced an already existing hard-​money orthodoxy. Polanyi (1957, p. 24) notes how this period regarded “stable money as the supreme need of human society.” In fact, monetary authorities tended to see depreciating currencies as a “national disgrace.” That profit-​oriented and responsible private banking would be conterminous with a stable money supply is fairly straightforward. In a regime in which the issue of notes was competitive, any bank issuing notes as a normal function of its private banking activities would absolutely have a strong incentive to refrain from issuing those notes in an inflationary manner.8 If notes could not be covered by sufficient specie, the result would be a flight from its notes which could endanger the bank’s very solvency. Since all banks of issue (including central banks) were strongly compelled by the profit motive, there was a tendency toward a stable money supply. And this of course conformed to the prevailing monetary orthodoxy against inflation.9 Both the ideology of stable money and the private elements of central banking were allowed to persist because the anti-​interventionist bias of prevailing political markets produced few incentives to control the money supply. Since policymakers did not pay a high price for failing to provide prosperity, it was not necessary for them to use their monopoly over state institutions to create levers by which to generate growth and employment. In other words, states did not have to monopolize the money supply because they did not need to lubricate or even inflate the economy out of a recession in the short run. The political benefits of inflation were far fewer in the 19th century.10

The rise of the guardian state  19 The government budget shared a similar fate during the 19th century. Like inflation, government spending was also strongly configured by a prevailing orthodoxy, in this case one of fiscal prudence, and like inflation it was subject to a similar contingent rule. The rule was one of sound finance which could be violated in certain extraordinary circumstances like war, but in such a case peacetime surpluses would be targeted afterward so as to retire debt generated in war. Otherwise, fiscal orthodoxy in this period drew no distinction between public and private finance. Mueller (1989, p. 295) notes how running a peacetime deficit in the 19th century was considered by the public as an “almost immoral act.” One might say that fiscal policy did not exist insofar as political discretion could be exercised over the budget. The budget, in peacetime, was run by fairly mechanistic rules oriented around the convergence of spending and revenues. This “Gladstonian” fiscal orientation, as Laidler (1987, p. 364) calls it, served to eliminate government spending as a lever with which to influence the macroeconomy. Hence, political control over the budget was at a minimum.This, as in the case of money, conformed to the prevailing ideology of the period. If macroeconomies didn’t have to be inflated out of recession, then neither did they need to be “spent” out of recession. Moreover, since the state was not blamed for poverty, elaborate transfer programs directed toward social insurance and welfare did not need to come into being.11 Government, consequently, did not have to be very large because it didn’t need the resources to engage in the management of aggregate demand to preserve full employment, nor did it have to construct an elaborate welfare structure to abate economic adversity and poverty.The market could provide both, government didn’t have to.12 In summary, the 19th century state did not have to manage the macroeconomy because policymakers were not being held accountable for recession, unemployment and poverty. Such things were acts of nature, not people, and consequently out of the realm of control. In essence, the classical liberal consensus cast a strong shadow over the political institutions of the period. It set the foundations for how the state would relate to the economy. The role of a night watchman state was well configured for the economic demands which laissez-​faire society placed on the state apparatus in this period.13 The state hardly existed as an interventionist force, it never sought to construct political institutions that could serve as levers to control the macroeconomy, and therefore macroeconomic policy barely existed.14 All of this would change significantly in the 20th century, as a new ideology of prosperity and new state apparatus (i.e. the guardian state) would arise to transform the political and economic landscape.

The causal mechanism in the historical transition from market society to the prosperous society: class relations and class conflict in modern capitalism With the end of World War I there arose a new ideology about society and the economy. Polanyi (1957, p. 252) talked of the end of market society. People’s

20  The rise of the guardian state views about their economic fates altered fundamentally, from a passive toleration of macroeconomic outcomes to one that insisted on achieving and maintaining some level of prosperity. Burns (1960, p. 1) describes this new ideology as “the need for and the attainability of economic progress.” The description becomes complete by adding that society was also “entitled” to such progress. The adversity of the market would no longer be tolerated, as the new ideology of prosperity sought to, in Galbraith’s (1970, p. 39) terms, “soften” and “civilize” capitalism. While the market held much promise, it would no longer be left to run its rampant courses, but should be configured to attain some minimum levels of economic well-​being. Hence, the market society of the 19th century was transformed into a new prosperous society.15 The internationalism and market capitalism of the 19th century were transformed into the nationalism and interventionism of the 20th century. According to Ruggie (1982) and Polanyi (1957), classical liberalism gave way to embedded liberalism: a liberal philosophy embedded in socialist-​welfare concerns for growth, employment and redistribution. The major institutional manifestation of this transformation was the demise of the night watchman state and its replacement by the guardian state. The guardian state was a synthesis of the rise of both the welfare state (which provided social safety nets for society) and the interventionist state (state functions and institutions aimed at macroeconomic stabilization for the purpose of maintaining income and employment). The rudiments of the welfare state extend as far back as the 16th century and the Poor Laws. But these seminal forms of welfare laws were decentralized in administration and based more on punishment than on reward. Modern welfare institutions emerged in the 19th century as a result of urbanization and industrialization: the resulting social differentiation and division of labor created a disparity in living conditions, which stimulated a political response.16 Scholars who have logged the chronology of the welfare state have cited various phases in its development. Early activity represented government activism that built on Poor Law traditions. Legislation targeted workman’s compensation as well as support for sickness and old age. The 1930s witnessed the rise of full-​blown programs oriented around social services and mitigating income insecurity. By the 1950s there was a massive expansion in both programs and coverage, such that now all industrially advanced nations covered the four main social risks: accidents, sickness, unemployment and old age. Moreover, social insurance schemes became fully integrated according to a comprehensive concept of social welfare. The interventionist state more vigorously manifested itself after the turn of the century as macroeconomic stabilization as a systematic policy goal had its roots in the decades just prior to World War I, and macroeconomic stabilization based on long-​term planning had its roots in the Great Depression of the 1930s.17 The interventionist policy orientation was given systematic form, theoretical identity and intellectual legitimacy by the Keynesian revolution that took hold toward the end of the Great Depression years. With interventionism now fully integrated with a welfare orientation, the guardian state arose as the

The rise of the guardian state  21 defender of the poor, the needy (sick and old) and the worker.18 The transformation in the functions of the state from the 19th century was captured in Roosevelt’s definition of the New Deal: “plain English for a changed concept of the duty and responsibility of government toward economic life.”19 There were a number of processes (e.g. critical events, economic ideologies and policy orientations) and actors (e.g. subordinate economic classes, politicians reacting to changes in political markets, political parties and unions) that collectively effected the historical transition from market society to the prosperous society. But rather than looking at the causal mechanism as a set of converging factors (i.e. compelling forces that occurred contemporaneously), there is in fact a systematic relation between these processes and actors which represents a visible causal mechanism that explains the historical transition from market society and its night watchman state to the prosperous society and its guardian state. The causal mechanism is driven by class relations and class conflict in modern capitalism. In short, the rise of labor in modern capitalism (in numbers and organization [unions]) was a catalyst for political changes (the political empowerment of subordinate classes [labor and the middle class]). Political empowerment gave these classes the opportunity to translate their own particular ideologies (strongly driven by economic insecurity) into policy (i.e. the guardian state). The new policy orientation was consolidated through compromise with super-​ordinate classes that found many desirable qualities in the guardian state. Critical events such as war and depression generated economic and political environments that further compounded this transformation. Advancing capitalism in the 19th century served to shift the balance of power among classes. Industrialization created a larger labor force, and the larger number was accompanied by greater organization through unions. Modernization made this rising mass more educated, informed and mobile, and hence more demanding and more formidable adversaries for the bourgeoisie.20 This growing proletariat began taking on the bourgeoisie on two fronts: direct confrontation in the work environment (the strike and union initiatives) and indirect confrontation (through competition in the political marketplace).21 As empowerment through unionization came before actual political empowerment (unionization was well advanced far before the emergence of Leftist parties and the extension of suffrage to subordinate classes), the proletariat resorted more to direct confrontation through the use of strikes and union pressures. However, there was a concurrent (but less pronounced in the 19th century) push to intrude on the political monopoly of the bourgeoisie. The bourgeoisie resisted strongly on both fronts. Direct confrontation became especially pronounced and antagonistic. In fact, unlike competition in political markets, strikes and threats of strikes induced widespread reactions that generated disasters for worker movements throughout the industrialized world in the later 19th and early 20th centuries. At the micro-​level, strikes generated worsened conditions for labor, while at the macro-​level they brought forth anti-​labor legislation that was devastating to labor and its organization.22 These tumultuous cases of direct confrontation brought on critical consequences for both classes: seeds of

22  The rise of the guardian state revolution that threatened institutions of private property, national strikes and antagonistic legislation. According to Polanyi (1957, pp. 234–​235) and Gough (1979, p. 66), the class struggle took on an “ominous character.” This caused the struggle itself in great part to shift to the political arena where class conflict was muted through the political process. In Przeworski’s (1986, p. 11) terminology, the proletariat’s insurrection was transformed into a “bloodless” one through political institutions. Union strikes giving way to political parties and suffrage (“paper stones”) in this period marked a transformation in the class struggle.23 The link between democratization and union activity comes in more than timing as in a great many cases the political empowerment of labor through parliamentary government and suffrage came as a direct result of labor mobilization. Mobilization was directly responsible for the extension of suffrage in Belgium, Sweden, Austria, Finland, Norway and Sweden. In Finland and Denmark, mobilization was crucial in bringing about parliamentary government.24 According to Rueschemeyer et al. (1992, p. 98), extended suffrage and parliamentary government were, in fact, the two major political goals of the European labor movement before the war. Hence, since labor was a catalyst for the extension of suffrage and parliamentary government, democratization in advanced industrial nations featured an extremely strong proletarian element.25 That the struggle could shift to the less antagonistic track brought advantages for both groups, which explains the shift. For the proletariat it was the path of least resistance. For the bourgeoisie, mass strikes and the threat of political revolution were disruptive of business and threatened the very market institutions upon which business was founded. Shifting to a more neutral playing field and directing the contest toward trade union reforms and social relief kept the system of capitalist industrial organization intact.26 For the bourgeoisie, the political battlefield provided a means of diffusing and moderating the revolutionary fervor of proletarian reform by bringing the contest out of what Jessop (1982, p. 91) calls “collective confrontation.” The political process introduced various restraints for the proletarian movement. First, the political game caused a “deradicalization” of political ideology, as the need to gain large voter support (as workers were far short of majorities in all nations) served to water down what originated as a radical agenda oriented around changing the work relationship. This made the political platforms, by nature, more amorphous. This in turn served to dissolve the collective identity of the workers’ movement and replaced it with an agenda representative of a broader and less homogenous cross-​section of society.27 Aside from the dilution of a workers’ platform, the larger political alliance caused collective action problems in marshaling demands. Second, like electoral competition, the process of coalition-​building in the parliamentary game served to confirm the institutions of capitalism and dilute the class identity of the contest between economic groups. For example, in order to gain the favor of the highly courted agricultural groups, it was necessary to support the institution of private property. Moreover, while parties were often able to preserve some class identity, the coalitions among these parties produced

The rise of the guardian state  23 platforms that were quite diffuse. The coalition structure also gave bourgeois groups both veto power over political platforms and the means of co-​opting the labor movement by making trade-​offs in setting political agendas.28 Finally, the professionalization of party politics further diluted the class ideology of political movements by creating a cadre of political leaders who found that bureaucratic maneuvering was superior to class doctrines for “getting things done.”29 In effect, the political process served to dilute class cleavages because it transformed the contest from competition between diametrically opposed doctrines to competition among amorphous political agendas which in fact tended to exhibit various points of convergence, as median-​ voter theory would predict. Before World War I, the need for political support to effect national unification and destroy the last institutional remnants of feudalism made subordinate classes valuable allies to the prevailing ruling regimes. The War itself further increased their importance, and hence led to even greater political empowerment.30 The war made ruling regimes dependent on mass mobilization (in terms of military needs and home production) and on popular support. The rising political empowerment generated by dependence was compounded by the effects of the War on postwar politics: as Conservative politics were blamed for the war, and therefore lost much legitimacy.31 With the interwar period came a fuller political integration and consolidation of proletarian politics into a more encompassing coalition of subordinate classes. Where early ventures of the movement into party politics resulted in small pockets of support as a result of a more restricted revolutionary agenda, the post-​war movement became all-​encompassing as its ongoing quest for political support caused it to appeal to a variety of groups among subordinate classes. It was in this broad consolidation that the mature welfare state was born (i.e. as opposed to the earlier 19th century variant). This was the simple result of the working of political markets under the new balance of power in party politics. Leftist agendas were growing in popularity as a result of the war and the diversification of platforms aimed at the median voter (a natural function of Leftists courting allies). In order to keep up, parties formerly grounded in non-​Left agendas were forced to diversify somewhat in that direction. Hence, both Left and Right moved more toward the middle of the political continuum. This also allowed winning coalitions in the parliamentary game, as platforms could be better reconciled, hence maximizing alliance possibilities.32 Many points of convergence across politics were essentially grounded in the infrastructure of the welfare state: an intricate network of social support for the worker, the needy and the middle class in general.33 The state would substitute for industrialists in providing acceptable economic conditions for subordinate classes. This was evident in the fact that all the goals of union initiatives of the 19th century became principal legislative targets for Leftist parties in the political arena: minimum pay standards, regulations on working conditions, advancing retirement age, job security (the state as an employer), unemployment and health benefits, retirement stipends

24  The rise of the guardian state and maximum work hours.34 What in the 19th century was sought directly from industrialists through unions was in the 20th century transformed to demands from broad-​based political alliances directed toward the state; hence, it is no surprise that the welfare state carried a proletarian imprint throughout.35 In fact, losing this battle in the political arena was preferable for bourgeois groups as the state relieved them of having to directly provide many of these benefits to aggrieved groups. Moreover, the aggrieved groups carried the major burden of their own support through taxes. The rise of the welfare state was only part of the equation that led to the guardian state, as the guardian state was a synthesis of two policy orientations: (1) providing social-​safety nets (the welfare state) and (2) macroeconomic stabilization (i.e. the interventionist state). While the first was well under way before the war, but was consolidated by the war and the economic troubles of the interwar period, it was certainly these factors that led to the creation of the interventionist state, especially the economic hard times after World War I. The war and economic turbulence of the 1920s served to consolidate an interventionist policy orientation that was germinating in the Progressive period before the war.36 In fact, it would not be erroneous to say that economic policy began taking on a Keynesian orientation well before the Keynesian intellectual revolution was set off by the publication of the General Theory in 1936.37 The economic impact of demilitarization (employment, reorienting production) and the economic swings in the early 1920s compounded the progressive quest for economic performance by introducing critical (if not crisis) conditions. The responses were pervasive and fairly uniform, while the timing conformed to specific imperatives across nations: the state stepped forward as an economic champion to maintain income and employment in the face of significant obstacles. For the nations that had a legacy of state action (late developers), state intervention to assure macroeconomic performance during the 1920s was a “non-​issue.”38 For others, it involved the growth of an institutional infrastructure that laid the groundwork for the Keynesian policy responses to the Great Depression of the 1930s.39 Alvin Hansen (1927, p. 205), an astute observer of the times and destined to become one of Franklin Delano Roosevelt’s most influential academic New Dealers, noted that by the end of the 1920s a definitive macroeconomic posture oriented around the state stepping in to tame the “violent oscillations of the business cycle” had emerged, and consequently “laissez faire [was] being displaced by purposeful and scientific control.” The Great Depression of the 1930s strongly reinforced the macroeconomic interventionist posture of the state in democratic/​capitalist nations through both its length and severity. The motivation to guard income and employment was heightened by the possibility of deep-​secular stagnation in the economy. In terms of economic philosophy, the state needed to be especially active because unemployment could be both severe and prolonged (i.e. Keynes’s idea of secular stagnation became compelling among policymakers).40 It was the acceptance of this philosophy that turned 1920s-​brand of interventionism (more ad hoc and short term in focus) into a 1930s policy style that was more systematic

The rise of the guardian state  25 and founded on long-​term planning. Indeed, the state now had a permanent mandate. As Roosevelt (1941, p. 32) put it, a “major principle that public funds for public works should be used … [to reduce] unemployment has now been accepted.”41 Probably the greatest contribution of the Keynesian revolution in economic theory was not so much in introducing policy styles for national leaders, but to give already existing practices the academic blessing and legitimation as comprising the mandates of a systematic and well-​respected scientific theory of the macroeconomy. Like the welfare state, the interventionist state proved a point of compromise in the class and political competition of the period. In terms of class, the interventionist orientation overcame class cleavages by shifting the competition over economic security from a zero-​sum game (wages and job security could only come at the expense of profits) to a positive-​sum game (wages, employment, investment and profits all depended on the same policy tools of macroeconomic stabilization). In the words of Hirsch, the interventionist state “promised full employment and JS Mill too.”42 According to Gourevitch (1989), the Great Depression further consolidated this class compromise by forming a natural alliance between agriculture, workers and the bourgeoisie. In terms of politics, interventionism was consistent with the ideologies of all major interwar philosophies. For both the Left (Socialists and Communists) and the Right (Fascists), it attributed to the state the familiar role of economic catalyst for prosperity. For those who wanted progress without having to destroy democracy (Fascists) or capitalism (as the far Left did), a Keynesian philosophy of social democracy gave them an acceptable means of preserving both. Hence, it appealed across the political continuum: Left, Middle and Right.43 World War II revived the familiar problems of the economic impact of demilitarization, but now the belief in secular stagnation was strong as a result of memories of the Great Depression. The 1940s and 1950s fully consolidated the interventionist state by taking the systematic practices of the 1930s and turning them into law. This period produced the groundwork for legislation and institutions that officially put the state into the permanent business of macroeconomic stabilization in the developed world (and it exhibited a strong Keynesian fabric): the White Paper on Employment Policy in Great Britain, the Employment Act in the U.S., the Economic Planning Agency in Japan, the Paper on Employment and Income in Canada, the Postwar Economic Planning Commission in Sweden, the U.S. Employment Act of 1946 and the Paper on Full Employment in Australia.44 With the consequent wave of legislation and permanent institutions, the interventionist state graduated to the level of the welfare state and together consolidated a fully developed guardian state in advanced capitalist nations.45 The expansion of suffrage in the troughs of world wars and economic crises pushed governments, especially those of capitalist democracies, squarely into the role of economic guardian.While the U.S. took a more capitalist/​welfare path, the rest of the developed world pushed vigorously into a socialist model of economic management. The political dye was cast, and cast with vengeance.

26  The rise of the guardian state The shadow cast by the new ideology of prosperity and its guardian state spread to more than state institutions and the legal fabric of nations, and it cast an intellectual shadow as well. The emergence of growth theory and business cycles as central issues in the study of economics, as well as the growth of analysis into national income accounting and macroeconomic statistics, were also manifestations of the prosperous society.46 In terms of statistics, broad measures of economic activity (i.e., macroeconomic statistics) barely existed before World War I.47 The new interventionist policy required reliable statistics in order to operationalize performance and stabilization goals. The interwar years consequently marked a revolutionary period in the birth of broad measures of economic activity. One of the first initiatives in this direction was the creation, under Secretary of Commerce Hoover, of the Advisory Committee on Statistics in the U.S. shortly after World War I. The goal of the committee reflected the “new era” philosophy of economic engineering and prosperity. In Hoover’s own words, statistics were required to “develop a method by which we may make cumulative progress in social organization.”48 Their efforts launched the monthly publication of the Survey of Business Statistics in 1921. The early 1920s marked a fertile period in generating economic statistics. The NBER’s first task in 1920 was to produce a series of national income statistics. In 1921 Alvin Hansen published his Cycles of Prosperity and Depression. In 1922 the NBER published its Income in the U.S. 1909-​1918. The Federal Trade Commission did its pioneering study on income and wealth in the U.S. in 1923. The hard times of the 1930s fueled this rise in economic measurement. In the U.S., government-​affiliated and sponsored measurement initiatives were still driven by Hooverites and other devout statisticians who together formed a dynamic and productive corps of pioneers: Kuznets, Mitchell, Warburton, Hansen and Currie. These individuals had some renowned counterparts in Britain: Hicks, Stone, Meade, Pigou and Clark. In this period the NBER, the Division of Economic Research (Commerce Department), the Bureau of the Budget and the Federal Reserve all pushed the fold of statistical research.While Keynes himself did not produce significant amounts of new measures of the macroeconomy, his work imparted an indelible imprint on economic measurement both in the period and after. Keynes provided a systematic theory of the macroeconomy that lent itself to measurement. Kuznets and Warburton’s famous estimates of GNP by types of expenditures were inspired by Keynesian theory. Keynesian theory also inspired Lauchlin Currie to make estimates of government’s contribution to GNP, as well as Milton Gilbert’s contributions to income estimation which left an influential imprint on national income accounting in the U.S. In Britain, the pioneering work of Meade and Stone was done under the advice of Keynes himself.49 Growth theory too was driven by considerations of economic performance from its earliest manifestations.The classical growth theory of the 19th century (based on the work of Ricardo, Smith and Malthus) was stimulated by progress (i.e. the industrial revolution). Like economic measurement, the roots of

The rise of the guardian state  27 modern growth theory were formed in the ashes of war and the hard times of the interwar period. The Keynesian revolution further inspired the pioneers of modern growth theory by producing a systematic conception of the macroeconomy with growth as its focal point. Arthur Burns, in fact, locates both the motivations and theoretical foundations of growth theory in the General Theory itself. Evsey Domar and Roy Harrod’s pioneering contributions to growth theory took on the task of working out Keynes’s theoretical implication of full employment and growth paths (something Keynes himself did not fully do). The growing influence of the secular stagnation thesis, both because of the events of the 1930s and Keynesian revolution, enhanced the importance of analyzing economic growth, as possibilities of prolonged unemployment made the adverse effects of depression more severe and possibilities for prosperity more fleeting. In the post-​war period, Samuelson, Solow, Meade and Swan built on the work of the 1930s and 1940s in contributing to neoclassical growth theory. Later, the new macroeconomics of rational expectations (Lucas and Sargent) continued the legacy of growth theory through its interest in growth paths.50 The formal analysis of business cycles closely paralleled the rise of growth theory. By the interwar period, conditions themselves had a similar impact on business cycle studies. As Hansen (1938, p. 268) noted, “Reading the business cycle has become…a national game, yet a desperately serious one.” The work of the NBER, Hansen, Mitchell, Haberler, Schumpeter, Keynes, Frisch and Tinbergen built a strong foundation for business cycle theory in these years, a tradition that would carry the theory to the very central core of the study of macroeconomics, like growth theory itself.51

The new macroeconomic landscape under the prosperous society Political markets have been instrumental in both creating and perpetuating the guardian state. Industrially advanced democratic states have become guardians of the economy because, due to the political transformation that emanated from the evolution of class relations, political incentives have dictated such a role. The political transformation created many more demanders of prosperity in the 20th century, as compared to the 19th century, because the political systems of industrially advanced nations have increasingly empowered classes which have been more likely to suffer from economic adversity, or upon which the main burden of recession fell. In that the main solutions to this problem of economic security (guardian state institutions) have been constructed in ways that are appealing across class lines (i.e. the great class compromise embodied in the guardian state), such solutions have become pervasive. The supply of government policy, under such conditions, has placed a premium on maintaining prosperity. The new electoral imperative has become economic, and policymakers are either rewarded or punished for their performance on the macroeconomic front.

28  The rise of the guardian state To quote Poggi (1990, p. 139), in the post-​war period “the political process has come to revolve chiefly around economic issues.” Political platforms across parties have converged around the fundamental points that (1) industrial growth is the dominant social goal and (2) parties rate themselves based on how well they perform in providing such growth.Voters are influenced by the economy, both retrospectively (based on past performance) and prospectively (based on expectations and policy narratives). There is a massive literature on this subject which has become known as “economic voting,” with hundreds of contributions. There is quite a bit of variety to this literature with respect to how important economic performance is, which variables are most influential (e.g. sociotropic versus egocentric considerations), voter time horizons, and what specifically moderates the relationship between the economy and voting; therefore, the topic is very much a contested issue within certain parameters. But in the body of this research, there is overwhelming evidence across democracies in all parts of the world that voters are keenly sensitized to economic performance in voting, politicians are keenly aware of this trend, the trend has persisted for some time, and this trend seems to have grown over time.52 This posits politicians in the role of political entrepreneur: actors moved to trade policy alternatives for votes. While this simplifies elite preference functions in a way that drowns out more deeply internal motivations (principles, ideologies and personal preferences), elites do respond strongly to voter preferences in their policy considerations. In fact, it is the very premise that underlies the studies in a major field in political economy: public choice.53 Consequently, industrially advanced democratic states in the 20th century have come to politically monopolize the principal levers of the macroeconomy: the money supply and government spending. Central banks have become truly public institutions, stripped of the profit motive so prevalent during the 19th century.54 And while central money management is theoretically designated as independent or semi-​independent from politics, the banks themselves serve very public functions.With respect to the government budget, while spending was always subject to government control, it has become far more politicized. The budget in the 19th century was run by much more mechanistic rules embedded in a strict accounting orientation. Both major institutional changes have laid the groundwork for the emergence of a fully developed macroeconomic policy. While the market ideology of the 19th century discouraged the need for macroeconomic policy, the ideology of prosperity of the 20th century has demanded such a policy as the centerpiece of a general economic strategy for the guardian state. The impact of the ideology of prosperity on the macroeconomic landscape is quite evident when we look at both the instruments and principal macroeconomic goals of the guardian state.55 Through the agency of the guardian state, the ideology has encouraged a new landscape from that which we saw in the 19th century, one characterized by increased prosperity (greater economic growth and employment), higher inflation and bigger government.56

The rise of the guardian state  29 Inflation Ruggie (1983, p. 415) called inflation “the dominant domestic means of dealing with redistributional strife in advanced capitalist economies.” Galbraith (1970, p. 168) regarded inflation as “deeply woven in our social fabric” because our motives to fight it conflict with our concern for economic growth and security. In fact, the use of the money supply as a means of fighting recession is deeply rooted in capitalist-​democratic politics. While such initiatives (generally led by farmers) achieved less success during the 19th century, there was always far greater agitation for reflationary policies during periods of slow growth.57 The Great Depression systematically wore down the hard-​money resolve of monetary authorities and placed the money supply alongside of government activism as the primary instruments with which to fight recession. Hence, government spending and inflation became centerpieces of a strategy for fighting economic adversity.58 The use of the money supply to effect economic goals became entrenched in political repertoires after World War II. A large literature has emerged on the political utility of inflation in democracy. On the whole, the literature underscores the political utility generated by government’s monopoly over the money supply in terms of attending to the economic imperatives of democratic societies. And while excessive inflation is unacceptable, at least some inflation itself has become a prevalent macroeconomic tool of governments, as inflation allows governments to attend to important welfare and macroeconomic concerns. States can generate short-​term increases in growth and employment via trade-​offs on the Phillips curve.59 In its impact on short-​term growth, inflation can reduce adjustment costs in an economy (i.e. labor is more mobile in an expansion). Inflation can also attend to the needs of important political interest groups. Heavily indebted farmers could be relieved of their real debt burdens. Increasing the money supply would allow enough “lubrication” in the economy to accommodate increased nominal wages on the part of unions, and could even stimulate short-​term growth if wages have not increased in the same proportion. Finally, inflation could serve broader economic goals such as increasing a society’s access to credit. Managing the money supply can also generate significant indirect political utility as a means of financing government spending (i.e. monetizing the debt). Since government expenditure is the other major instrument for fulfilling the mandates of the prosperous society, any means which could make such spending less painful would be politically useful. In the short-​run, virtually all alternatives to financing government expenditures are more painful politically than inflation.Taxes are fairly rigid because the political costs of raising taxes are onerous. Restraint in spending would mean generating less prosperity. Finally, incurring debt would be seen as a cause of future tax hikes and could slow economic growth through its impact on interest rates. The political costs of monetizing debt are less onerous because they can be pushed off in time through inflationary lags. Moreover, they are less transparent since people cannot prove

30  The rise of the guardian state that inflation in any given time period was the result of monetization in previous periods.60 Since democracy generates the most pronounced demands for prosperity, and the money supply can be used to attend to those demands in ways that have limited political costs, democracy generates what Burton (1980) referred to as a natural “demand for inflation.” The empirical track record on money supplies and inflation among the G-​7 suggests that the inflationary legacy in industrialized democratic nations is indeed strong (see Tables 1.5 and 1.6). With very few exceptions, money and inflationary growth rates are significantly greater after World War II. In inflation, growth rates are greater in the Bretton Woods and post-​Bretton Woods periods than they are under the gold standard by a factor of 3.6 and 7.2, respectively. In money supplies, growth rates in the former two periods are more than double those under the gold standard. In both inflation and money growth, there appears to be greater convergence of rates under the gold standard than the post-​Bretton Woods period. Of course, inflation itself throughout these years was driven by other important factors as well, and such is the case with all the macroeconomic and institutional measures used in this analysis (see below for a discussion about competing explanations). The Bretton Woods years were characterized by a creeping inflation that was to a large extent a cost-​push phenomenon. Furthermore, the higher rates after 1970 were driven largely by the oil shocks and intensification of wage demands in the 1970s and 1980s. Moreover, higher growth in the period after 1945 may have fueled inflation in those years relative to the slower-​growth years before 1914. However, in terms of growth versus inflation, the increase in inflation between these periods is greater than the increase in growth. The size of government If the guardian role empowered the state as an economic agent responsible for managing the business cycle, then surely a major instrument it would use to effect this role came from its power to spend. Unlike the period before World War I, counter-​cyclical deficit spending became a welcomed part of a national macroeconomic environment rather than an evil. The power of the purse, in general, gained greater legitimacy during the Depression, and would spread well beyond the restricted role of a counter-​cyclical wedge to become an essential means of financing prosperity in national economies.61 Buying prosperity has occurred across the major functions of government: humanitarian, the supply of public goods and economic stabilization. Humanitarian spending has become tied up with creating economic safety nets at the lower rungs of society. This category of spending has seen the biggest growth rates after World War II, as transfers have accounted for a larger proportion of the increase in government expenditures than any other items.62 Public goods have contributed to prosperity via the provision of goods and services which would substitute for goods procurable through private markets. Hence, government has supplied some

The rise of the guardian state  31 minimum quality of life which is invariant with respect to incomes. Finally, the stabilization role of government spending has maintained a style of interventionist activism across the business cycle. While a large literature has emerged on the growth of government, it is clear that a common strand among many of the theories suggests that the increasing size of government is in large part a function of political competition to provide prosperity.63 Scholars have talked about the fiscal impact of the expanding support functions of democratic government. Discussions converge around the issue of meeting ever-​increasing political demands with limited resources. Buchanan and Wagner (1977, p. 223) have averred that budgets have become a manifestation of the “constellation of political forces.” Kohl (1981) has talked about the “fiscal overload” endemic to the welfare state, while O’Connor (1973) and Janowitz (1976) have conveyed the same argument in terms of a “fiscal crisis.” The greater demands for prosperity have placed greater pressure on government to grow. While buying prosperity is necessary, acquiring the means to pay for it has become increasingly difficult since the resource base of government is built up by impoverishing the private sector to some extent (taxation directly reduces incomes, while debt may raise interest rates and create unemployment).64 This suggests a dual tendency in democratic nations toward a growth in government and fiscal deficits. Data on G-​7 countries are consistent with this expectation (Tables 1.7 and 1.8). Every nation exhibits a far bigger government in relation to the size of the economy in the periods after World War II. On average the size of government under Bretton Woods was about 2½ times greater than that under the gold standard, while government growth under the post-​Bretton Woods period shows an increase by a factor of 3. The structure of deficits is also revealing. Average balance under the post-​Bretton Woods period shows a deficit of almost 2% of income, while that under the gold standard was in surplus at 0.16% of income. In Table 1.8, figures for deficits show that in the period 1974–​1989, with the exception of Germany and Japan, leading democratic nations came to run consistent and large deficits. By the last period, all were fraught with consistent and large deficits. As expected, the average of significant deficit years is the lowest under the gold standard. But a look at the distribution of national averages in Table 1.8 is even more revealing. Under the gold standard, everybody (with the exception of Germany) was running fairly infrequent deficits that were large. A tendency away from deficits has been replaced by a preponderance of large deficits. It may be a testament to the consolidation of the ideology of prosperity in the post-​war period that average deficit years are significantly greater under the 1974–​1989 (years of peace and void of a great depression) period than they are during the interwar period (a period marked by economic transition from war and severe depression). Figures for the period 1946–​1970, on average, show far less tendency toward deficit vis-​à-​vis the subsequent period, and only slightly more than the gold standard period. Since the former period represented a highpoint of Keynesian

32  The rise of the guardian state policy, one might expect greater relative tendency toward deficit. This however reflects some difficulties in the deficit-​trend measure as a reflection of guardian activity.The period in fact represented a highpoint in welfare spending. However, the period also showed considerably higher economic growth than the other two periods. All things being equal, growth itself has a strong impact on the fiscal balance (high growth encourages surplus, while low growth encourages deficits). High growth generates large revenues for the state, while limiting the fiscal pressures leading to excessive spending (growth diminishes economic distress, which reduces the need for transfers). Hence, inconsistencies in the data may reflect the differential impact of growth. But the fact that the period exhibits higher average tendency for deficit vis-​à-​vis the gold standard, while concurrently showing considerably higher growth, is consistent with a prosperous society argument.65 The goals: growth and employment Data on the instruments of the guardian state (inflation and government spending) are consistent with a prosperous society argument. In terms of the goals of the prosperous society, we would look above all at economic growth and employment for similar support. In fact, once the ideology of prosperity became fully consolidated and the guardian state arose to preserve its mandate, growth and employment became the sine qua non of economic security. In Galbraith’s (1970, p. 105) words, “the notion that [business cycles] must be allowed to run their course [has become] virtually extinct.” Data on growth suggest that the guardian state has met one of its two principal targets. Per capita growth rates (Table 1.1) conform to expectations. Under the Bretton Woods period, average growth is almost three times greater than average growth under the gold standard. Growth in the period after 1973 is 50% higher. A comparison of standard deviations suggests the attainment of a corollary goal: smoothing out the business cycle to avoid large swings in growth.66 Standard deviations are significantly lower in the periods after 1945. This restructuring of the business cycle is picked up in data comparing business cycles across the periods (Tables 1.2–​1.4). It appears that a rather drastic alteration of the business cycle has occurred across the past century. The length of expansions is far longer and the length of contractions is far shorter after World War II. The average length of an expansion is more than twice as long and the length of contractions is about 40% shorter. Expansions are longer in every single country, while contractions are shorter in every country except Japan and Germany. Looking at the proportion of expansion to contraction years, the proportion favors expansion by a large amount in every single country.The G-​7 average is about three and one-​half times greater (5.39 versus 1.49) after 1945 than before 1914. Unemployment figures (Table 1.9) suggest that G-​7 nations have done far better under Bretton Woods than under the gold standard. Unemployment and the volatility of employment are far lower under Bretton Woods. While

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Table 1.1 G-​7 Real per capita income, 1881–​2016a Interwar 1919–​1938

Bretton Woods 1946–​1970

Post-​Bretton Woods 1974–​1989

Post-​Bretton Woods 1990–​2016

Mean

Std Dev

Mean

Std Dev

Mean

Std Dev

Mean

Std Dev

Mean

Std Dev

1.8 1.1 1.7 1.5 1.4 2.3 1.0 1.5 0.3

5.0 2.4 2.9 4.6 3.8 2.8 4.1 3.7 0.8

0.2 1.2 2.6 1.3 2.0 0.2 0.9 1.2 0.7

8.1 4.5 8.5 7.2 6.1 8.8 4.7 6.8 1.5

2.0 2.1 5.0 3.9 8.1 2.5 5.6 4.2 1.8

2.8 1.8 3.3 2.2 2.7 2.6 3.3 2.7 0.4

2.1 1.5 2.2 1.7 3.5 1.6 2.5 2.2 0.5

2.7 4.2 1.9 1.5 1.1 2.6 2.2 2.3 0.7

3.5 3.8 3.7 3.2 2.1 3.0 2.9 3.2 0.4

1.8 8.7 9.9 9.4 9.3 7.9 10.3 8.2 1.9

Notes: a Mean growth rates for the years 1881–​1989 represent coefficients from a time trend estimated from a regression of the natural log of real gross domestic product (GDP) on a time trend and constant. The data is from Bordo (1993), with permission from the University of Chicago Press, ©1993 by the National Bureau Economic Research. For the years 1990–​2016 the figures represent average annual growth in real GDP. b Convergence is a measure of the mean of the absolute differences between each country mean and the G-​7 average.

The rise of the guardian state  33

United States United Kingdom Germany France Japan Canada Italy Average Convergenceb

Gold Standard 1881–​1913

34  The rise of the guardian state Table 1.2 G-​7 Structure of business cycles, 1880–​1913a Phases

United States United Kingdom Germany France Japan Canada Italy Total Average

# Exp

# Con

9 4 6 4 5 4 3 35 5

9 4 6 4 4 3 2 32 4.57

Years in Exp

Years in Con

Ave. Years in Exp

Ave. Years in Con

Ave Yrs Exp/​ Ave Yrs Con

17.37 16.66 18.66 17.50 11.66 16.50 12.66 111

13.16 13.99 14.99 14.00 7.83 5.50 4.30 74

1.93 4.17 3.11 4.38 2.33 4.13 4.22

1.46 3.50 2.50 3.50 1.96 1.83 2.15

1.32 1.19 1.24 1.25 1.19 2.26 1.96

3.47

2.41

1.49

Years in Con

Ave. Years in Exp

Ave. Years in Con

Ave Yrs Exp/​ Ave Yrs Con

50.58 51.00

10.00 6.16

5.06 12.75

0.91 1.54

5.56 8.28

30.42 44.42 48.75 48.67 38.00 311.84

11.42 10.58 12.83 7.50 12.75 71.24

6.08 6.35 6.09 12.17 6.33

1.90 1.32 1.43 1.50 1.82

3.20 4.81 4.26 8.11 3.48

7.83

1.49

5.39

Notes: a Computes figures only for full phases within the period. Exp=Expansion, Con=Contraction.

Table 1.3 G-​7 Structure of business cycles, 1948–​2014a Phases

United States United Kingdom Germany France Japan Canada Italy Total Average

# Exp

# Con

10 4

11 4

5 7 8 4 6 44 6.29

6 8 9 5 7 50 7.14

Years in Exp

Notes: a Computes figures only for full phases within the period. Exp=Expansion, Con=Contraction.

unemployment is higher after 1973, the standard deviation is lower. Hence, the latter period has shown greater success at attaining the corollary goal of employment smoothing.67 Employment figures, however, can be misleading as an indicator of the impact of the ideology of prosperity. First, comparisons of employment are made difficult by the non-​availability of data for Japan, Canada, and Italy before 1914. Moreover, since it has been a direct goal of the guardian state to reduce the burden of unemployment (e.g. unemployment insurance

The rise of the guardian state  35 Table 1.4 Comparison of the structure of business cycles, 1880–​1913 and 1948–​2014a Ave Yrs in Exp 1880–​ 1913

United States United Kingdom Germany France Japan Canada Italy Average

Ave Yrs in Exp 1948–​ 2014

Ave Yrs in Con 1880–​ 1913

Ave Yrs in Con 1948–​ 2014

Ave Yrs Exp/​ Ave Yrs Con 1880–​ 1913

Ave Yrs Exp/​ Ave Yrs Con 1948–​ 2014

1.93

5.06

1.46

0.91

1.32

5.56

4.17

12.75

3.50

1.54

1.19

8.28

3.11 4.38 2.33 4.13 4.22 3.47

6.08 6.35 6.09 12.17 6.33 7.83

2.50 3.50 1.96 1.83 2.15 2.41

1.90 1.32 1.43 1.50 1.82 1.49

1.24 1.25 1.19 2.26 1.96 1.49

3.20 4.81 4.62 8.11 3.48 5.39

Note: a Computes figures only for full phases within the period.

and transfer payments), one would expect that employment would become more tolerable. Hence, even a higher unemployment rate would not be entirely contradictory to expectations for outcomes under a guardian state. However, quite consistent with the state’s guardian role is the evolution of the state as an employer itself. Changes in the figures on government employment over the past century show a dramatic rise.68 Of course, just because macroeconomic outcomes conform to those we would expect under a guardian state, it does not eliminate alternative explanations. Could these same outcomes have been produced purely by economic forces, or even have been produced stochastically? Obviously, ideas and politics were not influencing these outcomes alone. While this chapter is not reductionist (there is no claim here of a theoretical monopoly over causation), there is strong reason to believe that ideas and politics have been instrumental in shaping the texture of macroeconomies across these periods, and hence should be given significant credit for producing such outcomes. The historical track record in political institutions across these time periods suggests that such outcomes were neither an accident nor solely a result of autonomous economic and stochastic forces. The record suggests that they were generated to a large extent by policy. The political landscape of all these nations was marked by the rise of institutions and laws oriented around regulation, welfare and stabilization: from the transformation of central banking to large-​scale transfer programs.69 This “Galbraithian assault on the market”, as Higgs (1987) would call it, spread the protective web of the guardian state to virtually every important component of the macroeconomies of industrially advanced nations.70 And these institutions

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United States United Kingdom Germany France Japan Canada Italy Average Convergenceb

Gold Standard 1881–​1913

Interwar 1919–​1938

Mean

Std Dev

Mean

0.3 0.3 0.6 0.0 4.6 0.4 0.6 1.0 1.0**

3.1 3.1 2.6 5.0 5.5 1.4 3.2 3.4 1.0

-​1.8 -​1.5 -​2.1 2.2 -​1.7 -​1.9 -​1.1 -​1.1 1.0

Bretton woods 1946–​1970

Post-​Bretton Woods 1974–​1989

Post-​Bretton Woods 1990–​2016

Std Dev

Mean

Std Dev

Mean

Std Dev

Mean

Std Dev

7.6 7.8 4.7 9.1 7.3 6.0 11.7 7.7 1.5

2.4 3.7 2.7 5.6 4.5 2.7 3.8 3.6 0.9

2.6 2.2 4.0 4.1 4.6 3.0 11.5 4.6 2.0

5.6 9.4 3.3 8.8 2.6 7.9 12.9 7.2 2.9

2.4 6.1 1.3 3.2 2.4 3.0 4.6 3.3 1.2

2.0 2.7 1.6 1.4 -​0.2 2.0 2.8 1.8 0.7

0.7 2.3 1.3 0.7 1.3 1.5 2.0 1.4 0.45

Notes: a 1881–​1989 mean growth rates represent coefficients from a time trend estimated from a regression of the natural log of the GNP deflator on a time trend and constant. The data is from Bordo (1993), with permission from the University of Chicago Press, ©1993 by the National Bureau Economic Research. Figures from 1990–​2016 represent simple measures of the GDP deflator. b Convergence is a measure of the mean of the absolute differences between each country mean and the G-​7 average. ** 0.63 without Japan.

36  The rise of the guardian state

Table 1.5 G-​7 inflation, 1881–​2016a

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Table 1.6 G-​7 Money supply, 1881–​2016a Interwar 1919–​1938

Bretton Woods 1946–​1970

Post-​Bretton Woods 1974–​1989

Post-​Bretton Woods 1990–​2016

Mean

Std Dev

Mean

Std Dev

Mean

Std Dev

Mean

Std Dev

Mean

Std Dev

6.1 2.1 5.7 2.2 5.8 7.4 3.2 4.6 1.8

5.9 1.7 4.7 3.5 10.8 5.3 3.1 5.0 2.0

0.6 0.8 1.3 6.4 0.5 1.1 3.6 2.0 1.7

8.6 4.7 10.1 8.5 9.7 4.7 6.2 7.5 2.0

6.3 3.2 12.8 11.5 17.3 6.0 13.3 10.1 4.2

5.8 3.2 6.0 7.5 15.9 4.0 7.8 7.2 2.8

8.6 13.5 5.7 8.8 5.7 11.0 13.4 9.5 2.7

2.4 5.6 4.5 3.4 6.2 5.5 4.9 4.6 1.1

5.5 7.2 6.1 3.2 2.5 5.3 3.2 4.7 1.5

2.5 10.5 7.2 4.1 0.96 2.8 3.1 4.5 4.5

Notes: a Mean growth rates for the years 1881-​1989 represent coefficients from a time trend estimated from a regression of the natural log of money supply on a time trend and constant. The data is from Bordo (1993), with permission from the University of Chicago Press, ©1993 by the National Bureau Economic Research. For the years 1989–​2016 figures represent growth rates in money supply. b Convergence is a measure of the mean of the absolute differences between each country mean and the G-​7 average.

The rise of the guardian state  37

United States United Kingdom Germany France Japan Canada Italy Average Convergenceb

Gold Standard 1881–​1913

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United States United Kingdom Germany France Japan Canada Italy Average Convergence (b)

Gold Standard 1881–​1913

Interwar 1919–​1938

Gov Exp as % of Income

Surp/​ Def as % of Incomea

Gov Exp as % of Income

2.37 7.65 5.37 11.68 15.80 5.58 13.85 8.90 4.32

0.24 -​0.05 -​2.83 -​0.51 5.65 -​0.46 -​0.91 0.16 1.54

6.65 20.15 10.71 19.51 28.86 9.94 26.53 17.48 7.56

Bretton Woods 1946–​1970

Post-​Bretton Woods 1974–​1989

Post-​Bretton Woods 1990–​2016

Surp/​ Def as % of Income1

Gov Exp as % of Income

Surp/​ Def as % of Income1

Gov Exp as % of Income

Surp/​ Def as % of Income1

Gov Exp as % of Income

Surp/​ Def as % of Incomea

-​1.78 0.78 -​1.41 -​4.30 5.88 -​1.54 -​9.93 -​1.76 3.11

17.90 29.89 14.30 21.82 31.18 16.26 21.53 21.84 4.97

-​0.28 2.48 4.53 -​1.09 0.79 0.83 -​5.61 0.24 1.91

21.70 35.88 14.50 22.44 35.18 23.29 36.98 27.14 7.62

-​3.47 -​3.19 7.06 -​1.14 2.68 -​3.18 -​12.57 -​1.97 4.21

33.65 38.39 46.45 53.76 34.97 43.06 50.10 42.91 6.20

-​2.95 -​3.91 -​2.21 -​3.75 -​5.14 -​2.08 -​4.68 -​3.53 0.96

Notes a Figures in these columns represent the average yearly fiscal balance as a percentage of national income for the relevant sample period. Negative signs in these columns represent deficits, while positive signs represent surpluses. b Convergence is a measure of the mean of the absolute differences between each country mean and the G-​7 average. Exp=government expenditure, Surp=fiscal surplus, Def=fiscal deficit.

38  The rise of the guardian state

Table 1.7 G-​7 Size of government, 1881–​2016

The rise of the guardian state  39 Table 1.8 G-​7 Structure of fiscal deficits, 1881–​2016 Gold Interwar Bretton Woods Post-B ​ retton Post-B ​ retton Standard 1919–​1938 1946–​1970 Woods Woods 1881–​1913 1974–​1989 1990–​2016 Deficit Yrs/​ Yrs in Sample %a United States 0 United Kingdom 12 Germany 100 France 21 Japan 10 Canada 15 Italy 30 Average 26.85

Deficit Yrs/​ Yrs in Sample %a

Deficit Yrs/​ Deficit Yrs in Sample Yrs/​ Yrs in %a Sample %1

Deficit Yrs/​ Yrs in Sample %a

40 5 9 79 0 55 90 39.71

20 4 5 48 12 4 100 27.57

70 85 65 100 77 52 100 78.53

93 87 0 47 0 87 100 59.00

Note: a Estimates represent the number of years in which fiscal deficits surpassed 1% of national income divided by the total number of observation years in the sample.

and laws do not even comprise a full representation of economic intervention. They do not include activities not formally regulated by law, such as counter-​ cyclical management of both money supplies and government spending. Surely such institutions, laws and activities made a difference. Welfare spending and counter-​cyclical macroeconomic policy have become mainstays of economic policy in the West. Furthermore, while any specific variable or period may be better explained by factors other than the prosperous society, it is difficult to conceive of any factor that does better at accounting for the general texture or landscape of macroeconomics across these periods than the change in economic orientations.71 Growth, inflation, and employment may have been influenced more by the oil shocks than by government intervention after 1973. Even if this is the case, the data still support the prosperous society argument in other periods. In addition, oil shocks do not explain the changing structure of the business cycle across the century. While an endogenous growth model might attribute higher growth and better employment performance in the 20th century to greater developments in human capital or technology, it does not as readily explain the growth of government.72 The growth of government, inflation and fiscal balance may be explained by institutional theories of the size of government such as Higgs (1987), but such theories do not as readily explain the structure of economic growth. Changes in economic growth may well explain changes in employment and inflation, but do not explain the changes in the growth of government. Perhaps the strongest evidence in this data set is the transformation in business cycles, and there is no reason to think that non-​ policy forces could make changes in business cycles so drastic across the period

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United States United Kingdom Germany France Japan Canada Italy Average Convergencea

Gold Standard 1881–​1913

Interwar 1919–​1938

Mean

Std Dev

Mean

7.06 4.42 2.37 7.35 Na Na Na 5.30 1.9

4.5 1.9 1.6 1.5 Na Na Na 2.4 1.1

10.66 9.28 11.32 4.45 4.79 8.41 4.45 7.6 2.6

Bretton Woods 1946–​1970

Post-​Bretton Woods 1974–​1989

Post-​Bretton Woods 1990–2016

Std Dev

Mean

Std Dev

Mean

Std Dev

Mean

Std Dev

8.1 3.4 8.2 2.5 1.2 5.7 0.2 4.2 2.7

4.61 1.80 3.78 1.45 1.15 4.10 6.21 3.3 1.6

1.1 0.4 3.1 0.5 0.3 1.8 2.7 1.4 1.0

7.13 7.31 6.13 7.23 2.28 8.59 8.69 6.8 1.4

1.3 2.9 2.8 2.6 0.4 1.8 2.1 2.0 0.8

6.1 6.7 7.7 10.0 3.9 8.0 9.9 7.5 1.6

1.5 1.7 1.9 1.5 1.0 1.5 1.9 1.6 0.23

Notes: a Convergence is a measure of the mean of the absolute differences between each country mean and the G-​7 average.

40  The rise of the guardian state

Table 1.9 G-​7 unemployment (%), 1881–​2016

The rise of the guardian state  41 of analysis. Business cycles have very much reflected the growing interventions of governments in managing the economy.

Notes 1 As Polanyi (1957, p. 46) put it, “man’s economy, as a rule, is submerged in his social relations.” Ruggie (1983) stressed how economic relations have a strong social dimension in that they are “embedded” in prevailing frameworks of social norms. 2 On rational expectations, see Sheffrin (1996). 3 For a good survey of the literature, see Harrison (1985). 4 This discussion of the impact of political markets highlights the main issues regarding the theory of the supply of and demand for government output. An ever-​increasing literature has emerged on this subject since Downs’ (1957) seminal work on the economic theory of politics. Good surveys are Mueller (1989) and Mueller (1997). 5 Class-​based theories of politics aver the primacy of the first two groups, while pluralist theories have looked at the influence of interest groups outside of a socioeconomic context. On class-​based theories, see especially Offe (1984), Rueschemeyer et al. (1992), Holloway and Picciotto (1978), Poggi (1990), Gough (1979), Jessop (1982 and 1990) and Przeworski (1986). For a good survey of the literature, see Barrow (1993).The pluralist literature is vast; for good surveys, see Mueller (1989 and 1997). 6 On the classical and neoclassical foundations of 19th century liberalism and the consequent impact on state–​economy relations, see Briggs (1968, p. 44), Alt and Crystal (1983, pp. 56–​58), Galbraith (1970), Ruggie (1983, p. 389), Nurkse (1944, p. 213) and Buchanan and Wagner (1977, pp. 27, 28). 7 On the political underdevelopment of subordinate classes, see Rueschemeyer et al. (1992), Therborn (1977), Przeworski and Sprague (1986), Alt and Crystal (1983) and Meltzer and Richard (1981). 8 In a metallic regime this would be synonymous with conformity between notes and underlying specie reserves. 9 See Gallarotti (1995, pp. 114–​119) on the structure of central banking in the 19th century. On the hard money orthodoxy of this period, see Alt and Crystal (1983, p. 56) and Gallarotti (1995). 10 This is not to say political manipulation of the money supply did not exist, only that it was directed toward other priorities. Avoiding inflation under a metallic regime was always seen as a contingent rule that could be broken under pressing political conditions, most commonly war. Hence, during war, convertibility was often suspended and inflationary issue of money engineered. See Bordo and Kydland (1990). 11 On the prevailing fiscal orthodoxy in the 19th century, see Alt and Crystal (1983, p. 58), Peden (1990, pp. 211, 212), Barro (1987) and Buchanan and Wagner (1977, pp. 11–​21). 12 Polanyi (1957, pp. 77–​85) underscores the liberal bias against building elaborate welfare systems in his discussion of how capitalists were against wage subsidies in the Poor and Speenhamland Laws because they saw them as destructive of workers’ incentive. 13 The less nationalist economic urge of the night watchman state vis-​à-​vis its successor of the 20th century (guardian state) may seem paradoxical in light of the fact that the 19th century produced a high-​point in colonization, and wars of the period

42  The rise of the guardian state (unlike much of the conflict in the 20th century) appeared more motivated by national interests than by ideology. This seeming paradox withers when one considers the relation between economic and security policy. In the 20th century the two have merged (i.e. economic policy and security policy have reinforced one another). Such was not the case in the 19th century, in which there was a significant disjuncture between the two. While geo-​strategic policy was a hotbed for nationalistic urges, international and domestic economic policies were far less so. This produced scenarios which would be quite unthinkable in the 20th century. For example, Russian bonds continued to be floated on the London market even during the Crimean War (which meant the British were financing the Russian war effort against their own compatriots), and during World War I German ships could purchase wartime catastrophe insurance from Lloyds of London. Similarly, the wave of colonization, according to Cohen (1973) and Fieldhouse (1961), was far more influenced by geo-​strategic than by economic considerations (i.e. the scramble for colonies was an extension of geo-​strategic competition on the Continent). On the disjuncture between economic and geo-​strategic policy in the 19th century, see especially Kennedy (1981). 14 This is not to say that there was no domestic economic policy at all before the 20th century. The state had been active in many ways in domestic and international economic spheres well before the 20th century (poor laws, anti-​combination laws, factory laws, bank charter acts and corn laws). A welfare-​state apparatus was also visible and growing in the 19th century (especially under Disraeli and Bismarck) with roots in the 16th century Poor Laws. This activity however was far more limited in scope and purpose (more microeconomic than macroeconomic), and it never achieved anything close to the degree of economic interventionism (macroeconomic stabilization) and welfare provision (social safety programs) of the guardian state of the 20th century. On the early welfare state, see Offe (1984, pp. 128, 129). See also below. 15 Hawtrey (1932, p. 300) highlights the Macmillan Report’s motor-​car analogy as representative of the ideological break with the neoclassical faith in markets during recessionary periods. While a motor-​car may run well and be quite useful, it “is not well adapted at pulling itself out of a ditch.” 16 The growth of the welfare state in the 19th century was less pronounced because of the ideology of fiscal restraint and asymmetrical political empowerment among classes. 17 On the origins of the interventionist policy, see Brinkley (1989), Critchlow and Hawley (1989), Barber (1985), Franklin Roosevelt (1941, p. 243) and Hardman ([1944] 1969, p. 128). 18 Przeworski (1986) notes that Keynes provided an already vibrant social democratic movement with a policy for managing capitalist economies in a way that preserved the welfare of workers. 19 Quoted in Barber (1996, p. 19). 20 From the mid-​19th century to World War I there was a considerable increase in the proportion of industrial labor among the adult population. Przeworski (1986, p. 49) attributes a rising proletarian class consciousness in Europe in this period to the convergence of several forces. Marxist and Socialist theory fused with the social movements to galvanize a sense of class (and a militant one at that). In terms of organization, unions effected a shift in the balance of power by giving labor monopoly power over its supply. In this period, union membership in Europe rose from

The rise of the guardian state  43 9% of the labor force to 30%. For statistics, see especially Przeworski and Sprague (1986, p. 27). On shifts in the class structure generated by advancing capitalism, see Therborn (1977), Rueschemeyer et al. (1992), Poggi (1990), Przeworski (1986), Skidelsky (1979), Przeworski and Sprague (1986) and Gough (1979). 21 I use the terms “bourgeoisie” and “proletariat” out of convention, and because the very core of class competition was strongly defined by industrialists and industrial labor. But in reality the class structure of competition was more complex, as privileged (feudal and capitalist) landed classes and agricultural labor were intimately involved in the struggle for political influence and improved working conditions. On the political front, also involved were small and medium farmers, peasants, petty bourgeoisie and mercantile industrialists. Hence, my usage of these terms reflects a broader conception of the class struggle. On this issue, see especially Rueschemeyer et al. (1992), Poggi (1990, p. 91) and Therborn (1977, pp. 24, 29). 22 The train of large-​scale strikes and repressive responses left a long bloody trail in this period: especially visible cases occurred in Belgium (1886, 1891 and 1902) and Sweden (1909). In Britain, there was a long period of conflict between government and unions.The Taft-​Vale Case in 1901, for example, established that striking unions could have their financial assets seized. See Przeworski (1986, p. 12) and Therborn (1977, p. 12). 23 The term comes from Przeworski and Sprague (1986).The timing of the formation of the first Socialist parties and universal male suffrage attest to the shift in revolutionary methods: Belgium (1885 and 1894, respectively), Finland (1899 , 1906), Italy (1892, 1913), Netherlands (1878, 1917), Norway (1887, 1898), Sweden (1889, 1907), Great Britain (1893, 1918), Austria (1889, 1907) and Spain (1879, 1907). See Przeworski and Sprague (1986, p. 36). 24 Rueschemeyer et al. (1992, p. 96) sees democratic institutions in both France and Britain as delayed responses to labor agitation. In the British case,Taft-​Vale appeared to be a watershed as repressive legislation turned the British labor movement toward the political arena. Similarly, in Belgium, after the failure of six general strikes, the Worker’s Party sought a greater political alliance with the Catholic Party. In Britain both the Tory and Liberal support of universal male suffrage emanated from competition over the labor vote. See Therborn (1977, pp. 12–​23) and Rueschemeyer, et al. (1992, pp. 92–​96). 25 In contrast to conventional pluralist and bourgeoisie-​led theories of democratization, Therborn (1977) and Rueschemeyer et al. (1992) see labor as the protagonist in this process rather than the bourgeoisie or middle classes. This view is supported by the timing and uneven nature of democratization. In all nations, capitalism preceded democratization. Furthermore, in the pattern of extending suffrage, class factors were more compelling than gender and race (women and racial minorities were the last to gain the vote). 26 Also reflective of this shift was an increasing contemporaneous shift in union activity toward trade-​union reforms and away from insurrection. In Russia, this shift was the focal point of Lenin’s diatribes in What is to be Done? ([1902] 1986). Gough (1979, p. 62) underscores the growing bourgeois acknowledgment that small losses (reforms) could be compensated by increased worker productivity. See also Therborn (1977, pp. 24, 25), Skidelsky (1979, p. 30) and Offe (1984, p. 179). 27 Przeworski and Sprague (1986, pp. 55) refer to this as the “dilemma of electoral socialism.” Jessop (1990, p. 179) notes how in the political arena bargaining shifted away from fundamental issues of private property and to relations in the workplace.

44  The rise of the guardian state Kloppenberg (1986, p. 200) describes it as a shift from “doctrine” to “process.”Voting patterns confirmed this deradicalization process as 1/​4 to 1/​3 of workers in Europe consistently voted for non-​Left parties, and sizable numbers of non-​workers voted Left. On this dilemma, see also Offe (1984, pp. 185–​187), Jessop (1990, pp. 183–​189) and Przeworski (1986, pp. 178–​184). 28 Jessop (1990, p. 176), Offe (1984, p. 185) and Przeworski and Sprague (1986, pp. 42–​ 52) underscore the strategic political advantage enjoyed by the bourgeoisie under the coalition structure. 29 Heclo (1975), Przeworski and Sprague (1986, pp. 15–​17) and Kloppenberg (1986, p. 263) have seen the political successes of the socialist movement grounded in incremental-​ bureaucratic (“chisel”), rather than revolutionary (“dynamite”), methods. 30 Barber (1985, p. 2) has noted how governments needed to maintain “cooperation” and “understanding” between themselves and industry to promote a stable economic transition out of war. 31 Rueschemeyer et al. (1992, p. 91). In various nations the political impact was immediate, as suffrage was extended and Leftist parties took power. See Therborn (1977, pp. 21, 29). 32 Representative of this diversification was the rise of reformist Liberalism: what originally emanated from a pro-​market (bourgeois) doctrine was tempered by socialist concerns to produce a more politically appealing agenda. The natural alliance with socialists produced the progressive movement in capitalist nations. Kloppenberg (1986, Ch 8) noted that the dual goals of “efficiency” and “social consciousness” characterized a “new liberalism” that consolidated subordinate groups and bridged the class struggle between the bourgeoisie and these groups. For statistics on the rise of Leftist parties, see Przeworski (1986, p. 18). 33 A welfare ideology was a natural ideological point of convergence for subordinate groups (hence politically viable as a catalyst for alliance) as they were all in one way or another in precarious economic situations under capitalism (because of work, age, health and income); hence, a philosophy espousing the construction of social safety nets was generally appealing. Just prior to World War I Michels observed how the expanded platform had turned labor parties into parties “of the people” [quoted in Przeworski (1986, p. 26)]. For bourgeoise groups, it meant allies in the political contest and the preservation of market institutions. Offe (1984, p. 184), Gough (1979, p. 67) and Kloppenberg (1986, p. 254) have seen the welfare state as the institutional manifestation of the political compromise between competing classes which took the form of social democracy. This view is representative of theories which posit the state as a set of institutions devoted to reorienting the class struggle in a way that preserves market economies. See Jessop (1990), Holloway and Picciotto (1978), Poulantzas (1968) and Alford and Friedland (1985). 34 Rosa Luxemburg was correct in noting that “the division between political and economic struggle…is but an artificial product” [quoted in Przeworski (1986, p. 13)]. Indeed, organized labor remained perhaps the single most dynamic force animating Leftist parties even after the parties evolved into broader social democratic alliances. See Gough (1979, p. 61), Poggi (1990, p. 113) and Jessop (1990, p. 176). 35 The pork-​barrel of the welfare state carried ample benefits for the proletariat’s allies as well: agricultural support programs; public services; and relief for the poor, sick and old. According to Offe (1984, p. 148), it was this “multifunctional” nature that

The rise of the guardian state  45 made the welfare state so politically compelling. Poulantzas (1968), Rueschemeyer et al. (1992, p. 8) and Przeworski (1986, p. 69) locate the rise of a middle-​class consciousness from this ideological synthesis embodied in the welfare state. 36 The idea of macroeconomic stabilization was visible in the two decades before the war. It emanated from the Progressive-​period belief that markets could malfunction and therefore required the state to intervene in order to “tame” the capitalist system. See Brinkley (1989), Barber (1985) and Critchlow and Hawley (1989). 37 Barber (1985, p. 41) notes that the policy orientation of the 1920s “anticipated most of Keynes’s conclusions.” However, in this anticipatory Keynesianism nations converged more on general goals and philosophies than on precise structures of macroeconomic policy tools and their uses. Nations did agree on the importance of a macroeconomic orientation for policy, and that policy above all should maintain income, employment and smooth the business cycle. They also agreed that the state should intervene with effective policy tools to bring these goals about, and that for many nations the principal tool was government spending.There was, however, much less agreement on the precise recipe for stabilization (balanced versus unbalanced budgets, taxation versus inflation, the precise targets of fiscal stimulus, etc.). Hence, references to this early Keynesian state signify broader policy outlines and goals. To some extent, this Keynesian posture (fiscal stimulus to maintain employment and income) emerged by default. Roosevelt himself averred that the state was the only economic catalyst capable of bringing an economy out of depression: it had access to unlimited resources and could not fail as an economic entity (Hardman [1944] 1969, pp. 89–​93). In fact, in late-​developers such as Germany, Italy and Japan there was a long legacy of relying on the state as an economic actor to facilitate industrialization (see Gerschenkron 1943). Indeed, Leon Keyserling was probably correct in stating that the policy responses to the depression years of the interwar period would not have been very different had Keynes not lived at all (see Sandilands 1990, pp. 84, 85). 38 See Barber (1985, pp. 16–​21) and Hall (1989) on the pervasiveness of interventionist policy. 39 For the U.S. it can be said, in contrast to FDR’s (in Hardman [1944] 1969, p. 103) claim that the governments of the 1920s were “do nothing,” that the New Deal originated in the President’s Council on Unemployment in 1921. Formed by then Secretary of Commerce Herbert Hoover in response to the economic slump of the post-​war years, the Council concluded that fiscal policies based on public works were the key to dealing with fluctuations in income and employment (see Barber 1985, p. 16). 40 On the specific policy mixes of individual nations, see Gourevitch (1989), Przeworski (1986, p. 213), Katzenstein (1985), Barber (1985) and the various contributions in Hall (1989). 41 Michael Kalecki (1943, p. 1) in a celebrated article “The Political Aspects of Full Employment” revealed the general sentiment at the time among economists: “A solid majority of economists is now of the opinion that … full employment may be secured by a government spending programme.” Alvin Hansen (1947, p. 16) reiterated this observation that nations must “undertake as a primary responsibility the maintenance at all times of adequate employment opportunities” (italics added).

46  The rise of the guardian state 42 Quoted in Skidelsky (1979, p. 34). On the interventionist state as a class compromise in the quest for economic security, see also Przeworski (1986, p. 208) and Offe (1984, p. 193). 43 On the political appeal of Keynesianism, see Skidelsky (1979) and Przeworski (1986, p. 36). 44 On the wave of legislation and institutions, see Hansen (1947, p. 16). 45 The entire institutional infrastructure created by the guardian state’s programs and bureaucracies represented the major component in the growth of government. On the institutional manifestations of the guardian state, see Brinkley (1989). 46 See especially Kuznets (1965) on growth theory. 47 On early ventures into measuring economic activity, see O’Brien (1994). 48 Quoted in Barber (1985, pp. 2, 3). Alvin Hansen (1927, p. 205) too voiced a common association between economic intervention and measurement, “modern means of gaining information…make for better insight into and control over economic conditions.” Keynes, even well before the historic publication of General Theory, underscored the need for accurate statistics to help government stabilize the economy (see Barber 1985, p. 40). 49 On the evolution of national income accounting, see especially O’Brien (1994). 50 On the evolution of growth theory, see Kuznets (1965) and Scott (1989). 51 On business-​cycle theory, see Zarnowitz (1992). 52 Since the literature is so massive, I cite works that are both representative and contain extensive literature reviews (see Monroe 1979; Lewis-​Beck and Stegmaier 2007; Duch 2007; Hellwig 2010; and Healy et al. 2017). See also the Special Issue: Economics and Elections of Electoral Studies (2000) for 18 articles covering a variety of issues and case studies. 53 For surveys of the field of study, see Mueller (2003). 54 On the growth of public functions and political concerns of central banks in the interwar period, see Hawtrey (1932) and Traynor (1949). 55 The macroeconomic data presented here is one manifestation of the guardian state. Other manifestations would also show up externally in terms of foreign economic policy and economic outcomes. This brings us to the issue of the famous trilemma, which suggests that nations cannot concurrently follow three policies robustly: open capital markets, fixed exchange rates and monetary independence. The final policy is a testament to domestic macroeconomic independence, which is an internal manifestation of the guardian state. Hence, external targets, the previous two policy objectives, suggest that indeed achieving such stability in such targets can pay a painful price in terms of the domestic macroeconomy. This book looks for manifestations of these external policies through the evaluation of case studies on monetary diplomacy. But others have in fact delivered studies of actual outcomes in external outcomes and policies that bear upon the impact of the guardian state. These studies do indeed support the proposition that there is a trade-​off in terms of internal and external targets, and that although external targets are important, economic decision-​makers are loath to allow external targets to compromise domestic economic objectives (see Aizeman et al. 2009 and 2010). 56 The data tracks Bordo’s (1993) periods of analysis up to 1989. Hence, the periods are somewhat neatly arranged around ranges of years corresponding to transformative events that had global impacts: pre-​War I, interwar period, post-​War II up to the periods of stagflation in the 1970s, the period following the onset of stagflation (1974–​1989) and then the period after the financial meltdown of 1987. In this

The rise of the guardian state  47 sense pervasive structural economic effects are somewhat more contained within periods of analysis rather than spread across periods. On the sources for the data, see Statistical Appendix below. 57 On growth and inflation, see Gallarotti (1995, pp. 151–​160) and Barber (1996, p. 14). 58 While various nations resisted reflation in trying to preserve gold standards, which according to Eichengreen (1992) made the depression much worse, it became increasingly popular among governments in the 1930s. There emerged a feeling that government was responsible for the money supply (i.e. the advent of public central banking) and that it should use its discretion over money in ways that were consistent with growth and employment. The turn toward inflation seemed to remain sturdy in the face of Keynesian beliefs regarding the role of money in an economy. Since money could matter under certain circumstances, according to Keynesians, inflation could be tolerated if it were managed in some counter-​cyclical way. Hence, while reflation had its critics (Kemmerer warned of the inflationary consequences of politicizing money), it was consistent with both the needs and theories of the times. To say that Keynesians could tolerate some inflation is not to attribute a monetarist orientation to Keynes (that money could be an effective tool for counter-​ cyclical stabilization policies). While Keynes believed that the money supply could have an effect on growth, it was always contingent on how it interacted with other variables (wages, the supply of goods, effective demand, employment and the interest rate). Furthermore, Keynes himself was quite outspoken about the deleterious effects of inflation throughout his writings. He ([1936] 1964, p. 269) stressed the dangers of the “great instability in prices,” perhaps the greatest being to “make business calculations futile.” But Keynes however did see the temptation present in monitizing expenditures. In How to Pay for the War (1940), Keynes argued that one of the greatest challenges of post-​war economic adjustment was going to be dealing with the inflationary pressures created by war financing (see Kahn 1972, Chs. 6, 7; Barber 1996, pp. 88–​95; Buchanan and Wagner 1977, pp. 32, 33; and Polanyi 1957, pp. 227–​230). 59 While the relation between employment and inflation is contentious, there is a general sentiment among economists that in the short run it is possible to make some gains in employment by increasing the money supply. Since political horizons are short, short-​run economic gains are sufficiently important to engage in such trade-​offs. 60 The literature on the politics of inflation is large, but excellent collections on the subject include Lindberg and Maier (1985), Hirsch and Goldthorpe (1977) and Whiteley (1980). On the inflationary impact of government growth, see Buchanan and Wagner (1977), Wagner (1980), Mueller (2003) and Cameron (1985). 61 On the Keynesian revolution and the role of government spending, see Galbraith (1970) and Barber (1996). 62 On the humanitarian dimension of government spending, see Meltzer and Richard (1981), Alt and Crystal (1983, p. 205) and Kohl (1981). 63 For a good survey, see Mueller (1989). 64 Alt and Crystal (1983, p. 191) note an asymmetrical stabilization tendency on the part of democratic governments. While they must spend substantial amounts in confronting economic crises, political market mechanisms work against their ability to recoup the resources in fair weather periods.

48  The rise of the guardian state 65 Other difficulties exist as well. Deficits may in fact be the manifestations of unanticipated distress: relief is required too quickly for expenses to be covered in more conventional ways like incremental shifts in marginal tax rates. Furthermore, they may also be influenced by other factors like access to capital markets. All such factors make the fiscal balance less accurate as a reflection of guardian-​state activity. The measure is more useful of course when all of these mitigating factors can be held constant. 66 Zarnowitz and Moore (1986) have shown that specifically in the case of the U.S. the amplitude of the cycle has been dampened significantly across the century. Bordo (1993, p. 15) points to the influence of counter-​cyclical fiscal and monetary policy in smoothing the cycle. 67 Also over the past several decades, consistent with the argument here, average unemployment tended lower in regions of the world in which democracy was more predominant vis-​à-​vis other regions where democracy was far less visible (see World Bank Unemployment Statistics 2020). 68 In the five leading western nations, for example, changes in percentage of labor force employed by government from pre-​World War I to the 1980s attest to the growth of the guardian functions of the state as a direct employer: for France 7.1% to 32.6%, for Britain 7.1% to 31.4%, for the U.S. 1.5% to 18.3%, for Italy 4.7% to 24.4% and for Germany 10.6% to 25.8% (see Poggi 1990). 69 Moreover, the intellectual shadow of prosperity was very visible in the evolution of economic theory (growth and business cycle theory) and the measurement of economic activity. 70 Burns (1960), Briggs (1968), Higgs (1987) and Buchanan and Wagner (1977) have noted the importance of institutional changes in industrially advanced nations that have created automatic stabilizers for economies. 71 It has been the intention of this argument only to account for the general landscape, and well acknowledges that trends in any given component macroeconomic or institutional statistic may best be explained by alternative factors. 72 On endogenous growth, see Romer (1990).

2  The 19th century conferences

Monetary diplomacy in the 19th century Cooperation of any kind among national governments before the 20th century was quite the exception rather than the rule. Trends in the growth of international organization suggest a very limited amount of cooperation among governments. By the turn of the 20th century there were no more than 25 international governmental organizations of any kind in existence. Early international organizations tended to be formed around specific mandates (both technical coordination as in the International Telegraph Union, and economic regulation of regional waterways like the Commission on the Rhine), with regional memberships and concerns. None had anything to do with regulating monetary relations.1 Cooperation among governments on monetary or coinage issues before the 20th century was even rarer than cooperation in general. Willis (1901, p. 71) in his classic study of the Latin Monetary Union noted that the founding of the Union in 1865 represents the first major attempt at intergovernmental monetary cooperation.2 Before this, there were actually a handful of monetary treaties, exclusively among Germanic states, usually governing the reciprocal acceptance of coin among monetary systems which featured a high degree of commercial and monetary interdependence.3 The most extensive of these was the Vienna Monetary Union, which lasted from 1857 to 1866. The Union made the thaler common legal tender in Austria and southern and northern German states, all of which found that trade dependence and the infusion of each other’s coins made some standardization essential (Nielsen 1933, p. 596). The Latin Monetary Union was originally instituted among Western European nations on franc standards: Belgium, Switzerland, Italy, and France (Greece and Romania joined later on).The initial impetus to standardize coinage among franc users came because differing finenesses among small coins caused problems in circulation among these states. The problem originated with the new Italian Coinage Law of 1862, which kept the prevailing (in franc nations)

50  The 19th century conferences .900 fineness in larger coins but reduced the fineness of smaller coin (coin of denominations smaller than 5 francs) to .835, and the Swiss Coinage Law of 1860, which reduced the fineness of small Swiss coin to .800. This created predictable problems in other franc systems that kept the .900 fineness for small coin, as differing finenesses created opportunities for arbitrage, and Gresham’s Law caused small Italian and Swiss coin to drive out national coins of other franc countries (of course, Swiss coin drove out Italian coin). The bad money (coins of lowest fineness) drove out good money (coins of higher fineness).This led to destabilizing shortages in small coin, which made some kind of coordination of coinage laws necessary. A more fundamental and political dimension of the creation of the Union was Napoleon III’s conviction that the creation of a Union founded on French monetary practices would heighten the international political status of France, a necessary condition for France’s ultimate reacquisition of the international dominance which ended with the Napoleonic Wars in 1815. This explains why Napoleon issued an open invitation to any nation that wished to join the Union at any time thereafter. The Union treaty, signed in 1865, standardized coinage practices among the franc-­bloc countries based on French coinage practices instituted in the early 19th century: bimetallism at a legal ratio of 15½ to 1, large coins at a fineness of .900, and smaller coins at a fineness of .835. The standardization of fineness took care of the immediate problem of coinage shortages, and the replication of French monetary law conferred onto France the status that Napoleon desired: hegemony over a monetary bloc.4 The only other significant formal monetary agreement of the period was the Scandinavian Monetary Union in 1873. This union was for the purpose of avoiding any unfavorable developments in member monetary systems after Germany’s shift from a silver to gold standard in 1871. These nations found the German transformation compelling given a pronounced trade dependence on German states; hence once Germany made the switch, they decided that their monetary systems would have to follow along. Given their own monetary interdependence, each recognizing the monies of the others as legal tender, the move to gold would best be instituted en bloc. Sweden and Denmark initiated the Union in May of 1873, later to be joined by Norway in 1875. The Union called for standardization based on the krone and gold. All legal-​tender and subsidiary coin from any member was acceptable within the economies of the other members (Nielsen 1933, p. 598). These schemes can essentially be labeled as relatively low-​level cooperative attempts which looked to maintain stable systems of domestic circulation of coin, with some international overtones couched in trade dependence. They were quite different from the kinds of monetary cooperation we have seen in the 20th century. All of these cooperative initiatives were between a limited number of nations. They tended to be regional, encompassing blocs that found themselves in some kind of monetary and/​or trade interdependence. None really extended, aside from the Latin Union, to nations with which the other members had limited monetary and commercial transactions. All of them were

The 19th century conferences  51 oriented around actual or prospective problems specifically relevant to the circulation of coin: usually reactions to overabundance or shortages of coin for circulation. None were for the more general purposes we usually equate with international monetary cooperation: collective maintenance of convertibility, the coordination of inflation rates or economic growth, or management of balance-​of-​payments. The Scandinavian Union did exhibit concern for stabilizing exchange rates among trade-​interdependent nations, but this as well as the other schemes were strongly driven by circulation concerns. Finally, they were configured around the monetary hegemony of a regionally dominant economy. Early Germanic schemes as well as the Austrian and Scandinavian unions typically centered around Austria and Prussia and later Germany. The Latin Union centered, of course, around France. The period from the 1860s to World War I witnessed four major attempts to construct an international monetary regime among developed nations. These attempts took the form of international monetary conferences in the years 1867, 1878, 1881 and 1892. It was at these conferences that the leading economies of the world met to discuss the prospects for cooperative schemes which attended to principal domestic monetary goals as well as pressing developments in the international monetary system.

The Conference of 1867 After the signing of the Latin Monetary Treaty in 1865, Napoleon III set his sights on extending the union to as many nations as would care to join, with special attention to advanced-​industrial nations.Waiting until the Austro-​ Prussian War concluded, Napoleon sent invitations to European nations and the United States (U.S.) to consider joining. The responses to outright membership generally met with some reservation, and Napoleon followed up by issuing invitations to consider monetary unification at a general meeting of all advanced nations in Paris in 1867. The motivation was again principally one of status for France among the community of nations. With a global union around the franc, Paris would vie for monetary primacy in finance, and with primacy came a boon to French economic and political standing. There was indeed little motivation based on guardian priorities of domestic economic growth and employment. This was principally hegemonic competition with Britain. The momentum and incentives characterizing the international monetary system at the time suggested great prospects for success. The franc union was growing in importance. The Papal States had joined the Latin Union in 1866, with Romania and Greece coming on board the following year. But more generally, the 1860s witnessed a pronounced popular and public momentum for unification of weights and measures, monetary standardization being seen as a subset of the general initiative for international standardization in a shrinking world. There had been numerous international meetings on the general subject, with the Postal Congress in Paris (1863) being the first such meeting which extended the desire for standardization to money. Such meetings were especially visible among chambers of commerce in Germanic

52  The 19th century conferences states. The Paris Conference of 1867 was directly preceded by the Conference Relative to the Establishment of an International System of Measures, Weights and Coins in 1866.The sentiment by national representatives was clearly strong, arrangements being made for further meetings and an institutional framework to increase public support for standardization. Both through publicity reaching business classes and growing support among government officials, the period directly preceding the Conference of 1867 was one in which a clear “sentiment” for monetary union was pervasive in public and private circles (Reti 1998 and Russell 1898). On the eve of the first session of the Conference of 1867 it appeared that the structure of monetary incentives and burdens pointed to the consummation of a union.Virtually all monetary diplomats at the conference and their superiors were in agreement with the Austrian diplomat Baron de Hock on the universal unification coinage: It cannot be doubted that the universal unification of coins, by creating a common medium of circulation, constitutes one of the most effective means for the development of general commerce. Such a medium, adopted by every state and individual, saves the loss of time and the trouble caused by the computation to which it is constantly necessary to resort to ascertain the precise value of the different coins; it reduces to a minimum the rate of exchange, that painful burden to commerce; it obviates the losses from exchange of money, to which the arts and manufactures and not less travellers are subject; it increases the utility of money, and thereby even its value; it diminishes the needs of circulation, and tends finally to an immediate and radical cure of the crises which sprang up in commerce by the accumulation of money at one point and its absence at another. Nations supporting such unification mirrored this mindset, but it underscored the monetary lubrication that enhanced international exchange. It also had a domestic element in removing bottlenecks to investment, which might adversely affect domestic economic activity. There was little evidence of targeting specific sectors, socio-​economic groups (middle class or labor) or even a general populist appeal. In this and other conferences, diplomacy was shielded by a protective vail of market logic: there was little inkling of any guardian posture that was to protect prosperity for some greater populist entity (U.S. Senate 1867, p. 20). Besides France, the other dominant bimetallist nation in the world, the U.S., whose support for the Latin Union would create compelling international momentum for unification based on the French system, showed a low estimation of the specific costs of such support as well as domestic legislative momentum in that direction. American monetary officials made it clear in 1866 that American conformity to French coinage standards would entail minimal sacrifice. “Our gold dollar is equal to 517 centimes. A reduction of 17 centimes (3½ cents) would leave it an exact multiple of the French unit, or franc, and the

The 19th century conferences  53 equivalent of five francs.”5 Everyone agreed that the reduction of value in the dollar was trivial. And monetary officials tended to see such trivial sacrifices as representing a minimal obstacle to an international union. On this point they were in agreement with John Sherman: Certainly, each commercial nation should be willing to yield a little to secure a gold coin of equal value... As the gold 5-​franc piece is now in use by over 60,000,000 of people..., and is of convenient form and size.6 Furthermore, in July of that year Congress had passed a law making the metric system, which was the preferred system of measure at all of these international meetings, legal and optional in the U.S. As Sherman further noted, it was a period when Congress was disposed to “adopt any practical measure” that would bring about uniform monetary practices among nations (Russell 1898, p. 42). During preliminary discussions between U.S. delegate Ruggles and French Finance Minister Parieu, it seemed that agreement between the two nations was imminent. The biggest potential roadblock in early negotiations appeared to be French reluctance to coin a new 25-​franc piece, which the U.S. desired because it conformed to the American half-​eagle. Parieu noted his reservations but made it clear that if the U.S. insistence was strong, France would drop its objections on this issue. It appeared that the U.S., the largest producer of precious metals and one of the largest economies in the world, was primed to come into union with the franc bloc on the Continent. Strictly with respect to coinage weights and finenesses, conformity to the French system seemed roughly as trivial for Great Britain as it was for the U.S. In order to make the sovereign conform exactly to the new 25-​franc piece, Great Britain would have to reduce the fineness of gold coin to 9/​l0ths (from ll/​12ths), an act which would also bring them into the decimal system of measure. This amounted to a reduction of value of about two pence (or four cents in U.S. money).The famous monetary authority Feer-​Herzog, a representative of Switzerland at the conference, in fact, noted that this difference was so “trifling” that the two coins could actually circulate concurrently without any alteration in the sovereign.7 John Sherman perceived the changes as “so slight ... that an enlightened self-​interest will soon induce them to make it.” And in Britain too, as in Germany, France and the U.S., there was much support among commercial classes as manifested in chambers-​of-​commerce meetings for monetary unification (Russell 1898, p. 43). Any effective monetary regime on a global scale would have to have the U.S., France and Great Britain as members. The U.S. had a principal effect on the market for metals, being the largest producer of precious metals in the world, as well as a leading financial center. Since the intrinsic value of coin depended on conditions in the market for metals, any regime that was to stabilize national money supplies in terms of inflation and circulation would have to have the cooperation of the U.S. France was the center of the Latin Monetary Union,

54  The 19th century conferences which meant that its currency practices would automatically be exported to its Latin allies. French cooperation would assure Continental cooperation. Great Britain, of course, featured the world’s leading financial center in London, and it also housed the world’s largest market for precious metals. Given the influence of London on national and international monetary developments, British membership was also a necessary condition for successful monetary union. Delegates at the conference were quite outspoken about the importance of tripartite cooperation among these nations for the success of an international agreement.8 They were also optimistic about the likelihood of such cooperation, because they perceived the interests of these three core nations to be perfectly served by such a formal union. Mindsets gravitated around the following principles as comprising the most likely regime to emerge at the conference: first, the standard would be monometallic and based on gold rather than silver. Early prompts from Napoleon III to nations about the possibility of a bimetallist union were met with general displeasure. The consensus reaction which Napoleon received from nations was that they would only consider union based on gold. This, of course, was perfectly consistent with British interests. Great Britain was committed to keeping its own standard, and its commerce would benefit greatly from increasing monetary conformity with its trading partners. Second, the standardization of weights and finenesses was essential to maintaining stable circulation in nations with low restrictions on international capital flows, which included transactions in precious metals. Certainly, the three major monetary players all desired stable systems of circulation. Third, the franc seemed a most efficient central monetary unit, with the 5-​franc piece being the central international coin. A very important group of nations on the Continent already had domestic regimes that conformed to the franc system, while the U.S. and Great Britain had only to make “trifling” adjustments to their coins to bring about conformity in coinage. Upon this set of rules, noted Russell (1898, p. 86), there appeared “apparent unanimity ... as to the desirability of monetary union” (Russell 1898, p. 37). What started as seemingly perfunctory diplomacy on an already resolved issue, however, took on an extremely uncooperative character.The British delegation issued a statement that would become the trademark of British monetary diplomacy for the rest of the century. They kindly thanked France for the invitation but made it quite clear that they would consider no resolutions that caused the British to change any of their present currency practices, no matter how trifling. Moreover, they declared that the British delegates should not be seen as issuing binding opinions on their government: they were there strictly to listen to the arguments, study the issues and report back to their government. Compounding the de facto withdrawal of one of the three essential monetary actors in the world from the most reasonable cooperative scheme, the other two (U.S. and France) came to an impasse over the use of specific national coins.The French came to insist on the franc as the exclusive numeraire. The U.S. preferred concurrent circulation of francs and dollars. U.S. representative Ruggles averred that it was impossible to eliminate the idea of the dollar in his country.

The 19th century conferences  55 Moreover, there was strong concern over the consequences of concurrent circulation, as both British and U.S. delegates expressed fears that the 25-​franc piece might very well displace their half-​eagles and sovereigns in circulation. National prestige was essentially at the root of this impasse, each nation seeing the displacement of its numeraire by that of another as a sign of international economic inferiority. It appears that it was the status-​consciousness of the French, which was the motivation for the conference itself, that was most obstructive to agreement on universal coinage, since the U.S. was somewhat more willing to discuss concurrent circulation while the French were not (Russell 1898, p. 22 and U.S. Senate 1867, p. 55). France’s intransigence also snuffed out whatever possibility there was to forge an agreement that would have some chance of British support. In fact, the Chancellor of the Exchequer himself made it clear that Britain might consider union with France if France would consider bringing seigniorage charges into conformity. This seemed quite reasonable, since any large discrepancy in seigniorage charges in a common currency area would cause one nation (the one with the lowest seigniorage charges) to obtain all the monetary metal. The most reasonable solution, therefore, would have dictated concurrent circulation with equal seigniorage charges, but France was being unreasonable.9 This was curious behavior for a nation so intent on being the orchestrator of monetary union. Another major roadblock to forging an international monetary union was that no agreement governing transition from bimetallism to gold could be reached. Such an agreement was vital to the immediate functioning of the union, since it was impossible to make a speedy transition to full monometallism. There would have to be some common legal bimetallic ratio instituted among nations in transition; otherwise, arbitrage opportunities would disturb their domestic circulations.10 Furthermore, the burden of converting silver into gold would have to be allocated among nations in a way that was perceived as fair and didn’t create shortages of gold. Some kind of time frame for transition would also have to be administered. None of these issues generated agreement, as it was decided to leave transition up to the discretion of the monetary authorities of each nation (Russell 1898, pp. 69–​72). Unlike all three future conferences, however, this one produced a resolution which delegates could bring to their legislatures. The agreement produced more than vague guidelines for action, but never resolved the most contentious issues. It called for nations to move to gold, with the 5-​franc piece being the centerpiece of the union, but coins of various nations would have legal tender throughout the union. As for rules of coinage, the kilogram was established as the common weight, common methods of assay were to be instituted, coins of similar values should have similar diameters, worn coin should be promptly removed from circulation and nations should pursue a similar enforcement of monetary laws. Finally, future conferences were called for to hammer out more specific details and attend to unresolved issues. The conference adjourned with some optimism that national legislatures would ratify the resolution. But none

56  The 19th century conferences of the legislatures did. Differences over fundamental issues allowed a watered-​ down resolution in Paris, but the differences proved too strong for legislators’ intent on adopting an international regime that would benefit their nations. The single most promising opportunity to build a formal international regime based on gold in the 19th century fell by the wayside. It is perhaps indicative of the failure of the resolution to generate support that a French monetary commission appointed in 1867 to study the question of monetary reform in France came out for continuing the French bimetallic standard that already existed (Reti 1998, p. 56 and Russell 1898, pp. 80–​88).

The Conference of 1878 The next international monetary conference would take 11 years to arrive, and this one found its origin in silver agitation in the U.S.. The 1870s had seen a large depreciation in the value of silver bullion. In 1867 the price of silver in London was 60 9/​16 pence per ounce and the market bimetallic ratio was 15.57 to 1. By 1878 these figures stood at 52 9/​16 and 17.92 to 1, respectively. In the U.S., much of the depreciation was blamed on the demonetization of the silver dollar in 1873, but in actuality broader supply-​and-​demand trends in the international market for metals were to blame. The effects of depreciation were also evident in other nations, as nations practicing bimetallic standards found it necessary to limit or suspend the coinage of silver at their mints (Gallarotti 1995, Chapter 6). Agitation in the U.S. to resuscitate the use of silver so as to stop its depreciation was headed by Congressman Richard Bland of Missouri. His own draft of a silver bill (the Bland Bill) failed to get Congressional support in 1877, but the bill was amended into the Bland-​Allison Bill, which was passed by Congress in 1878. The principal features of the bill were the revival of the silver dollar and a commitment on the part of the government to purchase between 2 and 4 million dollars worth of silver per year for coinage. The bill also called for the U.S. government to invite other governments to an international conference to discuss the possibility of instituting an international bimetallist union. With the remonetization of silver both in the U.S. and the world, it was hoped that depreciation of silver in the U.S. would be abated. International negotiation, therefore, was no longer oriented around building a gold regime as in 1867, but for the purpose of increasing the monetary use of silver through international bimetallism. In fact, no other international conference for the rest of the century would ever consider union around gold again, but a greater monetary use for silver. This was, of course, understandable given that the precipitous fall in the value of silver created extremely difficult conditions both monetarily and commercially. It was these conditions that made monetary cooperation in the late 1870s seem crucial. Just as the Conference of 1867 opened on what seemed to be a favorable set of incentives and momentum, the Conference of 1878 opened under conditions which

The 19th century conferences  57 strongly dictated the creation of some kind of international monetary regime to stabilize the price of silver (Reti 1998, pp. 61–​87). By the late 1870s many nations, certainly all the most advanced monetary powers, had already made the transition to gold monometallism unilaterally. These nations found their trade with nations remaining on silver to be greatly disturbed by the continuing fall in the value of silver. An appreciating exchange rate made their exports less competitive in the markets of silver-​using nations, and trade clearing with these nations became more difficult as silver nations found it increasingly difficult to pay out in gold without threatening convertibility. Silver nations also found it increasingly difficult to attract capital, as investors from gold nations exhibited growing reluctance to invest in silver nations because of exchange risk. In addition, all the advanced nations that made the transition to gold in this decade did so with a limp. The large store of silver that remained in monetary use in these nations found its fate linked to the international value of silver bullion. As this value declined, an enormous burden was thrown onto these limping nations, with a sizable portion of their money stock losing value.This also made gold convertibility more difficult to maintain, as this silver could now fetch less gold on the international market, and gold became the primary metallic means of international clearing. Finally, the many creditors, both private and public, in gold nations that had contracted debt with silver nations naturally found the real value of debt declining in proportion to the value of silver (Great Britain, Gold and Silver Commission ([1888] 1936, p. 87 and Reti 1998, pp. 61–​87). The four core nations of the international monetary system all found themselves with strong compulsion to create a regime because the depreciation of silver placed great burdens on all of their economies. With India being on a silver standard in this period, one cannot overstate the concern which the depreciation of silver generated for Britain.11 India had become the most important link in the British balance-​of-​payments. Exports to India were increasingly making up for British deficits with other nations. With India on a silver standard, British industries found it more difficult to export and found it more difficult to compete with Indian exports to Britain. Furthermore, British creditors faced the burden of receiving debt payments from India and other silver nations in depreciated silver.12 There was also the monetary turmoil which a leading colony of Great Britain had to face because of a depreciated currency (i.e. inflation, loss of reserves). Holland was in a similar situation, as its Eastern colonies remained on silver through the period of depreciation, and all of the problems relevant to Indian-​British relations also pertained to Dutch-​ colonial relations (Great Britain, Report of the Commissioners Representing Great Britain at the Paris Conference 1878, p. 11 and Reti 1998, pp. 61–​87). More generally, every nation that made a transition to gold in the 1870s had sizable stocks of monetary silver, both in public and private possession. Germany, the U.S. and France had especially large stocks.This was a function of an inability to purge their systems of excess monetary silver. For many of these

58  The 19th century conferences nations, in fact, public holdings of silver actually remained greater than public holdings of gold until well into the 1880s.13 This imposed several large burdens. Further depreciation might create problems in circulation. Moreover, depreciation would impose heavy losses in the value of central bank reserves, thus threatening metallic convertibility (i.e. people and nations increasingly resisted silver in payment of debts, and the world monetary gold supply was somewhat scarce). Investors in these nations also made sizable loans denominated in silver.14 In the Latin Union the depreciation of silver was especially threatening because the Union was founded on the agreement that should the Union end, coins would have to be redeemed by their respective governments. Belgium and France had issued very large amounts of silver 5-​franc pieces and were extremely reluctant to have them returned en masse for conversion. There was also a group of nations on fiat (paper) standards, principally Italy, Russia, and Austria-​Hungary, that found the gold link impossible to make given the depreciated state of their paper currencies, but strongly supported an international bimetallic regime which provided a more viable form of metallic standard for them in the short run. Since gold was scarce and their paper depreciated, resuming exclusively on gold would have been impossible, as the premium on gold would drive it from circulation (Russell 1898, p. 227 and Reti 1998, pp. 61–​87). Perhaps the most pressing and pervasive development of all was the fact that the world was in a strongly deflationary period. Prices had taken an unprecedented fall, and this was in the face of declining gold production. It was not difficult for supporters of bimetallism to make a case against the evils of monometallism, especially given the fact that most monetary authorities sympathized with the quantity theory of money. Weary monetary authorities appeared ready to accept an expansion of their metallic monetary bases that would come with the expanded use of silver. This is the closest these 19th century conferences came to manifesting a guardian posture about a domestic economic situation. But there was of course no evidence of motivations to manage business cycles for some greater macroeconomic goals involving unemployment and growth. The emphasis was on deflation, which principally characterized what was called the Great Depression of the 1870s.While prices showed several years of significant deflation, other macroeconomic outcomes such as manufacturing vitality, growth and employment were not in dire conditions at all. In fact, economic historians look at this event as one of principally deflation sine the other accompanying traits of a stereotypically depression. Of course, groups whose fate was tied up with the depreciation of silver (miners, bankers and farmers) generated narratives of the impact of falling prices on the fate of labor in order to gain the favor of other important political actors in the fight over monetary legislation. Bryan’s “Cross of Gold” narrative in the 1890s best captured the political manifestations of the politics of soft money and the plight of main street America (i.e. some grand populist push in the use of silver for maintaining living standards for the broader populous). But these ideas on the relationship between prices and the greater macroeconomy were far more

The 19th century conferences  59 contested and controversial, than they would be in the future with the development of monetarism and macroeconomics as economic theories, and many other issues regarding trade, convertibility and specie circulation showed that deflation itself was anything but the singular driver of negotiations at this conference (Gallarotti 1995, pp. 192, 151–​160 and Reti 1998, pp. 146–​148). On the eve of the Conference of 1878, the incentives that faced nations dictated some kind of regime that would make greater monetary use of silver. There was little disagreement among monetary authorities of the period that the growing demonetization of silver across the globe carried “the most fatal consequences.”15 Once the conference began, it was perceived as all the more important that some regime be forged, because as one British authority stated, “if the propositions of the American delegates should be simply rejected, rejection might be erroneously interpreted by the public, who might see in such a declaration a verdict given against the use of silver as money,” which would surely compound the depreciation and with it the undesirable consequences of such depreciation (Great Britain, Report of the Commissioners Representing Great Britain at the Paris Conference 1878, p. 14). The conference began in a period which generated other reasons for optimism about the monetary resuscitation of silver. The U.S. Congress had shifted to a soft-​money (Democratic) majority for the first time since the Civil War. President Hayes and his advisors wanted to see the creation of some international regime to support the price of silver so as to quiet political agitation for silver legislation at home. France, the central cog in the Latin Monetary Union, had been reluctant to suspend the coining of the 5-​franc silver piece indefinitely in the hope that an opportunity would arise where an international bimetallic regime could be constructed. Here was such an opportunity. And by the late 1870s gold had become more scarce owing to expanded use and a declining supply, while silver was extremely abundant. There had been quite a change over one decade: in 1867 nations were calling unequivocally for a gold union. Now it appeared that a bimetallic union was in great demand (Russell 1898, pp. 201–​203 and Reti 1998, pp. 66–​84). The conference opened with a shock, however. Germany, absolutely committed to its gold standard, refused even to attend. The significance of this event cannot be overstated. Germany had emerged by the late 1870s as one of the four dominant monetary powers in the world. More importantly, it was in an ongoing process of trying to liquidate its excess silver stock so as to add to its official monetary gold stock.The pattern throughout the 1870s suggests that German officials sold silver when its price moved up and refrained from public liquidation when the price was declining. No one, except German officials, knew exactly how much excess silver was still to be liquidated, but international perceptions suggest that it still had quite a mass to liquidate, judging from estimates in public documents. German officials did not abate fears at all with their taciturn style in international meetings.16 Even with the significant incentives nations had to come to some sort of agreement on a regime to support the price of silver, and it would have been expecting a great deal for

60  The 19th century conferences nations to contribute to the public good of a high price for silver when the possibility of a predatory Germany (waiting for a high price to liquidate its mass of excess silver) lurked on the horizon. In this case, the game became a pure Prisoner’s Dilemma, with nations extremely reluctant to cooperate unless they could get some assurances that Germany would not impose a sucker’s payoff onto the rest of them. In this specific game the sucker’s outcome represented other nations acquiring silver so as to maintain some floor price, and when this price was reached Germany would dump its hoards of silver on the market. Hence, nations would lose gold to Germany (making their own convertibility difficult to maintain) and in return would gain silver which was again likely to depreciate after Germany liquidated its public holdings and the regime fell apart (Great Britain, Gold and Silver Commission [1888] 1936). The German decision not to attend put one of the other core nations, France, immediately on the defensive. Along with the U.S., France’s cooperation was absolutely essential to the viability of a bimetallist union, because it was the center of the Latin Union, which was still, at least marginally, a de jure bimetallist union, and any comprehensive regime would have to coalesce around it. The French delegates immediately proclaimed that France would adopt an “expectant attitude,” which meant their decision to cooperate in a bimetallic union would be contingent on developments in the other two great silver-​using nations: the U.S. and Germany (Russell 1898, p. 207). The German reluctance also froze Holland, Norway, Sweden and Denmark. As trade and monetary satellites of Germany (in fact, they had promptly followed Germany onto gold in the early 1870s out of trade dependence), they could not adopt any standard which was significantly different from Germany’s. Their cooperation was therefore also contingent on German cooperation.17 The U.S. was still strongly pursuing some kind of agreement. As the largest producer of silver in the world, it still had hopes of building a regime, as it felt that other nations should be willing to cooperate with a nation with such influence over conditions in the market for metals. In fact, so anxious was the U.S. to initiate a regime that they raised the sights of the conference (placating early requests by Great Britain, Norway and Sweden) by including the adoption of a universal coin on the conference agenda. But even this commitment to building a regime did not fully move European nations, some of which even harbored fears that the U.S. itself might be a candidate for exploiting the cooperation of other nations (Russell 1898, pp. 208, 213–​218). The French delegate Say further raised pessimism at the conference by voicing serious concern over the future of the silver market. Asian demand, he argued, could never keep up with the world supply. Hence, any price-​support scheme would have to invoke especially large commitments to buy silver. He also speculated on the effects on the market in the case of a mass German liquidation. With some commitment from Germany now seen as crucial, the delegates again implored Germany to attend the conference. Germany once again refused. The refusal generated more rhetoric about the risk of sucker’s payoffs for nations that contributed to supporting the price of silver. Belgian

The 19th century conferences  61 delegate Pirmez cited cooperating nations as targets for those loath enough to take advantage of a high price of silver. He added that even under full cooperation, a bimetallic regime was difficult to maintain.When the market ratio came to diverge significantly from the legal ratio prevailing in the regime, the regime would become a de facto monometallic union, as Gresham’s Law would cause the undervalued metal to be driven out by the overvalued metal. History supported Pirmez. The highly respected Swiss monetary authority Charles Feer-​Herzog joined Pirmez in theoretical diatribes against the viability of bimetallism. With the second and third most dominant monetary powers in the Latin Union now voicing reluctance alongside of France on the question of international bimetallism, it appeared that the dominant silver bloc in the world would not be a leading force in the creation of an international regime. Italy, the one member of the Union that was unrelenting in its encouragement for such a regime, had suspended convertibility in 1866 and would not resume until 1884. In fact, its own support for bimetallism was really as a transitional state of metallism: Italy looked forward to an exclusive gold link in the future, but its currency was too depreciated to support gold convertibility at that moment (Russell 1898, pp. 213–​218). As with the Conference of 1867, it was a fairly well-​accepted fact in 1878 that an international regime could be forged out of cooperation among the four core nations of the international monetary system. In fact, most delegates believed that any viable regime really didn’t require more than these nations in cooperation. With the French wavering, the U.S. might still bring the leading monetary power (Great Britain) into supporter ship and put pressure on France to cooperate. With the three core nations in cooperation, a regime might still be possible in some form. But as in the Conference of 1867, Great Britain once more opted out of any initiative for building an international regime. If Britain would not support a gold regime in 1867, it certainly would not support a bimetallic regime in 1878, especially given its commitment to a gold standard. And like the conference of 11 years prior, British delegates once more issued the caveat that the British government was not bound by any resolutions passed at the conference. Furthermore, the British delegate Goschen pointed out all of the reasons that further deliberations on the creation of an international bimetallic regime were pointless: Germany, Britain, and Norway would not shift from gold; Latin nations would not change their legal ratio from 15½-​to-​1 nor would they open their mints to silver; and the support of Italy, Austria-​Hungary, and Russia was insufficient to build a metallist regime since none of these nations practiced convertibility, all being on fiat standards (U.S. Senate 1879, p. 51). Great Britain followed up these comments (stated in the third session of the negotiations) with a joint response (along with France) to a last-​ditch exhortation from the U.S. for nations to consider international bimetallism. The response was drawn up on behalf of all of the other nations at the conference and submitted at the fourth session. The response essentially made three points: (1) that both silver and gold should be maintained in monetary use, but that each nation should be allowed to determine the specific way in which this

62  The 19th century conferences was to be done, (2) nations should be free to use silver coin as they saw fit and (3) nations could not agree on an international legal ratio for gold and silver. The response received general support from the group of nations, and it essentially said that the community of nations agreed to disagree on the question of the appropriate monetary use of silver. So vacuous was the response that it generated support from both those theoretically in favor and those against bimetallism (Russell 1898, pp. 243, 244). With the other three core nations reluctant to support the U.S. in an initiative to build a regime, and other nations (including their monetary satellites) in a holding pattern, the only other option for the U.S. was neither a viable nor a desirable one. Actually, it was suggested by the Dutch delegate Mees. He noted the possibility of looking for allies in the less developed world, where nations were still adhering to non-​gold standards. Once this union acquired enough members, Europe might be induced to join. In actuality, the monetary systems of less developed nations were not stable enough to support an international agreement. Secondly, it appears that the U.S. delegates took offense at the suggestion that they might be in a cooperative scheme with less developed economies. In any case, nothing more was said about this alternative (Russell 1898, pp. 243, 244). The U.S. delegation might have been able to build some kind of price-​ support scheme for silver, even if not formal international bimetallism, if it had been more willing to consider major propositions separately. But they continued to present the agenda as an integrated set of rules governing a prospective regime. The British later stated that they would have been ready to vote in the affirmative on a proposition that sought to maintain some floor price for silver (perhaps a regime which strictly regulated subsidiary coinage). In fact, the British government clearly desired a price­-support scheme for silver throughout the period of silver’s decline. It was, for example, strongly advocated by the Gold and Silver Commission ([1888] 1936). But under pressure to consider this as part of an international bimetallic union, the British refused to support the U.S. plan (Great Britain, Gold and Silver Commission [1888] 1936, p. 208 and Russell 1898, p. 225). In retrospect, the failure to build a regime at the conference appears as a glaring manifestation of typically collective action problems and moral hazard. The German refusal to attend may have doomed the conference from the beginning, as its silver stock would have essentially held the regime hostage. Fear of exploitation by free riders and rule breakers, however, were not only focalized around Germany, but were generalized even to those who would have joined the regime. Pessimism over the prospects of building a successful regime was “intensified by a sense of the precarious nature of the arrangement, by apprehensions that other nations would depart from it, and by the desire on the part of each nation to protect itself from the mischievous consequences which would result from such departures.”18 Fears of obtaining the sucker’s payoff were manifest in the pervasiveness of an expectant attitude over the conference,

The 19th century conferences  63 which also mirrored economic interdependence among those nations (Reti 1998, p. 170). Another aspect of collective failure was not so much the fear of free riding from others, but a disposition toward complacency because of perceptions that the U.S. would unilaterally shoulder the burden of a bimetallist regime (i.e. make a commitment to buy a disproportionate amount of silver). Developments in the U.S. (the passage of the Bland-​Allison Act and the new soft-​money Democratic majority in Congress) made other nations more optimistic about the possibility for strong unilateral action on the part of the U.S. to abate the fall of silver. These expectations were strong even before the political developments in the U.S., given the fact that the U.S. was perceived as having the biggest stake in a regime resuscitating silver: it was traditionally bimetallist by law, and was the biggest producer of silver in the world. The recent political developments heightened the optimism.19 This created a moral hazard which reduced the urgency to forge an agreement on the U.S.’s terms, since nations felt the U.S. would accept a disproportionate burden in maintaining the price of silver. As Russell (1898, p. 224) noted, other nations became optimistic about the U.S. “pulling their chestnuts out of the fire.” This seriously undermined the U.S. bargaining position, as other nations still expected a regime to be forged irrespective of their support.20 As one monetary treatise of the period noted: “As long as [the U.S.] continues the purchase of silver and its coinage, [Europe will not feel] compelled to resort to some means to secure the use of silver as money” (Upton 1884, p. 246). In general, then, the price of silver was seen as a public good. As such, nations were extremely concerned with free riders, given the perceived benefits of such action. Cooperation itself, however, became perceived as less than urgent since the U.S. was expected to contribute disproportionately to maintaining the price of silver, thus providing some free-​r iding opportunities for other nations. Notwithstanding the favorable incentives and strong potential for regime building in the late 1870s, these obstacles proved too formidable to overcome.

The Conference of 1881 Another conference was orchestrated three years later, with both the French and the U.S. sharing the initiative of bringing the advanced nations of the world together once more to discuss the possibility of an international bimetallic union. The time for regime building in this period was certainly not any less propitious than in periods preceding the other two conferences. When invitations were sent out in February 1881, the world was once again primed for some kind of regime which would end the problem of depreciating silver. Although business and prices had recovered from the deflation of the 1870s, Europe found itself in dire straits. Europe had a bad harvest while the U.S. had a good one. This put pressure on European payments as agricultural trade moved in favor of the U.S. The resulting loss in gold forced interest rates up,

64  The 19th century conferences and Europe found itself with sluggish economies. Distinguished European scholars, including Giffen, were in fact blaming the woes of the 1870s and early 1880s on the relative appreciation of gold (i.e. the argument being that there was a relation between the premium that developed on gold over paper and the deflations which nations were experiencing). It was also, argued Russell (1898, p. 323), a time when the general doctrine of bimetallism had reached a peak in its perceived feasibility (Russell 1898, pp. 251–​264 and Reti 1998, pp. 99–​107). Latin Union nations still wanted some kind of protection against the Union’s ending, and ending meant that they would have to redeem their own silver coins which were held in other Latin nations. France was especially burdened by the depreciation of silver. Most of the Latin Union silver was moving into France. Furthermore, France was losing more gold than ever. It was losing 400% more gold in 1880 than it was in 1876.21 The Reichsbank still had large silver holdings, with two-​thirds of the metallic holdings of the bank being held in silver. More generally, German officials were making an issue of the increasing public costs of redeeming their silver into gold. This was especially troubling because the budget deficit was rather large at the end of the 1870s, and a continuation of absorbing the increasing costs of conversion would seriously disturb the public accounts. The German government did not want to resort to the option of raising taxes because the Conservative German ruling regime was feeling intense political pressure from the socialists, and such an unpopular move could undermine the support of the Conservative state. But it wanted to complete the limp as quickly as possible, given the agitation of German creditors (principally bond­holders), who were increasingly complaining of having to accept payment in legal­tender silver. Also, in France and in Germany silver was increasingly shunned in business transactions, as shopkeepers and retailers made pronounced efforts to give out change in silver, while buyers were reluctant to accept. Here domestic monetary concerns showed a disposition toward solving fiscal and commercial transaction problems—​quite a different set of priorities than those dictated by a guardian mentality regarding a populist economic fate that was tied into electoral mandates (Reti 1998, pp. 99–​107). Political agitation for silver in the U.S. made the U.S. especially willing to build an international regime. A. J. Warner’s bill calling for unlimited coinage of silver passed the House of Representatives in May 1879 by a vote of 114:7. Although the bill was killed in the Senate Finance Committee, there was no question that there was a great political schism in the U.S. which had to be addressed. An international regime appeared to be just the medicine (Russell 1898, p. 259 and Reti 1998, p. 101). The year 1881 seemed all the more favorable a period than 1878 to build a regime which solved the silver problem.The two largest silver users in the world, France and the U.S., were more anxious than ever for a regime to materialize. And this time Germany found the silver problem too compelling not to participate in multilateral talks. Considering the importance of German cooperation, given its excess silver stock, a German commitment was a necessary condition

The 19th century conferences  65 for any viable regime.With three of the four core nations apparently primed for cooperation, and the world acknowledging the importance of an international solution to the problem, the conference was awaited with optimism. The optimism even heightened as the conference began its toils. The joint invitation on the part of the U.S. and France once again proposed an international bimetallic union, to be practiced with a common legal bimetallic ratio between gold and silver. Germany announced that it was prepared to limit its sales of silver abroad if a bimetallist union was formed. Moreover, it would enlarge its use of silver at home, and allow nations to discriminate against German silver in the event they felt overburdened with the metal. The French delegation was especially supportive of the theory and practice of bimetallism. For the very first time Great Britain allowed representatives of British India to attend an international monetary conference.This was significant because it was the Indian problem that most compelled the British government to do something about the international depreciation of silver. Also, the leading theoretical voice against bimetallism and for gold monometallism in past conferences, Charles Feer-​Herzog of Switzerland, had died shortly before the conference (Reti 1998, pp. 99–​107). Once the formal agenda was presented, however, in a set of questions regarding the optimal method of stabilizing the price of silver through bimetallism, nations surprisingly made rather lukewarm responses. By the second session, 12 of the 18 nations that attended issued statements that made others dubious about the extent of their willingness to cooperate. Germany curiously followed up its preliminary promise of cooperation by Thielmann’s statement that the resolutions of the conference would not be binding on the German government, but only serve as a basis for future negotiations. Great Britain, as in the past, made its pro forma disclaimer: it would not consider any international regime that threatened the practice of gold monometallism in Britain.They were joined in this disclaimer by Portugal (which, of course, had to stay close to British practices given its use of British coins in circulation), Sweden, Norway and Denmark. Greece and Russia proclaimed it impossible to change their present systems, and Russia could not foresee resuming convertibility. The Swedish delegate Forssell noted how this “monometallist inertia” led by Germany and Britain was putting a damper on the proceedings. Support for a bimetallist regime would be principally marshaled behind a bridgehead of six nations: France, U.S., Holland, Italy, Austria-​Hungary and Russia. Holland still had a ruler who was sympathetic to bimetallism, and the latter three nations thought convertibility would be best resumed under bimetallism rather than a pure gold standard (Russell 1898, pp. 274–​78, 298 and Reti 1998, pp. 107–​113). Debate resumed with Belgium, as in past conferences, coming out strongly against bimetallism and for a gold standard. Much of the early debate was on theoretical issues of the viability of differing standards. This kind of debate had led nowhere in previous conferences, and was apparently leading nowhere now. It not only diluted, but also limited substantive debate. One of the biggest

66  The 19th century conferences supporters of a bimetallist regime at the conference, Italy, had a delegation head (Count Rusconi) who showed a penchant for trying to resolve highly problematic theoretical issues before moving onto policy prescriptions. At this point the Russian delegate Thoener presented what seemed like a reasonable compromise between those wanting a comprehensive union and those wanting just a price-​support scheme for silver. He actually revived an earlier proposal of the Danish delegate Levy.The plan simply called for a regime which regulated small coins. It required nations to replace small non-​silver coins and notes with silver, thus assuring an increased demand for silver in the future. Such a possibility was much discussed, but never gained enough support because nations remained unconvinced of its effects on the market for metals (Reti 1998, pp. 107–​113 and Russell 1898, pp. 286, 287, 309, 310). Things reached a confrontational peak at the tenth session as the German representative Schraut blamed the precipitous fall of silver on the Latin Monetary Union’s suspension of the 5-​franc piece. Cernuschi of France responded with a statement that mirrored the feelings of many delegates: that Germany was making token concessions in order to goad the community of nations to raise the price of silver, and when the price was sufficiently high, Germany would convert its mass of silver into gold. These perceptions of the sinister, free-​r iding motives of Germany were something that plagued every effort at international cooperation from 1878 on. It was something no amount of German promises or commitments could ever fully destroy (Russell 1898, pp. 313, 314 and Reti 1998, pp. 107–​113). At the following session, the Dutch delegate Pierson’s comments summed up the general feeling at the conference. He stated that Holland would consider joining a bimetallist union that included all of Europe and the U.S., but would be reluctant to join any regime founded on some smaller subset of these nations. As with the conference three years earlier, cooperation would have to be marshaled on comprehensive support or not at all, but such support did not appear to be forthcoming. From this point on, any substantive agreement seemed slim. The U.S. and France tried to save the negotiations by re-​issuing a joint statement of the objectives of the conference at the 13th session, but based on the substance of previous statements, delegates felt a positive response could not be justified. Forssell’s comment was also quite representative. He noted that as long as the U.S. and France would not start the ball rolling with a bipartite regime, and as long as Great Britain and Germany refused to provide substantive concessions, cooperation was undesirable for Sweden. Now only very few still believed that a viable regime required only the participation of France and the U.S. The conference adjourned with all the perfunctory optimism about points of agreement and the possibility of exploring these further in the future (Russell 1898, p. 306 and U.S. House of Representatives 1881, pp. 466, 502–​505). Again, as with the Conference of 1878, nations could not overcome the collective action problems which neutralized some very favorable predispositions toward building a regime. Moreover, the moral hazard generated by expectations

The 19th century conferences  67 of unilateral action on the part of the U.S. proved once more to be an obstructing factor. It is indicative of the influence of political developments in the U.S. that right after Warner’s bill passed the House, Germany immediately stopped selling silver. Perhaps German monetary authorities found it advantageous to await a rise in the price of silver resulting from U.S. legislation. Secretary of State Folger, in fact, stated in an 1882 report that the most effective way of bringing about international cooperation on the silver question in this period was for the U.S. to suspend further coinage of silver dollars. Unlike three years before, however, moral hazard appeared to have more diversified sources in 1881. Nations began perceiving more pervasive possibilities for unilateral actions. The years 1879 and 1880 gave birth to rumors that Bismarck was turning to bimetallism and would remonetize silver in Germany. Rumors were vindicated when in 1880 Bismarck laid a bill before the Federal Council which called for a 20% increase in the coinage of imperial silver. One U.S. diplomat in Germany (White) wrote back to the Secretary of State that Germany was embarking on an extensive use of silver. France was still strongly in the picture, given its co-​orchestration of the conference with the U.S. and the fact that the Latin Union was still in existence legally, even though the nations were practicing gold standards except for Italy. Some optimism even came to target Great Britain as a positive source of some significant unilateral initiative. The U.S., for one, expected something to come out of the British delegation, given the Indian problem (after all, this conference was attended by a representative of British India). With each of the core nations expecting unilateral actions from the others, a debilitating holding pattern of moral hazard emerged among those nations that were most capable of building a regime. The U.S. and France were waiting for the Germans and British to end their bargaining ploys embodied in weak concessions, and make major commitments to buy silver on the international market. The British and Germans maintained the perception that France and the U.S. had too much at stake to let a regime slip out of their grasp. In fact, a major reason for the reluctance to make substantive British and German concessions was their belief in the inevitability of a U.S.–​French regime. And, of course, within each of these pairs existed reciprocal expectations of unilateral initiatives. Britain and Germany appeared to be playing a waiting game, thinking that the other would be first to make a substantive concession. The U.S. and France continued to see each other as being compelled by irresistible domestic and regional pressures (Goodhart 1972, p. 107; Russell 1898, pp. 256–​ 258, 265, 307, 311, 320, 325, 353; and Reti 1998, pp. 107–​113). As with moral hazard, the perceptions of prospective free riding also became more pervasive. Even though some nations saw Germany as a possible initiator of a regime, others still considered it the central protagonist with respect to perceived potential rule breakers, but the U.S. and Great Britain were also thrown into the role (the latter more in terms of a failure to contribute than any perceived attempt to liquidate silver at higher prices). Delegates were cautious about Britain’s “surreptitious” attempts to goad other nations into cooperation

68  The 19th century conferences with its flimsy concessions on the purchase of silver. Such was also the view of the German concessions.22 It is certainly clear that both Germany and Britain desired some regime to be built by the Latin Union and the U.S., with themselves preferably making nominal concessions for cooperation. Some fears also appeared among European nations that the U.S. was trying to increase the price of silver so that it could liquidate its silver stock. At one point, in fact, a U.S. delegate (Howe) was compelled to assure the other delegates that the U.S. had no such ulterior motives for building a regime. But no statement could eliminate all the fears. The reluctance of the Germans and the British to move beyond nominal support for a regime, and French and U.S. hesitancy in taking a substantive initiative, combined to limit prospects for any kind of agreement. Furthermore, the French and Americans, more generally, had a base of support that was founded on relatively weak monetary powers. Of the other four major supporters of a bimetallist regime (Italy, Russia, Austria-​Hungary and Holland), all but one (Holland) were operating on depreciated fiat (paper) standards, and Holland’s metallic holdings were relatively small (Russell 1898, pp. 211–​214, 249, 292, 303; Reti 1998, pp. 107–​113; and Horton 1892). The demise of these negotiations did not bring down the final curtain on monetary cooperation. The U.S. remained a driving force over the next decade in exploring possibilities for some kind of international regime to solve the silver problem. By the late 1880s and early 1890s, the U.S. felt it once more a propitious time to initiate another conference. This time the initiative was unilateral (U.S.) rather than a joint initiative with France.

The Conference of 1892 The early 1890s was a period that appeared less favorable to international bimetallism, as the most advanced nations had now been practicing a gold standard for at least a decade and were apparently quite comfortable with it. In fact, in a preliminary U.S. communiqué with Great Britain, the British government stated that it would not consider discussing the possibility of international bimetallism (which it discussed at previous conferences), but would only attend a new conference whose objective was somewhat more restricted to a regime that was limited to increasing the monetary use of silver (i.e. a pure price-​ support scheme). France was now somewhat less animated about pursuing an international bimetallic regime, since the Bank of France had accumulated so large a gold stock that monometallic convertibility was no longer as difficult to maintain. In fact, it even refused to host a conference. Brussels was chosen as an alternative site. Furthermore, Austria-​Hungary was preparing to make the link to gold in 1892. Hence, the U.S. lost some support from an erstwhile ally on the international silver question. Moreover, Great Britain was resolved to link India to gold should this next conference fail. However, virtually all the incentives which made nations want to support the price of silver a decade ago were still in existence in the early 1890s. And

The 19th century conferences  69 since gold was still perceived by many as relatively scarce given its monetary use, greater use of silver was certainly still desirable. Furthermore, since the U.S. delegation was now planning to set its sights a little lower and push for a price-​support scheme rather than an international bimetallic union, prospects for a substantive agreement appeared more promising. When the conference finally took shape in 1892, once again the attendance represented all economically advanced nations in the world. The initial signals appeared mixed. Spain, Holland, Mexico, Denmark and Great Britain accepted the U.S.’s vague resolution calling for increased monetary use of silver. This was especially exciting for the U.S., since it was unusual for the British delegation to vote on anything, given its historic behavior at international monetary conferences. It appeared that the British delegation was unusually supportive of some kind of regime in early negotiations.23 But reactions from other nations seemed less promising. Delegates from Germany, Russia and Austria-​Hungary made statements to the effect that their governments precluded them from voting on resolutions. They were just there to observe and report. Germany voiced satisfaction with its present system, although it was perturbed by developments in the silver market. France was somewhat inconsistent in its initial reaction to the U.S. proposal. On one hand it criticized the U.S. for lowering its goals on the silver issue, but also questioned why France should be willing to make greater use of silver when its own system was overflowing with the metal. Romania, Greece, Portugal and Turkey expressed outright reservations on the U.S. proposal. Early statements by both India and the U.S. raised the urgency of reaching some kind of agreement. Molesworth, the delegate of British India, averred that if the conference failed to produce a solution to the silver problem, India would make a shift to a gold standard. He further argued that an effective price-​ support regime could be built around India, the U.S. and Latin Union nations alone. McCreary of the U.S. followed up this statement with his own: if the conference failed, the U.S. would surely repeal the Sherman Act (Reti 1998, pp. 115–​131; U.S. Senate 1893, p. 10; and Russell 1898, pp. 390, 399, 400). The one concrete plan to emerge from the early sessions came, surprisingly, from the British delegate Rothschild. The Rothschild Plan was essentially a price-​support scheme that targeted a floor price for silver at 43 pence-​per-​ ounce. Unfortunately, the plan proved to be as contentious as it was beneficial for Europe. The plan drew the immediate vehemence of the U.S., as no proposal in the history of monetary negotiations in the 19th century was ever a more blatant attempt to free ride. Rothschild called for the U.S. government to continue its present level of silver purchases into the future. Europe and Great Britain would only commit to buying silver if the price of silver dropped to 43 pence per ounce (i.e. this would be the intervention price for Europe). And even then, Europe and Great Britain were not committed to buying anything more than 5 million pounds sterling of the metal. With the U.S. continuing its present level of purchases and the silver market invigorated with news of a successful conference, it was unlikely that the intervention price would ever be

70  The 19th century conferences reached under normal conditions. And even if it were, European and British central banks stood to make a profit, as they would be buying at a floor price and could convert their excess silver when the price appreciated. This would create the regime which European nations desired all along, one where the burden of supporting the price of silver would be borne almost exclusively by the U.S. The plan was eventually modified to increase the European purchase quota, but never lost its free-​r iding character. At this point a smaller committee of the whole was selected to confer over proposals which they could present to the body at large. The committee resuscitated the Levy Plan, which was last marshaled by the Russian delegate Thoener at the Conference of 1881. Some saw such a plan for regulating small silver coin as a viable common denominator, while others considered it only a palliative without real substance. In any event, it was the British who spoke out strongly against this plan, insisting that it would have to be integrated into the Rothschild Plan to be acceptable. Furthermore, the British government did not want to retire the necessary amount of gold coinage called for by the Levy Plan. Interestingly, now that the British delegation was so active (unlike the previous three conferences), it was either trying to free ride on other nations or block what seemed to be the most reasonable agreements. India protested for reasons that the plan was not substantive enough to solve the silver problem. Hence, nations disliked it from extremely different vantage points: some said it asked for too much, while others insisted it didn’t ask for enough (Russell 1898, pp. 391–​396 and Reti 1998, 131–​136). By the concluding sessions, debate had appeared to lose its focus, and arguments seemed to come full circle to the Conference of 1878 when gold supporters argued against supporters of bimetallism on the theoretical and historical grounds for each one’s favored standard. The proposals now seemed to be going back to more elaborate plans for international bimetallism at a point when the delegates appeared unable to reach agreement on a regime of a lower order. To its own detriment, discussion shifted to specific facets of elaborate plans, when only general principles had a chance for generating some agreement. Given the state of negotiations, the delegates thought it prudent to adjourn until next May. The conference closed its duties without voting on a proposal, not even the Levy or Rothschild plans. This adjournment closed the curtain on international monetary cooperation in the 19th century. There would be no renewal of the conference’s business in May 1893, as nations felt attempts at regime building to solve the silver problem carried little potential for success.24 As in the Conferences of 1878 and 1881, problems of collective action and moral hazard proved once more to be obstructive forces. The British attempts to free ride through the Rothschild Plan and the moral hazard created by the passage of the Sherman Act in the U.S. in 1890 (raising the silver purchase obligations imposed by the Bland-​Allison Act heightened expectations that the U.S. would act unilaterally) created both confrontation and complacency, respectively. But in 1892 neither problem appeared to be as debilitating

The 19th century conferences  71 as it was in the previous two conferences. The Rothschild Plan was modified, and the Sherman Act appeared doomed if the conference failed. The British were taking an initiative instead of waiting for unilateral action by France, Germany or the U.S. Other nations were not as expectant of unilateral action from Britain, given that it was considering altering India’s standard to gold. And France was now perceived as less of a source for unilateral action, as its gold holdings had increased dramatically over the decade. Germany, too, was seen as having adapted to the gold standard as excess silver problems were perceived as less pressing. What probably was most responsible for the failure of the conference was diminishing support for international bimetallism. The U.S. had maintained the initiative throughout the 1880s, but its supporting cast continued to diminish. Nations had become comfortable with gold standards, and they had preserved them through the years in which the fall in the value of silver was most precipitous. Even France had dropped out of that dynamic group of nations pushing the creation of a bimetallic regime. It was difficult enough for the U.S. without its supporting cast from the Conference of 1881. But without France providing its traditional support, any U.S. initiative was unlikely to engender the necessary cooperation for a regime. The century closed without a single successful conference. Although the first engendered a resolution (to adopt an international monetary union founded on the franc and gold), the resolution was not ratified by legislatures.

Guardianship and monetary diplomacy of the 19th century While there was a sense of the “domestic trades” at these conferences, it was far from the mature macroeconomic constructs that would emerge with the work of Clark, Kuznets and Keynes in the 1930s. As noted in the previous chapter, only by the 20th century were governments themselves formerly compiling estimates of the national income, but before the 1930s there was a larger variation on the estimates for economic performance and far from a unified view of what comprised the macroeconomy. What’s more is that the history of national accounting was often tied to specific policy objectives, like taxation or sustaining war. In actuality it was financial crises and aftermaths that most galvanized perceptions of a holistic idea of the “trades.” And since national income evaluation was often tied to specific goals, there was no significant sense of an ongoing business cycle in both good and bad times, and this was compounded by the general absence of macroeconomic stabilization functions like fiscal or monetary policy. Again as noted in Chapter 1, business cycles were not seen as something that could be manipulated, but more as acts of God. The statistics on business cycles in Chapter 1 manifest this belief given the changes in the cycle from the 19th to the 20th centuries (see Tables 1.2, 1.3 and 1.4). Moreover, the idea of inflation entered into the economic lexicon only after the mid-​19th century when there was a significant proliferation in the use of banknotes. The idea was motivated by sensitivity to the relationship between banknotes and the underlying specie that preserved convertibility.

72  The 19th century conferences Indeed, there was a keen sense among diplomats at these conferences that the selection of a specie regime would have a significant impact on prices in their nations. And of course, there was a sense of the impact on economic welfare in those nations. But notwithstanding the presence of such issues, the diplomats were far from a group that approached a problem of specie regimes as shaping macroeconomies. Hence, it would have been too much to expect them to approach these negotiations as would negotiators in the 1930s and beyond, especially given the limited suffrage in these nations, and hence the guardian priorities on the part of the state were limited to some general ideas of preserving the stability of a monetary system, which in part delivered a more favorable environment for the domestic trades and a number of economic groups whose fates were perceived as being tied up to monetary policies. The idea of smoothing out business cycles for the purpose of managing growth and employment would be manifest well into the future and not at these early conferences (Blaug 1996 and Vanoli 2002). The domestic economic concerns that most glaringly manifested themselves at these conferences were varied. First, there was a concern of bottlenecks in the supply of money that would create an international imbalance in access to investment capital, and as such would affect the domestic trades. Second, the concern for domestic groups took the form of those actors that might be adversely affected by differing policies regarding the choice of monetary metals. In this respect, attention was cast on a macroeconomic target of inflation, but not in a way that impacted a populist prosperity that characterized a guardian posture, In fact, attention was more restricted to impacts on agriculture and labor. Third, there was some concern over the fiscal impact of monetary policies, as debt held in depreciating currencies was seen as a threat to domestic budgets. And of course this period saw extensive spending as a result of growing state institutions, war and the growth of populations. Fourth, there was concern with the impact of coinage laws creating dysfunction in the domestic trades as a result of changing values of gold and silver, which in turn led to bottlenecks in domestic transactions. But these domestic concerns were far from a guardian posture that sought broader macroeconomic goals related to maintaining some minimum level of popular prosperity. Political entrepreneurship in a period of restricted suffrage was far less driven by broad economic targets, as it would be later in the 20th century when the masses made such targets essential to political survival. The goals were much more oriented around purely monetary imperatives of balancing the supply and demand of precious metals so as to maintain stable circulations and stable prices for the metals within and across the respective monetary systems. Even with the Conference of 1878 being initiated in a period of deflation across many countries, as noted above, guardian concerns with the effects of deflation as impinging on political entrepreneurs for broad macroeconomic outcomes across a business cycle so as to maintain some base level of populist prosperity did not crystallize. Concerns filtered beyond a general fear of impact on the domestic trades and embraced some more specific concerns related to certain

The 19th century conferences  73 groups, sectors and international trade.This was a period in which there was an absence of mass political pressures in diplomacy. So even if domestic economic growth and employment were in dire straits, there were far fewer avenues through which to send such concerns up the diplomatic flagpole since political leaders would not pay a price at the polls for such outcomes. Restricted suffrage basically eliminated mass voices in the domestic chorus that diplomats heard (Eichengreen 1992 and Simmons 1994). In the monetary diplomacy of the 19th century, no cooperative schemes emerged from the negotiations among national governments and very little effective cooperation took place. It is interesting that very little success was achieved at the four international monetary conferences of the period when the most powerful monetary players in the system faced consistent and significant incentives to create a formal monetary regime: either a monetary union or a multilateral price-​support scheme. British intransigence was an ongoing barrier to success. In this respect, the British appear to have acted against their own best interests, since a regime appeared to carry far more benefits than the potential sacrifices Britain would have had to make (which by many accounts were in fact small). In this case we had an antithesis of a guardian posture: domestic economic welfare and interests were compromised for the sake of maintaining orthodox monetary practices. There were perforce extensive benefits for the British economy which were compromised from this intransigence. First, it had a fundamental interest in promoting trade as a monetary hegemon, as its gold standard would have been exported to other countries if the Conference of 1867 had achieved its goal. Second, the stabilization schemes for silver in later conferences would have maintained the income of British ex-​patriots working in silver nations such as India. Evidence from British government documents of the period shows this to have been a major issue among parliamentarians and monetary elites. It is interesting that many of the international relations scholars who have looked at monetary relations in this period attribute any major successes in outcomes to British hegemony. In fact, the opposite is true. If anything, the British did more to block the emergence of cooperative schemes than leading them. But when it agreed to a plan to maintain the value of silver in 1892, it did so in a predatory way by trying to free ride on the U.S. and in fact exploit the U.S. by trading its silver for a higher price. If there was a hegemonic actor in this period, it was the French, who played a leadership role in bringing about cooperation among banks in the abatement of financial crises. But it could not overcome British intransigence.25 The other major barriers which manifested themselves across the conferences were moral hazard and fears of exploitation (i.e. fears of free riding). A good deal of complacency was created by expectations that large and powerful nations would unilaterally or multilaterally build a regime. Such complacency was also evident among core nations themselves. Hence, nations systematically held back in making concessions in the hope that they could benefit from a regime that was supported exclusively by other nations. Compounding this complacency were fears that if indeed such concessions were made, the cooperating nations might be exploited by

74  The 19th century conferences free riders. This latter factor was especially important in precluding the emergence of a price-​support agreement for silver (Reti 1998, p. 170 and Gallarotti 2010, pp. 59–​72).

Notes 1 2 3 4 5 6 7

On early international organization, Jacobson (1984, p. 34). In this case cooperation took the form of coordinating coinage laws. For a comprehensive list, see U.S. Senate (1879, p. 779). On the formation of the Latin Union, see Willis (1901). U.S. diplomat Beckwith, quoted in Russell (1898, p. 38). Quoted in Russell (1898, p. 43). He estimated that transaction costs of arbitrage would be greater than the difference in intrinsic value (see Russell 1898, pp. 57–​60). 8 See the comments of Count d’Avilla in U.S. Senate (1867, p. 31). 9 Although the conference documents shed little light on the rationale behind this intransigence, French reluctance to consider changes in seigniorage charges appears to have derived from a reluctance to alter long-​honored monetary practices (see Russell 1898, p. 102). 10 Debate over the legal ratio was especially contentious as supporters of monometallism felt that the ratio should be done away with in fear that its maintenance would delay the transition to gold. Others felt no transition could ever be that rapid, and hence there was a significant need for a legal ratio. 11 Public documents of the period more than bear this out. See, especially, Great Britain, Gold and Silver Commission ([1888] 1936). 12 As the world’s largest net creditor, the prospect of a depreciation in debt most severely impacted Great Britain. 13 In the Bank of France, for example, specie holdings in 1874 were made up of about only 20% silver (12.528 million pounds sterling versus a gold stock of 40.484 million pounds). By 1878 silver specie had surpassed gold specie—​42.324 million versus 39.344 million in gold (Russell 1898, p. 260). 14 Even when loans were denominated in both silver and gold, the debtor could always pay in the depreciated metal. 15 These were the words of the Dutch monetary diplomat Mees, quoted in Russell 1898, p. 223. 16 Russell (1898, p. 203) suggests that there may have been some sinister reasons for this reluctance to negotiate with other nations on the silver question (i.e. perhaps wanting to keep the amount of excess silver a secret). This is dubious given that Germany had shown a moderate trend over the decade in liquidating its silver, and didn’t change its style at all even after the conference. Aside from a show of dedication to its recently instituted gold standard in 1871, it is difficult to find any other reason for German intransigence in accounts of the conference. 17 See the comment of Dutch delegate Mees in Russell (1898, p. 223). 18 Great Britain, Gold and Silver Commission ([1888] 1936, p. 124). 19 All developments didn’t cut the same way, as the demonetization of the silver dollar in 1873 generated some skepticism about U.S. intentions. But more recent events, such as the Bland-​Allison Act, served to diminish this skepticism. 20 In this respect, the analysis of Hardin (1982, p. 73) on collective action is relevant. When communities have substitutes for cooperation, they will be less successful in

The 19th century conferences  75 procuring public goods. For example, the existence of high-​quality private schools will diminish the collective action in support of better public education, as potential supporters will send their children to private schools (i.e. vote with their feet instead of raising their “voice”). In this case, expectations of unilateral action by the U.S. acted as a substitute for cooperation. 21 It was actually in this loss of gold and growing stock of silver that the conference found its origin. Disturbed by these developments in their monetary stock, French officials began prompting the U.S. government on the possibility of another monetary conference (see Russell 1898, p. 260 and Reti 1998, p. 102). 22 Delegates remembered well how just prior to the conference Germany had taken advantage of an increase in the price of silver orchestrated by the British intervention in the market to stabilize the pound–​rupee rate (Russell 1898, p. 254). 23 See the statement of Britain’s Rothschild in Russell (1898, p. 385). 24 On the aftermath of the conference, see especially Reti (1998, pp. 136–​153). 25 On myths and realities of British and French monetary hegemonies of the period, see Gallarotti (1996 and 2005).

3  The interwar conferences Genoa and London

Genoa Conference of 1922: the emergence of a guardian ideology The idea of a Genoa Conference (April 10 to May 19, 1922) was born at a conference in Cannes in January 1922, with a resolution pushed strongly by Britain’s Lloyd George for a major meeting regarding the economic and financial reconstruction of Europe as a way to hammer out crucial differences with France’s Poincare over the financial fate of Europe in the post-​war years, especially on the questions of German reparations. Many problems were festering after the war: reparations, war debts, disarmament, the international role of the new regime in Soviet Russia, the financial fates of the Soviets and Germany, the international financial system, trade and geostrategic prospects in alliance developments going forward. The 3 years following the Treaty of Versailles witnessed constant bickering over the peace agreement in virtually every important political and economic aspect. The post-​war order and alliances were splintering. The global economy saw widespread economic stagnation. Lloyd George in addressing the House of Commons on the outcomes of the conference noted how going into the conference the world was mired in various wars: military (as Russia and Poland were still mobilizing troops at each other’s borders), diplomatic, arms races, property and trade. Such conditions were pushing for the emergence of a strong parochial-​guardian posture in the management of domestic economies to promote employment and growth.Very little came out of the Genoa Conference in terms of formal agreements aside from a proposal for nations to implement gold-​exchange standards. A somewhat chaotic interaction arose in a splintering of negotiations leading to a tangential Treaty of Rapallo between Germany and the Soviets that eliminated any territorial and financial claims each nation had against the other. Apart from the failure or success of the conference, the negotiations had very strong manifestations of political and economic policy orientations of the day. In this regard, it cast a noticeable shadow of the prevailing thinking about guardian economic policy (Hansard 1922; Morgan 1986, p. 315; and Fink 1984, pp. 3–​5). The Genoa Conference would naturally be oriented around reestablishing monetary stability and attending to the economic dislocation caused by the

The interwar conferences  77 war. The Cunliffe Report of 1918 (a manifestation of a 19th century monetary orthodoxy that sanctified the precedence of international over national adjustment) still held great sway over British monetary functionaries and diplomats (Clarke 1973, pp. 11, 12). Britain of course was queen of the conference in the absence of the U.S.. This primacy was manifest in Lloyd George twisting France’s Poincare’s arm to attend the conference when France was most reticent to compromise its domestic economic goals for the sake of international agreements. In fact, Briand’s government had just fallen because of a feeling that it was not doing enough for French economic needs. Moreover, France had everything to lose from an agreement at Genoa, which would no doubt affect its reparations and debt arrangements with Germany and the Soviets (Fink 1984, pp. 71–​76). It is a testament to the power of domestic economic imperatives that nations historically wedded to particular monetary and fiscal orthodoxy of rigid gold convertibility and balanced budgets, that it took 3 years to come to the table after the war about issues that few political and economic elites disagreed on. Obviously both convertibility and fiscal orthodoxy were contingent rules that were suspended in times of war, but the 19th century had few major conflicts aside from the Napoleonic, Crimean and Franco-​Prussian wars; and nations reestablished fiscal and monetary rules relatively quickly afterward. Therefore, World War I was especially vexing as no such precedent ever appeared to warrant a sustained departure from rules forged over at least two previous centuries. However, this does not fully justify a broad consensus about the sanctity of rules being pushed aside for as long as they were. Clearly each nation was reticent about being shackled by rules when it required major flexibility in fiscal and monetary strategies in adjusting to the economic devastation of this particular war. However, certain impediments appeared early on and carried a poisonous impact on negotiations down the line.The U.S. was not present.While President Harding wrote a letter to the Italian Ambassador saying that the U.S. absence was based on the belief that the conference was more political than economic, it is clear that its absence was strongly reflective of the sense of domestic economic sovereignty that pervaded the conference, especially financial and monetary impacts of international agreements (debt, reparations and resumption) on the American economy. After all, the U.S. had far more to lose in a political than an economic agreement. Even the prospects of building a trans-​Atlantic highway that would promote a new and stable post-​war order was not enough to dislodge Americans from a guardian posture. France was equally recalcitrant about discussing German reparations. Without confronting issues of war finance, it is difficult to see how any agreements about rebuilding an international economy could be sustained. Hence, in a sense, the conference was born in original sin (Hansard 1922 and Fink 1984, pp. 49, 235). Structurally the international system was broken. Convertibility was suspended, profligate spending was required to rebuild, the international trading system was disrupted with impediments that remained in place and domestic economies were grounded. But reestablishment was now tricky because nations

78  The interwar conferences found themselves in a more predatory environment, in greater salience relative to the silver convertibility dilemma of the late 19th century. Now nations had a far greater temptation to relieve domestic pressures by victimizing cooperative efforts to re-​establish convertibility. Unless it was done in a joint-​step collective, nations that lagged could gain much by converting non-​specie assets into valuable specie and maintain a safer store of reserves. So too with trade, laggard nations could “clean up” on nations that first opened their markets. Consequently, the war threw nations into a far greater posture of mercantilism with no real precedents on how to extricate themselves. Hence, a guardian posture would be a natural outgrowth of structural conditions, but now an even more adamant ideology manifested itself suggesting heretic departures from long-​standing practices of monetary orthodoxy. It is difficult to pinpoint precise causes, but surely such an advent of a domestic economic entrenchment of this type would suggest that more than war was driving leaders. This is because fundamental approaches to post-​crisis reconstruction were emerging in ways that bucked long-​standing traditions of thinking (Bordo and Kydland 1990 and Kenwood and Lougheed 1999). This shift manifested itself quite starkly and early on at the conference proceedings.1 To start, there emerged general concerns regarding the need for systematic central bank cooperation in currency proposals generated by the Second Commission.2 This was certainly a step-​level change in domestic economic reconstruction (suggesting a new level of domestic guardianship), as before the war systematic central bank cooperation among the banks did not exist. Liquidity shortages were hardly managed by what scholars came to label as the “international orchestra” of great public financial institutions under the direction of the Bank of England. If anything, it was at its most demonstrable a pickup quartet organized by the Bank of France, with more generally sporadic solo performances used to alleviate international shock effects. And these arrangements, group and solo, were quickly extemporized after the crises were addressed. In fact, preserving convertibility in central banks was not fundamentally different in terms of monetary orthodoxy from private banks doing so with their own assets. While the central banks had both public and private mandates, the perceptions were the same and lacked a strong distinction between public and private banking procedures. Such distinctions would have shown up with far greater regulation of banking on the part of monetary authorities, but such regulation was more restricted to basic rules about business contracts and obligations. This new post-​war take on central banking demonstrated a radical change in orthodoxy that manifested this greater guardian posture: ideas about the nature of central banking itself. Up until this period central banks were public in the sense that they managed the government accounts, but beyond that they largely functioned as private joint-​stock banks with shareholders and presidents that were strongly motivated by profits. The idea of central banking itself before the war was very far from what we saw afterward. There was no real conception of strong public institutions that were guardians of an economy. The new perception of banking was something well

The interwar conferences  79 off the parameters of the 19th century thinking about domestic economics. This point was all the more compounded by a concern about the possibilities of the politicization of central banking. Such a concern could only come from a fear of domestic parochialism emanating from guardian postures becoming a major obstacle to the sort of international stability that existed in monetary and trade relations before the war. The heretical nature of this politicization concern was even more clear when representatives mentioned “banks of issue,” which were strictly private banks. Those concerns of political tampering that extended to private banks were perforce a testament to the advent of a new guardian orthodoxy in banking. Moreover, it was recommended that all nations should have at least one central bank of issue. This was a testament to the need of a central monetary presence in nations that did not have one. Indeed the modern conception of large-​scale public banking was emerging (Gallarotti 1995, pp. 78–​85, 111–​140 and 2005 and Papers Relating to International Economic Conference 1922, p. 60). Domestic priorities were clearly superior to reestablishing preexisting international arrangements. Exhortations to reestablishing trade and monometallic standards on gold were hedged by an acknowledgment that certain domestic economic targets would first have to precede such a state. When we consider the monetary power structure at the conference, this departure from the 19th century orthodoxy is even more glaring. The U.S. of course was not present and France had to be coaxed into attending given their focus on domestic problems. Essentially Britain was in a principal position to dictate an agenda. And we know how strongly British financial authorities held to the vision of the gold standard espoused by the Cunliffe Report (1918). Britain showed a pathological commitment to this vision throughout the 19th century, even in times that challenged the system itself. It remained insular in attempts to alter the system at monetary conferences and reticent to try new modes of financial intermediation in the face of crises. Even within the British financial system, the Bank of England also looked askance at intervening in the financial system and also at facilitating cooperation among joint-​stock banks in the face of difficulties. In a sense the most powerful diplomatic force at the conference came in with baggage comprising several centuries of venerated practices of finance. And this force was buttressed by Lloyd George’s being overwhelmingly invested both ideologically and politically (as all the major nations were, but perhaps to a lesser degree because more was expected of Britain as the leading power at the conference) in the conference and his vision of resurrecting a “revitalized liberalism”: principles so glaringly manifest in the Cunliffe Report (1918).3 The momentum for restoring the status quo was all the more reinforced by the Brussels International Financial Conference of 1920 called by the League of Nations. The exhortations mirrored prevailing orthodoxy with a call for balanced budgets, resumption of gold standards and free trade.4 With the U.S. out of the picture, France limping in with no power to make concessions internationally, Germany obliterated, and the Soviets being a focus of post-​war

80  The interwar conferences reconstruction, Britain should have had few obstacles in pushing an agenda through to various agreements. Such outcomes would be neither shallow nor hortatory like the Brussels Conference.5 Furthermore, Lloyd George had maintained a dominant and even arrogant posture in negotiations leading up to Genoa. The conditions facing Britain in the after-​war period must have been stupendous for the diplomats to cave so significantly to new models of financial reconstruction (Pauly 1996, pp. 7–​9; Gallarotti 1995, pp. 113–​140; Clarke 1973, p. 14; Fink 1984, pp. 41–​43; Williams 1991, p. 41; and Gallarotti 2005).6 The French diplomat Colrat, who presided over the Economic Commission of the conference, stated this most vigorously as pertaining to trade. But the message seemed to permeate economic adjustment in general: Each nation must resolve it on its own account by the adjustment of its industry to its natural wealth and its acquired capabilities.The Commission has very rightly considered that it could not lay down binding rules for this adjustment, since they would necessarily be of a varying character. It would be vain to deny, and it is not without advantage to proclaim, that this adjustment is desirable, and even urgently desirable, and that it is of the greatest importance for the general stability of international trade. (quoted in Mills (1922, pp. 238, 239) Fiscal imbalance and a shortage of liquidity were the major obstacles. These were interconnected as fiscal balances were dependent on acquiring international loans. In the absence of such liquidity transfers, it was feared that fiduciary standards could lead to inflationary pressures. This broader view of macroeconomic interactions showed a greater sophistication in looking at domestic economic reconstruction than had emerged before at the conferences in the 19th century. Interestingly, with a greater guardian posture naturally arose greater scrutiny of how domestic economies worked. A more comprehensive concept of a macroeconomy was emerging.This was also evident in the question of parities.While this would be expected given a present-​day mindset, the very questioning of parities was anathema to any orthodoxy of the times. Britain had maintained the same parity from 1717, the year Sir Isaac Newton was head of the mint. Other developed nations held firm parities throughout the 19th century. Even official bimetallic ratios were held rigid throughout the 1870s when the misalignment between market and mint parities was driving monetary gold out of leading national economies. The conferences of the 19th century clearly demonstrated that nations were extremely reluctant to make even modest changes to domestic mint parities even when the benefits of doing so were certainly significant. Hence, this “questioning of parity change” also showed a new sanctification of domestic economic performance. As we would later see, Britain’s own resumption on gold at the same but terribly overvalued parity would buck this emerging guardian imperative, to the greater detriment of Britain and later the international economy with its contributions to fueling the Great Depression. This would send shock waves through future

The interwar conferences  81 monetary diplomacy and make leaders much more sensitive to issues of convertibility and adjustment. But even in the immediate post-​war years leaders were able to ascertain destabilizing potentials for resumption. Diplomats were clear in alerting the world to the “strain” of resumption under the old parities, especially for inflationary economies. But beyond this the emergence of statements attesting to the public oversight of exchange rates was quite revolutionary (Gallarotti 1995, pp. 42–​45, 166; Clark 1973, pp. 14, 15; Eichengreen 1992 and Papers Relating to International Economic Conference 1922; pp. 60–​63, 66). Of course a certain amount of past monetary orthodoxy, which overrode any guardian mentality, was evident in the overt references to reestablishing gold standards. But the arguments were encased in quite new ideas that reflected the advent of a new age. Aside from the new malleable parities, quite a departure from staid fixtures of old parities that were considered sacrosanct, the idea of explicit/​public management of reserves and parities was quite a change from a general public complacency about how reserves were managed by central banks, mostly void of any real state oversight. And even more radically, there emerged an idea that central bank cooperation was needed to stabilize international finance: multilateral cooperation among banks being almost completely absent (with exception to some international financial crises) in the years prior to the war. Indeed, monetary orthodoxy of the 19th century had undergone a radical transformation in the minds of the presiding diplomats, a manifestation of a major change within a greater weltanschauung of a new generation of leaders and the public at large. Representatives actually called for the Bank of England to organize a conference of central banks to build a basis for international monetary cooperation. Postures on trade reflected both new and old: it was agreed that the regulation of trade through tariffs would continue but only as a temporary measure until nations could return to the fairly fluid flow of goods of the pre-​war years (Gallarotti 1995, pp. 78–​85; Mills 1922, p. 29; Clarke 1973, pp. 14, 15; and Papers Relating to International Economic Conference 1922; pp. 17–​22). We could also see an interesting deviation from de jure conceptualization of what a monetary standard was in the Second Commission’s declaration on pursuing a “gold-​exchange standard.” In fact, the classical gold standard was always a gold-​exchange standard in practice, a fact interestingly lost on traditional scholarship on the period, but the visions of the standard were really focused on the use of gold in all the major roles of money, even as a medium of exchange. It was clear that other sorts of assets would have to buttress the role of gold, which was now looked at as quite precarious in an unpredictable new world (Gallarotti 1995, pp. 27–​34 and Papers Relating to International Economic Conference 1922; p. 62). The Commission stated: A participating country, in addition to any gold reserves held at home, may maintain in any other participating country reserves of approved assets in the form of bank balances, bills, short term securities or other suitable liquid resources.

82  The interwar conferences The concern for insulating domestic economies from possible disruptions in adjustment after the war led to even more radical departures from previous monetary orthodoxy. The idea of central banks being able to hold each other’s balances was a big step up from nations holding balances for colonial banks. This would create a greater pool of liquidity-​sharing that went beyond the more common bilateral lending that prevailed before the war. Furthermore, the language of the Second Commission report revealed reference to a proposed “International Corporation” that was conceived as a multilateral repository of liquidity not unlike the future IMF. The idea floated in the report suggested an attempt to amass liquidity to leverage the future reconstruction of Europe in the post-​war period. Similarly, on this front the Second Commission recommended policy coordination between the U.S. and Great Britain so as to better maintain their parities. And beyond this, it was proposed that nations establish some sort of capacity for the multilateral oversight and management of capital flows between nations. While the language featured a concern with taxation flight and double-​taxation, the ideas of governments cooperating to regulate capital flows in any form were quite a departure from prevailing practices. In addition, the Commission recommended that nations participate in an information clearinghouse that would make transparent the information relating to national accounts, very much like the International Monetary Fund (IMF) has been a venue for financial information of its members (Papers Relating to International Economic Conference 1922, pp. 63, 64). Genoa ushered in a new age in economic orientations. Domestic balance emerged as an explicit goal in itself and one that was subject to public management. In essence the idea of a prosperous society began to crystalize. Before this, the prosperity of a society was a function of the whims of the market, and while the domestic trades were certainly a major concern for political and monetary elites, it was never conceptualized as being something that would warrant serious departures from monetary orthodoxy. The exchange rate was not something that was manipulated to control inflation or affect the business cycle. Nations did not create international organizations to protect national economies by overseeing capital flows. Central banks did not enter into cooperation to share reserves outside of colonial contexts. Ironically, this was also a new age in the conceptualization of international economics. In a sense the idea of external balance was born as well. The conference for the first time framed a nation’s business cycle in contradistinction to external targets. In economic theory, the idea of trade-​offs in balancing was well into the future. But among these elites, a crude idea of impossibility theorems was born. Before the conference external balance fell within the general vision of maintaining the value of a national currency. But this was hardly a monopolistic orientation belonging to public managers. Central banks were more generally following a simple directive of private banking: maintaining the value of its notes. Banks were largely issuers of their own currencies (note-​issuing banks). Protection of a national currency was essentially the same as banks of issue protecting the value of their notes to protect confidence. The system at the national and international levels in the 19th

The interwar conferences  83 century manifested the outcomes of a system that was managed publicly with such goals in mind, but it was not. Simple pursuit of a stable value for bank and national notes created a fairly stable external balance among leading economic powers in the later 19th century (Gallarotti 1995). It is not surprising that stable parities could be the outcome of rigid orthodoxies at the micro level. Stable trade and capital flows should most certainly prevail when nations are enjoying stable parities, and they did. But under this scenario, the domestic economy was never in a position to trump such orthodoxies because there was no real management of the business cycle (a scan of Tables 1.2–​1.4 in Chapter 1 is testament enough—​the numbers are far too skewed across periods to think this was just a function of chance). Nations were now going into the post-​war years within a whole new world of prosperous societies and the gauntlet now fell onto leaders to deliver on the new orientation of well-​being, and those prime directives crystalized into the guardian state. The idea was ascendant, and the public tools to fulfil the spirit of idea were being concomitantly invented. Genoa gave birth to fraternal twins. Interestingly, historians such as Kindleberger (1973) and Eichengreen (1992) are often quick to impeach elites for the depth and length of the Great Depression. The reality is that both the goals of prosperity and the tools necessary to deliver it were still in their developmental stages. Even if managers got it right in their minds, disagreements on what the goals were and the lack of public tools made a successful implementation difficult.This is not to say that things could not have been better, but it is questionable that the period could have experienced a radically different outcome. Elites were navigating uncharted waters with inferior vessels. Perhaps the clearest manifestation of the new guardian orthodox was the view of famed American diplomat Benjamin Strong, who even after such bold deviations from past orthodoxy opined that the conference did not at all go far enough in protecting domestic economies from the rigors of the external adjustment required by a hard peg. In the case of the U.S., the hard gold link stripped America’s flexibility to manage domestic money in ways that addressed national economic priorities. He felt that the world was entering a new age, one in which some cookie-​cutter approach to adjustment was not consistent with current economic realities. The adjustment must be sufficiently flexible across nations.To support this new free-​for-​all adjustment plan, the world would need a major international pool of liquidity that nations could draw on to leverage external balancing while they were pursuing adjustment consistent with their particularistic economic targets. Once more an early vision of an IMF emerged at the conference (Clarke 1973, pp. 14, 15). One significant competing argument that cuts against the rise of a new guardian economic orientation would be that the gravity of the war and dictates for reconstruction led to an overwhelming shift in economic practices. But here the evidence suggests much more than just a shift on steroids. The concerns about economic performance suggested a sustained effort directed at economic prosperity, and this was a public goal, hence an intended management of the business cycle (i.e. maintaining sustained growth through public

84  The interwar conferences oversight and management). Such a mindset was missing prior to the war. Even radical adjustment did not need to be conceptualized outside of the orthodoxy that prevailed before the war. There was no reason to think the methods of the past which did not manage the business cycle and did not feature a large public management element were any less effective in reestablishing convertibility. There were few impediments to reestablishing convertibility in the past with respect to domestic economic performance. After all the business cycle was not an outcome of public management. Domestic growth had always been sacrificed on the altar of external adjustment. Why should the period removed just 5 years from the war be so radically different? In other words, the level of adjustment should have been a matter of scale rather than a matter of style. Sub-​par domestic growth could have been tolerated in greater measure and hence new institutions were not necessary if this were the case. The orthodoxy of resumption was traditionally a financial matter. A gold or specie standard was a contingent rule that could only be suspended after a crisis, and quick resumption was a priority if a nation did not want to be seen as economically inferior. And while the Second Commission did certainly underscore the financial basis of resumption, the idea of setting parities was tied to the state of “economic circumstances,” and hence the advent of a concern for business cycles that was not evident before the war (Papers Relating to International Economic Conference 1922, p. 62). Second, the radical departure from existing practices of central banking and international monetary practices seem to have been beyond a simple response to adjustment. Adjustment could simply have been more painful in terms of domestic growth. But the narrative at this conference was of a different flavor. The practices of public central banking, systematic reserve swap arrangements, international organizations to regulate capital flows, political management of parities and the mere fact that these new practices were being publicly sanctioned through diplomacy were all developments that painted a picture that seemed a level above what we may have expected from even a massive shift from war. Of course, one could still argue that the level of this particular crisis led to the most radical departures from orthodoxy. But even here the shadow of the future raises the relevance of a new guardian posture. Financial and economic conditions revived later in the 1920s, even enough for the center of the financial world (Britain) to reestablish its gold link, but nations still resisted resumption and continued to follow through on some of the new arrangements, especially in multilateral financial cooperation for the purpose of domestic stabilization and central banking practices. Moreover, a number of these new arrangements were not extemporized; hence, a reflection that the prosperity achieved after the war was to be sustained. It was clear that the continuation of these new arrangements reflected a new mindset that wanted domestic economic relief from adjustment to be placed on a much longer path (Gallarotti 1995, Eichengreen 1992, Clarke 1973 and Bordo 1990).7 Coming into Genoa there was overwhelming momentum to resuscitate an international economic order. For one thing, nations did not know how to carry on a suspended international monetary and trade system in peace

The interwar conferences  85 time. The rules and norms of economic regimes were always suspended during major wars, given that the systems were always a contingent rule. So nonsystems existed during times of war, but never during times of peace in the 19th century when a true international economy emerged. There was no real alternative at this time for the gold standard/​open-​trading system that had prevailed during the 19th century. Therefore, an unsuccessful conference would create a most unknown possibility: muddling through peace time with no real system to undergird economic relations. Second, the British came in with a preponderant diplomatic position. It was the best positioned economically of the European nations, and the only other strong counter-​wedge (the U.S.) was not present. Blazing British guns were manned by a prime minister who was staking his political career on reconstructing a broken world. And the British were still ideologically tied to the economic orthodoxy of the pre-​war system, as evident in the Cunliffe report and subsequent meetings at Brussels and Cannes. In fact, the British had a 40-​year diplomatic legacy of sticking to monetary orthodoxy even when small deviations from the system would have benefited the British economy significantly. It is a true testament to the emergent guardian posture among nations at the conference that even this overwhelming pressure to make some domestic concessions to reestablish investment and trade on sound footing failed to nudge nations. In the end the Genoa resolutions about a return to a pre-​war regime of a gold standard, domestic fiscal and monetary discipline, and a stable system of reserves were as illusory at the feeble resolutions at Brussels and Cannes. It was a far different world from the Victorian one that preceded it. There were new electoral forces emergent that made leaders far more accountable and guarded about the domestic price they paid for the world order under the classical gold standard. Fink (1984, p. 236) perhaps best captures the dynamic of the new world economic order: Governments, worried about their electorates’ grievances, were even less likely than they had been before 1914 to make sacrifices on behalf of an abstract gold standard or the international monetary system.

The London Conference of 1933: consolidating a guardian ideology One could say that London was like Genoa in that it was convened to restore a world destroyed, in this case economically. The League of Nations called countries together to meet in a period of a trough in a vicious business cycle downturn. The prices of goods, especially agricultural and resource prices, had dropped by some 62% from 1929. Raw material prices were especially affected as agricultural stocks were twice in 1932 than they were in 1925. National income was down by more than 60% in many nations. Trade volume was down to 35% of what it was in the first quarter of 1929. In terms of employment, the International Labor Organization (ILO) estimated that at the beginning of 1933 there were 30 million unemployed workers. Excess capacity in

86  The interwar conferences manufacturing was alarming. In the U.S., for example, steel production was only at 10% of its capacity. One underemphasized rupture was the public health effects of this mass unemployment. Britain was well off the gold standard and only a few nations actually remained on it. Half of the nations of the world officially abandoned it, and some 30 states imposed exchanged controls. It is needless to say that the depression threw fiscal affairs into chaos. Sovereign debt was pervasive throughout the world. Debtor nations were forced off gold en masse. The world was divided into three monetary blocs: a gold bloc, nations with exchange controls and nations with devalued currencies. Moreover, the world was very much at war economically, with trade and monetary policies that caused nations to “beggar” one another. Policies such as the Smoot-​Hawley Tariff in 1930 and Britain leaving the gold standard in 1931 placed the world in a free-​for-​all tussle. So extensive was this warfare that nations had to preface the meeting in London (at Lausanne just prior to the London Conference) with an economic armistice while they negotiated what would hopefully become an economic “peace treaty.”8 So the state of the world was not dissimilar to conditions after the war. Moreover, the economic destabilization of war was still manifest, especially with respect to wartime finance (loans and reparations). So glaring were the remnants of these financial problems that the planners of the conference tried to separate the negotiations on debt and reparations out, and tried to deal with them in other venues (one being Lausanne). And like the Genoa Conference, nations were entrenched in their domestic economic needs. This guardian posture was at the heart of immediate post-​war reconstruction (which is why Genoa failed), it was driving the economic warfare that destabilized the 1920s and early 1930s (and exacerbated the Depression), and it was a Herculean obstacle facing nations at London. This was a challenge everyone was well aware of, but negotiators were also aware that a full return to a 19th century posture of sacrificing domestic goals for monetary and commercial orthodoxy was a chimera (Eichengreen and Uzan 1990, p. 3; League of Nations 1933, pp. 6, 7, 14, 18, 19; Feis 1966, p. 116; and Angell 1933, pp. 18, 19).9 Notwithstanding the gloom of the period, there were a number of voices and forces sympathetic to the Cunliffe and Genoa proposals. France had stabilized its currency in the later 1920s after inflationary bouts, but bankers and government officials were concerned about the depreciation of the franc. Stabilization caused the gold to flow into France, placing its currency in a better position. In the U.S., while the gold link was broken earlier in the year, gold holdings were quite abundant. The jury was out on the benefits of resumption because the U.S. had done both very well economically and very badly under the same gold standard. But the sclerosis gave some orthodox voices salience. Britain was an interesting case since in no nation had gold orthodoxy been as venerated historically, but they were the hardest hit, primarily because of an ultraorthodox resumption at the pre-​war parity in 1925. Even when France and the U.S. were experiencing an economic boom in the 1920s, British growth lagged well behind. On the eve of its renunciation of a gold standard, its unemployment rate stood at 21%. But even here, voices of orthodoxy rang out. After all, if the

The interwar conferences  87 international standard could be reestablished, Britain stood to gain the most, as the leading financial center in the world (Simmons 1994, pp. 228, 229 and Clarke 1973, pp. 19–​23). The diplomatic landscape was most familiar, and recalled many of Genoa’s travails: resumption of gold standards that could be sustained, inflating the prices of goods, eliminating exchange controls, restoring trade and restoring sound credit arrangements among nations. The conference would not, as other meetings had before it, consider fundamental questions of war debts and reparations, and at this conference the U.S. was well represented. With respect to the agenda carved out by the Preparatory Commission of Experts on economic issues, the scenario for an agreement started with disjuncture between acceptable international solutions and the domestic economic difficulties, which brought nations to the table. Much like Genoa, the declarations were of another era, and ultimately the new guardian landscape gave precedence to any domestic economic objectives that did not interface with 19th century economic orthodoxy. As with every economic conference of the interwar period, a Catch-​22 dynamic was ever-​present. Compromises on international cooperation that would be necessary to bring domestic economies back from the brink of deprivation required sacrifices that made the deprivation all that more acute in the short run. Hence, if something was acceptable for domestic imperatives, it would have been unacceptable as a compromise; and conversely if something was viable for international relations to be restored, it would have been domestically unacceptable.10 The key here was to find innovative solutions in the grey area between a sustainable international regime and domestic economic objectives. Nothing like this was ever really accomplished before. In the 19th century it was all or nothing, except for political crises when it was acceptable to deviate from a rule-​based economic orthodoxy. It was easy to understand why leaders were consistently caught in a status quo trap in terms of proposed objectives at international conferences.11 The recipe was always the same, as the resolutions to all the meetings (public and private) manifested a return to Victorian liberalism. Of course, nothing but gold was ever viable in three generations (since the 1850s). There was no other option that was even considered viable. Bimetallism had disqualified itself with the vagaries of mining playing havoc with currencies. Silver was too cumbersome a medium of exchange. The idea of floating notes without some real commodity backing was considered beyond radical.12 So there was a call to return to a monometallic gold standard, even as the domestic problems of nations interfaced decreasingly with such a standard. But as in Genoa, this was conditional in a guardian respect, as the parties that would be established were subject to domestic economic priorities. Moreover, as with Genoa, the need to address war-​time finances was necessary for greater certainty about replenishing gold reserves. But London was not supposed to address such things substantively, as it was hoped that Lausanne would do that, and the fundamental issues on these questions were never sufficiently solved (as, of course, the U.S. never accepted the plan). Hence, the conference was born in

88  The interwar conferences original sin. Moreover, freer trade and capital flows were also necessary for gold to be resuscitated, and so it really was an all or nothing objective with respect to resuscitating the pre-​war international economy. Any one of these three objectives could torpedo the hopes of negotiators if it were not resolved in a way that interfaced with the other two.13 Again, as with Genoa, domestic economic sovereignty was reaffirmed within a general expectation for economic cooperation. Negotiators stressed the importance of fiscal prudence, stable domestic financial conditions and responsible monetary policy. But the objective of functional economic policy was ultimately framed as “to give a sufficient flexibility to the national economy” (Papers Relating to International Economic Conference 1922, pp. 60–​63,66; Clarke 1973, pp. 23, 24; Feis 1966, p. 117; League of Nations 1933, pp. 22, 23; and Angell 1933, pp. 13, 31, 68–​72). The plan of transition back to collective gold monometallism really did nothing to eliminate the Prisoner’s Dilemma dynamic that plagued the international economy during the 1930s (i.e. predatory trade restrictions and competitive devaluations). In fact, it tried to institute it in the short run. Nations on gold with abundant reserves would have to open up their financial markets and maintain low discount rates so that gold could flow out. Nations off the standard or on artificially managed standards (i.e. through capital controls) were to attempt to move toward similar polices “at the earliest possible moment.” Of course, strategic incentives to cheat during the transition period carried great benefits as struggling nations could build up their gold reserves. Nations would have every incentive to make “the earliest possible moment” as late as possible. Hence, the strategic incentive drove a race to the bottom: everybody would benefit by being the last on board. And of course this assured the best possible domestic financial state in case the collective enterprise failed. The incentive to drag one’s feet in transition was augmented by a call to initiate compliance by opening up trade, which at this time was the most pernicious predatory challenge facing nations. The framers of the agenda were somewhat more realistic when they called for the transition to be multilaterally managed through the League of Nations and the Bank of International Settlements.14 But this mechanism did not guarantee the elimination of predatory transitions. The fact was that 80% of monetary gold was held by five nations at the time, and it would have been difficult to find any nation of these five that would have stood up so vigorously and claim itself to be a financial deux ex machina for the international system, to Kindleberger’s (1973) great lament. The plan was utopian at best (League of Nations 1933, pp. 23, 24 and Angell 1933, pp. 32–​42).15 The Prisoner’s Dilemma dynamic was most glaring in the preliminary sparing among a small group of nations during discussions within the Commission about stabilizing exchange rates.16 This preceded other issues, as of course it had the fewest actors involved: only the big three.Trade required the agreement of some 60 nations; hence, it was most prudent to begin with exchange rates. Furthermore, most of the gold in the world was held by these nations: exchange stabilization required abundant gold reserves in the core nations in order to provide enough gold to anchor the entire global network. Once pegged, other

The interwar conferences  89 nations could just link into the network at reasonable parities. But the negotiations quickly demonstrated another beggar-​thy-​neighbor threat. France and the U.S. preferred that Britain be the first to return to gold at a reasonable parity. They promised to follow. Of course, Britain would have exposed itself to making a domestic slump even worse if the U.S. or France reneged on their promise or lagged in resumption. Britain preferred another sequencing in the plan. Britain preferred that their own resumption should be preceded by efforts in the U.S. and France to raise domestic prices, reduce trade barriers and join into a cooperative scheme of central banks (Clavin 1991, p. 518 and Clarke 1973, pp. 26, 27). The Catch 22 dilemma facing nations was abundantly clear in the Commission’s evaluation of the solution to the resumption of capital movements. The Commission noted that a necessary condition for resumption was a sustainable equilibrium in balances-​of-​payments. Each nation was encouraged to restore such an equilibrium. But in a world of depression, the only hope for such equilibrium in any one nation was for it to expand its exports while attracting capital flows. All nations faced the same incentive structure. So the equilibrium built on economic growth meant preying upon other nations. To the extent that all nations would act in the same manner, the tendency for predatory policies grew all the more. The alternative for any single nation was to cut demand, thus reducing its trade deficit, but such a policy would exacerbate an already devastating recession. The Commission was stating the obvious, but it was utopian to say the least. It was analogous to a doctor trying to abate an epidemic by calling on the afflicted to reduce their breathing. And even here, the Commission emphasized how such a resumption required some agreement on foreign debts, which brought wartime finance back in. But as noted the planners of London thought that would be so divisive an issue to confront, that it was not seen as a principal agenda item here. The Commission was more prudent in suggesting harbingers of Bretton Woods, in the form of multilateral coordination of resumption and an international fund that would supply liquidity where needed. But even here, pessimism was voiced over the likelihood of a stabilization fund (League of Nations 1933, pp. 26, 27 and Angell 1933, p. 39). The narrative on resuscitating trade featured the same guardian constraints on the restoration of a 19th century liberal order that were so prominent on the issue of monetary resumption. The grand objective of an open trading regime was manifest in the shibboleths of the liberal vision of the agenda, but the qualifications were compelling. The proposed truce itself was predicated upon two different models: the stricter proposals of the Ouchy Convention of June 1932 and the more elastic system of the Geneva Agreement of 1930.These two agreements were restricted in the number of signatories; hence, they were not shoe-​in models for everyone else.17 And of course, there was sufficient leeway for domestic implementation in each of these models.18 Furthermore, two methods of tariff reduction (percentage reduction and uniform level attainment) hardly made the predatory aspects of resumption disappear. While each may

90  The interwar conferences have produced an equal reduction, still the question of equitability was not resolved.19 Finally, the exceptions to a uniformly applied trade agreement were fairly extensive, even in an abbreviated agenda. Compliance was contemplated as being conditional on a number of factors: maintaining revenue duties so as not to disturb fiscal balances, maintaining duties for the sake of avoiding domestic economic hardships, allowing certain wheat-​producing nations to be exempt from reducing barriers on agricultural goods and exempting regional agreements like customs unions. The exception clauses made the exemption process all the more indeterminate by distinguishing between temporary and permanent exceptions in a way that was vague (League of Nations 1933, pp. 23, 24 and Angell 1933, pp. 62–​72). The start of negotiations did nothing to significantly alleviate the prevailing domestic political environment. And this was also true of Genoa, but now the fear of the leap of faith required for a resuscitation of the 19th century international economy was all the more intense, because now nations had attempted to restore the system in piecemeal ways; and this coincided with the most severe economic depression to date. The fact that this occurred in peacetime was of preponderant impact psychologically. If the guardian vanguard was present and vigilant at Genoa, it was all the more animated in London. Clarke (1973) comments on the political situation underlying the guardian posture in this period: …[T]‌he prospects for successful cooperation were never good. Among the obstacles, the diverse experiences in the major countries in the previous decade were probably most important. The political basis for a cooperative effort consequently failed to develop. Moreover, governments, politically insecure and under pressure to relieve domestic economic distress, were desperately preoccupied with the short-​term effects of policy.The large but nebulous long-​term gains promised by advocates of international cooperation were insufficient to win acceptance for a bargain that involved even moderate short-​term [domestic] risks. (p. 22) The challenges to cooperation that the domestic guardian posture elicited were quite evident in the U.S., and of course the U.S. was the lynchpin for the negotiations. The entire edifice depended on the state of war finance. Domestic concerns were pervasively apparent in the tussle of war finance. Nations refused to roll back reparations and the U.S. refused to cancel war debts.20 All of the domestic political pressures involving a guardian posture were manifest on this issue. Every nation got significant political pushback on making concessions in these areas when their own domestic economies were in peril (Clarke 1973, pp. 23, 24). Any substantive agreement depended first on the U.S. relieving the burden of collecting on war debts.21 That would have provided the necessary liquidity for nations to even attempt resumption, and after resumption a return to normal trade relations. The U.S. was still locked into an isolationist

The interwar conferences  91 mode in Congress that made entry in the world economy problematic and that torpedoed the League of Nations. Roosevelt himself in his inaugural speech stated that an international scheme was clearly “secondary…to a sound national economy.”22 It is most revealing that his lead negotiator in London, James Warburg, in his journal commented on how elusive FDR was on questions of international cooperation. He noted that to bridge such a subject with FDR was “a very odd experience” (Morrison 1993, p. 309 and Eichengreen and Uzan 1990).23 Moreover, the delegation that was sent over to London essentially carried a mercantilist posture with it. Aside from Secretary Hull and Governor Cox of Ohio (who were ideologically globalist), the rest were a diverse group of mercantilists that reflected FDR’s own priorities. Most reflective of this self-​ concerned posture was Nevada Senator Key Pittman, whose main purpose at the conference was to get an agreement to raise the price of silver for his silver mining constituents and miners in neighboring states. Herbert Feis (1966, p. 174), another delegate on the side of Hull and Cox, referred to the group of negotiators as a “motley crew.”24 Hull himself, as a major supporter of an international agreement, was disappointed by the composition of the group, noting how they lacked loyalty and team spirit. Despite the high bureaucratic profile of the group, FDR never gave them actual authority to make any commitments at the conference. And whatever proposals were floated were, in the minds of the American delegates, clearly to be circumscribed by FDR’s domestic recovery policies.25 These perceptions were reinforced by occasional communiques and political outcomes showing the U.S.’s and FDR’s position over negotiations, and these were roundly oriented around preserving the structure of his New Deal.26 Consequently, from a diplomatic perspective, this made negotiations quite difficult for everybody. American statements were often sporadic and schizophrenic. Moreover, the pace of negotiations was affected by delays in communication back home (Victa 2016, p. 1; Feis 1966, p. 174; and Morrison 1993, pp. 311, 312).27 FDR’s guardian posture and political events back in the U.S. surprised few of the American delegates, although they were unsettling for them in trying to firm up a deal with the British and the French, who had been assured by FDR the previous year that the U.S. was onboard with exchange stabilization. That FDR was locked into a guardian posture in the negotiations was hardly surprising and fully expected. FDR won the election on the shoulders of a domestic recovery program.28 Tussling with Congress over his recovery or New Deal policies took all his political capital, as one would expect with a recalcitrant and unruly Congress all clawing for the benefits of their own states. Each Congressman found a battleground over FDR’s policies, as the impact of each national act had potentially significant redistributive consequences among the states. And with this confrontational entrenchment between Congressmen, shots fired across the Atlantic from diplomats looking to “get a piece of the action” were most distasteful. FDR had enough trouble with stewarding his own domestic vision without external forces upsetting the apple cart. In fact, even

92  The interwar conferences without FDR marshaling bills for international cooperation, American political pushback was strong in response to the notifications about proceedings from American diplomats in London (Feis 1966, p. 231 and Clarke 1973, pp. 33, 34). It was already clear that war debts would not be significantly broached, but it was also clear that the American Congress would not appropriate new credits for an international stabilization fund (having already floated loans that were not being paid back) and furthermore as noted Congress adjourned on June 15 without granting Secretary Cordell Hull the necessary authority to lower tariffs.29 Hence, the only nation strong enough to lead a group of nations into resumption was hamstrung, thus eliminating any possible vanguard policy to initiate cooperation. Hull himself noted that he “left for London with the highest hopes but, arrived with empty hands.”30 U.S. recalcitrance was the most glaring manifestation of the presence of a guardian posture at the conference. American politics formed a bulwark around the proceedings, vigorously trying to insulate domestic growth and employment from the impact of international treaties. It elevated American isolationism to an economic pathology (Morrison 1993, p. 309; Feis 1966, p. 231; and Clarke 1973, pp. 29–​34). Negotiations devolved into a predictable cycle of mistrust and attempts to free ride. American delegate Herbert Feis (1966, p. 179) averred that “the conference never really got underway.”There was chaos right out of the gate, which was a carry-​over from the pre-​negotiation guardian dynamics. France itself cast a shadow with its own bombshell on June 15 when it stated flatly that it would not be paying its war debts.31 Britain had worked its own side deal to shield itself of the transition costs of resumption by negotiating the Ottawa agreement to form a preferential trading bloc with their dominions just previously in 1932. This privileged position of Britain was not lost on negotiators, which was an advantage on one hand (in seeing the British as being strong enough to take a leading role in resumption), but certainly a disadvantage as the British came in with a shield while disgruntled other nations had to face resumption without a such shock absorber (Feis 1966, p. 171 and Clarke 1973, pp. 23, 30).32 The Thomas Amendment, which was the third pillar of Roosevelt’s historic Agricultural Adjustment Act of May 1933, gave the most poignant view into the electoral politics of American domestic economic guardianship. The act was sponsored by an Oklahoma Congressman Elmer Thomas and essentially gave the President broad powers over monetary policy for the purpose of inflating the economy in cases where it felt the Fed was intransigent to falling prices. It allowed the President extensive influence in the management of open market operations and money issue, and the management of the gold standard. It smacked of American economic populism, especially from the political guardians of domestic agricultural interests.33 While the President himself was not fully on board with the broadly inflationary potential of the bill, along with Fed officials, he knew a strongly guardian posture in Congress would override any veto, so he reluctantly accepted it. In this case, American Congress manifested an unshakable phalanx against any threats to domestic prices and employment. The politics of the bill were a stark testament to the anatomy

The interwar conferences  93 of political power in the guardian camp. The battleground was an educational experience of how the guardian state delivered political outcomes, in this case especially in the area of agricultural relief (Eichengreen and Uzan 1990, p. 33; Feis 1966, pp. 126–​128 and Wicker 1971). FDR’s prioritization of commodity prices in the U.S. over international monetary stabilization based on the dollar exchange rate was amply relayed on July 5 in a communique from the American delegation to the Secretary General of the conference Joseph Avenol: We wish to make this perfectly clear; we are interested in American commodity prices. What is to be the value of the dollar in terms of foreign currencies is not and cannot be our immediate concern. (American Delegation to the Secretary General 1933) Electoral politics were also impacting France and Britain. The most obvious manifestation of electoral sensitivity came in the attempts for each of the big three to free ride on one another. No administration was safe from a deteriorating economy resulting from initiating compliance under a treaty. If other nations failed to come around, the beggar-​thy-​neighbor effects would surely sink any prime minister and local politicians. But in the French case it was complicated by the electoral power of agriculture. French politics was strongly driven by the farm vote, especially in local politics where greater than half the voting power was in agriculture.The modified proportional system of representative politics led to the proliferation of political parties with highly specialized interests as constituents. This gave agriculture significant electoral influence in local politics. Above and beyond the electoral structure, organized agricultural movements emerged as a dominant force in the early 1930s. With the prices of agricultural commodities threatened by any significant trade agreements, France came into the conference with major constraints on trade concessions. This surely made a substantive agreement difficult, given the comprehensive need for concessions to cover both trade and money. Britain faced similar electoral pressures. The British saw a shift in the Cabinet, which also reflected broader shifts in electoral politics. Nationalism in foreign economic policy was ascendant, as the aggressive tariff legislation of the early 1930s demonstrated. The war-​debt issue also served to keep any fractures among parties at bay in British politics. Within the Cabinet, monetary policy shifted to Chamberlain and the Treasury, both beacons of mercantilism (Eichengreen and Uzan 1990, pp. 35–​39 and Clavin 1991, pp. 500–​506). The negotiations on exchange stabilization took precedence, as we would expect since only three nations needed to compromise, and they moved swiftly.34 Other issues were barely broached. In fact, negotiators on other issues essentially laid back waiting for progress on exchange stabilization. France continued the pre-​negotiation sparing over sequencing on exchange stabilization. Once more it adopted a free-​r ider posture in asking the British and U.S. to resume before it locked into the parities. The provisional plan was quick and flawed. The initial proposal from the big-​three nations was for three currencies to be pegged for

94  The interwar conferences a limited period from where they stood on the day of the agreement. The new dollar rates would be $4.00 to the pound and $.0466 to the franc. Based on the rates from April 18 (two months before), this meant a dollar devaluation vis-​à-​ vis the pound of 17% and a devaluation vis the franc of 21%.The nations agreed to float a stabilization fund of 60 million dollars to defend the parities and to set margins of fluctuation around each currency in the range of 1 and 1/​2%.While the devaluation fed into FDR’s inflationist bent, still the idea of losing gold because of resumption was compelling. But even more compelling was that the language about allowing nations to change the parities only under “exceptional and unforeseen circumstances” was interpreted as a constraint against using the Thomas Amendment provisions. FDR would not accept it (Clarke 1973, pp. 32, 33 and Feis 1966, pp. 184, 185).35 The big three nations of France, Britain and U.S. then floated a proposal without fixing parities, one that principally called for an agreement among those nations to limit fluctuations in their currencies. There was no mention of specific fixed parities, and the agreement could be abrogated by any nation under “extraordinary circumstances.” It was hardly the treaty that Europeans were looking for. It basically limited excessive competitive devaluation, but left the door wide open for competition to persist.36 This of course was an authoritarian management of resumption, as other nations were only passengers on the train back to gold. Also as expected, American guardian politics at this point reared their ugly heads with widespread populist assaults on the conference and Roosevelt’s participation. In the previous months the U.S. prices of stocks and commodities had been increasing as the value of the dollar (now detached from the gold anchor) depreciated. Word of the proceedings raised the value of the dollar on currency markets, and prices declined once more. Political pushback was pervasive and visceral. As with the Thomas Amendment, any globalist sentiments FDR may have had were quickly quashed by Congressional postures. FDR nixed this proposal as well (Edwards 2017, p. 8; Morrison 1993, pp. 310–​312; Feis 1966, pp. 151, 182; and Clarke 1973, pp. 31–​36. FDR is quoted in Clarke 1973, p. 36). Following the failed proposals, negotiations resumed with the U.S., British and gold bloc nations. A somewhat similar variation of the first proposal was floated. The new proposal looked to limit exchange speculation in their currencies essentially through central bank cooperation. Gold nations would maintain their practices and non-​gold nations would move toward resumption in ways that supported domestic economic recovery policies (i.e. “under proper condition”). FDR, as with the previous plan, rejected the idea. He followed suit with a most devastating “bombshell” statement that effectively torpedoed the agreement on exchange stabilization on July 3. He parroted the Congressional narrative of the primacy of domestic economic goals in the search for schemes of international cooperation. “The sound economic system of a nation” must be the first and foremost objective for each diplomat at such an international conference. He eviscerated the idea of pursuing exchange stabilization among a few nations at the expense of domestic monetary and fiscal objectives. In

The interwar conferences  95 keeping with the political mood at home, FDR relied on “dog whistles” (i.e., veiled references) in his communication to convey an attachment to a populist posture on monetary autonomy, implying that the international conference was infected by the “fetishes” of “international bankers” (Eichengreen and Uzan 1990, p. 12; Feis 1966, pp. 231,232; Clarke 1973, pp. 32,33; Edwards 2017, pp. 9–​12; and Morrison 1993, pp. 310–​313). In the end, it wasn’t about resumption, but simply about eliminating gyrations in the dollar, as the other nations were on board with committing to abating unstable exchanges so as to limit competitive depreciation. Parities for non-​gold nations were not targeted. Resumption would have effectively done that of course, but stabilizing the dollar was different from limiting destabilizing fluctuations. In terms of stabilizing the dollar, which was the essence of the proposal, intervention by the Fed on the domestic front could have turned the trick. But this plan in no way limited the discretion over monetary policy contemplated by the Thomas Amendment. In effect, FDR could have agreed to this without changing anything in practice. But merely the news of such an agreement which limited the discretion of U.S. monetary agency was a political bomb, as FDR had seen when political interests delivered pushback in response to news about the proceedings at the conference. FDR in no way needed to make Congress a more difficult battleground than it already was, as he needed support on the Hill to push through his recovery program. This guardian dynamic was most devastating for the negotiations and visible in the form of FDR’s own commitment to the electoral imperative behind his New Deal (Morrison 1993, pp. 312, 313 and Feis 1966, pp. 211–​233).37 Domestic priorities of course fed into the paranoia that drove a Prisoner’s Dilemma dynamic among the participating nations. Pre-​negotiation sparing and free-​r iding attempts during negotiation made nations more uncertain about how viable cooperation would be. Since all the agenda items had potentially extensive redistributive economic consequences for the participants, there were few areas of potential refuge from the deleterious consequences of free riding. Moreover, the various economies had no buffers to withstand a further deterioration in their economic fates. Even the most poignant promises did little to abate the disconcerting perceptions of potential victimization. There were no insouciant participants at this conference, especially among the core nations. U.S. diplomats did not help the globalist cause on the side of the American camp by reporting that the British and French were acting strategically in order to alleviate domestic distress resulting from war debts and currency depreciation. FDR basically hamstrung Hull and any internationalist initiatives by telling the Secretary that he would not be asking Congress to approve a trade bill that would reduce tariffs and that he was not authorizing the American delegation to forge an agreement on permanent exchange stabilization. Furthermore, the President told the delegation that they could seek only de facto exchange stabilization, and that any parity agreed upon would have to be consistent with domestic recovery policies. And of course, France came forward to declare itself

96  The interwar conferences unable to pay back any debts to the other nations. All of this was taking place in an environment with France wanting immediate action, with an American and British commitment coming first, and the British standing back in a watch-​ and-​wait posture.The exchange stabilization negotiations were DOA, which in turn torpedoed the rest of the conference proceedings on other issues. It would not be an exaggeration to say that negotiations evolved into a chain gang. Everything on exchange stabilization revolved around the Americans simply agreeing to procedures for stabilization. European nations marshaled the most flexible expectations possible on stabilizing exchange rates, fully aware of the American guardian obstacles that hindered FDR in pushing for an international agreement. Parities were left flexible of course, although some believed them to still be a bit rigid (Clavin 1991, pp. 496, 514; Morrison 1993, pp. 310–​313; Clarke 1973, pp. 37, 38; and Feis 1966, pp. 179, 196).38 In the end the economic nationalism of FDR and America sank any hopes of American leadership or even strong supportership, which took both France and Britain out of leadership postures. In September 1933 (well after the conference had concluded) British Prime Minister MacDonald asked U.S. Ambassador to Britain Bingham if there were any hope of concluding an agreement with the U.S. at that time. Bingham reported in a telegram to Secretary of State Hull: I pointed out to him that the immediate foreground of American policy was concerned with measures of recovery in the United States and every proposal certainly for the time being must be examined in relation to that program. (Ambassador in Great Britain 1933) Indeed, the same explanation was at the root of the conference’s failure several months before.

The interwar conferences Keynes’ tersely summed up the history of monetary diplomacy during the interwar years.“International conferences have not a good record” (Department of State 1948,V. 1, p. 1109). Both conferences were unfortunately born in original sin. Neither was built on or sought agreement on war finance. Without such an agreement, any sustained regime that built upon the old 19th century model of monometallism, free trade and free capital movements was effectively impossible. The U.S. was a consistent veto player at both conferences. In the first it failed to show up, which severely damaged prospects for post-​war international economic reconstruction. At London, it failed to step up in support of a regime, and ended up torpedoing the conference with an intransigent attachment to an economic autarchy founded on FDR’s New Deal imperatives. Interestingly, this is precisely what Kindleberger (1973) was contemplating when he proposed a more general theory about international economic revival from crisis. He spoke of an all-​powerful hegemonic power to engage (to its own

The interwar conferences  97 detriment) in counter-​cyclical investment and free trade, so as to lead the world out of depression. In reality all that was needed from the U.S. was a milder form of leadership as contemplated in Gallarotti (2005). In Genoa, merely coming and making some concessions on war debts and reparations would have gone far to pushing Europe toward a revived international economic system. There was no need for massive investments or even dropping all its tariffs. In this case you needed someone to take some more modest sacrifices to lead nations out of a Nash equilibrium in a Prisoner’s Dilemma. This scenario was perfectly replicated at London. Here the accommodations were even more modest. Some concessions of war debts would have certainly turned the trick as Europe was prepared to drop German reparations. But Europe was settling for much less. Eventually just some agreement to limit gyrations in the dollar, which would not have forced the U.S. back to gold nor would it undermine FDR’s monetary independence under the Thomas Amendment, was required. This was especially crucial in London as the rest of the economic negotiations hinged on an exchange stabilization agreement among the big three nations. Of course, what were minor concessions promoting leadership in theory were seen as toxic in terms of political costs. And here the guardian state reared its powerful head. It is interesting how creative the solutions were at Genoa. In fact, it was a new orthodoxy: one that tried to balance the needs of internal and external adjustment.This was foreign among developed nations emerging from the 19th century. Hybrid systems never existed outside of crisis periods, and heading into peace time was not exactly seen as an appropriate environment for suspending long honored practices in monetary policies. It is a testament to the rise of a guardian mentality that such creative accommodations in the service of domestic economic primacy were floated. But if familiar methods of international economy relations were not to emerge, then certainly these more experimental methods were quite tenuous in terms of what people considered sustainable. There simply was too much domestic autonomy to serve as a basis for international rules of conduct. Without certainty about the domestic front, nothing was possible. Students of monetary policy within these transition years after the war identified a shift from the pre-​war orthodoxy of protecting external balance over domestic adjustment to one that made domestic adjustment itself a principal goal. There was a significant reconfiguration of monetary ideology away from sacrificing domestic economic stability and prosperity on the altar of external balance. As Ruggie (1982) notes about this pre-​war consensus on monetary orthodoxy: It is impossible to say precisely when these assumptions ceased to be operative and their contraries took hold. But it is clear that after World War I there was a growing tendency [to configure monetary policy so as to favor domestic economic goals]. (p. 390)

98  The interwar conferences Of course, as noted, this was consistent with prevailing ideas, or more accurately the lack of ideas, on how economies should function. This reconstitution of monetary policy was very consistent with the new balance of political power that resulted from the spread of suffrage down the socioeconomic ladder (Boomfield 1963, Nurkse 1944, Polanyi [1944]1957, Ruggie 1982 and Gallarotti 1995). Polanyi ([1944]1957, p. 234) captures this transformation in speaking about the new popularity of socialism after the war. Socialism essentially reflected an orthodoxy grounded in preserving prosperity for the masses, and such an outcome was a reflection of the political agency granted to the masses by expanding suffrage. “Socialism is, essentially, the inherent tendency in an industrial civilization to transcend the self-​regulating market by consciously subordinating it to a democratic society” (p. 234). Simmons (1994, p. 50) notes that the interwar period saw a change “in the political landscape that had been compatible with a credible commitment to gold.” This of course denotes the willingness to sacrifice domestic prosperity on the altar of international adjustment. She goes on to state: Thus the stability of the international monetary system had as much to do with internal as with international politics during the two decades between the wars. The distinguishing factors in a country’s ability to maintain external economic balance have largely to do with the credibility of its commitment to pursue “moderate” macroeconomic policies, a commitment that came under question in more and more cases with the close of World War I. (p. 51) With the failure of the London Conference, the international system splintered into protective blocs. The French organized a gold bloc, the British retreated into its preferential trading system and America returned to its economic island fortress. Even as astute an observer of the proceedings as James Angell (1933, p. 13) was, he perhaps bled a bit into utopianism in his assessment of the potential of the conference. He disappointingly observed that the press was far from enthusiastic about the agenda when it was made public. He chalks this up to a failure of the press to understand the agenda and its promise to turn small domestic sacrifices in the short run into larger gains once the international economy was restored. Apparently, the press better understood the power of the guardian posture on the part of nations: that in the face of domestic economic primacy, such grand multilateral schemes which put domestic prosperity at risk (no matter how small and how temporary) had become untenable. Clarke (1973, p. 40) notes that with the failure of the conference came a recognition that “the traditional monetary conception [of the 19th century liberal order] was dying” and that the world was now cast in the search for a new regime, one “that would satisfactorily reconcile…domestic prosperity and external stability.” The international economy of the 19th century was gone, the new

The interwar conferences  99 system would have to place the guardian state firmly into the inner sanctum of the institutional structure of international economic relations. The classical liberal system was dead, long live the “embedded liberal system!” (Morrison 1993, p. 317; Clarke 1973, p. 39; Ruggie 1982; and Polanyi [1944]1957).

Notes 1 This guardian posture had also manifested itself in previous negotiations following the war, the most glaring such appearance being the first principle of the Cannes Resolution stating that nations would not interfere in each other’s domestic economic and political regulation. This was a strong affirmation of the sanctity of economic sovereignty (Fink 1984, p. 40). 2 Preliminary work on currency proposals was done by the Second Commission, which was appointed by the conference to deal with financial matters (Papers Relating to International Economic Conference 1922, p. 59). 3 Lloyd George had campaigned after the war based on his role as an international “pacifier.” He had taken leading roles in previous meetings in Washington, Cannes and London in promoting agreements meant to restore order in a splintering post-​ war order. Genoa was a major gambit for him, as his political position was tenuous before April 1922, and even at one point he threatened to resign. He gambled on pushing off a national election till after the Genoa Conference. Hence, no one had a greater incentive at the conference than Lloyd George to engineer substantive agreements. Lloyd George was certainly indulging in double entendre when he noted in his address to the House of Commons that a failure at Genoa would be “tragic”: certainly for Europe and most likely for Lloyd George’s political career (Hansard 1922 and Fink 1984, p. 47). 4 The conference did however introduce a concept of multilateral financial oversight of national economies, which itself was a radical break from orthodoxy (Pauly 1996). 5 The absence of the U.S. was a further manifestation of the emerging sanctity of domestic economic parochialism. Congress was reluctant to sacrifice domestic economic stability by immersing itself in the post-​war problems of European nations. Especially paramount was an urgency about avoiding inflationary pressures which multilateral deals could carry for the U.S. (Fink 1984, p. 49). 6 The Brussels output was largely hortatory given that private banking specialists met outside the purview of national governments, but the visions it manifested were significant (Pauly 1996, pp. 7–​9). 7 But we also see that the past orthodoxy was a constant barrier to the flourishing of a full guardian posture during the interwar period. Eichengreen (1992) makes it quite evident that a time-​honored attachment to the need for a timely resumption on traditional parities was responsible for deepening and prolonging the Great Depression. This was a manifestation of the youth of the new guardian orientation. This new orientation was a gradual, even if revolutionary, change in economic thought that matured and entrenched itself with the passage of time. We see below in the other cases of monetary diplomacy that such orthodoxy was being vigorously purged in the face of an ever-​stronger guardian posture after World War II. 8 It was the resolution at Lausanne on July 15, 1932 that called for a major international monetary conference among nations (Angell 1933, p. 3).

100  The interwar conferences 9 The Italian delegate Bianchini was most utopic when we called for nations to “make a momentary sacrifice of domestic interest for the ultimate welfare.” And yet the agenda set forth by the Preparatory Commission of Experts underscored the inescapable truth that “[t]‌he responsibility of governments is clear and inescapable” and that “[a] policy of ‘nibbling’ will not solve the problem” (League of Nations 1933, pp. 16, 19). 10 Kindleberger (1973) ascertained this situation to be a Prisoner’s Dilemma in Nash equilibrium. His recipe was for a champion to emerge that would allow itself to be the provider of public goods such as open markets and investment, and thus giving other nations enough prosperity to come on board and cooperate in an international agreement. Someone needed to be a “sucker” in the short run so as to encourage cooperation and thus bring the world into a sustainable Pareto-​optimal equilibrium. 11 Like the Genoa negotiators, the agenda at London clearly stated that gold was really the only option, after considering silver and bimetallism “unsuitable” due to the unstable and currently depressed value of silver. Fiduciary or fiat standards were not even mentioned (Angell 1933, pp. 40–​42; League of Nations 1933, pp. 22–​25; and Papers Relating to International Economic Conference 1922, pp. 60–​63). But even Bretton Woods selected a gold standard, even if nominal.The Smithsonian attempt to resuscitate Bretton Woods was also a call to reestablish some nominal gold standard. It actually took decades of failure and use of an ersatz standard (i.e. metal was never really the main reserve and transaction currency) to finally cast nations into fiduciary standards, as they finally realized they were using national currencies all along. Clearly, monetary elites fell prey to traps of status quo or endowment effects, that is, situations where decision-​makers stay close to past courses of action, even at their own peril. On these psychological traps in decision-​making, see Jervis (2017). 12 Interestingly leaders never paid as much attention to practice as they paid to statutes. The development that actually allowed metals to function as monetary standards was the fact that fiduciary financial instruments lubricated the rough spots that arose from using commodities for all the functions of money (Gallarotti 1995, pp. 27–​34). 13 Angell (1933, p. 13) nicely captures the Prisoner’s Dilemma dynamic by noting that in the present state of economic warfare nations are “reluctant to act in isolation, or even act first.” 14 Of course, it was not that negotiators at the conference were obtuse to the threat of mutual defections. The Commission was quite clear about the need for a more or less “simultaneous” movement to the kind of liberal policies required for the restoration of a stable global economy (League of Nations 1933, p. 29 and Angell 1933, p. 39). 15 As with Genoa, nations realized that an orthodox gold standard never truly existed and now it would have been unwise to try and institute one.The narrative of monetary rules suggested a diminution of gold as a clearing currency. And so, voices strongly urged more of a gold-​exchange standard with fiduciary instruments filling the roles of reserves, clearing payments and circulating currency. Targets for gold cover were significantly reduced in the eyes of the planners (League of Nations 1933, pp. 23, 24 and Angell 1933, pp. 35–​39). 16 This particular strategic dynamic preceded the experts’ discussions, as it was also manifest at the Washington meetings among the big three nations (U.S., Britain and France) in April (Eichengreen and Uzan 1990, p. 10).

The interwar conferences  101 17 Under the Geneva Agreement nations that were proclaiming themselves “injured” had the power to “denunciate” the agreement. Under the Ouchy Agreement, there were nine major exception categories that allowed nations to abrogate the agreement, and at a general level nations could maintain trade barriers in the event that “exchanges” were “disturbed” (Angell 1933, pp. 84–​89). 18 Even the supposedly stricter Ouchy model was only a customs union among three nations and specified a gradual reduction in tariffs (Angell 1933, p. 85). 19 Nations with excessive barriers could reduce under either model and still maintain an advantage over trading partners. 20 It was made clear to the U.S. that without U.S. concessions on war debts, little could be hoped for in London. A telegram from the British Ambassador Lindsay to Secretary of State Stimson on April 12 made the point in a typically polite way. We believe that, failing a prior agreement as to how a final settlement of war debts can be reached and in fact is to be reached, progress at the conference on any financial and economic problem will be attended with the greatest difficulty. Failing such an agreement some of the most important issues of the conference can only be dealt with provisionally, as indeed was the case at Lausanne. (British Ambassador 1933) 21 The cancellation of war debts would have been a Herculean political task for the U.S. in the midst of the Great Depression. Just the payment on interest of this debt alone composed 6% of Treasury receipts in 1931(Morrison 1993, p. 309). 22 Statements before the conference such as this and others such as American delegate Moley’s statement on May 20 that American economy recovery was of “paramount importance” and that the U.S. would principally look inward to achieve this goal, made negotiations at London all the harder (Moley quoted in Feis 1966, p. 172). 23 FDR and Warburg are quoted in Clarke (1973, pp. 25, 26). 24 American delegate Moley reflected the antipathy which the FDR clique had for internationalists like Hull, noting that Hull’s exhalations “of the old lassiez-​faire liberal internationalism have become harder and harder to bear” (quoted in Feis 1966, p. 172). Feis (1966, p. 208) in fact opined that the American nationalist delegates would rather see the conference fail than stabilize the dollar. 25 It even went beyond individual perceptions, as American delegates were warned about accepting proposals that Congress would reject (Eichengreen and Uzan 1990, p. 34). 26 Two especially crucial roadblocks were delivered when FDR failed to push both war debt and tariff reduction bills through Congress (Clarke 1973, p. 29). 27 This was mainly the President’s fault. His pathological focus on domestic recovery made the conference much less pressing for him, as his many dismissive statements about the potential and consequences of the conference aptly demonstrated. This explains why he went out to sea on vacation during the negotiations. This limited his access to communication with the delegates, which made their job excessively difficult given that they did not have binding authority to enter into agreements (Morrison 1993, p. 313). This caused great consternation among the other nations, who threatened to walk away from the conference.The various telegrams imploring the President to send on detailed instructions suggested that negotiations were blocked because the American delegation could not marshal precise proposals or responses to prompts. One telegram from the Chairman of the American delegation

102  The interwar conferences Hull to the Acting Secretary of State on July 6 stated, “I learned today that at the 6 o’clock meeting Monday they intended to drive through the Bureau a resolution adjourning the conference and [blaming] you as being responsible” (Chairman of the American Delegation 1933). 28 FDR won every region in the U.S. presidential election with an overall total of 472 electoral votes. The majority shifted strongly to nationalist Democrats in the 1930s, with urban workers and farmers emerging as an electoral vanguard for FDR. There was little choice for FDR but to protect his base of support (Morrison 1993, p. 317 and Eichengreen and Uzan 1990, pp. 31, 39). 29 Of course war debts were brought in via the side door. Informal discussions among the delegates broached the subject, and Britain tried to discretely vail the issue within other discussions and got it into the agenda as well as in Chamberlain’s opening address (Clavin 1991, pp. 396, 502 and Eichengreen and Uzan 1990, pp. 6, 7). 30 Quoted in Clarke (1933, p. 29). See also Fies (1966, p. 175). 31 American delegate Herbert Feis (1966, p. 182) opined that this act purged whatever internationalist sentiments FDR may have had and rendered him hostile to French exhortations to resume the American gold parity. But Feis (1966, p. 196) also made it clear how continuing American political pushback from Democratic leaders made the proceedings at the conference decreasingly important. 32 Britain was also acting nefariously in trying to extort resumption from the U.S. The British informed Secretary Hull that gold nations would in fact leave the gold standard if the U.S. did not stabilize the dollar. Such an action would also abrogate the tariff truce under which they were negotiating (Feis 1966, p. 207). 33 Delegate Herbert Feis (1966, pp. 122, 123) notes how the politics of inflation recalled the political fight in 1896 over gold and silver, with populist inflationists carrying exhortations for American leaders not to be nailed to a deflationary “cross” constructed by Eastern bankers that would undermine the fate of the greater populous (see also Eichgreen and Uzan 1990, p. 33). 34 The big three nations had agreed on this in May and it was most certainly supported by FDR who repeated this in a directive to his delegates (Morrison 1993, p. 310). 35 FDR got significant political pushback on the news of this proposal. One such communication came from a committee of nationalistic Americans that were protesting a treaty that would keep the dollar at so high a value as to worsen deflationary pressures in the U.S. economy (Clarke 1973, pp. 32, 33). 36 FDR himself was alarmed by the threat of such actions by France and Britain (Morrison 1993, p. 312). 37 Victa (2016, p. 2) underscores this electoral imperative, noting that conference delegate Raymond Moley came to a meeting in Washington with FDR and his advisor Louis Howe. Howe was primarily concerned with campaigning and FDR’s electoral support, and both resoundingly underscored just how much his bombshell statement garnered public sentiment in the U.S. 38 A fundamental pattern of American foreign policy in the inter-​war period carried on a pervasive style of effectively vetoing international agreements. Nonparticipation in Genoa neutered the potential to rebuild the international economy. We saw a similar outcome with Congress torpedoing Wilson’s Fourteen Points bill. Lausanne in 1932 also fell victim to U.S. recalcitrance as Europe was ready to cancel German reparations in return for the U.S. writing down war debts, which the U.S. refused to do (Eichngeeen and Uzan 1990).

4  Mature guardianship Bretton Woods

For monetary scholars, talking about Bretton Woods has taken on a biblical flavor. Of all the monetary diplomatic encounters in this book, no event has gotten greater attention. It may have become more legend than fact. Certainly, it rivals any form of fictional narrative, with all its drama about bigger than life individuals duking it out in the ashes of war to rebuild a system that was broken since 1914. Legends of a monetary Trojan War between an Achillian champion of the U.S. (Harry Dexter White) and a Hectorian British champion (John Maynard Keynes) seem to have crystalized over time. Like a grand fictional duel in a novel, this had all the drama of a grave face-​off in the form of the great intellect and sharp wit of Keynes against the Thorian political hammer of White: a fight to the death.1 The outcome was quite unbiblical in that the Goliath defeated David in diplomacy and perhaps even in body: as the Articles ultimately conformed quite closely to U.S. preferences and Keynes himself suffered a mild heart attack during the final days of the conference (Moggridge 1992, p. 742). It took place in a humble location, poorly reflective of the magnitude of the project undertaken there in July 1944 among 730 delegates from 44 nations. Teenagers and mature vacationers, who pay significantly more than the 11 dollar basic-​room rate charged in July 1944, running to the mountains of New Hampshire gaze upon the pictures which still adorn the walls as remnants of a group of arcane interlopers in a world of outdoor adventures and thrill-​seeking. There is little to be added to the great chronicles of this historic event in this chapter, nor is there any attempt to produce a nuanced theory behind the motivations of the great nations behind the conference. We cover a case that has been painstakingly reconstructed in the annals of history. It is rather our objective to filter out all the noise of a greater narrative involving structural theories of international relations and grand strategies so as to focus on the workings of the guardian dynamic within the negotiations themselves. Of course, the scholarship on Bretton Woods has made it quite clear that the regime was designed to protect domestic sovereignty over macroeconomic policy. In this respect, the regime’s guardian nature is hardly a surprise to the reader. The contribution of this chapter, rather, is to illuminate the precise elements and outcomes in the negotiations that went into this design through a deeper process tracing of the quest on the part of nations to maintain

104  Mature guardianship: Bretton Woods domestic economic sovereignty. Hence, this is an exercise in analytical isolation on one kind of dynamic driving outcomes, with full recognition that many other factors were also at work. To give a medical metaphor, this examination tries to isolate the effects of a single malady among a myriad of other physical conditions. It is in effect a chronicle of the manifestations of the guardian state in monetary relations in the 1940s.2 Notwithstanding the manifestations of national guardianship, a great many observers have come to see Bretton Woods as a significant break with the sort of economic nationalism that reigned supreme in the interwar years. But while this may well have been contemplated as a poster board for the reconstruction of economic relations after World War II, the deeper reality is that the same domestic economic guardianship that drove nations apart in the 1930s was to be intimately ingrained in the structure and implementation of the new regime. The seeds of Bretton Woods were sown more directly during stabilization efforts of the 1930s, efforts that never compromised the centrality of domestic adjustment. Of principal importance in terms of this institutional legacy was the Tripartite Agreement of 1936.3 The Agreement was the result of the recognition that France required a devaluation of the franc. The international monetary system was still mired in a monetary war among nations, and now the splintering of monetary practices formed three main blocs (franc area or gold nations, the sterling area and the U.S.) promised to raise the stakes by confrontation in monetary alliances. Rather than devolving into a world war, Britain and the U.S. decided to allow the franc to fall under collective supervision. This opened the door something akin to the Concert of Europe of 1815: conflicts over currencies would be undertaken at the diplomatic table rather than through acts of economic war.4 The Agreement set up guidelines for supervising exchange rates and clearing arrangements. But it was in these arrangements that domestic guardianship manifested itself. Exchange parities were not considered fixed. Any nation could revalue its currency provided they gave advanced notice to the other parties. This allowed the flexibility to adjust balances-​ of-​ payment without painful internal accommodations. Moreover, while transactions in gold were sanctified, still the gold link was made tenuous by allowing nations to temporarily settle imbalances by relying on fiduciary reserves. By allowing debtor nations to run up balances on creditor nations without endangering their metallic reserves, this system interestingly shifted external adjustment from debtors to creditors. This was a clear accommodation for nations to avoid difficult domestic economic sacrifices for the sake of squaring bilateral accounts. In this sense one could consider the collective outstanding balances run up across nations as constituting a stabilization fund for the purpose of leveraging out of domestic recession. This would essentially be the very modus operandi of the future International Monetary Fund. A strong legacy was developing after World War I, a legacy that would put the international economic system on another trajectory. It was a trajectory that would defend the economic sovereignty of nations by allowing enough safety values in the rules of the game to protect domestic economic imperatives,

Mature guardianship: Bretton Woods  105 especially growth and employment. It was clear that gold would not be seen in the same way it had been seen before the war. All the major conferences of the interwar period sought to supplement gold so as to insulate nations from suffering serious bouts of deflation. And while an inescapable status quo psychology prevailed for about six decades after World War I, monometallism or even bimetallism would never again be considered state of the art.5 National currencies would bolster international reserve holdings. The 1940s would up the ante on supplemental reserves by introducing proposals for supranational currencies such as Keynes’ bancor and White’s unitas. Furthermore, while exchange stabilization around well-​defined parities was always paramount, the freedom to change parties was always part of prevailing proposals. Like greater liquidity, this was another safety valve against painful internal adjustment. Finally, the idea of setting up mechanisms to leverage out of short-​term external disequilibrium was quite new. The idea of shifting the burden of adjustment from debtors to creditors took many proposed forms, but it was perhaps the most glaring preservation of economic sovereignty characterizing the new guardian state. The exchange stabilizing pools of liquidity relieved nations of sacrificing employment and growth for the sake of maintaining parities.6 The guardian legacy of the 1930s was carried into Bretton Woods in the visions of the major architects of the postwar regime: John Maynard Keynes and Harry Dexter White. And while the interwar crises drove a realization in both men that the movement out of a Hobbesian economic world was to be fostered through multilateral cooperation to a degree never before achieved, both men traditionally differed in their visions about international monetary stabilization as a general theory of institution building. Keynes of course was the architype of economic nationalism: he was the very incarnation of a guardian philosophy. His very name today evinces visions of governments standing ready to protect employment and growth through fiscal measures. Hence, coming into Bretton Woods, Keynes was mainly concerned with ways in which a stabilization agreement could have enough flexibility for individual nations to avoid the painful consequences of internal adjustment.White displayed a somewhat more internationalist orientation contemplating large-​scale multilateral agreements and organizations that would coordinate domestic actions and policies, with less emphasis on individual flexibility in following the greater multilateral rules. But while much has been made about differences among these architects of postwar reconstruction, even the earliest visions of both men seem to suggest merging sensitivities to the imperatives of domestic economic sovereignty under the new rules of the game.7 Both men were concerned with the difficulties of prolonged domestic adjustment under a regime of fixed exchange rates. No one on either side of the Atlantic found comfort in a regime as radical as one of flexible exchange rates; hence, some form of adjustment would have to take place in balancing external accounts other than changing parities. Both men liked the idea of having some relief values for internal adjustments aside from flexible parities. And above and beyond their own personal commitments to guarding the domestic economies of nations, they both had a keen awareness

106  Mature guardianship: Bretton Woods of the guardian Weltanschauung of the times in national legislatures. This basically created boundaries for any reconstruction plans after the war which they may have contemplated. Stabilization funds were the answer. We have shown in the last chapter that such an idea was featured at the highest levels of monetary diplomacy in the 1930s, notwithstanding a reluctance to institute it. Essentially this was a system that allowed debtor nations to leverage out of short-​term deficits by drawing on pools of liquidity. This fundamentally placed a large financial burden of maintaining exchange rates onto creditor nations. Imbalances could be leveraged in the short term without deflationary domestic monetary policies, which served to preserve parities and maintain trade flows. Clearly, only plans that maintained sufficient domestic economic safeguards were realizable in legislative and more general public voting environments. The very diplomats that negotiated on these issues, as functionaries of executive departments in democracies, functioned in domestic political networks that were overseen by executive leaders and legislators.8 There was little economic independence among diplomats, especially when drafting the most far-​reaching international economic treaty in history. Politics was always front and center (Steil 2013, p. 125; Rees 1973, p. 141; Ikenberry 1993, pp. 158, 164 and Block 1977). In terms of the Keynes plan, the protection of domestic economic sovereignty was quite evident in the Preface of the April 1943 draft9: There should be the least possible interference with internal national policies, and the plan should not wander from the international terrain… .Nevertheless in the realm of internal policy the authority of the Governing Board of the proposed Institution should be limited to recommendations, or at the most to imposing conditions for the more extended enjoyment of the facilities which the Institution offers. (Keynes 1943 plan reprinted in Horsefield 1969,V. III, pp. 19–​36) Keynes’ plan originated in a premise that free markets of the 19th century were not a satisfactory foundation for organizing balances-​of-​payments. As quoted by his biographer Donald Moggride (1992, p. 673), Keynes stated that “[n]‌othing is more certain than that movement of capital funds must be regulated;—​which in itself will involve far reaching departures from laissez faire arrangements.” Under such conditions, he theorized, regular international banking operations could never be carried out. All international transactions would have to filter through central banks, and in turn the transactions among the banks would be further centralized through the institution of his famous Clearing Union. An international currency (bancor) would serve as a unit of account and reserve asset. Bancor in fact would be the monetary foundation of the system. Although it would be defined in terms of gold, its convertibility would only be one way: central banks could sell gold for bancor at the Union but could not obtain gold for bancor. Of course this reflected his long aversion to using gold as a monetary standard. Indeed, his famous reference

Mature guardianship: Bretton Woods  107 to gold as a “barbarous relic” well reflected its deficiency as a foundation of international liquidity. This one-​way option was a testament to his quest to generate greater liquidity in the international system so as to provide an option to painful internal adjustment. Each nation would be granted a quota in the Union equal to a substantial sum (originally 50% but then later 75% in the April 1943 plan) total of imports and exports over the previous 3 years. Nations could draw on that quota when in need of liquidity for balancing payments. Balance-​of-​payments themselves would show up in the Union’s ledger in the form of credits or positive balances and debits or overdrafts. Hence, this plan indexed access to liquidity in a progressive manner, giving greatest access to the nations that carried on the most abundant transactions. The plan had built-​ in adjustment safety values that abated the need for internal adjustment for debtors. Once a nation’s overdraft privilege was reached (overdrafting to 25% of its quota), it could automatically devalue its currency by 5%. Nations could run up greater debits in higher tranches under certain conditions. Stipulations got ominous once a level of 75% was reached, bringing default into the picture. Hence, 75% was considered a “rigid” maximum for debtors. Debtors could borrow freely and without conditions up to that first tranche of their quotas and could go on to run up debits to greater proportions of quotas under certain conditions. A 50% run-​up could induce another 5% depreciation. Keynes’ concern with postwar positions in the structure of balances-​of-​ payments showed up in his argument about the pressures on surplus nations. Keynes stipulated that excess balances should be dealt with through interest charges of credits and debits, thus placing an adjustment burden on nations to avoid running excess balances. But the penalty was mild at only 1% of excesses. Hence, this was a plan of fairly liberal access to liquidity as a substitute for internal adjustment in the short run.The plan however did not mirror the same precise stipulations for creditor nations aside from the 1% interest on credit balances. Keynes did not propose the same tranche stipulations on creditors (aside from stipulating that a run-​up of credits equal to 50% of quotas would bring a number of options in, including a 5% appreciation), nor did he propose a rigid limit on credits. While this may have seemed to conflict with his expectations that Britain would be relying on American credit after the war, and that therefore giving creditors free reign under his plan was anathema, his logic appeared otherwise. He was concerned with undermining his plan for liquidity if creditors were pressed on excess balances. But it was also clear in the text that creditors faced strong pressures to balance whether their credits were piling up in a central bank as reserves or in the Clearing Union as credits. Hence, there was an ongoing pressure to adjust from surpluses. The general orientation also accorded with Britain’s own particularistic guardianship in that this accorded with how Britain saw its coming domestic economic challenges and debtor position in the postwar system. A system of abundant liquidity with flexible external adjustment mechanisms fit well into its domestic imperatives (Steil 2013, pp. 143–​147; Keynes 1943 plan reprinted in Horsefield 1969,V. III, pp. 19–​36; and Moggridge 1992, pp. 673, 674).

108  Mature guardianship: Bretton Woods Similarly, the White plan, while seemingly more internationalist in narrative, had a strong nationalist foundation. This foundation was often embedded in universalist objectives. A statement in the Preamble to the White plan is most representative of this pattern. Only through international cooperation will it be possible for countries successfully to apply measures directed toward attaining and maintaining a high level of employment and income which must be the primary objective of economic policy. (White 1943 plan reprinted in Horsefield 1969,V. III, p. 83) White’s plan was different, but essentially his ideas mirrored Keynes’ guardian safety valves for running external imbalances without painful internal adjustment. White’s plan conceived of an international stabilization fund as a repository of liquidity funded by contributions from its members. The fundamental design was based on the hope of stabilizing the international market for currencies, providing liquidity for short-​term balance of payments relief and maintaining domestic agency over macroeconomic policy. The Fund would be composed of contributions from its members called quotas, paid both in gold and fiduciary reserves, and computed based on a more intricate formula than Keynes’ plan employing a number of economic indicators.The original amount of such quotas would add up to 5 billion dollars. There would be an international monetary unit of the Fund called unitas, like bancor, which would be defined in terms of gold and national currencies. Nations could obtain liquidity by buying currencies of other nations based on a complicated formula for the purposes of alleviating balance-​of-​payments difficulties. In terms of exchange rates, nations would determine a proper band within which parities could fluctuate. Nations could change their parities if faced with “fundamental disequilibrium.” But unlike Keynes, nations could not automatically change their parities without the consent of the Fund management. The plan called for the establishment of free capital movements on current account, but allowed controls on capital account. Finally, the structure of governance was indexed to the size of quotas. This gave nations with larger economies greater voting power. Like Keynes’ plan, the White plan was convivial with U.S. economic interests in the coming postwar system. The stipulations of the plan combined extensive flexibility for domestic policy given the voting power within the Fund with sufficient strictures against actions that would adversely affect American exports (White 1943 plan reprinted in Horsefield 1969,V. III, pp. 83–​96, and Steil 2013, pp. 133–​136).10 Revisions of the two plans went on within each respective nation for at least a year before the two nations began a series of inter-​governmental meetings to interface the two. The plans of course were widely vetted and discussed in by both governments. Much of this interfacing was accomplished in a series of meetings between British and American delegations headed of course by Keynes and White, respectively: running from mid-​September to October 11,

Mature guardianship: Bretton Woods  109 1943. Emotions of course ran high at these meetings, with quite a variation in diplomatic postures, but eventually some sense of order prevailed. The joint statement kept the basic structure of safeguards for domestic adjustment. In point number 2 of Section I, it was made starkly clear that a principal goal of the plan was “the maintenance of a high level of employment and real income” (document reprinted in Horsefield, V. III, p. 131). In fact, because guardian visions were a driving force in both plans, there was already much overlap in the two visions of post-​war reconstruction. The British objected to a number of specific stipulations on implementation and design, but in the end made a great many accommodations. However, even in areas where accommodations were made to the White Plan, it was fairly clear that the general objectives of each category of the plans were in sync in terms of protecting domestic economic sovereignty. The Fund generated more limited liquidity than the Keynes plan, demonstrating the differing positions of the two economies in the coming postwar system. But the fundamental idea of being able to leverage out of painful internal adjustment required to correct short-​term balance of payments difficulties was strongly manifest in both plans. The expansionist orientation of generating more liquidity through lending was bolstered in both plans by the creation of an international currency unit that would shift international transactions away from the deflationary strictures of gold. Gold had a greater role under the Fund as nations were required to put up half their quotas in gold. The Clearing Union would hold gold, but aside from being a numeraire for defining the value of reserves, it was not as central to its workings. Both plans stipulated fixed exchange rates, with the White plan being stricter on allowing deviations. This of course mirrored a British aversion to the problems of an overvalued pound, but also American fears of competitive devaluation.Yet both offered the possibility of adjusting parities as a safety value for avoiding painful internal adjustment. While both fundamentally embraced free capital movements over some period of time, there were safeguards on these as well. Keynes was much more tolerant of exchange controls, and his plan left the implementation of such controls to the discretion of nations. White allowed a grace period of 1 year for nations to comply, but he only stipulated dismantling controls on current account, and exempted controls on capital account (Joint Statement reprinted in Horsefield, V. III, pp. 128–​135; Moggridge 1992, pp. 721–​731; Steil 2013, pp. 147–​151; and Gardner 1956, pp. 80–​95). After meetings between the U.S. and Britain on July 1, 1944, representatives began showing up at Mount Washington Hotel at Bretton Woods, New Hampshire. Both the diplomatic landscape coming in and the hotel at the time were in disrepair.11 Many questions were unresolved by the experts at a meeting in Atlantic City just a week prior, and of course the two major players came in with differing priorities in post-​war reconstruction. The format was nothing short of chaotic with numerous committees, subcommittees and ad hoc committees. Moreover, many negotiations went on informally. All of this was going on with more than 700 participants in what were often very large venues with communications done via microphone in English to an audience whose

110  Mature guardianship: Bretton Woods mastery of the language was on a whole wanting. The documents generated at the conference numbered over 500, and they filled about 1,200 printed pages.12 To think that any historian could adequately translate such proceedings into a conclusive narrative is presumptuous at the least, although many have tried. In this particular chronicle of the conference proceedings, the goal is more to trace guardian outcomes in the most controversial issues of the negotiations. Hence, the analysis will invariably touch on issues of major economic impact (Moggridge 1992, p. 741; Department of State 1948,V. I, pp. 12, 13; Rees 1973, p. 233; and Horsefield 1969,V. I, pp. 89–​93). Much ink has been spilled on how America rose up from the ashes of war to lead the world back to stability. It was the supposed hegemon that paid a large domestic price to provide the public goods of stability. It did what Kindleberger (1973) had prescribed for the interwar period. But to think of America as serving up domestic interests for the sake of providing some international public good does not fully appreciate the situation of July 1944. The U.S. had never been anything other than isolationist in its history. FDR staked his entire political career on domestic economic revival. The wars in Europe and Pacific were raging with no clear end in sight. The U.S. was in great domestic economic turmoil, even if it were not the battleground itself.To think that domestic politics, anywhere in the world, would somehow suspend its pathological parochialism, is a belief that is quite a stretch. Even scholars such as Block (1977, p. 37), who talk about the U.S. taking a more internationalist path over a nationalist path in building a new postwar regime, are not obtuse to the tenacious struggle in American politics over the impact of such a venture on the domestic economy.13 To say that domestic politics was important is trivial. But to say that somehow it was less of an overriding concern than establishing a stable international system is naïve. It was always of principal importance. If anyone thinks that any nation after 10 years of economic depression and several years of war was going into any international meeting feeling magnanimous and prosperous enough to ignore its own economic interests, it would be bold indeed. As much as nations were thinking outwardly, 15 years of deprivation cast a very deep shadow on the fabric of domestic politics. Domestic politics was intensely interlaced in every possible issue. The Joint Statement that emerged after about 2 years of negotiations between the U.S. and Britain, that formed the main agenda at the conference, had gone through the political wringer on both sides of the Atlantic: this included wide exposure of the various drafts and proposals both to the public and within government circles. White and Keynes were placed on the political hot plate before their legislatures, which perused the drafts with great attention and diligence. It was not an easy job for them to defend the plan given that the joint statement was a synthesis of internationalism and economic nationalism, and hence was assailed by both sides. But nationalists had the loudest voices in the legislatures, as they should, given their parochial imperatives of protecting the welfare of their citizens. There was little chance that a joint compromise coming out of Bretton Woods was ever going to be in significant conflict with

Mature guardianship: Bretton Woods  111 domestic economic goals.The agenda was politically molded and then the final plan of course had to be ratified in political venues (Eckes 1975, p. 140; Steil 2013, pp. 166–​169; Block 1977, p. 43; Gardner 1956, pp. 96, 97; and Moggridge 1992, pp. 730, 735, 737). Legislators had ultimate control of the outcome and significant influence over its drafting.14 Keynes himself provided some notable reactions to the political crucible the two men occupied. After being questioned in the House of Commons on the Joint Statement in May 1943, he later lamented “seven hours in that cursed gallery, lacerated in mind and body” (Moggridge 1992, p. 736). In perhaps one of the more ironic tales in Keynes’ life, he actually had to assure the economic nationalists in the House of Lords that he was still sympathetic to Keynesian economics: I hope your Lordships will trust me not to have turned my back on all I have fought for. To establish these three principles which I have just stated has been my main task for the last twenty years. Sometimes alone, in popular articles in the press, in pamphlets, in dozens of letters to The Times, in text books, in enormous and obscure treatises, I have spent my strength to persuade my countrymen and the world at large to change their traditional doctrines and, by taking better thought, to remove the curse of unemployment. Was it not I, when many of today’s iconoclasts were still worshippers of the Calf, who wrote that ‘Gold is a barbarous relic’? Am I so faithless, so forgetful, so senile that, at the very moment of triumph of these ideas when, with gathering momentum, Governments, parliaments, banks, the press, the public, and even economists, have at last accepted these new doctrines, I go off to help forge new chains to hold us fast in the old dungeon? I trust, my Lords, that you will not believe it. (Moggridge 1992, p. 737) Morgenthau, the head of the American delegation at Bretton Woods, was especially attentive to keeping in close consultation with the American Congress throughout the entire process of negotiation. He firmly believed that President Woodrow Wilson might have gotten his League of Nations proposal through the Senate had he been more communicative with legislators back home during the proceedings. In fact, Morgenthau stacked the deck politically at Bretton Woods. He strategically included a diverse representation of political players (both private and public) that would cover important domestic sources of support back home.The Vice Chairman Fred Vinson, who was a former member of the House representing Kentucky and Director of the Office of Economic Stabilization, had extensive ties into inner sanctums of power on the Hill. Robert Wagner and Brent Spence were Chairmen of the Senate and House Committees on Banking and Currency, respectively. Also on the delegation were two ranking Republican Congressmen: Jesse Wolcott of Michigan and Charles Tobey of New Hampshire. Wagner and Spence, both Democrats, were in a crucial bureaucratic position as they

112  Mature guardianship: Bretton Woods chaired committees that would vet the agreement. Leading Republicans on the committee, although potentially troubling, assured that Republicans back home could not accuse FDR and Morgenthau of a lack of representation at the conference. Also included was Edward “Ned” Brown, President of the First National Bank of Chicago. He was sympathetic to Morgenthau’s cause and could later be used to sell Midwestern isolationists on the plan (Odell 1988, p. 305 and Steil 2013, p. 233). Of course, the ratification of the Articles once negotiated passed through the same political ringer that earlier proposals filtered through. The vanguard of both Treasuries navigated through a plethora of private and public individuals to eventually get the agreement ratified. In both cases, they had to push through the phalanx of political populism on both sides of the Atlantic. Isolationist American Senator Taft’s reference to the interests of the “working man” was voiced in both nations, with an accompanying chorus of protectors of civic organizations and the farming community. The concert featured an operatic crescendo on domestic sovereignty during the ratification process. The marketing by the U.S. Treasury of the final Articles was as vigorous after the agreement as it was in the period leading up to the conference. Eckes’ (1975, Chapter 5) detailed chronicle on the “Selling of Bretton Woods” to America is testament to the exhaustive effort that the Treasury undertook to ingratiate the plan to every possible group of players in the American political system: Congress, media, trade groups, women voters, farmers, academics, bankers, car manufacturers and the general public.15 Moreover, and fortunately for the supporters of the plan, the ratification coincided with the end of the war, which gave the Treasury vanguards a propitious platform from which to marshal sentiments for a universal leap of faith that helped to break down nationalist resistance to such an agreement in the respective legislatures (Eckes 1975, pp. 165–​210; Gardner 1956, pp. 121–​143; and Odell 1988, pp. 304, 305). As for the supposed hegemonic power, the U.S., the meeting dates of the conference (July 1 to 19) were orchestrated around domestic politics. The Treasury arranged it so the meeting would end before the day (July 20) of the Democratic National Convention, where FDR was to be announced as the Democratic candidate for President.16 It is hard to believe that the New Deal President would have looked forward to announcing an agreement that was not eminently beneficial to the U.S. after 15 years of devastation.The American public would not have been very amenable to arguments that the U.S. should carry a Sisyphusian burden of international public goods that would compromise America’s economic welfare. Neither was it likely that FDR, after 12 years of making his political life dependent on domestic revitalization, would be a likely interlocutor for such a universalist narrative.17 Notwithstanding the common scholarly refrain that an internationalist foreign policy under Secretary of State Hull set the U.S. on a new course that placed international stability at a high level relative to purely domestic parochialism, this was far from the truth. FDR was never an internationalist. The previous chapter attests to just how resistant

Mature guardianship: Bretton Woods  113 FDR could be in the face of agreements that were necessary for global economic stability, to the U.S.’s own detriment. While the idea of preventing the recrudescence of Fascism and war made him more amendable to international treaties, he was deeply invested in domestic political outcomes. Furthermore, the idea that Hull the internationalist ran foreign policy attributes far more power to a person who knew his place in the administration quite well. At the London meeting and throughout the 1930s, he proved to continually be a meek personality in the face of the domestic political power brokers above in the Washington hierarchy. It was for him truly a decade of continual frustration. But Treasury reigned supreme over the State Department at the negotiations at Bretton Woods, and those functionaries held a strong economic nationalist slant in their ideological orientations (Block 1977, p. 39; Steil 2013, p. 176; and Moggridge 1992, p. 737). Certainly every delegate at Bretton Woods was quite cognizant, as we would expect, of the domestic political impact of the outcomes of the conference for their nations. It was for them a crucial venue through which to ingratiate political leaders to their weary citizens. Keynes attested to the conference as a domestic political platform when he observed that each delegate was “… wanting to get something on the record which would look good in the press down at home…” (Horsefield 1969,V. 1, p. 92).18 And the public statements from delegates were clear declarations of using the agreements to attend to domestic economic prosperity. FDR’s letter to the delegates cited “the economic health of every country” (Department of State 1948,V. I, p. 71). Chairman of the First Commission attending to the construction of the Fund, Harry Dexter White, reaffirmed the politically charged message from FDR in the very first sentence of his opening address to the Commission: “[e]‌ach of the United and Associated Nations has as a fundamental objective the creation of as full production and employment as is possible in its own country” (Department of State 1948,V. I, p. 97). Chairman of the Brazilian delegation Arthur de Souza Costa identified the meeting as a springboard to “increased productivity, elimination of unemployment and progressive improvement in living standards” (Department of State 1948, V. I, p. 77). Canadian Chairman Ilsley stated that each nation had “a vital national interest” in the success of an international agreement (Department of State 1948, V. I, p. 78). The Uruguayan delegation noted how important an international agreement would be for their nation as “Uruguay will be able to maintain its economy free from those violent fluctuations which characterize the economy of a young country easily” (Department of State 1948, V. II, p. 1159). H.H. Kung, Chairman of the Chinese delegation, stated “we plan to lay the economic foundations of a modern China” (Department of State 1948,V. II, p. 1165). Henry Morgenthau, at the Closing Plenary Session of the conference on July 20, the proceedings of which were certainly a watershed of media attention, issued statements that certainly garnered political points for FDR’s reelection campaign. He revived FDR’s populist trope, from his first inaugural address, embracing the needs of main street over Wall Street when he referred to access to credit arranged so as “to drive only the usurious money

114  Mature guardianship: Bretton Woods lenders from the temple of international finance” (Department of State 1948, V. I, p. 1119). He also declared: The American Delegation which I have had the honor of leading, has at all times been conscious of its primary obligation—​the protection of American interests. And the other representatives here have been no less loyal or devoted to the welfare of their own people. (Department of State 1948,V. I, p. 1117) The emergence of a euphoric mantra at the end of the conference was a testament to the guardian vision contemplated in the agreement: “a New Deal for a new world” (Rees 1973, p. 235).19 As will be seen, one of the pervasive themes throughout the negotiations at Bretton Woods, especially on the most contentious issues, was nations trying to construct an international regime that interfaced squarely with the objective of guarding their domestic economies. This essentially Prisoner’s Dilemma dynamic (everyone else attends to maintaining external stability, while I free ride by attending to my domestic economy) was as seen above also quite pervasive in the interwar negotiations as well. In the interwar years, there was no force for international regime building strong enough to push back against this predatory assault. But under Bretton Woods, however, the two power brokers of the international system took the lead in creating a regime. In the interwar years, such concerted action on the part of champions was absent: Britain tried but was too weak to pull it off, and the U.S. was either absent or intransigent. Under Bretton Woods the U.S. and Britain would lead the others out of the trenches in attacking global instability.20 Underlying the universal narrative of the Articles of Agreement was a deeply woven network of safeguards for economic sovereignty.21 Section ii of Article I on “Purposes” called for: [T]‌he promotion and maintenance of high levels of employment and real income and…the development of the productive resources of all members as the primary objectives of economic policy. (p. 187) Section v states another such purpose of the Fund: To give confidence to members by making the Fund’s resources available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance-​of-​payments without resorting to measures destructive of national or international prosperity. (p. 188) Article II on Membership cast a wide net, inviting up to 46 nations to join, and thus take advantage of the Fund’s resources in guarding domestic economic

Mature guardianship: Bretton Woods  115 prosperity. None of these stipulations in the Article generated much controversy at the conference. But they were crucial in defining general boundaries and the prime directives of the Fund. Negotiations on Article III on quotas and subscriptions, as might be expected, were more of a hornet’s nest. Quotas remained a thorny issue as they had been in negotiations prior to July 1944. Negotiations on this issue were delegated to a smaller ad hoc committee, which unfortunately left almost no record of its work. A number of formulas for establishing a quota were entrusted to the committee for consideration, and of course there was significant tussle over which formula would be considered. American and British hopes that the committee would flatly accept their own universal formulas were dashed when nations became unruly about following a single algorithm. Rather the quotas that emerged from the committee were a function of negotiation. White and Keynes attested to the difficulty of agreeing on a single formula, hence the quotas would have to be negotiated. White in fact, later in 1947, verified that within the committee, quotas were a result of pulling and hauling among the members. A sign of discord is that the recommendations of the committee were not unanimous, with five committee members (including France) protesting that their quotas were not sufficient. But while negotiations in the committee left little documented footprint, the reaction to its recommendations no doubt reflects what certainly must have gone on inside the committee, and these reactions were of course strongly parochial. Upon the report of the committee, five more nations (including Australia), not represented in the committee, joined the other five in protesting modest quotas. While the Chair of the committee Mr.Vinson ultimately convinced nations to go along, a number of nations left protests on the record. Much of this parochial angst was allayed by Section 2 of Article III, which stipulates that quotas could be adjusted either at regular intervals of 5 years or upon request. Furthermore, gold subscriptions emerged again as an issue, but was far less divisive given that expectations seemed to gravitate favorably around a widely touted figure of 25% of quotas. A number of nations, including self-​designated war-​torn nations, such as the Soviet Union and Czechoslovakia, sought greater latitude in gold payments. France also issued a reservation about dealing with such nations. Some language addressing latitude for “occupied” territories made it into the Article in the end (Gardner 1956, pp. 112–​114; Horsefield 1969, V. 1, pp. 94–​ 100; and Articles pp. 187, 188). In terms of exchange rate management, controversies were especially salient over Article IV (Par Values of Currencies).There was, as we would expect, quite a bit of contentious discussion on stability versus flexibly. The general mood of negotiations ended up converging on the language of the Joint Statement put forth on the agenda. This is also not surprising. The joint statement represented the position of the U.S. and Great Britain. In a situation of broad disagreement, under strong pressure to cooperate, there is little alternative than for actors to gravitate toward the specific recommendations of an agenda as a focal point. The final Article ended up with the familiar “fundamental disequilibrium” exception to fixed parities, which served to produce a domestic safety valve for

116  Mature guardianship: Bretton Woods each member of the Fund. Revaluation of up to 10% could be implemented without permission of the Fund, and a further revaluation of up to 10% was possible with the consent of the Fund. A further revaluation was also possible, but the Fund might take longer to consent or refuse. There was a push to allow nations with less voting power (under 10%) greater latitude in revaluing parities without permission, most certainly an accommodation to nations that could not muster enough voting power to undertake needed revaluations. Another notable outcome was a push to allow nations whose financial systems were small to be exempt from the rules over parities. Each of these initiatives was successful in defining the ultimate rules on parities. Similarly, the issue of uniform alterations in parities generated some controversy over rules and hierarchy in voting power. The proposed rule on uniform alterations stipulated that they could be implemented with a majority vote, and the concurrence of every member with at least a 10% voting share. Some smaller nations sought to exempt themselves and others in that cohort from such a rule, so as to maintain sovereign control over exchange rates, and thus maintain more instruments for external adjustment. In addition, France objected to giving powerful nations veto power over uniform parity changes. Ultimately, the exception was extended to all nations, which meant that any member could reject a uniform parity change if it informed the Fund within 72 hours of the action.The veto rule remained in place, much to France’s chagrin.The embodiment of some modicum of national agency over external adjustment was an ongoing manifestation of the guardian posture visible throughout monetary diplomacy of the 1930s (Rees, 1973, p. 232; Steil 2013, p. 217; Horsefield 1969, V. 1, pp. 100, 101; and Articles, pp. 189–​191). Extensive jostling in terms of nationalist competition over the agreement was quite evident in terms of the role of key currencies under the plan. The extremely contentious role of the dollar versus gold came to a head under the negotiations pertaining to Article IV. Both the British and Americans agreed that, notwithstanding Keynes’ historical aversion to the “barbarous relic” having a major role in his vision of the plan, parities would be “expressed” in terms of gold. Keynes himself had resisted giving the dollar a special role in the Fund, but the U.S. vigorously sought such a role for its currency. The Joint Statement made only mention of gold. In a cunning bureaucratic maneuver that actually reflected the U.S. power over procedures of the negotiations, White was able to slip in a phrase designating the dollar as being on par with gold in terms of expressing parities under Keynes’ nose at a strategic venue under the general radar, Keynes being at another meeting involving the International Bank for Reconstruction and Development (proceedings which he chaired) at the time. The language White sent to the Drafting Committee mentioned gold and “a gold-​convertible currency unit,” which essentially meant the U.S. dollar (Steil 2013, pp. 214–​216). Similarly, as expected, the issue of drawing from the fund in Article V (Transactions with the Fund) carried over the disagreements among the technocrats at Atlantic City the week prior. The agenda of course brought

Mature guardianship: Bretton Woods  117 forth the familiar 25, 200, 75 formula governing drawings. Members would be able to draw on the Fund up to 25% of its quota per year, not to exceed an accumulated total of 200% of its quota. Members who fell below 75% of their quotas could draw additional funds above the 25% up to the shortfall below 75%. A number of nations carried over objections from the technocrats’ meeting in Atlantic City. Greater elasticity in drawing rights was a consistent critical refrain, and the specific instruments of such proposals varied. Section 4 of the Article allayed concerns over limited access, although it rejected specific stipulations proposed in favor of a more general exemption clause under the language of “Waiver of Conditions.” Under this language, the Fund had the power to wave the rules over drawing from the Fund based on the “period or exceptional requirement of the member requesting the waiver.”The exemption clause further stipulated that a member’s willingness to float collateral would also be considered in obtaining a waiver. But although not entirely satisfied, nations seeking to protect domestic sovereignty were able to include a safety value in the final document. Under these same Transactions negotiations (Article V), repurchasing rules led to some of the most assiduous diplomacy at the conference. Repurchasing rules proved onerous for nations seeking liquidity. Amendments to the agenda at the conference abounded, as they had in Atlantic City. The agenda proposal stipulated that nations would be required to repurchase their currencies from the Fund equal to one-​half of the increase that year of the Fund’s holdings of that currency plus one-​half of the increase that year of the members’ monetary reserves (decreases in reserves would reduce the obligation in kind). A number of amendments looked to loosen the requirements through a variety of proposals: waiving the repurchasing obligation entirely, raising the minimum Fund holding of any currency from 75% of a member quota to 100%, or introducing silver on par with gold and gold-​convertible currencies. The delegates, led by a British drafting committee, eventually found agreeable language that codified some of these considerations in the final document. Furthermore, the stipulations of Schedule B which was included in the Articles produced rules that allowed proportional allocation of national reserves for the purpose of repurchasing currency. This meant that the repurchasing amounts would be distributed proportionally among the members’ monetary reserves based on the increases across the different kinds of reserves, thus distributing the burden of repurchasing equitably across various reserve assets. In addition, and reflective of the self-​serving grappling among delegations for the spoils of diplomacy, a group of silver nations attempted to carve out a central role for silver. Being smaller and less powerful nations, they were denied a central role for the metal but allowed a role as a “collateral” currency under Section 4 (Steil 2013, pp. 214, 229–​233; Horsefield 1969,V. 1, pp. 101–​103; and Articles, pp. 191–​193, 210, 211).22 Article VI on Capital Transfers demonstrated the crucial commercial priorities underlying the agreement, but also showed the importance of national agency over domestic financial systems. The Article specifically stipulated that

118  Mature guardianship: Bretton Woods controls on exchange were not permitted on current account, but were indeed permitted on capital account. Trade payments were seen as more fundamental to long-​term stability than capital movements. In fact, capital movements in the form of hot money flows had the potential to destabilize domestic financial systems, and if transmitted over a larger area, could destabilize the greater international monetary system. Moreover, the regulation of capital flows maintained economic sovereignty over fiscal and monetary policy. Capital controls allowed a nation to delink its interest rate from the international financial system, thus preserving autonomy over monetary policy. And of course foreign flows of capital could also undermine structures of domestic taxation. While the idea of liberal investment practices was embraced on both sides, this freedom to regulate investment flows was a manifestation of being able to insulate domestic economies from external shocks. Other stipulations under Section 1 reinforced this protective shield over domestic finance by prohibiting member nations from making use of the Fund’s resources to leverage a large outflow of capital (Steil 2013, pp. 145, 150 and Articles, pp. 193, 194). There was little controversy over the scarce currency clause (Article VII), which was in fact a central concern of the original planners. This issue was one of the most prominently addressed points of negotiation for 2 years leading up to the conference. In principle, it was a manifestation of a debtor guardian posture in that it placed a burden of adjustment on creditor nations.The Americans were much less concerned with disciplining creditor nations early on in the1940s. But the British were especially worried about credit balances under the rules of the Fund, and the Americans too became worried about a dollar shortage from America’s expected trade surpluses. Keynes had originally contemplated the penalization of surpluses through interest charges, which he thought would encourage sufficient liquidity in the system, and thus placing the burden of adjustment on creditors. White’s plan distributed the burden somewhat more evenly among debtors and creditors. His original plan did not have a scarce currency clause, but later iterations of the American plan adopted it.The somewhat differing postures were obviously reflective of their differing positions in the international economy. Britain saw itself as a future major debtor that would be relying on U.S. dollars to leverage itself out of domestic adjustment, while most foresaw the U.S. as the nation that would be running surpluses in the postwar period. Consequently, there needed to be a mechanism that forced the U.S. to limit its accumulation of reserves so as to finance the international system. The agreement that developed between the U.S. and Britain had crystalized in moving toward a joint statement in 1943. Some may think this a manifestation of U.S. hegemonic provisions of public goods by letting itself be disciplined for its dominate commercial export capacity. But, in fact, while the British saw this as a clause with teeth, the Americans had, at the conference and continued to have in the later 1940s, a more restricted view of the operation of the scarce currency clause. Moreover, Congress itself was somewhat more mystified by the technical operations of the Fund, and hence was somewhat more obtuse to the full disciplining consequences of the clause.23 By the time it might have become

Mature guardianship: Bretton Woods  119 a more salient issue in the later 1940s and early 1950s, however, it became clear that the U.S. was not becoming a hoarding creditor, but a fountain of liquidity for the system: the feared dollar shortage turned into a dollar abundance (Steil 2013, pp. 212–​214; Rees 1973, pp. 227, 228; Moggridge 1992, pp. 140, 728; Gardner 1956, pp. 116,117; and Articles pp. 194, 195). Any American concerns with being the target of excessive discipline for exporting goods were allayed by the stipulations regarding scare currencies that left creditors some safety valves under the clause. As codified the stipulations left great room for creditor autonomy in responding to a scarce status. It stated that the Fund “may” inform other members of the status and “may” issue a report, but the scarce currency country got to participate in the report. The Fund then “may, if it deems it appropriate to replenish its holdings,” resort to one of two courses: (1) the Fund may borrow the scarce currency from the creditor or other nations or (2) buy the currency with gold. Members could refuse to follow stipulation number 1 if they wished. The Article also stated that scarce currencies can be subject to exchange controls by other nations, but that the latter nations have full agency over the implementation of the controls. It also encouraged the latter nations to be sympathetic to the demands of other interested parties in implementing the controls. Essentially the term “may” suggests that actions required Fund approval, which could be strongly influenced by creditors since they dominated voting. And of course, this in conjunction with the other terms of creditor agency in the wording, essentially reduced the question of scarce currencies to bargaining within the Fund and between nations in forums outside the Fund. Given the power of creditor nations inside and outside the Fund, the structure of codification left ample escape avenues for scarce currency nations (Articles, pp. 194, 195). Under the issue of member obligations to buy balances of their currencies held by other members (Article VIII, Section 4), Britain was especially concerned with the large sterling balances accumulated during the war in the dominions as a result of large current account surpluses generated by asymmetric trade with Britain. The liquidation of such a large overhang by repaying on these balances was perceived to be financially destabilizing for British finance under this statute. Section 4 allayed the British concern by stipulating that the repurchase of foreign held balances only applied to those balances recently acquired, which exempted those balances that had been accumulating in past years. This would allow the British to negotiate the settlement of these transactions bilaterally within the sterling area, which opened up opportunities to revive the Commonwealth arrangements, and thus maintain a regional financial safety valve for the British state. There was also the general concern, of course, regarding the financing of trade in the postwar period. In actuality, since sterling would be a key currency in the postwar period and trading within the sterling area (and many of these territories were developing and hence financially weak) was effected in the same currency, this protection of sterling balances seemed to serve as a device to maintain the availability of liquidity for current transactions.

120  Mature guardianship: Bretton Woods The concern with encouraging trade, which was a major goal of the Fund, was expressed in a stipulation that the obligations pertained specifically to the need for “payments to make current transactions.” Furthermore, the issue of developing nation needs surfaced in the context of obligations to furnish information under Section 5 of the Article. A concern for asymmetries in the ability to generate information about domestic economies required for the Fund to do its job, which emerged at Atlantic City, was also salient here. The obligation to provide information was modified by a stipulation which took into consideration the ability of nations to furnish such information. Developing nations were clearly allowed, in this respect, greater leeway in abiding by the obligations. In addition, a microeconomic guardian exemption was codified in a stipulation that information would not include financial data about corporations and individuals (Moggridge 1992, pp. 724, 732, 744, 749; Ikenberry 1993, p. 171; Horsefield 1969, V. I, pp. 104, 105; and Articles 1969, V. 1, pp. 196, 197). Under Articles IX, X and XI, the Fund perspicaciously protected itself and its member nations through claiming immunities and specifying relations with other entities.As an international governmental organization, the institution and member diplomats were protected from legal sanction. The member diplomats had full freedom to travel, communicate and transact across borders without national restrictions in the execution of their duties. Relations with other organizations in related activities were safeguarded with respect to preserving the letter and spirit of the Articles of Agreements. Any relations that would cause the Articles to be compromised would be prohibited or included under an amendment to the Articles. In terms of non-​members, member nations had free reign in their foreign relations and in no way were restricted by the rules of the Articles unless their actions compromised the Articles or the interests of other members (Articles, pp. 197–​199). The issue of the organization and management of the Fund (Article XII), as expected, garnered much attention. Clearly each nation wished to maximize its influence over a body that carried so many consequences for its macroeconomic fate. Access to the Board of Governors was less contentious because each nation was represented by a member and hence had input into decisions. The Board of Directors was quite a different story as it was an elite group that ran the day-​to-​day operations of the Fund, and hence had direct control of policy. The jockeying on access here continued from the week prior. There was the expected feeding frenzy on the part of nations to leverage their access to the Board of Directors. The most successful of these was Canada. Canada used creative diplomacy to get itself a seat by asking that nations not among the five leading quota nations (who automatically could appoint a director) be qualified to fill seats if their holdings in the Fund were most reduced below their quotas over the past 2 years (which meant that their holdings were used the most on average). Egypt failed to gain a seat for Middle Eastern nations, being outvoted. Cuba was able to establish a rule to allow nations of Latin America to appoint two directors.

Mature guardianship: Bretton Woods  121 On Fund management, another issue arose as to how the Managing Director of the Fund would select his/​her staff. Some nations pushed to get an equitable representation across nations so as to avoid regional monopolies in the staff. The language rather stressed “the highest levels of efficiency and technical competence.” Since staffers were under the guidance of the directors, and that body did achieve dispersed representation, this issue was not as contentious as the selection of directors. Also of modest controversy was the selection of the Managing Director within the discussion of staffing, and this of course was also made less contentious since the Managing Director was conceived more as a chairperson and moderator of the Board than an officer with power over outcomes (he/​she would have no vote in meetings of the governors and would have no vote on the Board of Directors except to break a tie). Finally, the distribution of votes made less of an impact because it was just an implementation of voting shares already agreed to beforehand. A most thorny issue under Section 8 was muted by a U.S.–​British agreement on the Fund’s oversight of national macroeconomic policies.The revised White Plan had stated that members “give consideration” to the Fund’s advice on such policies. The British opposed such language. They eventually settled on more innocuous language stating that the Fund had the right to communicate “informally” with members, and in the case of “serious disequilibrium” the Fund would have the right to publish a report on the member’s economic conditions by a 2/​3 of voting quota majority decision (Rees 1973, p. 226; Horsefield 1969, V. 1, pp. 105–​108; and Articles, pp. 198–​202).24 The discussion on a headquarters location (Article XIII) was a power play for banking privileges among the leading financial centers, especially between the British and Americans, each desiring to host the main offices of the Fund. Britain perhaps fought hardest on the issue at the conference, sensing some greater leverage here relative to other issues. This was a major face-​off both in terms of domestic politics (the U.S. playing the strong Congress card on this point) and international politics as it was a contest over the future center of world finance.25 An American victory would solidify the growing sentiment that the center of financial gravity had shifted across the Atlantic. It was also one of the several issues over which Keynes threatened to leave the conference. After much resistance the British finally came around to an emergent sense that the nation with the highest quota, and hence the major creditor, would hold the seat. For such a proud nation, laying prostrate to a former colony must have been truly difficult. After centuries of occupying the throne of global finance, the British would now abdicate in favor of a new monarch. At stake was more than prestige and home field advantage in diplomacy, but the headquarters would house a bulk of the Fund’s holdings. The British deferred to Americans after some extortionary pressures from American delegates who claimed that Congress would not accept the agreement if the Fund were not headquartered in the U.S. But the British, demands as well as those of other leading financial centers, were somewhat satisfied with a stipulation that agencies or branch offices would be headquartered in other nations. Additionally, the other four

122  Mature guardianship: Bretton Woods leading quota holders aside from the U.S. could also designate depositories of Fund assets (Eckes 1973, p. 146; Moggridge 1992, pp. 744, 745; Steil 2013, pp. 222, 223; Horsefield 1969,V. 1, p. 108; and Articles, p. 202). The issue of the timing of compliance was addressed in Article XIV (Transitional Period). The stipulations guaranteed full domestic agency over exchange restrictions for 5 years without any accountability. Nations had 3 years until the Fund would begin reporting on exchange controls, but it was only after 5 years from the original date of the Fund’s launching that nations maintaining such controls could be prompted by the Fund to meet and issue an explanation. The nature of this meeting, however, would be purely one of consultation about future intentions by the member nations. While a punitive stipulation involving withdrawal was contemplated in the event that controls persisted in ways that were contrary to the purposes of the Fund, no specific timeline was stipulated for such punishment. Section 5 of the Article posits a very soft approach to defining and implementing compliance by noting that postwar conditions would challenge members’ abilities to comply with the rules, and hence the Fund would grant requests by members for accommodations for domestic economic reasons “the benefit of any reasonable doubt.” The issue was of extreme importance to all nations, all the more to war-​torn nations. The British were the major force in extending this transition period over the course of redrafting the plans from 1942. This more generous 5-​year period essentially made this plan a wartime adjustment plan by extending phase-​in policies well into peacetime, thus protecting domestic economic sovereignty well into the postwar period (Moggridge 1992, pp. 733, 738, 743; Gardner 1956, pp. 119–​121; Horsefield 1969, V. 1, pp. 108, 109; and Articles, p. 203). The remaining issues (except for the last, XX) touched heavily on domestic economic sovereignty with respect to further instruments for nations to use in order to work around the principal stipulations of the Fund. Under Articles XV to XIX (Withdrawal, Amendments, Emergency Provisions, Interpretation and Terms of Explanation), a number of possible escape routes were presented and discussed. Withdrawal was made somewhat more benign by not making membership a condition for belonging to other international organizations. Still withdrawal was subject to a vote and hence not automatic. Furthermore, a nation had recourse through a process of appeal. In case of emergencies, and the Fund’s operations would have to suspend its operations, the language allowed a second automatic extension of no more than 120 days. In fact, an extension by a governors’ vote would push the suspension to 240 days. Of course, the amendments’ clause allowed infinite possibilities for altering the agreement in perpetuity. Nations had a greater incentive to lock into a flexible constitution, which is what an agreement with amendments would provide.The amendment process, like any litigious initiative within the framework of the Fund, essentially came down to bargaining and ultimate voting within the Fund’s administrative structures.Votes to amend required 3/​5 of the Board of Governors with 4/​5 of the voting power. Interestingly, unanimous approval was required for

Mature guardianship: Bretton Woods  123 amendments that would impede national sovereignty in the most important issues: on the right to withdraw, on the right to maintain one’s own quota and on the right to change one’s own parity.The Fund would not have the power to determine the most important instruments without the consent of the members in question. The stipulations under Interpretation and Explanations were classically legal guidelines for navigating compliance issues. The framers well knew that great agency could be acquired in terms of national sovereignty over policy if the rules were vague. But even with firm statutes, creative interpretation could generate much leeway for individual agency under the rules. As much as the stipulations within Article XIX (Explanations) attempted to define the precise definition of financial instruments such as currencies, reserves, convertible currencies, currency liabilities, official holdings, depositories, fiscal agencies, current transactions, etc., still the possibilities for creative accounting to interpret such terms to the benefit of a nation remained abundant. Article XVIII on Interpretation modified the statutes of explanation by establishing a process through which nations could defend their interpretations. Such matters were directly adjudicated by the directors, but in the event of an unfavorable decision, the aggrieved member could appeal to the Board of Governors, hence a safety valve supplementing creative accounting for the purpose of greater domestic flexibility. The final Article on Final Provision merely laid out technical details for implementation of the agreements (Horsefield 1969, V. 1, pp. 109,110 and Articles, pp. 203–​209). In the end, the Articles of Agreement generated at the conference were in a sense a miracle in that they created something never before seen in history: an organization based on multilateral cooperation that governed monetary relations and that oversaw macroeconomic policies. It is a testament to the difficulty of constraining domestic economic sovereignty in the age of the guardian state that it took two world wars, a plague, hundreds of millions of deaths and the worst economic depression in recorded history to finally push nations to work together. But even here the Articles were as much a testament to the resilience of the guardian state as to its abatement. As is clear from the previous discussion, the document as negotiated was pervaded by language that, to a lesser or greater degree, guarded the most sensitive domestic economic priorities of nations.The historiography has underscored how the foundations of Bretton Woods were based on paradoxes, the most glaring being referred to as the Triffen Dilemma. The paradox thus states that the regime was founded on the need for abundant liquidity, but for key currency nations to supply that liquidity, they would have to run massive deficits that ultimately undermined their ability to sustain their parities without painful internal adjustment. Keynes had foreseen this and hence suggested adding greater liquidity through bancor, but the Articles never included an international currency that would supplement currency reserves. The even greater paradox or dilemma was how to preserve domestic economic sovereignty within a framework that preserved external stability. So the document featured the schizophrenic quality it had in order to try and walk the tight rope between internal and external stability. Hence, the multitude of escapes

124  Mature guardianship: Bretton Woods and loopholes that characterized the agreement were the only rational response to something that was largely impossible to sustain.26 This analysis will not delve into the problems that confronted the regime, for all too much has been said about that issue. But clearly the problems faced by the regime were very much a function of the purposely flawed plan that survived the negotiations. As Skidelsky (2003, p. 127) observed, “[t]‌here were far too many contractual escape clauses and ‘voluntary misunderstandings’ for the plan to function effectively as an international regime.” But the dilemma facing the world at the time was that only flawed international “rules of the game” could have survived the guardian imperatives of nations after the war. It is not surprising that something designed so poorly was not mainly responsible for whatever stability emerged after the war. It was rather the breaking of the rules (the large devaluations in European currencies and the cushion of inconvertibility till the late 1950s) and resources outside the Fund plan (the “creditor voluntarism” of the U.S. in unilaterally exporting dollars) that propped up the international system. Essentially, the regime ended up working well only because it acquired a lot of help from its principal friend, the U.S. The framers hardly failed, however, but ingeniously pushed some sort of internationalism to the furthest extent they could, given the guardian postures of nations. They should in fact be commended for perspicaciously navigating the harsh terrain of domestic economic nationalism to find a generally agreeable solution. The Articles created a system that allowed nations to protect their domestic economies while creating just enough international constraints to avoid a return to the free-​for-​all mercantilism of the interwar period. Guardian politics, albeit subject to some necessary constraints, had won the day.27 Ikenberry’s (1993, p. 158) assessment of the motivating forces behind the creation of Bretton Woods best captures this role of guardian politics in building the regime: The ideas of monetary order advanced by British and American experts had political virtues: they defined a middle ground between the old and contentious alternatives of laissez-​faire and interventionism. These ideas ultimately carried the day because they created conditions for larger political coalitions within and between governments-​coalitions that themselves reflected a more general postwar reworking of the sociopolitical order in the Western capitalist democracies.28 It was an “order” of welfare capitalism, or what Ruggie (1983) called “embedded liberalism,” that guarded domestic prosperity and employment. In today’s nuanced nomenclature it was the new normal. But the new normal made any international straight jacket unacceptable to national economic architects. In fact, the idea of the viability of a strict codification of international monetary relations with the hard rules proposed at the conference was an illusion. Any regime as schizophrenic as the one instituted at Bretton Woods was already essentially obsolete, and of course this would

Mature guardianship: Bretton Woods  125 become increasingly apparent as the world became more globalized. As the level of international economic interpenetration and globalization caused greater disturbances in domestic economies, even the more relaxed implementation of the rules became increasingly difficult to bare. The regime was destined to have a short reign.

Notes 1 Note the title of a fairly recent book on the Bretton Woods negotiations by Steil (2013): The Battle of Bretton Woods: John Maynard, Harry Dexter White, and the Making of a New World Order. 2 The conference at Bretton Woods dealt with drawing up agreements for both an International Monetary Fund and an International Bank for Reconstruction and Development. This analysis will just look at the proceedings having to do with the Fund alone (Department of State 1948,V. 1, pp. v–​xix). 3 But even at the Genoa and London negotiations, as has been demonstrated above, we saw a legacy emerging that fed into the regime-​building style that came to characterize Bretton Woods. 4 The Napoleonic Wars pushed nations off the battlefield and into conference rooms when confronting each other on territorial disagreements. 5 It is hardly surprising that monetary authorities kept clinging to some sort of gold connection in their monetary regimes after World War I. Metals had been the basis of monetary systems since time immemorial. To shift to a purely fiduciary regime would have been as radical as shifting to diets which excluded meat. Of course, such a switch would actually be healthier if people could ingest enough protein via other sources, but psychologically it was inconceivable. Interestingly, just like the 19th century gold standard was never really practiced as authorities had imagined, neither did people eat much meat. Hence, people were partaking in an unconventional lifestyle, without being fully aware. 6 Genoa contemplated a stabilization fund. Genoa talks introduced an “International Corporation” as a repository for a stabilization fund similar to the IMF later. The Commission of Experts at the London Conference suggested a “Monetary Normalization Fund” that would be administered through the Bank of International Settlements. The Tripartite Agreement contemplated, also through the instruments of the BIS, a credit swapping arrangement among central banks so as to finance trade without having to destabilize exchange rates.This was a de facto fund as money was never transferred to an intermediary, but directly from creditors to debtors (Papers Relating to International Economic Conference 1922; pp. 63, 64; Horsefield 1969, V. I, p. 7; and League of Nations 1933, pp. 26, 63, 90, 91). 7 Rees (1973, pp. 146, 231, 232) notes how with respect to the forces for economic nationalism in Britain, “…both Keynes and White were aware of these political factors, and on the American side there was an equally strong awareness of what Congress would tolerate as defender of national sovereignty and the dollar.” 8 Rees (1973, p. 142) notes how along with diplomats at the monetary negotiations of the 1940s, debates in both Congress and Parliament were part of the “continuing drama.” Moreover, the two executive offices of the Treasuries of both the British and Americans, the leading functionaries of monetary diplomacy, had very strong guardian postures. The British Treasury behind Keynes pushed a strong guardian

126  Mature guardianship: Bretton Woods front owing to their expected weakened condition in the postwar period. And of course Henry Morgenthau, an outspoken New Dealer and FDR acolyte, was Secretary of the Treasury and the American overseer of monetary diplomacy (Block 1977, p. 39). 9 There were of course revisions of both plans from 1942 to 1943. Keynes’ revised draft of April 1943 and White’s revised draft of July 10, 1943 became the ultimate foundations for negotiations between the two nations in forming a joint plan (Documents reprinted in Horsefield 1969,V. III, pp. 3–​96, 128–​135). 10 Whatever reputation White acquired as an internationalist is somewhat undermined by a strong desire to make the U.S. and the American dollar the centerpiece of a new postwar regime. His own personal sense of nationalism also manifested itself in an international as well as a national context (Rees 1973, p. 144). 11 On a more humorous note, rumor had it that the hotel manager was so distressed about the condition of the hotel at the time that he locked himself in his office with a case of whiskey (Moggridge 1992, p. 741). 12 The proceedings and accompanying documents were printed by the U.S. Department of State (1948,V. I and II). 13 But even here Block (1977, p. 32) notes that the IMF “was shaped initially by national capitalist assumptions.” Economic nationalists, on a whole, were not complete isolationists, but it was certain that the power of the coalition and its reach into the political process of framing and ratifying an ultimate international plan would not tolerate an agreement that would significantly compromise domestic economic priorities. 14 Moreover, the American delegation to the conference included four Congressmen: two Democrats and two Republicans (Steil 2013, p. 206). 15 Morgenthau brought in Randolph Feltus, a New York public relations man, to spearhead the initiative. Eckes (1975, p. 168) called it “one of the most elaborate and sophisticated plans ever conducted by a government agency in support of legislation.” 16 Secretary of the Treasury Henry Morgenthau noted that the timing of the conference “was good for the world, good for the nation, and good for the Democratic Party” (Morgenthau quoted in James 1996, p. 54). 17 While FDR was far from subversive toward an international agreement as he was with London, his posture of domestic guardianship was still evident in a sentence (which implied an additive vision of international stability) that was interlaced in a universalist narrative within his written address to the conference delegates. “It follows, therefore, that the economic health of every country is a proper matter of concern to all its neighbors, near and distant” (Moggridge 1992, p. 737 and Department of State 1948,V. I, p. 71). 18 There was a political motivation on the part of the Morgenthau’s arranging massive press coverage so as to make the conference a media circus. Knowing that the agreement would be a tough sell to nationalists back home, the extended coverage gave a greater platform of psychological support for pushing an internationalist agenda through the American political system. But this also carried on his international marketing initiative of the drafting period, which was targeted at gaining broad support to sell his plan at home and abroad (Steil 2013, pp. 164, 202). 19 Gardner’s (1956, p. 98) basic view of the regime reinforces this philosophic thrust: a regime based on “government intervention, cheap money, and deficit spending.”

Mature guardianship: Bretton Woods  127 20 In this respect, Kindleberger’s(1973) assessment of the failures and solutions to interwar cooperation (i.e., the argument that a dominant power was absent to support the system through hegemonic investment of their economic resources), is mistaken. In fact there was no hegemon in 1944, as neither Britain nor America were a thriving economic powers due to the war, and hence willing to initiate cooperation by themselves committing to agreements. Failure of cooperation during the interwar years was more a function of the reluctance of any one or several important nation(s) to step up first, and hence lead a chain gang of willing nations, than an absence of an all-​powerful provider of public goods. In this case what was needed was a leader or leaders willing to take a sucker-​payoff risk in a Prisoner’s Dilemma game and commit to cooperation, thus pulling the chain gang of nations out of a Nash equilibrium. This leadership could be accomplished by lesser-​than-​hegemon powers, as noted in Gallarotti’s (2005) vision of monetary hegemony. Cooperation as the key to regime building is discussed in Chapter 7 below. 21 The Articles referred to from here on represent the final Articles of Agreement as codified on July 22, 1944. The Articles stipulated in the conference agenda served as points of negotiations and did not correspond to the final Articles. The page numbers cited for Articles refer to the page numbers in the reprinted copy of the Articles in Horsefield (1969,V. III). 22 On the silver issue, one of the most entertaining incidents at the conference involved an interloper, representing an American silver company, who unscrupulously obtained a diplomatic pass into the proceedings and attempted to rally a coalition of silver nations to mobilize for the monetization of the metal (Steil 2013, p. 214). 23 The Americans often relied on the technical obfuscations to get sensitive issues through a potentially recalcitrant Congress and interest groups. One such example was in the silver question just mentioned above. Silver had quite a bit of political power in Congress and in the White House. Stonewalling on the silver issue was politically explosive. Hence, much of the diplomacy was low profile and the ultimate accommodation was lost in the white noise of the financial stipulations (Steil 2013, p. 214). 24 Of all the stipulations of the Articles, Section 8 was perhaps the most sensitive, given that it was the most specific language about Fund influence over national macroeconomic policies. While both the British and Americans, and most every other nation, wanted sufficient limits to such oversight and control, the watered down British proposals suggested that the British were more animated to protect national economic sovereignty. 25 White was a cagy diplomat who was not oblivious to the common diplomatic bargaining strategy of using the American Congress as a way of wrenching concessions out of Keynes and other negotiators. Actually he and Morgenthau did this frequently. Keynes, angry and exasperated over the use of the Congress card, once barked: Well, the trouble with you people is, all the time you are thinking about the Presidential election-​everything is Congress.You keep throwing it at us all the time. (quoted in Steil 2013, p. 223)

128  Mature guardianship: Bretton Woods And while some may see this as common diplomatic practice and discount the truthfulness of the actual mood in Congress, it is certain that Keynes and others did take such threats seriously, being quite in touch with the actual mood in the American Congress. Keynes had been across the Atlantic quite frequently to explain and sell his plan. Hence, legislators did not have to be in the meetings among diplomats for the shadow of domestic politics to assert itself. But it should be noted that even with America’s preponderant bargaining position, Britain obtained quite a bit of leverage as a veto power. Having the Commonwealth as a multilateral backup to the Fund, albeit a far more restricted one, the British still had a credible threat. Keynes was never shy about veiled threats implying the viability of such a fallback option (Moggridge 1956, p. 96,100; Steil 2013, pp. 162, 208–​210, 223; and Rees (1973, p. 148). 26 Of course, we know that the spirit of the Articles was preserved not by the rules but by the U.S. providing liquidity outside of the framework of the Fund. The massive outpouring of dollars from U.S. banks and the government kept the system well financed. As long as the U.S. could sustain its debt, the regime could carry on. This also allowed greater flexibility in compliance as member nations were allowed to maintain capital controls for more than a decade after the Articles were ratified. But as we also saw, even the power of the U.S. could not sustain a unilateral support of a regime, and the debts of the U.S. became too large to manage under the rules. 27 On the actual workings of the regime, see especially James (1996, Chapters 2 and 3). 28 Ikenberry (1993, p. 175) observed that the ideas of the community of experts who forged the plan served a “politically integrating role” by allowing differing political interests to coalesce in support of the final agreement (italics in original).

5  Guardianship under monetary imperialism The Smithsonian Conference

On August 15, 1971, President Richard Nixon announced to the world that the U.S. would no longer be converting American dollars from foreign central banks into gold. With the severing of the link between the dollar and gold, the operation of the Bretton Woods regime was interrupted. The principal foundations of confidence, liquidity and exchange were officially abrogated. The move by the U.S. was a classic manifestation of U.S. domestic guardianship. The move would supposedly restore America’s competitiveness vis-​à-​vis Europe and a rising Japan by allowing the dollar to depreciate. The move was also politically strategic as the growing competitiveness was seen as a vehicle for increasing employment prior to the Presidential election. For many scholars who had predicted an American crash and burn as the key currency nation, the question was much more about when rather than if the gold window would be closed. The inherent contradictions of the Bretton Woods agreement appeared to have produced an official gestation period of 26 years, but in reality the regime only functioned de facto from 1958 after European capital controls were discontinued.The predictions of the narratives underlying the Triffen Dilemma, Unholy Trinity, Impossible Trinity or the Trilemma, among the names of the theorems that captured the inherent tension within the regime, came to fruition. These contradictions, as demonstrated in the previous chapter, emanated primarily from the tension of reconciling domestic economic sovereignty with hard commitments to international cooperation. The regime was effectively born in original sin in terms of a system of preserving such commitments. Hence, the regime built in 1944 was a magical sleight of hand. Nations were deluded into thinking that these contradictions were effectively abated by the rules of the regime, but in effect they were abated by loopholes, long transitions to compliance and of course the availability of American dollars to lubricate the system.1 There has been a great deal said about the decline of Bretton Woods, and the case of decline is relevant to the role of the guardian state. Our purpose here, however, will be reserved for an analysis of the immediate situation facing the world in the late 1960s and early 1970s, and the subsequent negotiations within the context of the Smithsonian Agreement. The agreement itself was cited by many as a successful reestablishment of international monetary order. U.S. President Nixon hailed it as “the greatest monetary meeting in the history of the world”

130  Guardianship under monetary imperialism (quoted in Frasher 2014, p. 93). But alas, like its predecessor, the regime itself could never effectively bridge the gap between hard rules for international cooperation with a guardian posture that protected economic sovereignty. It, like Bretton Woods, was born in original sin, and consequently met with a predictable end. But unlike Bretton Woods, the U.S. went from being a somewhat benevolent hegemon to a malevolent hegemon. The early 1970s in monetary relations and diplomacy would be characterized by the U.S. shifting the burden of solving its economic problems to the world. From the Smithsonian Conference on through Plaza and the Louvre, the U.S. would make its domestic economic problems the problems of the world to solve. In this respect the U.S. went beyond what Cohen calls “monetary geography” and became a monetary imperialist by drawing on resources from the international system to solve its particular economic problems. In ascertaining the principal fault lines in the operation of the International Monetary Fund (IMF), it is most illuminating to go directly to perceptions from the very inner sanctum of monetary scrutiny itself. In 1969 the IMF Board of Directors undertook an extensive study of the operation of the exchange rate mechanism from its founding. The culminating analysis appeared in a report entitled “The Role of Exchange Rates in Adjustment of International Payments,” which was issued to the members and the Board of Governors in September 1970.2 While praising the Fund’s arrangements for managing exchange rates, the report also was quite forthcoming in citing the problems with such arrangements. In the narrative delineating the problems, the two-​ headed hydra of adjustment, which fundamentally defined the course of monetary diplomacy from 1919 to the present, continually reared its ugly heads. Essentially the underlying predicament of the regime was the tension between domestic economic sovereignty and commitments to international stability. The regulations on exchange rates appeared front and center as a bulwark in protecting the regime itself. The report castigated the delays in adjustment as the principal affliction. Early and small adjustments were far preferable to the pattern of larger and delayed adjustment that arose under the operation of the Fund. Delays caused major problems in the short and long run. In the short run, nations were forced to rely on destabilizing instruments such as trade restrictions or capital controls. In the somewhat longer run, the buildup of large speculative positions led to destabilizing capital flows that in fact reduced rather than augmented reserves. This suppression of necessary small adjustment in rates came to generate the need for more destabilizing changes in rates. The fundamental flaw in the management of rates, according to this report, was that adjustment through parity changes was always contemplated as a last rather than first resort. And this led to alternative strategies for correcting external imbalances that placed greater burdens on domestic economies. Here lied the conundrum. If nations turned to other external safeguards such as drawing on reserves, borrowing, trade restrictions or capital controls without adjusting rates, they were essentially locking into inappropriate parities that down the road would lead to greater domestic economic disequilibrium (inappropriate rates

Guardianship under monetary imperialism  131 would exhaust external safeguards and leave more painful adjustment as the last line of defense). In this case, modest and anticipatory adjustments in parities would lead to a smaller tremor in the regime and avoid other courses of action that might lead to a larger seismic disruption. Complying with the external constraints of the regime fundamentally challenged domestic economic sovereignty across nations. The report was quite clear about the difficulty of a group of nations following different domestic paths and simultaneously following the rules. It averred that the world at present was in a situation that portended poorly for the rules. Nations were on different inflationary trajectories and were also on different growth trajectories. Accommodating such differences in macroeconomic paths was becoming all the more difficult in a world of more integrated capital markets. It was too much to hope that nations would be constrained by a straitjacket of macroeconomic coordination given domestic priorities. Hence, the bulging divergence in economic paths would have the regime bursting at the seams (U.S. Treasury 1972, p. 367 and Report on “Role of Exchange Rates” reprinted in De Vries 1976,V. II, pp. 298–​301).3 Based on the evaluation of the functioning of the regime, the report goes on to suggest various courses of action to correct the flaws in the exchange rate mechanism, and of course each was crucial in decreasing the tension between internal and external adjustment. First, the report suggests a more prompt adjustment of parities at appropriate levels. Given the problems of delays leading to pressures for erratic and larger changes in parities, prompt changes of a more modest size could stave off larger and more destabilizing changes down the road. This of course would be a stronger first line of defense against what ultimately would result in an assault on macroeconomic independence down the road. Second, the report suggested wider margins around parities.The wider margins would give greater room for agency over domestic economic policy as speculation would be less sensitive to divergences across macroeconomies. The bands might also promote smoother adjustment in allowing slightly more divergent inflationary paths, which in turn could reduce the returns to speculation on changes in parities. Finally, the report embraced the idea of expanding resort to temporary deviations from parities, which in turn would give far greater protection to economic sovereignty under cases of a generally undefined situation of serious disequilibrium (Report on “The Role of Exchange Rates” reprinted in De Vries 1976,V. II, pp. 324–​330). Unfortunately, nations failed to act on these prescriptions after the IMF Board of Governors meeting in Copenhagen. Consequently, the 11 months that would follow brought the regime to its knees. The 1960s witnessed a number of shocks in the system with various devaluations, capped in salience by the franc, sterling and the Canadian decisions to float. A calm in the market in 1969 was followed in 1970 by a wave of shocks. Divergent conditions in the various financial markets were causing difficulties in managing parities in the face of divergent macroeconomic paths. The disturbances were a means of securing stable domestic conditions in the face of hot-​money flows. The market in foreign exchange had grown to the point that nations with open capital markets

132  Guardianship under monetary imperialism were absorbing large investment flows. The speed and quantity of the flows were causing the regime to rupture at the seams.The monetary system acquired the characteristics of a complex-tightly-coupled system where small changes in initial conditions would lead to far greater proportional changes in systemic conditions. Any one change in the system generated manifold consequences in other parts of the system.4 Germany, for example, wanted to free itself from the straightjacket of its parities and revalue so that it could pursue a harder monetary policy domestically and deflect the excessive inflow of dollars. Once Germany floated, other nations such as Belgium, Luxembourg, Switzerland and Austria found it necessary to revalue so as to deflect destabilizing inflows as well. Moreover, trade dependence between Germany and other European nations made the shadowing of exchange rates all the more necessary. Monetary authorities were quite concerned, in the face of an already sizable deficit in the U.S. balance-​of-​payments, of potentially destabilizing capital flows from the Continent to the U.S. in the face of a gap in credit conditions between the two sides of the Atlantic, a gap which resulted from divergent macroeconomic policies. By May the flow of capital from the U.S. to the Continent became alarming, despite earlier attempts to bring interest rates into greater conformity in the prior month, which in turn worsened the American deficit and its reserve position. Consequently, Continental nations were importing inflation in the face of attempts to maintain stable money, a conditioned worsened by intervention in currency markets to prop up the value of the dollar.The system crashed on May 5 when Austria, Switzerland, Portugal, Germany, Belgium,​ Luxembourg, and the Netherlands shut down their foreign exchange markets. Five other nations including Finland and Norway withdrew support for the dollar and several other currencies (De Vries 1976, V. I, pp. 519–​524 and U.S. Treasury 1972, pp. 391–​394). This led to a very familiar collective action problem that surfaced in Genoa and London. Once parities and the dollar were compromised, return to the system required a joint initiative. Any first responder to a cooperative scheme faced the unenviable costs of absorbing all the fallout from the market. In the face of open capital markets, any one nation taking a fixed position in a world of floaters would have to absorb very large capital transactions from nations that would be following along in the scheme to re-​fix parities. If the delay in followership were long, a nation’s reserves would see undesirable changes, and hence the fixed rate could not possibly be supported. Like the two conferences of the 1930s, no one was willing to run out of the foxhole first. Also, very much like the case of these conferences, the monetary champions of the respective periods were neither in shape nor willing to lead the troops out. The corrective courses contemplated by monetary authorities under these grave conditions, interestingly, touched upon something the Bretton Woods regime never significantly addressed nor had the hard institutional instruments to address: macroeconomic coordination. The paper tiger rules of the Fund really failed to engender this single most important requirement for holding exchange rates fixed in the face of open capital markets with high volume

Guardianship under monetary imperialism  133 trading in currencies. And of course this was intentional because the regime gave a wide berth to domestic macroeconomic agency. Since the regime created a system that allowed nations to escape the chains of internal adjustment through its leveraging facilities and exchange rate adjustments, nations could select their own macroeconomic paths to a large extent. But as capital markets grew in size and intensity, even small divergences in the paths came to strain the system. Many of the questions for reform had to do with the extent to which macroeconomic divergence was causing such shocks and whether such coordination was possible.5 Otherwise questions covered different models of capital control. It is interesting and most likely a function of the status-​quo trap that early responses to this problem stayed close to home institutionally. This is reminiscent of the status-​quo chains, with respect to gold, that limited negotiations at Genoa and London.6 At these conferences, reinstituting gold was so ingrained in the reformist thinking because nothing else had ever been attempted. Even though gold had become obsolete in a world requiring far greater liquidity, monetary authorities found it hard to delve into experimental models of monetary organization. Similarly, macroeconomic coordination had never been undertaken in any systematic way. Certainly, the theoretical issues on coordination never escaped the perspicacious minds of interwar reformers, but no such systematic and institutionally sanctioned plan of such a nature was ever attempted. It is no wonder that monetary authorities were staying close to the Articles of the Fund in framing solutions, and not going outside of the legal box. Should the Fund suspend margin provisions temporarily under Article XVI Section 1? Should the Fund undertake negotiations with specific nations to allow wider margins under Article IV Section 4? Would consultation with the Fund under Article VIII on exchange rate flexibility be a viable solution? Under Article XVI Section 1.C., how long should these exceptions to the rules be made? Managing Director of the Fund Pierre-​Paul Schweitzer suggested immediately following the policy shocks on invocation of Article XVII to propose amendments to the Articles as well as an initiative to better coordinate macroeconomic policies.7 But whatever the alternatives to fixing the problem with parities, it was certain that in discussing these options, politics played a crucial role. As De Vries (1976, V. I, p. 526) notes, in addition to the daunting technical problems, “it was evident that sharp differences that were really political in character would have to be resolved as well” (U.S.Treasury 1972, p. 368 and De Vries 1976,V. I, pp. 521, 525). The balloon at this point was bound to burst, and the unstable structure of capital flows in tightly coupled capital markets brought the system to a nadir. In July and August nations were experiencing hot-​dollar inflows, and with far less faith in the dollar given revaluations in other nations, leaders became all the more incentivized to acquire gold for a troubled currency while it still held stable purchasing power for the metal.The potentially devastating potential to convert such a dollar overhang became compelling. The U.S., while having thought about rescinding convertibility in September, was forced into more immediate action. Nixon officially suspended U.S. convertibility on

134  Guardianship under monetary imperialism Table 5.1 U.S. balance of payments, 1970–​1971a

Merchandise trade balance Balance on current account (excluding government grants)  U.S. Government grants and capital U.S. private long-​term capital Foreign long-​term capital   Balance on current account and long-​ term capital Balance on official reserve transactions Annual Report 1972, p. 391.

1970

1971

Quart Average

1st Quarter

2nd Quarter

528 546

269 828

-​1,040 -​329

-​833 -​1,446 973 -​760

-​1,026 1,724 639 -​1,283

-​​1,060 -​1,964 116 -​3,237

-​2,455

-​5,533

-​5,731

a In millions of dollars, seasonally adjusted.

August 15, 1971.8 The external situation leading to this has garnered much attention and need not be rehashed here.9 Leave it said that the U.S. was faced with twin deficits in the middle of 1971 as its external payments position deteriorated. An adverse balance of trade and capital outflows created an alarming gap between American dollars in the system and American reserves: in mid-​ 1971 the gap stood at liabilities exceeding reserves by 30 billion dollars. The U.S. experienced drastic changes in its balance-​of-​ payments from 1970 to 1971 (see Table 5.1). We see that the U.S. balances on trade and current account, as well as its reserve transactions, showed alarming changes.The fiscal deficit after two quarters stood at 22 billion dollars, and the third quarter along witnessed a deficit of 13 billion dollars. But the domestic economy was in the midst of stagflation. The gold link remained an obstacle to the kind of macroeconomic policy freedom required to fix the domestic economy. Nixon announced a diverse plan to abate America’s economic woes on August 15. On the domestic side it invoked tax cuts, rollbacks on fiscal expenditures and a freeze on wages and prices. On the external side, Nixon called for a suspension of the U.S. commitment to convert dollars into gold (“closing the gold window”) and a 10% surcharge on imports not subject to quantitative limits. The timing of the Nixon bomb was no accident. With the Presidential election coming up, Nixon needed an economic plan that would allay public fears.10 This was very much reminiscent of the Treasury timing the end of the Bretton Woods Conference to coincide with the Democratic Convention in 1944 (U.S. Treasury 1972, p. 391; Frasher 2014, pp. 71, 72, 87; Silber 2012, p. 91; and De Vries 1976,V. I., pp. 527–​529). The U.S. posture was to a large extent the culmination of John Connolly ascending to the leadership of international monetary policy in the administration’s economic bureaucracy. Nixon appointed him to replace David Kennedy as Treasury Secretary. He became the President’s darling as he shared

Guardianship under monetary imperialism  135 a similar domestic economic focus with Nixon based on a keen sensitivity to domestic politics. His approach to the international monetary problem for the U.S. was envisioned as a problem of balance-​of-​payments disruption owing to skewed trading relations rather than one of capital flows. The premise of this vision was that the U.S. had fallen from grace economically due to free riding on the part of its allies: a heavy price to have paid for security during the Cold War. The U.S. had been far too generous, to its own detriment, in supporting balance-​of-​payments positions of allies, as well as in shouldering the financial burden of collective security. A sucker’s paternalism led to economic decay.This made the U.S. position in contemplating solutions to multilateral problems, of course, more confrontational. The position was a stark transition from one of supporting a regime through economic public goods to extorting concessions from client nations in order to bolster its domestic economy. Interestingly, this guardian power play was also perceived as the only viable way to preserve the status of the dollar and confidence in America’s leadership within the regime (Silber 2012, pp. 74, 75 and Frasher 2014, pp. 66, 67). These policies were endorsed by the Report of the U.S. Commission on International Trade and Investment Policy to the President in 1971. The plan laid bare the strong link between what was confronting the U.S. internationally and the fate of the domestic economy.The international challenges were essentially contemplated as domestic American challenges: Clearly, our present difficulties in international trade, investment, and payments are inextricably linked with domestic problems.We are, therefore, assigning high priority to measures the United States must take to increase the strength and resilience of its economy. First of all, we must return to a condition of economic health, with much lower unemployment and greater price stability. This objective cannot be achieved by fiscal and monetary policies alone, although more could be done with those instruments. To avoid cost-​push inflation, we will have to adopt other measures designed to moderate wage and price increases, to increase productivity, and to improve the structure and functioning of our labor market. Second, we must take measures to stimulate economic growth and to improve the technological capability which largely supports our export performance. While a relative shift in U.S. economic activity from goods production toward services has been a constant feature of our economic growth, we should not contemplate becoming non-​competitive in goods production generally. A high rate of growth would benefit exports by helping to hold down unit-​labor costs. It would also facilitate the reemployment of workers displaced by imports. Finally, the resumption of economic growth, with greater price stability, would make the United States more attractive to foreign, as well as U.S. investment. (U.S. Commission 1971, p. 8)

136  Guardianship under monetary imperialism The world was in a unique situation. The Bretton Woods system was the very first institutionalized global regime nations had ever known. The classical gold standard was indeed a regime in terms of norms and procedures around which expectations converged, but there were never any official rules because this network of actions oriented around money was never codified in any way (Gallarotti 1995). Nations attempted for the first time to rebuild a system of formal rules for organizing the world’s monetary relations. The negotiations at Genoa, London and Bretton Woods were devoted to creating a formal regime, while the challenge facing nations at this juncture was to recreate a formal regime. Obviously, the approaches to these situations would also be different. The challenge in the former was defined by conforming domestic economic policy to the strictures of international rules, while the latter was defined by conforming international rules to the strictures of domestic economic policy. In effect, the guardian state now had far greater latitude in building a regime, and nations never lost focus on this prerogative. The direct aftermath of the Nixon bomb sent monetary authorities scurrying for damage control. The U.S. move was communicated to the IMF only one hour before Nixon made his announcement. Hence, little prior planning was effected. Monetary authorities had realized for some time that exchange rates were misaligned and needed to be altered in some fundamental way. The IMF report entitled “The Role of Exchange Rates in Adjustment of International Payments,” which was issued to the members and the Board of Governors in September 1970, was a culmination of thinking about this situation. The misalignment had been prominent on the IMF’s radar over the late 1960s, with the general feeling that the U.S. dollar was overvalued and that revaluation in Europe or devaluation of the dollar was necessary. The world was most concerned with U.S. inflation and the U.S.’s burgeoning deficit following expenditures on the war in Vietnam. But domestic guardianship prevented nations from doing anything about it. Germany and Japan, for example, did not want to compromise their export performances. Differing assessments of the crisis suggested a continuum over its impact. Those that embraced the situation noted that the regime needed a catalyst to invoke a necessary realignment, so the crisis was heaven sent. Most of the opinions took a less sanguine approach.There was disagreement on whether negotiations were better facilitated by a crisis or under normal conditions. The question became mute with the announcement. For the U.S., as U.S. IMF Director Dale averred, there was little hope for the U.S. to negotiate a change in the value of gold and realign the dollars while it had an open gold window. Speculation would sink the ship for sure. The U.S., it was suggested, had no choice (De Vries 1976, V. I., pp. 531–​534 and Silber 2012, pp. 89–​91). The question of realignment would be, as everyone was well aware, a hornet’s nest. Since the rates had a crucial impact on growth and employment, nations went into discussion on the issue with guarded postures. In a sense, the balance between international rules and internal adjustment had to be recalibrated on the fly. History had shown that this was extraordinarily difficult

Guardianship under monetary imperialism  137 even under conditions of measured contemplation and advanced planning. The system of exchange rates was tightly coupled. Without some coordination in altering parities, any one change would reverberate through the system. This was a problem that could only be dealt with jointly. The impact went well beyond just parties with the dollar, but was also evident in cross-​rates. European rates themselves were in a predicament. The structure of European rates had of course a significant redistributive effect on the Continent, and this in turn had major consequences for prospects of integration. The entire structure of rates across regions and nations appeared to blend together into a game of pick-​up-​ sticks: it was hard to move any one parity without disrupting the economic fates of many other nations (Frasher 2014, pp. 87, 88, 94). The options for action seemed endless, and unlike conferences of the past, many of these options were not framed in well-​developed plans. Moreover, there appeared to be far more disagreements among the current technocrats than among the technocrats working in the shadows of the past conferences of the 1930s and Bretton Woods. Should the U.S. depreciate vis-​à-​vis other currencies by raising the dollar price of gold or should other currencies revalue vis-​à-​vis the dollar without compromising the dollar price of gold? Should there be a uniform devaluation of the dollar against other currencies or a conditional one? Should the new rates be determined by allowing a temporary float to reveal the optimal new rate structure? Or should the rates be determined analytically based on a formula endogenizing key macroeconomic variables and external balances for each nation? What should the new rates be? How should the new rate structure be supported? The international monetary jury would be most perplexed by these questions. The U.S. certainly did not help matters by dropping the convertibility bomb without any idea on what a restructured plan for monetary order would look like in the aftermath of its action, which left the world flummoxed. So clueless were nations as to the motives underlying the move by the U.S. that the IMF Board of Directors found itself questioning U.S. IMF Director Dale regarding America’s intentions on the day after the bomb (U.S. Treasury 1972, p. 367; De Vries 1976, V. I., pp. 535–​538; and Silber 2012, p. 93). The weeks following the American bombshell saw the expected chaos among monetary authorities, especially outside the U.S. The U.S. was hiding behind a new exorbitant privilege as the Nixon plan was attending to American domestic needs without threatening financial chaos for the U.S. external position. The suspension of convertibility and the tariff increase shielded the economy while the domestic policies were pursued.The American gold reserves were protected, with other nations continuing to passively hold dollars (as long as price stability prevailed in the U.S.) having to revalue. Moreover, the administration was convinced that benign neglect would stimulate the economy and could generate half a million jobs. Other nations were feeling more heat. Every nation was contemplating how a rebuilt system, or the alternative of no system, might impact on important domestic economic issues. The IMF stood up to take the lead in coordinating an unprepared international financial network of

138  Guardianship under monetary imperialism central bankers and finance ministers by serving as a central point of communication. Once more, as with the conferences of the past, especially London and Genoa, nations found themselves in a Nash equilibrium after the free-​for-​all abrogated the rules. Nations had taken self-​serving courses of action that torpedoed any collective solution. Indeed, it was in form, but not magnitude, a return to the economic warfare of the 1930s. Once nations left the Pareto-​optimal equilibrium, other nations that stayed would be facing the sucker’s payoff. It is often the case that in a Prisoner’s Dilemma game, Pareto equilibria are easier to maintain than to achieve. Maintenance gives greater incentives for each individual nation not to defect (as defection leads to mass opprobrium), but acquisition generates greater incentives not to cooperate (i.e. leading a group out of a Nash equilibrium produces grave risks and certainly short-​term costs—​and relatively fewer nations [compared to a regime-​breaking situation] will criticize a nation for not taking that chance). But unlike Genoa or London, the particular venue within which the reconstruction would take place was quite uncertain in the immediate aftermath. The IMF was taking a leadership role in generating analysis of the situation and promoting communication with all the important financial bodies like the Group of 10 (G-​10), Bank for International Settlements and European Economic Community. And of course, as is normal with human communities in crisis, authority filtered to the top.While the Fund sought to remain a major player in the reconstruction of the regime, it became apparent to IMF Executive Director Schweitzer that the center of diplomatic gravity for restoring order in a world in financial disorder was moving to the inner sanctum of the monetary hierarchy. The locus of leadership had to shift to the most powerful financial centers: the G-​10. This mirrored the workings within previous negotiations in the 1930s and Bretton Woods: deference shifted to nations with the greatest impacts on and stakes in the system. There was no better manifestation of this power transition than Schweitzer inviting the G-​10 to meet at IMF headquarters in Washington.11 Nonetheless, the IMF was strategically positioned to promote cooperation because it was the one overarching and legitimate guardian of the regime.There was one great advantage that the Smithsonian negotiations had over all previous conferences of the 20th century: there was a coordinating institution in place in the IMF. This served to mitigate the collective action problem in bringing nations back into a cooperative relationship. While other nations took leads in the prior conferences, none enjoyed the same “focal” power or legitimacy as the IMF since the body itself was not tied to the interests of any one particular nation.12 Hence, Executive Director Schweitzer was in a pivotal position to promote cooperation, and he took advantage. He embarked on a crusade to bring national monetary authorities and Fund managers into a network of communication. He also initiated a media campaign to push the idea of currency realignments as a wedge to creating a new set of rules for monetary relations. There was quite a bit of chaos in the world system at this point, with nations resorting to all sorts of arrangements: dual markets, pegs to the dollar with wider bands and generalized floating. While the IMF deferred to a more

Guardianship under monetary imperialism  139 elite set of monetary power brokers, still its role as a nodal base for communication was certainly instrumental in furthering negotiations toward a solution (Frasher 2014, p. 68 and De Vries 1976,V. I., pp. 538–​543). The deputies of the G-​10 met in Paris on September 3 and 4, 1971.Volcker apprised the other deputies that the U.S. required a large shift in its balance-​ of-​ payments in order to become economically sound enough to consider concessions that would promote multilateral reform. The U.S. was trying to extract concessions from other nations that would swing its balance by 13 billion dollars in order to go from a deficit of 11 billion to a 2 billion-​dollar surplus. It was made clear that this swing would have to include more than monetary concessions from other nations. In fact, they would have to make accommodations in both trade policy and military expenditures. The target for the balance swing was accosted by the deputies as excessive. More consternation was evoked by American demands for some significant realignments, while refusing to bear the cost of realignment by not changing the price of gold.13 This was placing the onus of adjustment onto other nations. But neither the U.S. nor the other deputies discussed any details of the new parity alignments; only the question of the necessity of such a realignment was discussed. Moreover, the deputies inveighed against the brash unilateral imposition of a surcharge on imports. The U.S. held to a bargaining posture of extortion, announcing that it would remove the surcharge once accommodations were made on revaluation, trade and military burden sharing. Connally was exploiting the pressure on the part of other nations who were feeling the heat to revalue their currencies: Nero was playing the fiddle while Rome burned (Silber 2012, p. 98 and Frasher 2014, pp. 77, 78). Confrontational postures persisted at the meeting of the G-​10 in London on September 15 and 16.TheVolcker group continued to parrot strong U.S. support for a solution that effectively strengthened the U.S. external position. This of course was convivial with Nixon’s domestic plan for recovery, but it was also thought of as quite marketable as a collective solution.The U.S. had to generate a stronger balance-​of-​payments position in order to restore confidence in the regime lynchpin: the dollar. But running surpluses in the U.S. meant running deficits in other nations, and this could be a receipt for importing recession. This created a zero-​sum bargaining continuum and made any advantages for one into disadvantages for others. This gave the U.S. the enviable advantage of siting on mechanisms for distorting trade and exchanges into some undefined future, since no one had any idea of what sort of targets were appropriate. While the idea of a 13-​billion-​dollar improvement in the overall balance was contemplated as a minimum, no upper boundary was considered. Disagreements arose over whether the U.S. should raise the dollar price of gold, over whether to impose a quick and provisional solution or whether to make a permanent fix. The other nations tried to extort an accommodation from the U.S. to revoke the 10% surcharge as a precondition for bargaining. The U.S. stood in a secure position of watching and waiting for the floating to reveal some set of agreeable parities, while it was free to pursue its domestic goals unobstructed by drastic

140  Guardianship under monetary imperialism commitments under a new set of rules. But it hoped to convince other nations to let it free ride for some transitional period by calling for them to reduce trade barriers and revalue their currencies vis-​à-​vis the dollar by 10–​15%. The U.S. continued to stonewall on the dollar price of gold. In this respect it was continuing in its quest to deal out sucker positions to other nations by placing the burden of realignment onto them. The U.S. dug in on the position that realignment was best implemented by others changing parities vis-​à-​vis the dollar rather than the dollar having to itself devalue by increasing the price of gold. Connally suggested that a 7.75% revaluation of other currencies vis-​à-​ vis the dollar was necessary to take the U.S. out of deficit, a figure that roiled the deputies. The meeting did little to bring positions any closer than they had been, with newly appointed Chairman of the G-​10 John Connally of the U.S. stonewalling against any major American accommodations.The only thing nations could agree upon was that any fixed but adjustable plan for the future would necessitate wider margins than the 1% currently being practiced. At this point the guardians of the respective domestic economies were in deep divide (U.S. Treasury 1972, p. 367 and Frasher 2014, pp. 79–​82). The Governors of the IMF would shortly thereafter convene their 26th Annual Meeting on September 27 within an atmosphere of impending crisis. The narrative leading up to the meeting featured phrases like “trade war” and “collision course.” Notwithstanding the generalized stonewalling on the part of the leading financial powers, it was also clear that some set of universal rules would have to be invoked if nations were to continue to interact with open capital transactions and free trade. The financial system was far too tightly coupled for nations to be living by different rules, or no standards regulating behavior for that matter. The meeting was essentially a replay of the London meeting just ten days before. Positions did not change, and IMF Director Schweitzer was politically pushed into a blue-​sky resolution calling for cooperation among nations and consultation with the Fund in coming to an accord on a new system of exchange rates. While many dispersions were cast toward the U.S., the resolution of course took no position in assigning blame (De Vries 1976, V. I., pp. 545–​548). IMF Resolution 26-​9 of October 1 called on the members of the Fund to: •

establish a satisfactory structure of exchange rates, maintained within appropriate margins, for the currencies of members, together with the reduction of restrictive trade and exchange parities • facilitate resumption of the orderly conduct of the operations of the Fund • reverse “the tendency in present circumstances to maintain and extend restrictive trade and exchange practices” • bring about “satisfactory arrangements for the settlement of international transactions” (Resolution reprinted in De Vries 1976,V. II, pp. 331, 332). In an address to the Board of Governors of the IMF and the International Bank for Reconstruction and Development on September 30, John Connolly

Guardianship under monetary imperialism  141 reinterpreted these objects in terms of the needs of the U.S. He called Nixon’s announcement a manifestation of the new international reality and cited “the links … between effective domestic performance, a secure balance-​of-​payments, and international financial stability” (U.S. Treasury 1972, p. 365). He made it quite clear that U.S. economic stability was a necessary condition for international stability. In effect, supporting the U.S. was convivial with supporting the world order. The narrative underscored this proposed symbiosis: In its entirety this [U.S.] program is designed to fulfill our first obligation both to ourselves and to the international monetary system: a stable, prosperous domestic economy. I would like to emphasize the connection we see between the balance-​ of-​payments adjustment now required, on the one hand, and the long-​ range evolution and improvement of the monetary system on the other. First, without a full and lasting turnaround in the balance-​of-​payments position of the United States, any new monetary arrangements inevitably would break down. Second, such a turnaround cannot be fully assured and lasting unless necessary exchange rate changes are accompanied by trading arrangements that assure fair access to world markets for U.S. products. Third, a more balanced sharing of responsibilities for the security of the free world can and must be a part of a balanced economic order. These adjustments are both entirely feasible and eminently desirable in the light of the impressive economic growth and strength of other leading trading nations. Indeed, we believe our objectives are shared by all nations with a fundamental interest in a stable and balanced world trading and monetary system. We also share a common concern in seeing our deficit eliminated by means consistent with open economies and expanding trade. (U.S. Treasury 1972, p. 366) Relations over several months following the Nixon bomb were languishing in an arrested state, with nations holding their positions, but the venues for negotiations became quite dispersed across international organizations and among groups of nations.The schedule for U.S.Treasury officials might have rivaled any grand concert tour. All of the issues continued to prove contentious. Especially contentious was the level at which the U.S. balance-​of-​payments would have to be improved. Since this had significant redistributive consequences domestically, it is no surprise that nations remained apart and no surprise that the American estimates suggested a far greater improvement in the U.S. balance (U.S. sticking to 13 billion dollars) than the estimates generated by other nations (2–​3 billion-​dollar swing). The question of the U.S. balance created a skewed bargaining space because America was holding nations’ reserves hostage. As long as America suspended convertibility of the dollar, nations could not obtain the most prized reserve asset: gold. The onus was on other nations to convince the U.S. to release the hostages, but as long as the U.S. held the gold it enjoyed

142  Guardianship under monetary imperialism a supreme bargaining wedge to extract desired accommodations from other nations. The U.S. could afford to sit back behind its dual fortress of tariffs and exchange controls, while holding valuable assets of other nations (U.S. Treasury 1972, p. 366; Silber 2012, p. 94; and De Vries 1976,V. I., pp. 548–​551). Closing the gold window and sitting back was a bargaining strategy that the U.S. hoped might extract what they had desired all along: trade concessions from other nations to put their balance on a more promising path and an increase in burden sharing for collective security. This was an extortive hegemonic power play as everybody knew that the dollar problem was the lynchpin of the system. The bargaining strategy itself had properties of what Schelling (1981) refers to as the “rationality of irrationality.” In closing the window and stalling without proposing some definitive plan for reform of the regime, the U.S. placed the world in a most perplexing position, given the unpredictability of where the game would end. Without a U.S. stance on the fate of the dollar, no system could be envisioned.This promised to roil markets all over the world and frighten national leaders all the more. Of course, the stalling also held risks for the U.S., as Nixon’s Presidential prospects were linked to creating a more favorable environment on Wall Street and the U.S. risked a mass defection into a free float, which would make the U.S. balance-​of-​payments ever more precarious. The resulting posture converged toward a chicken game, where both sides held a potentially damaging weapon in the event of mutual stonewalling. But there were deeper reasons for the delay. Nixon eschewed a change in the price of gold because such a policy would have to pass through Congress. He feared that the Democratic-​dominated Congress would use this opportunity to impugn his leadership on the monetary question, thus dealing a setback to his re-​election campaign.14 Moreover, the Europeans were still having difficulty with infighting, especially among France and Germany who differed on revaluation strategies (Silber 2012, pp. 89–​95; Gowa 1983, pp. 24–​27, 63–​69; and Frasher 2014, pp. 68, 72, 82, 84, 95, 96). By mid-​November the standoff was beginning to relent. Pressures emanating from a continuing swoon on Wall Street and fears that the U.S.’s obstreperous posture was undermining its global power position, pushed the administration toward some sorts of accommodation. Moreover, the U.S. was able to work out favorable trade arrangements with Japan and Canada, and to get a European commitment to help shoulder the burden of collective security. A meeting of the G-​10 on November 30 and December 1 suggested that the sides were getting closer. The U.S. came into the meeting with a more conciliatory tone, floating suggestion to increase the price of gold by 10% after some bargaining subterfuge from Connally and Volcker stating different targets. The U.S. also communicated specific revaluation targets for a number of countries.While the targets were never agreed to, the other nations reciprocated the U.S. suggestions with a favorable disposition to accommodations on trade and burden sharing for collective security. Now the stage was set for a tripartite blessing of the outlines of a plan among the heads of state of France, Germany and the U.S.

Guardianship under monetary imperialism  143 The meeting ended without detailed targets, as there had been lots of wrangling over the level of dollar depreciation. But negotiators knew that the buck would be passed into a higher diplomatic paygrade of national leaders, and therefore pushed issues forward. French Prime Minister Pompidou met with German Chancellor Willy Brandt several days after the G-​10. Brandt gave Pompidou his blessing to negotiate for Germany so as to promote a united European front in bargaining with Nixon. The subsequent meeting between U.S. President Nixon and French Prime Minister Pompidou in the Azores on December 3 and 4 consummated the deal on dollar devaluation. This had been the big stumbling block which was holding back a resolution. The two heads of state signed the “Framework for Monetary and Trade Settlement.”The U.S. agreed to scrap the 10% import surcharge and to devalue the dollar by increasing the dollar price of gold from $36 per ounce to $38. France conceded accommodations on European currency realignments (with the franc appreciating vis-​à-​vis the dollar by 8% with more flexible bands), trade policy and defense-​cost sharing. This was a likely bargaining outcome given the momentum of events. The U.S. felt global pressure to devalue but other nations knew the U.S. was dug in on trade and cost-​sharing in the North Atlantic Treaty Organization. As with any chicken game, some sort of end point other than mutual defection is always in the interest of all parties. This was a propitious time for both sides, politically and economically. In keeping with the visibility of this agreement as a political showcase on the U.S. side, Nixon publicly sanctified the agreement with a statement that made it clear that the devaluation would in no way impact his domestic plan to restore wage-​ price stability and increase productivity. The sides were now more aligned. But there still remained some dicey issues which were “too hot to handle” in the Azores: the division of responsibility for defending the new parities, the role of gold under the new system and the timeline for restoring convertibility. The agreement could now be sent on to the greater G-​10 at a meeting in the Commons Room of the Smithsonian’s Red Castle on December 17 and 18 (Silber 2012, pp. 99–​103; Frasher 2014, pp. 84–​93; and De Vries 1976,V. I., pp. 551–​553). At the Smithsonian meeting it was agreed that the U.S. dollar would be devalued by 7.89% by increasing the dollar value of gold to 38 dollars an ounce. The U.S. also agreed to drop the 10% surcharge on imports. Of course, these were contingent upon foreign compliance to negotiated trade arrangements. All G-​10 nations except Italy agreed to revalue their currencies to the new dollar–​gold parity. In addition, the margins for exchange rate fluctuations were widened to 2 ¼ around parity. While of course maintaining their parities with gold, France agreed to a revaluation of the franc by 8.57% and Germany to a mark revaluation of 13.58%. There were also revaluations of the yen and the Italian lira. Moreover, the negotiators put a great many future agenda items on the record: division of responsibility for defending exchange rates, the role of reserves (standard drawing rights, gold and reserve currencies), dealing with hot

144  Guardianship under monetary imperialism money flows, determining optimal margins of fluctuation and proper levels of liquidity to target. But alas the agreement lacked fundamental systematic support mechanisms for the new parity structure. The U.S. refused to officially support the new dollar value, largely due to a desire to maintain Nixon’s domestic plan. The U.S. would not reinstate gold convertibility, nor would it commit to market intervention to support the new parities; hence, this new plan transformed the regime from a gold exchange standard to a dollar standard without a commitment on the part of the key currency nations to stabilize the system. Treasury Secretary Connally stated that the U.S. support mechanism would be through a “vigorous implementation of its efforts to maintain domestic price stability and productivity” (quoted in Frasher 2014, p. 93). This was the ultimate manifestation of the intrusion of domestic guardianship on schemes of international cooperation. International monetary management now shifted to domestic political arenas. But the meeting never resolved the most important safeguards to preserve the regime that were labeled as “too hot to handle” in the Azores. There was no detailed blueprint for the division of responsibility, the role of gold was still uncertain and the U.S. failed to propose a specific timeline for resumption (Frasher 2014, pp. 93–​95 and De Vries 1976, V. I, pp. 53–​56). The Smithsonian meeting was just putting a rubber stamp on issues that had already been resolved. A lion’s share of the deal was negotiated between Nixon and Pompidou, with the Smithsonian meeting serving the principal purpose of determining precisely how nations would revalue. Consequently, it had far less drama than prior conferences studied earlier But while only short and quite bureaucratic in nature, it was the culmination of a struggle that emanated from the very inner sanctum of national quests for economic sovereignty. Bretton Woods was split apart at the seams by inconsistencies between the regime rules and domestic economic priorities. The road back to an agreement involved the same political game, and in this case trying to avoid all the domestic political landmines that brought the regime down in the first place. The negotiations surrounding the agreement revealed a familiar landscape vis-​à-​vis the major conferences that had preceded it. They can best be characterized as a struggle among national economies to move from a Nash equilibrium in a Prisoner’s Dilemma game to a Pareto-​optimal (mutually cooperative) outcome. Getting out of the Nash state was not accomplished in Genoa nor in London. In Bretton Woods the equilibrium mirrored a somewhat hybrid feature (with the U.S. cooperating more than other nations, hence reflecting elements of a sucker’s equilibrium for the U.S.) because the U.S. played the leadership role in compelling nations out of the foxhole by standing as a supporter of the regime.15 Neither the U.S. nor Britain was able to lead the troops out at Genoa or London. Interestingly, under Bretton Woods, it was the hegemon that saved the system, while at Smithsonian, conversely, it was the system that saved the hegemon. The deal cut at Smithsonian helped the U.S. out of a bind both internationally

Guardianship under monetary imperialism  145 and domestically. It was sad to see how feeble the U.S. had become, a reality captured in the Report of the U.S. Secretary of the Treasury in 1972: The global objectives are more difficult than in the past, because the United States can no longer, as in the earlier postwar years, afford to absorb so fully the financial and economic costs of leadership in trade and payments liberalization without commensurate contributions by others. Thus international cooperation and understanding are fundamental to future progress. (U.S. Treasury 1972, p. 396) Then again the U.S. was not so feeble that it could not extort its desired concessions from other nations. If we were to translate this report into its real meaning, the “cooperation” mentioned represented the cooperation on the part of other nations to support the U.S. economy, while the term “understanding” represented an understanding on the part of other nations that solving American economic problems was essential to their own economic fates. But the kingdom required at least a nominal monarch, even if that monarch were underwhelmingly able to lead. The dollar had become the focal point of the entire monetary system, and although American primacy became more psychological than fact in the late 1960s, still the idea of a dollar–​gold anchor brought comfort to monetary authorities everywhere. In tacit games of bargaining, which any monetary system based in free-​market transactions fundamentally conforms to, the focal point itself does not have to be anything special, it need only exist in the minds of actors. The Smithsonian meeting, while somewhat uneventful in its proceedings, was yet historically significant as the very first case of exchange rates among major monetary powers being successfully negotiated around a conference table (De Vries 1976, V. I, p. 556). While Nixon’s assessment of the meeting as “the greatest monetary meeting in the history of the world” may have been hyperbolic, still it remains noteworthy in many ways both as a political and economic laboratory for scholars and policymakers. Alas, like Bretton Woods, the Smithsonian accord was born in original sin. Many observers harped on the inherent weakness of any exchange rate system void of enforceable rules. The problem with the Smithsonian accord as with Bretton Woods was that hard rules conflicted with the kind of flexibility necessary for preserving economic sovereignty. Many would point the finger of accusation at the U.S. for its failure to manufacture a stronger support system for the agreement on parities. But this was a reflection of the fact that an enforceable system of exchange rates was ever more inconsistent with domestic economic sovereignty in a globalizing world. This domestic sensitivity to external conditions accorded far better with a system of floating exchange rates than a system of fixed rates. The guardian vision had not been displaced from its lofty position of prominence atop the throne of economic policymaking. It is little

146  Guardianship under monetary imperialism wonder the agreement survived less than 14 months, a life far greater than the 3 months predicted by Paul Volcker (Silber 2012, p. 103). In terms of the manifestations of monetary power, it represented a major shift in U.S. hegemony: from a benevolent hegemon under Bretton Woods to a malevolent hegemon in the 1970s. The U.S., through its pronounced economic potential to disrupt the system, extorted a number of accommodations from other nations that served to abate severe economic problems and support particular objectives in the U.S. economy and balance-​of-​payments. In this respect, the U.S. successfully shifted the costs of its problems onto the rest of the world. The U.S. problems essentially became the world’s problems. In a Prisoner’s Dilemma game, this would be a predatory equilibrium where the largest burden of support for some collective position rested upon everybody besides the U.S., which was then free riding on the system.

Notes 1 Gowa (1983, p. 72) nicely summarizes how the U.S. deficit allowed the regime to function after capital controls were lifted in 1958: the deficit represented “an injection of international liquidity sufficient to increase world trade and to reconcile what otherwise would have been inconsistent balance-​of-​payments targets among the major countries.” 2 The report is reprinted in De Vries (1976,V. II, pp. 273–​330). 3 U.S. Treasury Secretary John Connally nicely illuminated this burgeoning problem in a later address to the IMF. There is another area in which we are, in a sense, victims of our own progress. As economies have become more closely intertwined, as international capital markets become more effective and efficient, and as controls and restrictions are reduced, the potential for volatile and disturbing capital flows expands enormously. (U.S. Treasury 1972, p. 367) 4 The celebrated report of the U.S. Commission on International Trade and Investment Policy to the President in 1971, which outlined the international problems facing the U.S. in the early 1970s, best captured this situation as it applied to all nations. The core of our present difficulty is the fact that government policies and practices, and international arrangements for collective decisionmaking, have not kept abreast of the high degree of international economic integration which has been achieved since World War II. (U.S. Commission 1971, p. 6) 5 This problem was certainly on the radar of monetary authorities. John Connolly’s address to the IMF on September 30 made that most evident in his comment that “difficult questions concern the mix of national fiscal and monetary policies.” But there were no blueprints for such an initiative since it had never been formally practiced in the past.The world was facing the need to solve problems in uncharted

Guardianship under monetary imperialism  147 avenues. In the past conferences we saw that nations did poorly at adapting to new economic developments because a status quo bias kept them close to previous models for managing their relations, models that were already obsolete. Similarly, as we would later see, the new Smithsonian arrangements would muddle through without making any significant headway in achieving the necessary grounding in systematic coordination. This was a major reason for the short life of the regime (U.S. Treasury 1972, p. 368). 6 Of course, we saw that Genoa generated new radical solutions in other areas besides basing the new system on gold. 7 Perhaps one of the bolder ideas was to evaluate a tripartite float as a model for a greater float among Fund members (De Vries 1976,V. I, p. 525). 8 This of course was reminiscent of the famous FDR bomb which effectively torpedoed negotiations in London. 9 The Annual Report of the Secretary of the Treasury in 1972 succinctly illuminated this Triffen problem in the context of U.S paternalism under the Bretton Woods regime: The pursuit of policies by other countries which tolerated and frequently encouraged surpluses left the U.S. to experience the deficits which represented the mirror image of these surpluses. This led to an erosion of the net U.S. reserve position, which worsened throughout the sixties and reached drastic proportions in 1970-​71 under the combined pressure of deterioration in trade, interest rate differentials, and finally, speculative forces. (U.S. Treasury 1972, p. 392) 10 Nixon’s speech was steeped in the same narrative of populist economics that FDR voiced in his communication during the London Conference: talking about creating “better jobs,” lowering “the cost of living” and protecting the public from “the international monetary speculators” (Silber 2012, p. 89). 11 The centralization of economic cooperation here was akin to the development of summits. Ostry (1988, p. 1) notes: The innovation of the Summit can be seen as an institutional response to the combined effect of the weakening of the established system of cooperation occasioned by the breakdown of Bretton Woods and the advent of the new problems requiring resolution at the highest levels. While she cites the special significance of the 1973 oil crisis, certainly the problem of imminent American insolvency was a new twist to the monetary game in the late 1960s and early 1970s. 12 Focal points are objects or actors around which expectations converge in tacit bargaining situations (Gallarotti 2001). 13 The U.S. position on gold mirrored a number of concerns. Raising the price might lead to greater speculation in the metal. Moreover, such speculation would benefit three nations to which the administration was poorly disposed: gold producers Russia and South Africa, and of course France who had accumulated a large stock of gold (Silber 2012, p. 63). 14 On a more general level, the U.S. economy had a relatively small trade sector; hence, domestic priorities would trump any internationalist priorities in a trade-​off between external and internal adjustment, irrespective of who the President was.

148  Guardianship under monetary imperialism This led to a political alignment that favored domestic over international policy priorities, whoever was in office. As Gowa (1983, p. 25) notes: Given the relatively low dependence of the U.S. economy on a whole on exports and imports, there was no significant political constituency within the United States that would support suppressing the American economy to the end of reducing the U.S. balance-​of-​payments deficit thereby improving the long-​term prospects of the Bretton Woods regime. 15 But as argued above, the U.S. was restrained in allowing itself to be suckered under the rules of the regime.

6  Guardianship in the monetary feudalism of the nonsystem Monetary imperialism part two at Plaza and Louvre–and beyond

Notwithstanding differing points of equilibrium within a Prisoner’s Dilemma scenario, throughout these conferences, the guardian state was always strongly manifest in all principal monetary powers. Even when nations took up excessive burdens in the costs of adjustment, it was always done in ways that were convivial with their most important domestic economic goals. So the imperialism was very much manifest, but there were constraints against extreme predation. The U.S. always gave nations enough leeway in their concessions to preserve important domestic economic objectives. In the years beyond Plaza and Louvre, the guardian state has only grown more entrenched in its position of primacy atop international monetary relations. It has now been about three decades since those accords and the world is deeply embedded into the monetary feudalism of the nonsystem. Nothing approaching the diplomatic gravitas of the conferences analyzed in this book has emerged since Louvre. Relations have carried on in the same non-​regime/​ free-​for-​all style ushered in after the demise of Bretton Woods, with a variety of different subsystems showing up: floating, pegs, dollarization and monetary union. Hence, the guardian state has had to function in a variety of monetary environments since the later 1980s.

Plaza The Smithsonian agreement lasted barely more than a year, coming to an unfortunate demise in February 1972. Nations scurried to find solutions that would allow their domestic economies to thrive in a globalized financial system. The global monetary system proceeded into what can best be characterized as monetary feudalism, or what Max Corden (1994) has called the “non-​system”: a situation that saw nations going in differing directions. The U.S., still bruising from attacks on the dollar in the 1960s and early 1970s, floated with trade and economically dependent nations pegging to the dollar, Europe pursued integration among a group of highly interdependent economies with large external sectors by retreating into the Snake and Japan managed the yen so as to avoid the dreaded “endaka” or overvalued yen. Interestingly, and perhaps a function of nations finally instituting a decision-​making system that had functioned de

150  Guardianship in the monetary feudalism facto within a façade of expansive multilateralism all along, the locus of decision-​ making shifted to the G-​5. We had seen this same pattern of power moving up the monetary food chain in the transition out of Bretton Woods, mainly because the reinstitution of rules was seen as a quicker fix than establishing a regime anew as in 1944. A deviation from equilibrium certainly was not perceived in the same laborious way as establishing an equilibrium with a new set of rules. Here the solution was seen as bringing a few nations back within the established rules. The road to the Plaza showed strong similarities to the Smithsonian case, as in both cases the catalyst for reform was the U.S. external position. But there were other structural forces at the international level that set the stage for the U.S. domestic problems to roil the system. Busting inflation in the 1970s and early 1980s in the U.S. was accomplished by Volcker’s hard-​money policies, which in turn raised interest rates. But other nations were jumping on the hard-​money bandwagon as well. Policy responses to the second oil shock were quite myopic in their collective aim to fight only inflation. But the recession of 1982 was much more severe than expected. The hard-​money policies pursued in tandem were a situation not very well understood and hence extricating from such a situation in a sustainable economic trajectory became challenging. Reagan’s supply side policies generated a fiscal crowding-​out effect that elevated interest rates all the more. But other nations were pursuing a less profligate trajectory in rebounding from the recession. They sought more fiscal restraint. This marked divergence in fiscal paths led to a sharp disjuncture in real interest rates, which generated an overvalued dollar, which in turn compromised the U.S.’s export competitiveness. The resulting mix of conditions led to sharp divergences in external balances across nations, with the U.S. facing large deficits and other nations such as Germany and Japan generating large surpluses. From 1980 to 1985, the value of the dollar rose by about 50% vis-​à-​vis the yen, mark, franc and pound. The U.S. trade deficit more than doubled from 109.8 billion dollars in 1975 to 220.6 billion dollars in 1985. As with the Smithsonian agreement there was a political backlash in the U.S. that pushed for some sort of relief from the effects of the overvalued dollar. Protectionist interests were galvanized. Foreign nations took note of this rising mood of protectionism.The problem became all the more vexing for other nations as the U.S. under the Reagan administration was generally following a “benign neglect” strategy of hands-​off international economic policy. The attention was on domestic policies. The U.S. was intent on letting other nations, as with the Smithsonian case, pull its chestnuts out of the fire (Eichengreen 1996, pp. 136–​149; Funabashi 1988, p. 10; Ostry 1988, pp. 2, 3; and Destler and Henning 1993, p. 34). The overvalued dollar brought the expected cavalcade of domestic political pressure.1 The buildup of exchange rate lobbying peaked in the spring and summer of 1985, with a number of American business groups and corporations descending on Capitol Hill for some relief. The voices drew Congressional attention to roll back loose fiscal policy, hard money and consider protectionism. The Presidential Cabinet started to fall into line. The administration however

Guardianship in the monetary feudalism  151 was wedded to its supply-​side fiscal policies. Somehow the way out for accommodating domestic political interests, given administration intransigence over domestic policy accommodation, would have to rely on other avenues. While Reagan had continued to champion a strong dollar because it accorded with hard money and maintained robust capital imports, the path of least resistance increasingly revealed itself in the form of currency realignments by others and foreign accommodations on trade. There could be an alliance among Congress, Cabinet, corporate interests and the administration to solve the problem of overvaluation by tapping into the emergence of what Destler (1993, p. 40) labeled “the political market” for external solutions through trade and exchange rate policy. The idea of dollar depreciation became less onerous, with inflation coming under control and the unemployment rate staying above 7% (Henning and Destler 1988, p. 323 and Destler and Henning 1993, pp. 33–​40). There was of course a strong desire on the part of other nations to reign in the dollar through some sort of multilateral action. The world outside the U.S. had been sufficiently burned through benign neglect in the previous decades, and now the U.S. insouciance was bringing back dark visions of a victimized past. But was the U.S. open to a multilateral solution? The U.S. could have engaged in a number of strategies that included both selling and talking the dollar down, and of course reducing interest rates. Going the multilateral route was very risky, as the U.S. internal and external policies could be crimped by foreign preferences. But multilateralism had some advantages if conducted in the right venue. The G-​5 appeared to be such a venue. The U.S. had long considered matters in elite fora, even with its de jure commitments to larger multilateralism. Limiting the number of players was a winning strategy for the U.S. by bringing the dollar problem into a controlled forum, and hence enhancing American diplomatic leverage by limiting the number of players to cut deals with or influence. Furthermore, effective currency realignment could only happen in such a context. The alternative would have been competing unilateral contests of currency intervention that could be destabilizing. In addition, the administration could deflect internal political pressure for making concessions on free trade and supply-​side domestic policies by allaying domestic concerns that the economic problems in America were the fault of insidious practices by other nations. An agreement in a multilateral context would demonstrate to Congress and domestic groups that other nations were relenting in their harmful practices. Finally, the Treasury, which would be taking the lead in any such initiatives, could gain greater autonomy over American foreign economic policy and sidestep intergovernmental constraints. Rising Treasury Secretary James Baker III found that such a move accorded with his own bureaucratic incentives (Putnam and Bayne 1987, pp. 97, 98; Henning and Destler 1988, pp. 18, 19; and Destler and Henning 1993, pp. 44, 45). The Plaza meeting itself was a testament to the continued failure of nations to adopt to the new reality of a tightly coupled monetary system, a failure that had eluded them in penning the Smithsonian agreement. But politics in the 1980s were a major stumbling block to effecting the sorts of concerted

152  Guardianship in the monetary feudalism responses necessary to correct the prevailing economic imbalances. Ostry (1988, p. 4) concisely summarized the problem: On the marco front a unilateral U.S. solution—​i.e., a reduction in the fiscal deficit—​had been the standard prescription of all Summits since Reaganomics startled the world. But unilateral action to achieve the much desired “soft landing” of the dollar, a more sustainable pattern of current account positions and a continuation of the economic growth necessary to prevent a new eruption of the debt crisis looked, by 1985, increasingly inadequate and was, in any case, politically out of reach. What was needed was a coordination action among the major powers to ensure more compatible policies. But this would turn out to be anything but an equitable coordination; rather it would be a coordination of policies that benefited the U.S. disproportionality. It would become a recipe for hegemonic free-​r iding. One could say that the Plaza meeting in September of 1985 emerged from the ashes of the Bonn II summit in May of that year. Negotiations over the dollar were far less successful than what the parties had hoped in Bonn. U.S. Treasury Secretary Baker pulled a power play and took the negotiations into a more elite forum by inviting other G-​5 members to discuss the issue at the Plaza hotel on September 22. One participant of the summit opined that “[t]‌he Bonn Summit really took place at the Plaza hotel” (quoted in Putnam and Bayne 1987, p. 208). Going into these negotiations, the different U.S. platforms were lining up along a parochial path of Prisoner’s Dilemma that was oriented around passing off the costs of adjustment across the Atlantic and Pacific. Other nations had their sights set on the value of the dollar and U.S. fiscal policy. The U.S. had its sights set on making other nations bear the lion’s share of adjustment. It was hoped that other nations would undertake fiscal stimulus and offer trade concessions, which in turn could shift the U.S. external balance into a more favorable direction without overly crimping its domestic policies. It was a more aggressive contemplation of macroeconomic coordination than what had been undertaken by Americans in the past. But in this case it would be “self-​promoting coordination” on both sides, with each nation seeking a more favorable configuration of policies with respect to its own domestic economic objectives. Once more, as in past conferences, nations were about to engage in a Prisoner’s Dilemma game of monetary diplomacy. Since hopes of a new round of General Agreement on Tariffs and Trade (GATT) were frustrated by delays, the question of trade would have to be blended into monetary discussions (Ostry 1988, p. 4; Putnam and Bayne 1987, pp. 197–​199).2 The proceedings at the Bonn II summit reflected the difficulties of coordination. Differing domestic economic and political situations made a systematic architecture a daunting task. Individual nations were pitching unilateral accommodations on macro policy in a manner that did not upset their fundamental domestic policy trajectories. The process was very much like a group of

Guardianship in the monetary feudalism  153 people shouting out their own individual contributions to a collective scheme without ever considering how they would fit together. It was a venture in cooperation without coordination. Many of the pieces appeared to be on the table: deregulating financial markets, reducing trade barriers and adjusting government budgets. Of course, the pieces had to be compatible, but the emphasis was on what nations could give rather than how the accommodations could be configured into a working plan.What they were willing to give was in line with their own macroeconomic objectives. Sovereignty reared its head when something more communitarian was needed. Nations gravitated to the Reagan-​ Thatcher playbook of macroeconomic planning. Hence, their policy positions were similar. The posture was very much nations staying in a predatory strategy within a Prisoner’s Dilemma game, hoping other nations would join them with cooperative moves and thus render an advantageous equilibrium for the recalcitrant nations. There was a deficiency in planning a network of differing but complimentary paths. But someone had to be willing to deviate from desired domestic policies, and that was anathema to all nations at the Summit. Without harmonization on monetary measures to bring down the dollar, ideal parity adjustments could not be reached, nor could trade agreements. France baulked at pushing an early gathering of GATT so as to protect the Common Agricultural Policy. Stalemate at Bonn II, no GATT meeting in sight and pressures from American domestic politics to get something done, led Treasury Secretary Baker to take the matter into the G-​5 at a September meeting at the Plaza Hotel in New York (Ostry 1988, pp. 4, 5 and Putnam and Bayne 1987, pp. 202–​205). Ostry’s (1988, p. 5) observation about the meeting she referred to as the “little summit that wasn’t” was spot on: The 1985 Bonn Summit endorsed convergence and cooperation at the very precise time when compatibility and coordination became the key, if elusive, for achieving world economic stability. Indeed risks of a financial eruption in exchange markets or a major protectionist assault by the U.S. Congress were widely perceived to have escalated. Yet international “hands” off prevailed at Bonn. The major significance of Plaza in terms of international cooperation was a recognition that additive solutions to the problem of monetary stability were not effective. As a foundation for policy trajectories this was a manifestation of economic sovereignty, and the idea of “lets all put our houses in order and the international system will take care of itself ” was a recipe for instability (Ostry 1988, p. 5). After Bonn the U.S. picked up the gauntlet of more vigorously pushing away from benign neglect of the early Reagan years and contemplated more robust strategies of “leaning against the wind” on the dollar, which would be a collective initiative between the U.S., Japan and European nations to bring the dollar down softly. The dollar problem was still paramount and rising protectionist sentiment in Congress made some sort of meeting urgent so as to

154  Guardianship in the monetary feudalism undermine legislation rising on the Hill that would have slapped surcharges onto the imports of surplus nations. More corporations were shifting to a protectionist stance and a number of Congressmen arose to lead a legislative phalanx inveighing against free trade, thus undercutting the liberal coalition upon which Reagan launched the liberal policy bandwagon.3 Plaza was pitched as a defusing device. Planners had hoped that progress could be made on legitimate macroeconomic policy coordination in addition to the expected negotiations on intervention. Few doubted that the only sustainable solution to external imbalances and currency misalignments was through effective harmonization of domestic policies. But political and economic obstacles would make many of these hopes difficult to realize.While there was a convergence of hope on general strategies, there was still much disagreement and uncertainty on details and implementation of an effective plan to address misalignments and external imbalances.The fundamental posture on the part of negotiators was to try and deflect as many of the costs of adjustment as possible. There was much wrangling over the relative burden of intervention. Nations were at odds on how the dollar should come down and were uncertain as to its impact on cross-​ rates in Europe. There was uncertainty about whether nations would actually fulfill any promises codified in an agreement, especially on the part of the U.S., which was not yet seen as a proactive force that would leave the relative safety of its tradition of benign neglect (Henning and Destler 1988, pp. 318, 233 and Funabashi 1988, pp. 9–​41). In the end the Plaza Accord reads like a tale of extortive hegemony with a powerful nation shifting the costs of adjustments onto more vulnerable actors. The U.S. came in holding Japanese and European exports hostage, and the ransom was collected in the form of a network of stipulations which shifted the cost of the U.S. external problems to the rest of the G-​5.4 The U.S. had come in with the posture that U.S. problems were essentially the problems of other nations, and they extracted an agreement manifesting that expectation. The accord, as one would suspect in an age of mature guardianship, placed domestic economic priorities right up front (in point 2) by pitching the agreement as a platform for “sustained growth and higher employment.” The initial 11 points of the accord basically placed domestic economic policies at center stage. Favorable performance across a number of macroeconomic targets like growth and stable money was highlighted. As with many public statements about international agreements, this was marked with effusive allusions to domestic wealth and prosperity: the ultimate sales pitch to national legislatures and publics who were far less invested in the technical jargon of international economic theories and more concerned with how agreements would affect their constituents’ pocketbooks. After introductory text which delineated the successes enjoyed by G-​5 nations in terms of domestic prosperity, a counterpoint of concern was interjected in points 10 and 11, which essentially warned that these favorable domestic outcomes were threatened principally by the overvalued dollar and the external imbalance of the U.S. Hence, the foundation of domestic prosperity in the world was a strong U.S. external position.

Guardianship in the monetary feudalism  155 The accord turned the other nations in the G-​5 into economic handmaidens of the U.S. Each nation agreed to a number of accommodations which served to promote adjustment in the U.S. They called for deregulation and liberalization of domestic economies which enhanced domestic economic expansion and gave financial markets greater potential for correcting exchange rate misalignments. There were general agreements on fiscal trajectories and tax reforms that either enhanced demand or at worst did not seriously impede demand. Nations agreed to hold tight to stable money, which in turn kept their interest rates high enough to promote dollar depreciation. But the emphasis was on stable rather than hard money because the U.S. wanted a soft landing for the dollar. Finally, nations took a firm stance against protectionism, which served to enhance U.S. market access. All of these accommodations created a fertile international economic environment to promote a soft landing for the dollar and improve the external position of the U.S. Conversely, the U.S. most certainly kept its domestic policy options open in the face of this collective generosity by essentially committing to staying on the course it had already carved out domestically. Of course, it committed to freer trade. But it reinforced its commitment to tax reform, pledged to reduce the public footprint in the economy so as to free up resources for the private sector and maintained full agency over monetary policy by committing neither to a loose-​money (which would have helped bring the dollar down, but might have produced a harder landing) nor a hard-​money line. On monetary policy it merely stated that it encouraged a kind of policy that was “conducive to sustainable growth and continued progress toward price stability.” In other words, it was fully free to pursue a policy of macroeconomic benign neglect. Notwithstanding the U.S. imposition of a constellation of favorable macroeconomic and international policies at the point of a gun, the accord itself gave a wide berth to the entire G-​5 on macroeconomic policy. While it was demonstrative about the need for cooperation, it never really addressed the need for coordination. Even in its nomenclature, the document was murky about the form which cooperation would take. It mentioned “obligations,” “cooperative efforts” and “consistency of individual policies,” but never produced language specifying coordination, compatibility or harmonization. Moreover, the implementation contemplated was given sufficient flexibility as the accord only stipulated general courses of action on macroeconomic and trade policy, with some exceptions. But when it did make exceptions and specify particular courses of action, it just reinforced policies that nations had already committed to domestically, such as the U.S. deficit reduction plan for 1986 and German tax cuts for 1986 and 1988. There did emerge more detailed agreements on market intervention to align exchange rates, specifically in terms of how the burden would be distributed among the G-​5. After the usual wrangling having to do with shifting most of the costs of intervention, the G-​5 agreed on a formula for apportioning intervention, with the U.S., Japan and Germany carrying the load. But the very centerpiece of the accord, which was really oriented

156  Guardianship in the monetary feudalism around effecting a short-​term soft landing for the dollar, was intervention in foreign currency markets to realign exchange rates rather than domestic adjustment. Much of the language on macroeconomic policy was important and looked for some relief therein, but more immediate action had to come from direct intervention as macroeconomic adjustments would produce results with a lag. But as much as the accord was deficient in effecting a coordinated set of macro policies, it was also deficient in legislating a longer-​ term intervention plan. There was agreement on a devalued dollar in the short and long term, while keeping control of the market, but there were disagreements on specifying a target for the dollar past 6 weeks. The range of a 10–​12% devaluation emerged as a target for a 6-​week timeline, as there was disagreement on how precisely that should be pursued. Nations agreed to “aim” at that target. But there was no shared sense on how markets would react to the interventions (which of course were not made public). Would they produce a hard landing? Would they produce a spike in the yen that was anathema (the dreaded “endaka,” or high yen)? What would it mean for European cross rates and hence would it affect European integration? The strategy of intervention was contemplated as a ratcheted adjustment based on current market conditions of the dollar, another manifestation of American extortion. Intervention was indexed to the daily dollar value, which paid less attention to the effects on cross rates or the short-​term costs of intervention, 70% of which were pawned off to the other G-​5 nations. In other words, the G-​5 should pathologically monitor the value of the dollar daily and undertake whatever collective effort was necessary to put America’s house in order. The strategy would produce a “whack-​a-​mole” effect in that as soon as one imbalance struck, the intervention might bring about corrections in the market mandating a further intervention. As soon as one mole was whacked, another would raise its precious little head.This process showed up in the actual interventions that occurred over the next month, with the dollar vacillating but eventually setting on a downward trajectory that brought about a 13% depreciation by the end of October. Although the aim was fortuitously realized and short-​term goal was achieved, the deficiencies of the accord on exchange rate planning were still quite evident and perplexing.5 There was as noted never a longer term plan on how the nations should proceed after the initial interventions.6 How far should nations continue to intervene? Would intervention be altered based on unexpected conditions? What longer-​run target was appropriate for the dollar? Moreover, there was little certainty on how the interventions would affect trade balances. There was furthermore no real plan on how the costs of intervention should be apportioned to the European G-​5, which was another demonstration of the obtuse posture of the accord with respect to cross rates. Finally, and perhaps most vexing, were national positions on sterilizing external capital flows. In order to enhance the effectiveness of an intervention, the transactions in currency markets would have to be allowed to filter through the economy. Hence, intervention to bring down

Guardianship in the monetary feudalism  157 the dollar should be supplemented by allowing the transactions to affect interest rates, and consequently mute demand for dollar-​denominated assets. In other words, external flows of capital should not be sterilized by monetary authorities. This however was not agreed to. It was quite anathema to tie one’s domestic policy to external positions after so much had been done to shift the burden of adjustment from macroeconomic policy to exchange rates. This would have been going back to some of the painful medicine of the classical gold standard. Needless to say, the accord enjoyed short-​term success in bringing the dollar down softly over the next several months, but its deficiencies as a longer-​run plan for stabilizing the dollar would show up in a continued bumpy ride for the world economy over the next several years, leading to a reprise in the meeting in Paris at the Louvre in February 1987. Much of the failure to carve out a functional plan in which the pieces of international and domestic policies were convivial with longer-​term economic goals of the G-​5 may indeed rest in Funabashi’s (1988, p. 37) observation about how the U.S. plan for the accord was constructed: the accord would “operate within political constraints” (Gallarotti 2004, pp. 14, 15 and Funabashi 1988, pp. 22–​41).7

Louvre Just like the Plaza Accord emerged from the ashes of the Bonn II Summit of 1985, the Louvre Accord can be said to have emerged out of promising negotiations at the Japan Summit of 1986. The Summit was a diplomatic landmark in monetary relations. As Funabashi (1988, p. 177) notes, it was “the most serious attempt to implement systematic currency stabilization among the Group of Five after more than a decade of unchartered floating exchange rates.” The road into Japan was menacing, notwithstanding the agreements at Plaza and a fundamental recognition that the strategy of additive stability was far inferior to a strategy of harmonization as an organizing principle for cooperation. The U.S. had clearly become a disruptive force to the system rather than a leader, at a time when leadership continued to be crucial: a manifestation of its ongoing hegemonic decline. There was a change in the economic landscape with new economic powers rising in Asia. Europe was moving toward greater integration. There was still a great deal of disagreement on the economic theoretical front over the role and optimal organization for exchange rates. Confrontational postures on the policy mix agreed to at Plaza continued. The U.S. wanted further depreciation of the dollar, and part of the solution was to shift the adjustment to Germany and Japan by asking for greater stimulus there. Germany was burned by the consequences of the stimulus of 1979–​1980 and was fearful of another hard landing. Japan was not averse, but Nakasone was platforming for the next election on a policy of fiscal restraint. The U.S. had found itself in a bind since the dollar depreciation never had the desired impact on the U.S. balance-​of-​payments. A 35% depreciation from its peak in February 1982 did little to promote a strong correction in the external balance. The stirrings

158  Guardianship in the monetary feudalism of protectionism on the Hill led the U.S. to continue to pressure other nations on fiscal policies, with an accompanying onslaught of confrontation on trade policy. Baker continued the U.S. practice of extortion by threatening a free fall in the dollar unless Japan and Germany lower interest rates in order to promote greater stimulus. This would allow the U.S. to continue to pursue looser monetary policy to stimulate its own economy, without destabilizing parities. And so, nations limped into Japan trying to navigate an uncertain voyage without a sturdy rudder. Ostry (1988, p. 6) referred to it as the next step in “creative adhocery.” Negotiators were coming in on different theoretical trajectories about solutions. Should we lead with fiscal matters? Should exchange rates be the focus of our plans? What were the time horizons for the solutions themselves? But the stakes in Japan would be elevated by a number of nations facing crucial elections, and hence the political constraints facing negotiators were daunting (Destler and Henning 1993, pp. 50, 51; Putnam and Bayne 1987, pp. 208–​211; and Ostry 1988, pp. 5, 6). The big blast at the Tokyo Summit in May 1986 came in the context of a philosophy that coordination was important and could be accomplished in a technical and scientific manner by linking harmonization of policies to a set of economic indicators. This was historic in that nations had never before agreed on a systematic model for implementing macroeconomic coordination. There were quite a number of indicators, as stipulated in the Baker plan: gross national product (GNP) growth, inflation, unemployment, fiscal deficits, trade and current balances, money growth, reserves, interest rates and exchange rates.8 Once some configuration of relative standings on the indicators came to fruition, whoever deviated from what was considered a desirable course would be required to take “remedial” action, and that this accommodation would be “automatic.” The Summit was also historic in thrashing out trade issues by calling for a new round of GATT in Punta del Este, Uruguay in September, a round that would for the first time deal with dicey agricultural issues—​issues that were long festering as destabilizing elements in the international trading system. As historic as the Summit was in bridging gaps in trade and monetary controversies, it still left much to be desired in terms of shutting down the latitude for economic sovereignty. The idea of “automaticity” was a throwback to a rules-​based system that could constrain the deleterious capriciousness of domestic guardian postures, but in fact the implementation left much room for maneuver and moreover the idea continued to generate disagreement. “Automatic” could be construed within a number of interpretations in terms of timelines and policy strategies. It was also never clear through what domestic political filters implementation had to pass. Similarly, the concept of “remedial” was also quite problematic, as remedial corrections could entail any variety of adjustments within the indicators themselves. The major structural deficiency of the indicator system was that it posed a tightly coupled recipe among a number of potentially conflicting macroeconomic targets. From a unilateral perspective, making corrections in any one indicator could potentially throw

Guardianship in the monetary feudalism  159 off your position on virtually every other indicator. But, moreover, multilaterally there were manifold effects as any changes in the indicators of one nation affected the indicators of all other nations. Short of using a supercomputer, the mathematical permutations would be impossible to reckon, and certainly not in a context that could guide policy (Ostry 1988, pp. 6, 7 and Putnam and Bayne 1987, pp. 215–​223). During the rest of 1986 things were still in a state of flux internationally. Nations were still grappling over macroeconomic and exchange rate targets. There was still much uncertainty in terms of the Plaza agreements. The U.S. economy was expanding with concerns about overheating and rising inflation. The trade deficit was still in the process of sorting out the J-​curve effect. Other nations were growing quite tired of bearing the costs of adjustments, while the U.S. in a privileged position sat back and waited for its external position to improve. Baker was now being pressured against bringing the dollar down from within the political hierarchy. It was indeed a propitious time to begin carving out some longer-​term planning about appropriate levels for exchange rates and thus place the G-​5 in a more amicable environment while the U.S. settled into a desired macroeconomic trajectory. Baker’s initiative in this regard unfolded in four steps: an agreement with Japan in October, the Louvre meeting in February 1987, the adjustment to the secret ranges agreed upon at Louvre for the yen in April 1987 and finally the G-​7 statement in December 1987. With Germany reluctant to discuss further accommodations in exchange rates and macroeconomic policy, Baker took a bilateral route with Japan, which had been the most accommodating of the non-​U.S. G-​3.The U.S. gambit could at least find some refuge in a U.S.–​Japan accord.The agreement basically traded a Japanese concession to stimulate its economy further by a 50-​basis-​point drop in interest rates for a U.S. commitment to keep the dollar stable at an agreeable rate. The timing was politically important as it came just before Congressional elections and therefore bolstered the image of an administration that was on top of the dollar and trade problems. It was also another way of extorting cooperation among the other G-​7 by threatening to leave them out of diplomatic inner sanctum of planning. But the deal began to unravel as Japan attempted to lock into a lower yen rate before the agreement was to take force by pulling the yen down, which led to distrust on the part of the U.S. Baker responded by talking the dollar down into a free fall in January. But the Baker plan backfired as the Federal Reserve Board and the U.S. banking community read Baker the riot act and forced him into a corner on stabilizing the dollar. Those power centers had had quite enough of a dollar depreciation, and wanted some semblance of order at a reasonable parity. Furthermore, a more immediate logistical factor forced Baker’s hand. The Treasury auction was coming up in February, which was of paramount importance in financing the U.S. current account deficit. The dollar would have to be stabilized before the auction. From that narrow corner Baker took his only viable option and called a meeting in Paris among the G-​5 plus Canada to bring some longer-​term order to the issue of parities (Funabashi 1988, p. 180 and Destler and Henning 1993, pp. 58, 59).

160  Guardianship in the monetary feudalism British Chancellor Lawson entered a new term into the lexicon of monetary diplomacy by labeling the Louvre meeting “Plaza II.” In many ways it was an extension of Plaza in that it made further accommodations among the G-​5 to continue to ameliorate the economic distress of the U.S. that was insufficiently abated by the Plaza Accord. The short-​term depreciation of the dollar as a result of the intervention agreements at the Plaza was not designed to address the U.S. problems much beyond 6 weeks; hence, some other booster shot was required to augment the original inoculation delivered at Plaza. And so the Louvre meeting turned out to be that point at which the Plaza Accord had fulfilled its functions and some longer-​range plan was supposed to be implemented.9 The end point of Plaza was far from actually visible. There was a consensus that some sort of agreement should be made to keep exchange rates “around current levels.” The time for calling this meeting was the result of a perfect storm of pressures. U.S. political interests were now seeing a balance of power shifting toward a more stable parity in the dollar.The depreciation coalition had already gotten a substantial depreciation in the dollar. The financial community was concerned with investment flows out of dollar assets, and the FED under Volcker was worried about importing inflation. The U.S. relations with Japan were in disarray after the little episode of subterfuge and retaliation between Baker and Miyazawa. Goodwill among the other G-​7 had faded with the U.S. bilateral power play leaving them out in the cold. But there was still extensive disagreement on parities and macroeconomic trajectories; hence, it was not a theoretically appropriate time to declare an equilibrium. But while it was not theoretically a propitious time to do so, politically it was expeditious (Destler and Henning 1993, pp. 60–​62; Ostry 1988, pp. 7, 8; and Funabashi 1988, pp. 177–​182). While the U.S. was not in as strong a bargaining position as it had been at Plaza, with protectionist interests having subsided and hence G-​7 imports were not in the same hostage state as they were in 1985, still the U.S. had a strong hand to play. Trade politics in the U.S. was quite unpredictable. There was no guarantee that protectionism would remain at bay. Moreover, Baker had shown the ability to weaponize the exchange rate by talking the dollar down, and notwithstanding American pressures to avoid such an outcome, there was nothing guaranteeing that Baker could not talk the dollar down significantly as he had done in January.10 Interestingly the outcome mirrored the slightly diminished U.S. position in that Louvre was somewhat less extortive than Plaza, but still extortive nonetheless. It was the manifestation of hegemonic free riding, part two (Destler and Henning 1993, pp. 60–​62; Funsbashi 1988, p. 180; and Gallarotti 2004, pp. 16–​18). The narrative of the Louvre Accord very much followed that of Plaza before it. There was much domestic political salesmanship in the opening statements in the form of self-​laudatory terminology within a domestic economic context. Nations were commended as having experienced very favorable domestic economic conditions over the recent year. The G-​7 had successfully moved toward “sustainable non-​inflationary expansion.” Nations were in the 5th year

Guardianship in the monetary feudalism  161 of expansion with prospects for continued expansion this year looking promising. Price stability had been attained. Exchange rates were in ranges that promised stable current accounts. Budgets were moving toward balance. Both tax and structural reforms were being enacted to deliver greater efficiency and incentive structures that promised even greater growth. These points for political consumption, as with Plaza, were followed by a counterpoint framing the foundations for the problems ahead. And like the Plaza, the Louvre message was the same. Although Louvre did not mention the U.S. by name in this regard, it was clear that the problems that could sink the ship continued to be with the U.S. external accounts. The statement noted “that the large trade and current account imbalances of some countries pose serious economic and political risks.” The statement then went on to illuminate implications of these imbalances for provoking protectionism. But the Louvre broadened the scope of peril by including extraordinary trade surpluses on the part of newly industrializing nations. This was a different approach to cooperation in that now the net for redistributing adjustment was cast over a wider area. The opening remarks also differed in that they set the agreement within a temporal sequence, thus rendering greater legitimacy to the stipulations as problem solvers. The statement identified itself as an initiative to implement a system of multilateral surveillance “pursuant” to the Tokyo Summit Declaration of May 6. This gave the meeting greater gravitas as a set of hard stipulations about international and domestic economic policies. In addition, legitimacy was enhanced by noting the participation of the International Monetary Fund (IMF) Executive Director in the discussions. Adding Canada to the coalition bearing the costs of adjustment worked very much in favor of the U.S., as now supportership could be diversified and even enhanced so as to relieve some pressure from the other G-​5 nations.11 Canada contributed a great deal to the U.S. cause. It agreed to continue an expansive policy, as well as continue market and tax reforms. It also agreed to pursue bilateral trade liberalization with the U.S. and support multilateral liberalization through GATT. France pledged to pursue tax cuts and market reforms that would liberalize the economy, and this opened up manifold opportunities for American investment. Japan agreed to pursue expansive monetary and fiscal policies that would address their extraordinary trade surpluses. This would be augmented by a pro-​stimulus tax reform program. There was also a very specific reference to the Bank of Japan lowering its interest rate by 50 basis points on February 23. These greater relative accommodations reflected the pattern of more pronounced relative compliance on the part of Japan to American prompts in the G-​7. Great Britain offered a double-​edged bonus to the U.S. by promising to continue a policy of growth (which would improve the trade balance), but yet following a prudent monetary path (which would protect the dollar from appreciating). And like other nations, Britain pledged to follow the path of liberal restructuring by pursuing privatization. Finally, as with Plaza, the U.S. gave up little. Its pledges basically restated macroeconomic policy trajectories it was already pursuing. The stipulations merely repeated the targets

162  Guardianship in the monetary feudalism of the Gramm-​Rudman bill for reducing the fiscal deficits for the years 1987 (3.9% of GNP) and 1988 (2.3% of GNP). After pledging to limit government expenditure so as to reduce the size of the government relative to GNP, the statement continued as follows: The United States will introduce a wide range of policies to improve its competitiveness and to enhance the strength and flexibility of its economy. Monetary policy will be consistent with economic expansion at a sustainable non-​inflationary pace. There are absolutely no accommodations in macroeconomic policy preference in these stipulations. Under such vague guidelines, the U.S. could virtually do what it wanted within some broad range of responsive macroeconomic management. Moreover, the pledges were perfectly convivial with Reagan’s supply-​side economics. In fact, these pledges (except for Plaza pledges toward revenue-​neutral tax reform and resisting protectionism) are precisely the same pledges the U.S. made under Plaza: reduce the size of government, reduce fiscal deficits and pursue appropriate monetary policy. The Louvre Accord stands in contradistinction to Plaza in three main regards. The first is conterminous with a monumental achievement in multilateral economic cooperation. It formally launched the Tokyo Summit indicator-​ based surveillance system as a vehicle toward substantive macroeconomic harmonization. It reaffirmed most of the indicators stipulated in the Summit Statement: growth, inflation, current account/​trade balances, fiscal budgets, monetary conditions and exchange rates. The stipulations on surveillance were stated as follows: *

periodically review medium-​term economic objectives and projections involving domestic and external variables. The medium-​term objectives and projections are to be mutually consistent and will serve as a basis for assessing national policies and performance; * regularly examine, using performance indicators, whether current economic developments and trends are consistent with the medium-​term objectives and projections and consider the need for remedial action. It is interesting that the term “medium term” was selected. Obviously this had to have a longer time horizon than the Plaza Accord whose purpose was short-​ term market intervention to relieve the immediate pressures from misaligned rates. Something greater than “short-​term” solutions were called for.Yet the G-​ 7 ministers had seen how capricious the market for currencies could be under a nonsystem, and unless one moved toward fixed bands around parities, there really was no such thing as a long term. Moreover, the indicator system contemplated monitor-​ and-​ adjustment style of macroeconomic accommodations. This necessitated more timely review and judgment. Of course, the language about implementation of surveillance did not give much more guidance for specific

Guardianship in the monetary feudalism  163 policy actions than the few terms in the Plaza Accord “monitor” and “surveillance.” Aside from more abundant terminology about monitoring, there were no precise guidelines for action. While symbolically a great bridge had been crossed with Tokyo and Louvre, realistically the G-​7 was far from actually practicing formal policy harmonization. There were no definitions stipulated for key policy terms like “remedial,” “periodic,” “medium term,” “consistent” and “mutually consistent.” Furthermore, neither secretly nor publicly were any figures revealed regarding what the relative indicator targets would be. Second, the Louvre Accord was for the purpose of locking in exchange rates, as opposed to the Plaza Accord which was for the purpose of altering exchange rates. In this respect, the Louvre had an advantage in that some set of parities were agreed upon. The short-​term intervention to bring down the dollar had a vague target and no one had any inkling as to what an equilibrium position looked like for the G-​7. Too much was changing in terms of macroeconomic conditions and external balances to be able to ascertain in advance what that equilibrium state would be. With Plaza, the G-​7 put itself in the painful position of muddling through as some sort of window of viability began to present itself. As noted, Louvre was not necessarily that window, only a window that presented itself as politically compelling. So Baker and the G-​7 took the gauntlet. The fact that this was not the ideal window revealed itself rather quickly after the Louvre meeting, as events disrupted the landscape once more. Finally, free riding took on a communal aspect under Louvre. Under Plaza, the U.S. was the sole free rider. Under Louvre the other G-​7 nations redistributed some of the burden issued by the U.S. to nations outside the group. Point 8 of the accord reads as follows: The Ministers and Governors noted that a number of newly industrialized economies were playing an increasingly important role in world trade.These economies have achieved strong growth based significantly on their access to open, growing export markets. Recently, some have accumulated trade surpluses which have contributed importantly to the present unsustainable pattern of global imbalances, thus increasing protectionist pressures. The Ministers and Governors considered that it is important that the newly industrialized developing economies should assume greater responsibility for preserving an open world trading system by reducing trade barriers and pursuing policies that allow their currencies to reflect more fully underlying economic fundamentals. This was essentially the same extortive narrative that the U.S. had been following with the other G-​7 throughout this period. In this case, however, the other G-​7 as a group could defray some of the burden laid upon it by holding the exports of nations outside the group hostage. The same veiled threats about trade war that were traditionally issued by the U.S. were evident in this language, but here targeted toward outside nations. In this particular instance, it was truly a case of taxation without representation. Even though the Executive Director of the

164  Guardianship in the monetary feudalism IMF participated in the discussions, representatives of the newly industrializing nations were not present. The redistributive proposals in the veiled threats were directed outside the inner sanctum of diplomacy, or extortion from afar. While both Plaza and Louvre issued paternalistic language with respect to the plight of developing nations and their problems in the world economy, the newly industrializing nations were open game (Statement 1987; Funsbashi 1988, pp. 177–​ 187; Gallarotti 2004, pp. 16–​18; and Destler and Henning 1993, pp. 60–​62). Both the Plaza and Louvre Accords continued that pattern among the monetary conferences of the 20th century. The guardian state was ever-​present in the diplomatic process of attempting to build cooperative systems to organize international monetary relations. Domestic economic sovereignty colored every phase in the quest to arrive at mutually acceptable rules around which policies could converge. Similarly, the strategic outlines of the interactions fell once more into the context of a Prisoner’s Dilemma game. In these two cases, the equilibrium point was similar to that of the Smithsonian agreement in that it was a case of hegemonic extortion: pushing other nations into an equilibrium in which the U.S. free rode on the burden of others, while at Bretton Woods it was a benevolent (albeit frugal within the stipulations of the IMF) hegemonic equilibrium in which other nations would free ride on the contributions of the U.S. Of course, both Genoa and London fell into a Nash equilibrium in which there was mutual defection. It is most evident that the presence of a powerful nation makes a difference in how regimes are built. They can either shoulder the burden, or they can shift the burden to other nations. Greater relative power gives the powerful actor the resources to shift equilibria to sucker outcomes for others. But it clearly takes far greater power to be able to support a regime than to tear one down. The U.S. had that power before 1970, and so was able to support a regime. But even though its power declined after 1970, it still had “veto” power in that it had the financial standing to disrupt the regime and thus hold stability hostage. The Plaza and Louvre continued this Smithsonian trend of imperialistic and malevolent hegemony, extorting a favorable equilibrium for itself and thus shifting the burden of adjustment to other nations. In both cases, as with the Smithsonian case, the U.S. weaponized its external position. In the Plaza case, the U.S. was able to hold European and Japanese exports hostage as the deterioration of its trade balance was generating protectionist legislation on the Hill. For trade-​dependent economies like the other G-​7 nations, this was a powerful extortive tool to force concessions on shouldering the burden of adjustment through intervention and macroeconomic stimulus. At Louvre, the trade threat was ever-​present of course, but Baker also enjoyed leverage by weaponizing the exchange rate and being able to talk the dollar down precipitously. This was a toxic combination for other G-​7 nations, and the consequences were, as with Plaza, accommodations in terms of macroeconomic policies and on intervention. Notwithstanding differing points of equilibrium within a Prisoner’s Dilemma scenario, throughout these conferences, the guardian state was always

Guardianship in the monetary feudalism  165 strongly manifest. Even when nations took up excessive burdens in the costs of adjustment, it was always done in ways that were convivial with their more important domestic economic goals. So the imperialism was very much manifest, but there were constraints against extreme predation. The U.S. always gave nations enough leeway in their concessions to preserve important domestic economic objectives. It was not a complete whitewash. At the most extreme in terms of hegemonic benevolence, the Bretton Woods system, even with the grand provider of the public good of stability, the most valued domestic economic objectives of its economy were well protected within the stipulations of the agreement. The manifestations of the preservation of domestic sovereignty may have been quite different across the kinds of equilibria achieved, but guardianship was pervasive.

Guardianship beyond Louvre It has now been three decades plus since the Plaza and Louvre (Plaza II) Accords, and the world is still deeply embedded into the monetary feudalism of the nonsystem. Nothing approaching the diplomatic gravitas of the grand conferences analyzed in this book has emerged since Louvre. Relations have carried on in the same non-​regime/​free-​for-​all style ushered in after the demise of Bretton Woods, with a variety of different subsystems showing up: floating, pegs, dollarization and monetary union. The guardian state has had to function in a variety of monetary environments. What do we see some three decades after Plaza and Louvre? The Plaza and Louvre negotiations may truly represent a watershed of policy coordination (Frankel 2015, p. 2 and Bergsten 2015, p. 1). But if that were indeed the case in the 1980s, then the years since the mid-​ 1980s can certainly be said to have descended into a nadir in coordinating policies. Frankel (2015, p. 2) succinctly delivers a snapshot comparison of the international monetary system both in the mid-​1980s and three decades later. [T]‌he essence of the [Plaza] initiative-​a deliberate effort to depreciate a major currency-​would be anathema today… .In light of the currency war concerns, the G-​7 has refrained from foreign exchange intervention in recent years. The G-​7 partners in February 2013 even accepted a proposal by the Treasury to agree to refrain from unilateral foreign exchange intervention in an insufficiently discussed ministers’ agreement that we could call the ‘anti-​Plaza accord.’12 What used to be foreign exchange intervention to make necessary adjustments has become labeled “currency manipulation.” The rules governing a stable network of parities in the mid-​1980s have descended into a turf war of “monetary geography” governed by a wild-​West show of mutual coexistence maintained at gunpoint (Cohen 1998). Parities are tolerated until some external balance goes awry, and then negotiations begin at gunpoint. This diverse landscape of feudal anarchy has allowed nations to align based on macroeconomic

166  Guardianship in the monetary feudalism complementarities. Europe of course found that prosperity required itself to be bound by hard rules, as trade-​dependent nations with larger external sectors found the costs of sovereignty greater than the benefits of submission to hard rules. In this case guardianship required compromising a good extent of economic sovereignty, but the Euro regime had built in plenty of relief values for preserving principal macroeconomic objectives. Nations with trade dependence on certain larger economies found that pegging allowed them to weather the shock effects of changes in the parities of the latter nations. Other nations that were not as economically interdependent with economic partners have found that free floating offered maximum agency over macroeconomic trajectories (Truman 2015 and Frankel 2015). The U.S. has wielded the biggest gun in the show, using the weapon of Congress to continue to discipline the exchange rate policies of nations with large current surplus. China and Japan have been the usual targets over the past three decades. More than ever, the international monetary system has seen nations retreating into thick boundaries of macroeconomic guardianship. In this respect the U.S. has remained in the veto-​bully mode of using its power to disrupt markets, which it adopted in the Smithsonian Agreement to solve its own particularistic domestic economic problems. It has, however, become an extortive hegemon more on a bilateral than on a multilateral basis. It has directed its extortionist practices toward each of the other two great monetary players. One might even say it is no longer imperialism at all, but a state of economic conflict among three large powers, each trying to push off its costs of adjustment onto the other two nations. Japan and China, pursuing policies of export-​led growth behind protectionist walls, have relied on the American consumers to run up strong balance-​of-​payments positions, and thus enjoy economic growth and employment. The U.S. has responded with the age-​old weapons of holding their exports hostage through threats of menacing legislation from Congress. The U.S. has faced an ever more stubborn canine in Japan, which has been less willing to follow the tug on a leash. If Japan has been stubborn, China has been simply obstreperous. This descent into feudalism and away from rules-​based systems has a number of aspects. The major disrupter of the system, the U.S., has found that financing current account imbalances may be the path of least resistance in terms of adjustment. Second, after the crisis of 2008–​2009, macroeconomic autonomy to maintain growth and employment has become more important than the state of external balances.Third, in a sense we have an implicit tripartite regime at the very core of the international monetary system: with the big three (Japan, U.S. and China) maintaining a rough equilibrium within the constellation through bilateral face-​offs and negotiations. The periphery of the system is functioning well with stable spin-​off, and of course there is more intervention going on in the periphery (major emerging market nations) than the core, hence another relief mechanism keeping a stable outer sphere of monetary relations. Fourth, the center of gravity has shifted even further away from a unipolar monetary structure with the rise of China and Japan since the 1970s.

Guardianship in the monetary feudalism  167 The developing and emerging nations are now a far greater part of the global economy than they were some decades ago: having seen their share in global GDP rise by more than 2/​3 to about 40% by 2015. So the system is far more multilateral than it was.13 Finally, the system has gotten ever more complex and tightly coupled. Financial interconnectedness has increased significantly: gross external liabilities grew from 30% of global GDP in 1980 to 160% in 2015 (Truman and 2015, p. 50; Furusawa 2017 and Frankel 2015, p. 10). The road away from rules taken after Louvre has continued to be disconcerting. In fact, the “anti-​Plaza” statements suggest that many agreements among leading nations are to avoid setting rules. The system has not devolved into the chaos of the 1930s, even with the financial crisis of 2008–​2009, so it seems that nations have tended to their own houses without overstepping the line into economic warfare. Hence, stability today is very much based on a much less codified gentlemen’s agreement to avoid extraordinary actions of selfishness that generate spirals of visceral reactions. In this respect things haven’t really changed in terms of how stability is maintained de facto. Even under the highpoint of multilateralism, the Bretton Woods regime, things proceeded by nations following norms, norms basically set and monitored by the U.S. The Articles left much leeway on how nations could function given that the rules were very imprecise, with many loopholes. The international system became the U.S.’s own private turf in a sense. They financed the start-​up costs (Marshall Plan), enforced the rules when nations went too far (through diplomacy and withholding resources), rewarded nations for playing along (access to liquidity and suspending convertibility requirements) and discouraged following the rules when it threatened them (the diplomacy and mechanisms to avoid gold conversions of weak currencies and support the dollar in the 1960s). The U.S. continued this style into Smithsonian, Plaza and Louvre negotiations In these cases the U.S. created a new set of rules that were even more favorable to their interests. The benevolent veneer of Bretton Woods was gone. The state of the U.S. economy now became the driving force behind what the rules were and how they were implemented. Metaphorically, these regimes actually functioned like exchange rate bands. The U.S. set a band within which actions could fluctuate. The boundaries themselves were an estimate about what lines were necessary to draw so as to keep the system out of a 1930s meltdown. It was a glaring case of muddling through with rough boundaries enforced by the biggest stakeholder.

Notes 1 Ostry (1988, p. 3) calls attention to the “protectionist fury in Congress” being galvanized by America’s declining competitiveness. 2 Ostry (1988, p. 4) cites the crucial need for a timely invocation of GATT. She affirmed the urgent need of “a powerful and credible signal, such as the launching of a new GATT Round, to halt the increasingly serious erosion of the multilateral trading system.”

168  Guardianship in the monetary feudalism 3 Henning and Willett (1988, p. 330) have argued that timing of the pressure and policy change toward activism may have been influenced by changes in the Treasury. Incoming Secretary Baker had undertaken discussion with various businesses on the severity of trade conditions under an overvalued dollar before Plaza, and hence the issue was very much on his radar as he replaced Regan. Moreover, they opined that interest groups for protection that were previously rebuffed by the Regan-​ Sprinkel team might have been reinvigorated by a change at the top. 4 At times the extortion was much more demonstrative, such as in the case of Baker’s strategy on holding out U.S. agreement on intervention until the very last minute at the meeting, so as to pressure Japan and Germany on a stimulus accommodation (Funabashi 1988, p. 38). 5 Funabashi (1988, pp. 23, 24) suggests that markets may have been driven as much by perceptions of national intentions as by capital flows, which in this case was a most fortuitous outcome for such an impetuous plan because the perceptions were being driven by a consistent series of actions imparting some stability onto expectations in currency markets.This is a familiar outcome in currency or any other market for financial assets that sets the old cliché “it’s not what you say it’s what you do” on its head. Such perceptions most certainly muted whack-​a-​mole gyrations brought about from differing speculative expectations.The announcement of the accord was immediately followed by a depreciation of the dollar, but then investors became skeptical about the weak dollar and proceeded to buy up dollars, thus reversing the depreciation. Ultimately the surprise of the announcement, the perceptions that the U.S.-​sponsored accord reflected a change in U.S. strong-​dollar policy, and perceptions that the FED would effectively not sterilize the capital flows with a hard money stance; all drove investor expectations that reinforced the interventions on the part of monetary authorities. 6 Of course this set the stage for another meeting at Louvre in 1987 to deal with the continuing drama of the dollar. Hence, Louvre was aptly named “Plaza Two.” 7 Interestingly, in terms of domestic political dramaturgy, each finance minister upon returning home conveyed a message that their macroeconomic plans had not been compromised. Rather, the costs of adjustments were to be borne by other nations (Destler and Henning 1993, p. 54). 8 There was a vague portent of the indicator idea in the Plaza Accord’s references to “monitor” and “surveillance,” but of course the accord never delved into the topic of monitoring economies (Funabashi 1988, p. 37). 9 In the words of British Chancellor Lawson, “I see this meeting as the lineal descendent of the Plaza meeting… .Then we agreed that the dollar should fall, now we all agree we need stability” (Quoted in Funabashi 1988, p. 177). 10 Evidently this drastic move shook up the rest of the G-​5 given that as early as December 1986, just a couple of months before, Baker was unable to extract an agenda for a meeting among the G-​5 deputies (Funabashi 1988, p. 178). 11 The meeting was formally held at the G-​7 level, but in actuality the deal was cut among the finance ministers and central bankers of the G-​5. Italy and Canada were included throughout the process in terms of consultation and discussion, but the essential stipulations were carved out among the G-​5 (Funabashi 1988, pp. 178, 179). 12 A statement from a recent G-​7 meeting mirrored this posture: “our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates” (quoted in Truman 2015, p. 49). This endorsement of domestic

Guardianship in the monetary feudalism  169 economic sovereignty over quantitative easing undergirded what at the meeting was a “ritual” reiteration on consultation and coordination which only “implicitly endorsed a policy of limited, transparent, and generally coordinated intervention” (Truman 2015, p. 49). 13 Eichengreen (2019) points out two competing views of the international monetary structure: the Harvard view that posits the continuation of a unipolar system based on the dollar and the Berkeley view that we are moving toward a more multipolar structure. His own view is that the former is more of a backward-​looking view, while the latter is more futuristic. However, he also mentions that there is an argument to be made about an “overlap” between the two states of monetary structure. On the comparative stability of these monetary orders, see Benassey-​Quere (2015).

7  Reflecting on a century of guardianship Patterns and implications

The track record laid by the case studies reflects a strong shadow of the socioeconomic expansion of suffrage over the past 150 years, and the resulting shift in economic policy in that period. Policymaking priorities shifted from the external aspects of the famous trilemma (stable exchange rates and capital market access) to the internal aspect of domestic economic sovereignty. This tectonic change of democratization, in turn, cast a preponderant shadow on policies and economic outcomes over this period. The intersection of domestic and international politics has led to a far different international economic landscape in the relations between nations. This book has attempted to trace that shadow in the major monetary conferences over this long period. While this is just one manifestation of the guardian state among many, it is indeed insightful because it produced a long and varied observational set in which nations were faced with stark choices between domestic economic prosperity and external objectives, hence providing a fertile social-​scientific laboratory for evaluating national priorities in navigating among these choices. The one constant pattern we did observe was the advent of an almost religious mandate to protect domestic growth and employment.We saw a great many differing approaches to external policies over this long period, and this menu was quite dynamic over time. But what was constant and ever salient was an uncompromising posture toward protecting domestic prosperity.

Guardianship and prisoner’s dilemmas Diplomacy has always demonstrated a strategic nature, and monetary diplomacy is no exception. It is a glaring pattern of monetary diplomacy however that the strategic incentives within the game changed from pre-​guardian years to the guardian age. The 19th century conferences showed a great deal of jockeying for position among nations seeking self-​serving arrangements in their negotiations. But the goals were not centrally positioned in getting free rides for the purpose of maintaining employment and growth. The 19th century did not deliver concepts of a macroeconomy, and any systematic domestic economic policy infrastructure to protect employment and growth was to arrive well into the future. In fact, there was no real domestic economic policy as

Reflecting on a century of guardianship  171 we know it today. National leaders were aware of the state of the “trades,” but in effect there could be nothing yet to protect that which essentially did not really exist conceptually or theoretically. In addition, all of the later negotiations came after global crises or significant economic turbulence. The 19th century conferences did not follow global wars, and aside from the Conference of 1878 (which followed a sharp deflationary period in the 1870s) did not come directly at the heels of economic turbulence. The monetary issues revolved around disturbances to domestic monetary systems due to the depreciation of silver after the Conference of 1867. Yet the history of the change from 19th to 20th century monetary diplomacy is poignantly demonstrative of a change in thinking about how strategic approaches should be framed. The 20th century diplomacy was about protecting domestic growth and jobs, while pushing the costs of the international goals onto other nations. In other words, nations sought above all to protect their domestic economies by free riding on the cooperative actions of others.1 The 19th century conferences saw a diverse mix of motivations, unlike the later conferences which gravitated around the impact of international monetary conditions on domestic growth and employment. More than anything, the Conference of 1867 unfolded under a competition for prestige. The stated goal of creating greater conformity in monetary practices, so as to push international standardization in weights and measures across differing areas, played out in the midst of technical issues and questions of monetary status. The technical issues were quite resolvable, with minor alterations in coinage systems within British coins (there was greater conformity between principal French and American coins). The quest for monetary status launched the conference in the context of France’s quest to internationalize the Latin Monetary Union. Britain’s response at the conference was disappointing yet not surprising. Its statement about being unwilling to make alterations in basic coinage standards to accommodate international standardization could only come from a reactionary sense of the sanctity of its time-​honored practices, which elevated it to the very top of the industrial hierarchy. Britain had much to gain in terms of economic benefits given that Napoleon III called for standardization on gold, with Britain and Portugal being the only nations on a pure gold standard at the time. This could only have made Britain more entrenched as the global center of finance. The lynchpin was making the franc the union numeraire, which would give it the status as the principal international monetary unit.The U.S. and France were in greater agreement on the technical issues.The U.S. was however concerned about concurrent circulation allowing the 25-​franc piece to displace the half-​eagle. While this threat played into technical issues, certainly there was the issue of a national monetary system with foreign coins dominating circulation. Therefore, the issues played out strategically among the big three monetary powers, which would be a trademark of the rest of major international monetary diplomacy throughout history. But the guardian state was not to be found driving this strategic interaction. In fact, this conference did not manifest a Prisoner’s Dilemma strategic structure. Nations were not

172  Reflecting on a century of guardianship trying to push off costs of adjustments except for France who was putting pressure on everybody else to conform to the franc system. But even here France was willing to change from bimetallism to gold monometallism, a major concession for attracting Great Britain. Great Britain was not interested in using the conference in order to free ride on any collective agreement: they largely retreated from regime building. The U.S. did feel some pressure as a possible sucker in allowing the franc to displace some American coins in circulation, but was not overtly seeking a self-​serving arrangement that would push costs of cooperation largely onto other nations. The strategic structure here was to create or preserve monetary practices without any overt or covert attempts to promote a self-​serving international regime supported largely by the resources of other nations. And of course, unlike the 20th century conferences, the state of the domestic trades was not a major issue. In essence, the Conference of 1867 conformed much less to a Prisoner’s Dilemma that all the conferences that would follow, principally because there were relatively few redistributive implications. And of course this was due to the fact that it was the only conference among the major conferences we studied that was not called for the purpose of resolving a major monetary or economic crisis. The system was relatively stable, with nations doing fairly well economically. There were some issues of monetary circulation within European nations on bimetallism, which led to the creation of some standardization measures in the form of the Latin Monetary Union in 1865. But there was no severe shock that led nations to seek multilateral cooperation. The Conference of 1867 might be characterized as a luxury good for France, but rather unnecessary to solve major economic or monetary problems in the nations invited to attend. The strategic interplay revolved around nations not willing to make major changes in coinage laws to accommodate the French appetite for international monetary prestige. The Conferences of 1878, 1881 and 1892 did in fact begin a long tradition of Prisoner’s Dilemma diplomacy. In this case there were overt attempts on all sides to achieve important domestic monetary goals (maintaining the price of silver) by pushing the costs of supporting the value of the metal onto other nations. But only in the Conferences of 1878 and 1881 were macroeconomic issues at play. In these cases, the 1870s saw deflationary years that plagued domestic economies. There was even a sense of the trouble with the domestic trades and there arose some domestic politicking that called attention to the deflationary consequences of silver’s decline with respect to employment. So in a sense, one can see a guardian element similar to the later conferences in the 20th century, but while the strategic profile among nations was domestically protective, it was not guardian in the more conventional sense of smoothing the business cycle by free riding on others. To reiterate, managing the business cycle, the cycle being something still foreign to 19th century minds, was not yet a policy or even a mature theoretical concept. The free-​r iding aspect of these conferences took the form of nations preferring to sit back and maintain the monetization of silver in their economies, while other nations agreed to maintain fully open markets to the conversion of silver. In essence the public good

Reflecting on a century of guardianship  173 was the price of silver, and every nation preferred an outcome where other nations committed to a lion’s share of guaranteed convertibility in order to prop up the value of the metal. The strategic interaction in the latter three conferences of the 19th century featured a common pattern that characterized all succeeding conferences: the game was really played out among the elite monetary powers. In the cases of the 19th century, it was France, the U.S., Germany and Great Britain. Each nation had a strong incentive to sit back and have other nations solve the problem by taking the risk of opening up their markets to the full conversion of silver. But this was precarious indeed as the world was cognizant of a pronounced disposition for going to full gold standards, or at least systems predominantly based on the use of gold. And anyone opening their markets to silver ran the risk of getting stuck with everybody’s silver when the metal might be demonetized or limited in its use. So lurking behind the promises of supporting the monetization of silver, there stood a sinister plot for nations to dump their silver at a high price and obtain more gold upon which to build a new monetary standard.The nation that accepted the most silver, if this were to happen, would have given out all its valuable gold for what would become a worthless metal. Germany was seen as an especially sinister presence in this game as they were most outspoken about pursuing a full gold standard. But even Britain which did not have as much silver in its domestic economy relative to bimetallist nations still had the problem of India. They too were boisterous in proclaiming a desire for India to move toward gold given the silver problem. India in that period had among the largest masses of transactional silver in the world. What better scenario for Great Britain than to have other nations buy Indian silver at top dollar and then bail on a price support system for the empire.These conferences essentially played out as Prisoner’s Dilemmas among an oligarchy of monetary powers, as would all future major conferences. From Genoa on, every major monetary conference reflected a Prisoner’s Dilemma element driven largely by a preponderant guardian posture to protect domestic economic prosperity. Nations consequently came to envision multilateral monetary schemes as potential springboards for enhancing the performance of their own domestic economies. Operationally this led to a pervasive disposition to frame solutions that allowed them to free ride on the contributions of others. In this case the public goods were liquidity and stability, and the domestic costs of supplying these goods in terms of jobs and economic growth were ideally pushed onto other nations. The Genoa Conference opened up with a pervasive parochial posture across nations. Looming over the meeting was the need to finance a crippled Russia and Germany, which meant the victors of the war having to consider compromises on reparations. The U.S. was far too reticent about its own domestic troubles to even show up at the conference. France had to be extorted by the need for British money to even appear, something the new government of Poincaire was loathe to do considering that domestic economic hardship brought down his predecessor. Lloyd George was politicking domestically on the success of such a conference,

174  Reflecting on a century of guardianship but Britain was not coming to the table in a position to carry a regime. It was looking for substantial participation from other parties, especially the U.S. and France. And of course, the more promises it could get out of these two nations in attending to the liquidity needs of other nations, the better. But all the other nations were also thinking along these lines. The actual game was played well before the conference in terms of how the nations came into the negotiations: it would have been far too much to ask that the nations involved could compromise crucial domestic economic goals for the purpose of floating an international agreement that could pump enough liquidity and compliance into the system to restore the Victorian international economy. All of the radical propositions which emerged at the conference were in fact testaments to just how far the world had moved beyond such a system. The confluence of domestic imperatives shaped the outcome of the conference, and the lofty expectations of Britain fell into a Nash equilibrium of mutual defections after the conference was concluded. The London Conference of 1933 followed suit, and here the pernicious tendencies to free ride on the resources of others were all the more evident. This was hardly surprising as the conference was coming on the heels of a Great Depression that cast nations into economic warfare and staunchly protective of their economic sovereignty. In this case, however, all the major parties at least showed up. The U.S. came in as a malicious free rider, trying to coax the creation of a regime that would bring stability to the international economic system without contributing much at all. In fact, even strong efforts on the part of France and Britain to achieve at least modest agreements on regime compliance failed in the face of U.S. recalcitrance. The U.S. was following a classic script of predatory hegemony (i.e. a dominant nation that attempts to push other nations to bear the costs of supporting a regime). But both those nations also sought to redistribute the costs of adjustments onto each other and the U.S. This was a classic case of oligopolistic failure in the face of Prisoner’s Dilemma incentives. Each stood in watchful waiting in hope of free riding on the resources of the other leading monetary powers. At Bretton Woods all of the countries were certainly in a free-​r iding mode given the scourge of war.The U.S. too was a nation in economic turmoil.While the U.S. may have been the best positioned to contribute to an international regime, its beneficence was limited. In fact, it sought a modestly priced regime in terms of its domestic costs. While it was not a free rider, it actually let other nations free ride to some extent it was certainly limiting the sucker’s payoff. It is interesting that so many Americans interpret the history of the regime in a paternalistic fashion, which is not surprising given the legendary nature of the event. Furthermore what others may consider modest concessions, Americans may think far more generous. One need only scrutinize how far the American concessions fell from the Keynes plan, and also consider the final stipulations of the Articles of Agreement of the IMF, to see that America was anything but a magnanimous patriarchal manager. The battle between Britain and the U.S. over the structure of monetary patriarchy on the part of the U.S. clearly

Reflecting on a century of guardianship  175 demonstrated a Prisoner’s Dilemma battle over the magnitude of regime support and its consequences for domestic economies. Keynes envisioned a regime that favored debtors of course, with opulent amounts of liquidity and American regime support. The U.S. pushed back with a much more limited support system in keeping with its domestic economic objectives. The battles were all the more manifest with Keynes and White facing critical scrutiny by conservative voices in their legislatures trying to preserve their domestic economic sovereignty. Both the legislators and the principal architects of Bretton Woods were most certainly trying to find as free a ride as was possible within the context of an international agreement. The pre-​conference game between the U.S. and Britain was just an ongoing effort to redistribute costs. This bilateral Prisoner’s Dilemma face-​off of course showed up somewhat less at the conference since most of the major stipulations were fundamentally agreed upon before the meetings. But we most definitely saw every other nation making very clear attempts at suckering the greater powers to bear all the costs of adjustments. The chronical of the meetings articulated above shows nations taking every opportunity to preserve their economic sovereignty under a vision of extensive patriarchal support on the part of greater monetary powers.2 But even the most magnanimous regime supporter, the U.S., engineered a final agreement that well shielded its domestic economy from potentially destabilizing hegemonic outlays to the regime. It was more than just the relatively (to the potential needs of debtors) modest liquidity pledges, but constitutional principles that gave it great flexibility in how it would and could support the regime. America’s true commitment to the needs of international system was as flimsy as the stipulations of the IMF’s final Articles of Agreement. As is evident in Chapter 4 of this book, the stipulations in the Articles not only granted tremendous leeway of action for the elite monetary powers, but also buttressed a great many rules onto a political rather than legal foundation. Given the elitist governing structure of the IMF and the many rules that were subject to implementation by meetings within this elitist structure (the Board of Directors), preponderant powers like the U.S. and Britain could spin compliance in a quite flexible manner. Compliance to even the hardest rules could be circumvented or altered through elite prerogative. Notwithstanding the ability of the U.S. to limit its support of the regime’s costs of adjustment, still it did procure the necessary public goods to buttress a regime. In fact, of all the major conferences considered in this book, this is the only one that can be said to have ended in a Prisoner’s Dilemma equilibrium of hegemonic support, albeit circumscribed by American domestic objectives. The Prisoner’s Dilemma posture only intensified in the years approaching the Smithsonian meetings and beyond to Louvre and Plaza, and the years following Louvre. America was now squarely in a free-​r ider mode along with all the other great (G-​5) powers. Of course, in keeping with the guardian imperatives, it is no coincidence that the U.S. moved to a more defection-​ based or predatory style as the domestic costs of supporting a regime grew to a level that threatened the American macroeconomy, and then remained high

176  Reflecting on a century of guardianship in the 1970s and beyond. During these years, there was a far more symmetrical approach to the game across nations. All nations were deeply entrenched in predatory solutions to the problem of currency misalignments. Each sought to free ride on other nations in bearing the costs of adjustment. The U.S. had changed from limited support of a regime to a hard-​core free-​r iding posture. In the three cases scrutinized above, in the aftermath of Bretton Woods, much of the game was played between the U.S. on one side and the other central monetary powers of the G-​5. The trail of monetary relations through these decades saw the U.S. using its exorbitant monetary power as a device for extorting compliance from other nations in supporting regimes, while it limited its sacrifices for supporting multilateral initiatives and maintained as much domestic economic sovereignty as it could. The U.S. threw the global monetary system into chaos by suspending convertibility in 1971, all the more given that it did so without any plan on how to restructure parities and the value of gold. It sat back behind its exorbitant privilege and tended to its domestic needs by gaining a trade advantage through tariffs and delinking domestic monetary policy from its international obligations. Benign neglect emerged as a powerful tool for extortion. The U.S. could follow its desired course of action without the same consequences that other nations faced. Moreover, the U.S. evoked a new posture that would essentially make the U.S. external problems the problems of the world. As Connally had suggested, there could be no stable world order as long as the U.S. suffered balance-​of-​payments difficulties. This was a step beyond free riding: the U.S. now sought payment for riding. The policy manifestations of this posture were to bring about more open markets for American exports, greater burden sharing for alliance security and shifting the burden of realignment onto other nations. The Smithsonian case represented a Prisoner’s Dilemma equilibrium where the hegemon was free riding on other nations. The Prisoner’s Dilemma game continued between the U.S. on one side and the other G-​5 powers on the other in the 1980s in the run-​up to Plaza. Once again America’s problems would be cast as the problems of the world. Benign neglect once again became a strong extortionary tool. With the U.S. external position deteriorating due to an overvalued dollar, strong pressure emerged in Congress to impose trade restrictions on U.S. imports. Reagan, like Nixon in the 1970s, was benignly letting the external position take care of itself while he focused mainly on domestic economic objectives. Other nations were essentially forced into taking the U.S.’s chestnuts out of the fire due to the building pressures of misalignment and the fact that protectionist sentiment in the U.S. made European and Japanese exports hostages. The U.S. once more approached international economic relations through a posture of protecting domestic economic agency, and framing solutions that had the other G-​5 nations essentially configuring their macroeconomies and international monetary transactions in a manner that would bring the dollar down softly and buttress the external account of the U.S. The U.S. made few accommodations on macroeconomic and international economic policy (with the exception of intervention in currency markets) to effect a soft landing, but got other G-​5

Reflecting on a century of guardianship  177 nations to agree to fiscal expansion, stable money policies, admonishing protectionism and currency intervention. But the free rides that nations, driven also by the guardian imperative, gave the U.S. were constrained within boundaries that did not pull those nations dangerously out of their own policies for sustaining growth and employment levels. The U.S. once more rode freely, but the ride was underwhelming relative to the needs of dollar–​parity stabilization. The Plaza Accord was born in original sin as it framed only short-​term solutions given the political difficulties of constructing a sustainable remedy for the dollar’s misalignment. The expected instability that emerged led to the meeting at Louvre, which could be contemplated as Plaza Part II.The Prisoner’s Dilemma game just carried on from Plaza to Louvre. The years leading up to Louvre meeting once more saw nations trying to pawn off the costs of stabilizing the dollar onto each other.The U.S. continued to seek fiscal and monetary stimuli from other G-​5 nations, while the G-​5 sought far greater American accommodations in its own macroeconomic trajectories. Each nation was leery about undertaking domestic policies that would work adversely on their targets for sustainable growth and employment. The incentives for mass free riding were heightened all the more by a number of upcoming elections among G-​5 nations that made domestic performance crucial. The system of indicators and its rule for remedial action for deviations was the type of Pareto-​optimal solution in a Prisoner’s Dilemma game that brings about mutual cooperation, but this system imposed a cooperative solution that was flawed in the loose nature of interpretation and implementation that was legislated in the rules. Essentially it gave the appearance of cooperation but in fact allowed enough leeway for nations to free ride. Redistributive power plays were also going on in smaller fora as the U.S. was targeting both Germany and Japan individually for concessions to shift the costs of dollar stabilization. Bilateral failure with Germany pushed the U.S. into the path of Japan. While Japan initially agreed on accommodations on the yen, it later would refuse to follow through on maintaining a lower boundary, and the deal fell apart. The U.S. shifted back into a larger forum that now also included Canada. Aside from the indicator system that was stipulated, the Louvre Accord read very much like the Plaza agreement in that the U.S. was able to shift the costs of stabilizing the dollar. Other nations would pursue expansionist policies while the U.S. essentially declared greater agency over its own macroeconomic policies. And of course like Plaza, although the ride was free, guarded nations found ways to provide transportation toward dollar stabilization in a cost-​effective way in terms of their own macroeconomic priorities. The years beyond Louvre to the present have seen an even more anarchic system arising in which Prisoner’s Dilemmas play out. The rise of China and Japan as major economic powers has shifted the play to a more symmetrical game. The great powers in fact have gone deeper into the nadir of a nonsystem by essentially agreeing not to create multilateral institutions. Moreover, the great powers have been loath to resort to currency intervention to stabilize currencies. In fact, such actions have become tantamount to economic

178  Reflecting on a century of guardianship warfare: being labeled currency manipulation. This “anti-​Plaza” posture among the great powers has brought back some of the destabilizing elements of the 1930s in more recent decades. The system has splintered into a monetary feudalism with the great powers pairing off into bilateral conflicts. Rather than multilateralizing policy approaches, monetary policies have been weaponized. The system is further from any sort of Pareto equilibrium than at any time since the 1930s. This unilateral and bilateral approach to dealing with external problems may be a testament to an acknowledgment among the great powers that multilateral solutions in a guardian world are impractical. It is quite sad to think that if anything the monetary Prisoner’s Dilemma game among nations has gotten more intense over the past 80 or so years. Rather than evolving, the monetary system has devolved since the highpoint of Bretton Woods. This is largely due to the consolidation of the guardian state. The differing equilibria in the Prisoner’s Dilemma games across the major monetary diplomatic initiatives of the past two centuries are shown in Figure 7.1. At the 19th century Conferences of 1878, 1881 and 1892 there was a more symmetrical game among major powers. All were suffering from the depreciation of silver, but little cooperation emerged. Nash equilibriums prevailed throughout. The Conference of 1867 did not exhibit as salient a Prisoner’s Dilemma game in terms of redistributing costs of regime building, but defectionary postures plagued the initiative. The conferences of the 1930s witnessed the major monetary powers deeply enmeshed in free-​riding diplomacy. The economic warfare of the 1930s carried into the conference parlors and led to more Nash equilibria. At Bretton Woods all nations were in free-​rider mode. The U.S., while leading the quest for regime building, was trying to shield itself from paying exorbitantly for supporting a regime. It was more in a cost minimization mode. But unlike previous conferences, the outcome of the Prisoner’s Dilemma game at Bretton Woods could be said to have rested in a free-​r ider mode for all nations except the U.S., which was the lone major cooperator in terms of supporting a regime. It is interesting that the next three agreements saw diametrically opposed equilibria. In the cases of the Smithsonian, Plaza and Louvre agreements, the U.S. free rode on the other major monetary powers. And of course we ended with more recent decades propelling us back into a more symmetrical Nash equilibrium of the 1930s. So the history is interestingly cyclical.We started out in mutual defection from the 1860s to the 1930s, shifted to free-​r iding equilibria from the 1940s to the 1980s, and then more recently devolved back to monetary anarchy with no regime building in a more symmetrical game. It is hard to judge such a historical cycle because it is unique. There is no comparative foil before or after. However, one thing is quite evident. There is no sign of magnanimity among nations, especially in the age of the guardian state. Where regimes were built, the track record shows nations being extremely reluctant to cooperate. At Bretton Woods, you were presented with a most reluctant champion that sought a bargain-​basement multilateral solution in terms of its domestic economic sacrifices. At Smithsonian, Plaza and Louvre conferences, contributions to the regime among the non-​U.S. G-​5

Reflecting on a century of guardianship  179 Nations B Cooperate

Defect

Breon Woods *4

Cooperate

Nations A

Defect

Louvre *7

London *3

Smithsonian *5

Genoa *2

Plaza *6

Conferences 1867,78,81,92 *1 Non-System a‚er Louvre *8

*1 Major players could be either A or B *2 Major players could be either A or B *3 Major players could be either A or B *4 Player A is the U.S., other major players are B *5 Player A is the U.S., other major players are B *6 Player A is the U.S., other major players are B *7 Player A is the U.S., other major players are B *8 Major players could be either A or B

Figure 7.1  Monetary Prisoner’s Dilemma game.

nations were extorted at the point of an economic gun. In all other cases, we see a Nash equilibrium, in other words a failure to build a regime. This is very much in line with the guardian imperative. Regime building requires extensive sacrifices in terms of domestic economies. Such sacrifices are anathema in a political environment that elevates growth and employment to prime directives. While historians tend to look at past efforts to achieve cooperation as great successes and manifestations of golden ages, in reality both in cases where regimes emerged and in cases of mutual defection, there is a pervasive pattern

180  Reflecting on a century of guardianship of underwhelming cooperation in all major monetary diplomatic initiatives in history. Indeed, there is little glitter in their successes, and quite a bit of darkness in their failure. In fact, there are no cases of mutual cooperation among nations to build a regime, a sad testament to the power of domestic guardianship.

Hegemony smagemony A great deal of ink has been spilled on the subject of hegemony in international relations. Scholarship on monetary relations has been at the forefront in developing the idea. In fact, the subject itself was introduced into the scholarship by Kindleberger’s (1973) work on the economic meltdown of the Great Depression. Much has been said specifically about monetary hegemony.3 Visions of hegemony crystalize into a bifurcated menu introduced by Snidal (1985). Emanating from a collective action model, the two poles of hegemony exhibit either a benevolent hegemon that uses its resources to provide the public goods required to create and maintain a stable regime of monetary relations (i.e. allows itself to be free-​r idden upon) or a malevolent hegemon that uses its power to extract regime support from weaker actors (i.e. hegemonic free riding). But in all the varied scenarios on monetary hegemony (as well as hegemony in general), the hegemon actually employs a vigorous use of its resources to attain its goals. In other words, hegemons are willing to spend and are at least actively engaged in what is happening around them. The track record of monetary history in the case studies articulated above, in this respect, shows a deplorable lack of commitment on the part of hegemons. What you have is a long track record of lethargic and bargain-​basement hegemons. Either they showed limited engagement in monetary outcomes or approached regime building as veritable cheapskates. There are no categories in the current scholarship for hegemons that are indolent or stingy. Moreover, the hegemonic stability scholarship assumes always that hegemons are rational actors that behave consistently in their own self-​interest. This premise derives from the structural nature of the logic. Hegemons act the way they do because of their positions in the international monetary power structure. Hegemonic action is a direct function of this position. In this respect, history has also shown that hegemons do not assertively pursue their self-​interest from a structural perspective. Hence, the present categories in the literature on monetary primacy and the logic upon which they are founded are quite deficient at capturing what actually occurred in history. Great Britain basically removed itself from the monetary diplomacy of the late 19th century. They behaved in a most irrational and indolent way. The conferences of the 19th century offered innumerable opportunities to push major British monetary interests. And yet they sat back and basically did nothing. The Conference of 1867 offered an opportunity for nations to go to gold standards. And although the franc would have ascended to a strong position of international status, still a world on gold would have made London all the more powerful as a global financial center, since Britain was the only major

Reflecting on a century of guardianship  181 nation on a full gold standard at the time. While the franc would have gained greater swagger, still sterling would have augmented its power as the global currency for transactions and investment. What Britain did in the other three Conferences of 1878, 1881 and 1892 is inexplicable from a self-​interested actor premise. British India, the very center of Britain’s international trading network, was suffering greatly from the depreciation of silver, Indian money being based extensively on silver. Stability in the colonies, especially centrally positioned trading partners like India, was essential to the British economy given the importance of the colonies in British trade. Allowing such a depreciation in a key economic entrepot is all the more inexplicable given the rather modest concessions Britain had to offer to create international price-support systems at those conferences. In some instances, a mere promise to cooperate would have elicited initiatives on the parts of the U.S. and/​or France. Perhaps one mistake could be tolerated, but the British had three chances to make something happen with just limited buying commitments for silver. The U.S. and France were most willing to do the heavy lifting of regime support, given their bimetallist standards. One could explain this through satisficing at the structural level: in fact, the British showed a consistent aversion to making even small changes in their monetary practices because of the sanctity of time-​honored traditions that delivered them to the pinnacle of the industrial world (Gallarotti 1995). But while status was safe enough without cooperation at the conferences, still the silver problem was of massive importance, and Britain did nothing to solve it. The logic of satisficing does not accord well with actors foregoing limited sacrifices to solve major problems. Such situations are above the threshold of doing nothing to improve one’s standing. While there is sufficient variation in visions of how dominant monetary powers behave in the existing literature, there are few categories that support the idea that hegemons do nothing at all when faced with a significant problem. The 1930s continued this legacy of underwhelming hegemony. At Genoa the U.S. did not even show up. If it were truly a rising hegemon, which we will never know since no one agrees on what constitutes a hegemon, it acted in a most unperspicacious manner in the eyes of scholarship on hegemonic behavior. If Britain were the hegemon of the period, it was in no way a benevolent hegemon as it most certainly would not support a regime with exorbitant domestic economic sacrifices. It was most certainly being frugal in its initiative to carve out a regime. But it also fell far short as a predatory essence. It arm-​twisted France into coming to the conference, but in the end did not have the muscle to carve out a regime. In fact, some would say it was most feeble in letting the Russians and Germans torpedo a regime by pulling out with a side deal. At best it stumbled and bumbled its way through a diplomatic process that seemed to slip away, all the more surprisingly, if we move to other levels of analysis to explain the outcome. At the domestic level of analysis, Lloyd George staked his political future on a conference success. One would think that if Britain had the power and resolve to make a regime happen, it could have done so.

182  Reflecting on a century of guardianship London also saw a less-​than-​impressive hegemonic performance by the then rising hegemon: the U.S. The entire approach on the part FDR to the conference can best be described as erratic and spontaneously carried out. Evidence shows that he went to great lengths to prepare for the creation of some stabilizing agreement among nations. While his early rhetoric exhibited a commitment to making a deal, his ongoing actions deteriorated into an obstructive pattern. Certainly we saw that the U.S. representatives, especially Hull, were continually flummoxed at the capricious Presidential communiques (when they were lucky enough to get them). FDR’s bombshell memo had a similar effect on the conference as statements by Britain during the conferences of the 19th century. The stone-​cold declaration that demonstrated American resistance to make any domestic sacrifices for building a stabilization pact effectively torpedoed any viable multilateral scheme, just as British intransigence torpedoed the 19th century conferences. Bretton Woods was the high point of benevolent hegemony in the history of monetary diplomacy. So do we see Kindlebergerian (1973) visions of hegemony vindicated? In a sense “yes,” and in a sense “no.” Certainly the U.S. put its resources in terms of liquidity and leadership forward in building a regime. But was it what we would consider robust hegemony? In fact, it is interesting that so much scholarship cites rising hegemony after global wars. No nation emerges from a global war in any condition to truly support a global economic system. If the U.S. were in fact a rising hegemon, it was far from its apogee of power. It was in fact fighting wars in Europe and the Pacific, whose outcomes were far from certain during much of the framing of the postwar regime. The Bretton Woods meeting took place just after the invasion of Normandy. It is stretch of the imagination to think that a nation deep into a wartime economic experience could be hegemonic. Even in its most optimistic visions of the near future, the U.S. was hardly qualified to be a true lender to the world in the amounts required to sustain a prosperous global economy. Above and beyond the U.S. hobbling to the podium of leadership, diplomats that had to negotiate a new multilateral agreement were functioning within strong economic nationalistic constraints from their legislatures. In fact, the two architects White and Keynes had to develop and revise their plans in a process of pulling and hauling with strong conservative powers in their respective governments.There was little chance that a truly opulently financed regime would ever arise when the price to be paid for that opulence included resources essential to domestic growth and employment. In fact, as much as has been made about differences among the two plans, in actuality both exhibited an economically nationalist orientation, with many safeguards for domestic macroeconomic agency. In the end, the Articles of Agreement were a testament to a non-​constitutional constitution. Pretty much every major rule dictating contributions and duties were set in a constellation of stipulations that allowed much leeway in compliance. Especially privileged in this slippery constitution were the most powerful nations, with the U.S. ascendant, given that many of the safeguards and exceptions to the rules ran through a hierarchical decision-​making structure where powerful nations

Reflecting on a century of guardianship  183 had the votes to amend compliance as they saw fit. If anything, Bretton Woods demonstrated a bipolar hegemony: I can take with my predatory right hand, what I have given with my benevolent left hand. The years following the conference showed precisely how deficient the regime was. Much of the stability in the system came from either outside the rules or from breaking the rules. Marshal plan money, liquidity outside the Fund, America’s defense of its Cold War allies and allowing Europe and Japan much leeway in compliance on trade and convertibility, all served to maintain a stable political economy for several decades after the conference. If the U.S. was anything but a benevolent hegemon under Bretton Woods, it would show an extortionary style of hegemony in the 1960s (one it would carry over in the 1970s and beyond) as it faced increasing difficulty under the rules of the regime. Eichengreen (1996) nicely articulates this outcome: America’s ultimate threat was to play bull in the china shop: to disrupt the trade and monetary systems if foreign central banks failed to support the dollar and foreign governments failed to stimulate merchandise imports from the United States. (p. 130) Indeed, the Smithsonian Agreement saw a shift in hegemony from one marked by benevolence (although constrained) to one of imperialistic or malevolent hegemony. We saw a transition from a hegemon supporting a regime before the 1970s to a situation where the regime supported a hegemon in the 1970s and beyond. The U.S. used its power over the international financial system to extort concessions from other nations that ameliorated the U.S. external position, while allowing the U.S. to protect its macroeconomic agency. So this behavior in fact would support visions of hegemony in the literature. But as in the previous cases, the hegemonic script was anything but consistent with hegemonic behavior, either from a structural or domestic level of analysis. The U.S. was anything but self-​protective in allowing the system to deteriorate as it did. Pressures that emerged after 1958 were allowed to destabilize and grow. The U.S. was fairly passive as pressures built up to a boiling point. The wheels came off in the later 1960s with nations breaking all the rules for currency stabilization. This had deleterious consequences both for America’s internal and external economic positions. Needless to say, even from a predatory perspective of hegemony, the U.S. was most deficient as a protector of American economic interests. In many cases it did use its weight to drag concessions out of nations in terms of refraining from gold conversions. But its actions were most uneven in its management to create a system that accorded with U.S. economic objectives. It could have “put the screws” to nations in a far more aggressive manner in order to protect its external balances and maintain greater domestic relief in adjustment. But it did not. So was this a case of benevolence coming occasionally to the fore to preserve the system? One could say that the U.S. intermittent benevolence in a period of monetary imperialism was akin to a virus preserving the

184  Reflecting on a century of guardianship health of its host so that it can feed on more victims. Was the U.S. getting all it could without decimating the supporters of the regime? It is difficult to assign a rational strategy to this schizophrenic series of policy outcomes. As we have seen above, many of the responses unfolded in a contingent context of current circumstances with uncertainty about the future. One must also consider the individual players, and their dynamic impact on policy and diplomacy. This is not to say that pure theory is worthless in an idiosyncratic world, but issues of human complexity color all behavioral legacies. Does a poorly orchestrated monetary imperialism signal an impeachment of malevolent hegemonic theory? Certainly it does not if inconsistencies to hegemonic free riding were the function of drawing back when the system was ready to collapse. But even here the system was collapsing. Even after parities were entirely compromised, the U.S. sat back and paid a steep economic price. Certainly using more muscle to keep parities aligned was possible. The U.S. sat back in benign neglect and let that serve as an extortionary tool to force nations to bear the adjustment costs of dollar depreciation. Such an outcome could have been orchestrated sooner so as to relieve the U.S. of the consequences on its own economic position. We saw above how deteriorating conditions on Wall Street and the U.S. external accounts were undercutting the negotiating power of the U.S. But the U.S. clearly did not have the muscle to impose its will as negotiations languished in a state of national stonewalling. If European nations were peons in this game of hegemonic imperialism, no one told them. They acted with great resolve and even impunity at times, notwithstanding the economic hardships they were facing. The accommodations were bounded by their need to maintain important macroeconomic targets. Moreover, a rational strategy of hegemonic bargaining was impeded by U.S. domestic political constraints, as Nixon’s reelection campaign dictated some courses of action over others. Certainly, destabilizing a system for the purpose of attaining a goal is perfectly in line with a vision of malevolent hegemony.4 But in this case, there was no certainty about how painful such a thing would be for either the U.S. or the nations being extorted. Nor was there a clear vision of an end to the chicken game. Clearly the U.S. was in a weakened state, and such a play does not accord with hegemony unless it is inspired by a strategy of “the rationality of irrationality.” But the rationality of irrationality strategy is most risky when mutual defection in a chicken game is deadly. The U.S. was certainly not in a position to sustain such a strategy; hence, the extortion was anything but hegemonic as the term is normally understood. In other words, hegemons do not commit suicide, nor would they move to the precipice of suicide in a weakened state. Plaza and Louvre continued the legacy of hegemonic imperialism. The instruments of extortion were the same. Benign neglect was a natural function of Reagan’s focus on domestic economic policy, letting the external balance deal largely with itself. The administration was mindful of its precarious external position and desiderate of a solution, but not at the risk of compromising domestic macroeconomic priorities. The U.S. once again sat back in its

Reflecting on a century of guardianship  185 exorbitant position and let things in Europe and Japan deteriorate. Once more the specter of American trade politics hovered over and pushed other nations into framing solutions to America’s misaligned currency and its external deficit. In the end, like the Smithsonian case, the U.S. extorted other nations into solving its external problems, while maintaining freedom to pursue its desired macroeconomic policies. And once more it muddled through by paying a significant price for not imposing its will sooner. Nations were anything but pawns that folded to the will of the monetary giant, they reluctantly fell into line, but within boundaries that preserved as much domestic economic freedom as possible. So the hegemonic extortion once again was underwhelming in terms of the power to compel. The post-​ Louvre nonsystem has not been hegemonically imperialized. We have returned to the constellations of monetary relations of the 1930s, in which several principal powers have determined outcomes in the system. Over the past decades it has been the U.S., Japan, the European Union and China rising. This monetary feudalism, interestingly, has arisen in a period of unipolar American primacy in the global system. Taken together, the military and economic power of the U.S. is at a relative apogee. However, the U.S. has not acted hegemonically, but fallen into a network of multilateral free riding once more, as it did in the 1930s. No doubt it has thrown its significant weight around in weaponizing its economic policy. But it has not been alone in undertaking economic assaults in this age of currency wars. Even more than the 1930s, the gap between structural power and behavior accords poorly with common visions of hegemony. Absolute primacy in the global system should incentivize the U.S. to either support the system or free ride in an imperialistic manner. It has done neither. It is very far from supporting the system; in fact, it has been consistently one of the more disruptive forces in the weaponization of economic policy. But these attempts at extortion have not caused target nations to kowtow to a preponderant presence. It is neither a benevolent nor a fully malevolent monetary hegemon. It persists in a grey area of hegemony carved out in the 1930s. Even more inconsistently with visions of hegemonic regime building is the fact that in a number of cases regime creation was a function of weakness in dominant powers rather than strength. Common visions of hegemony see regimes as a function of hegemonic strength. Greater power creates stronger rules, whether these rules primarily benefit other nations or the hegemon. In the conferences of the 19th century, Britain had achieved absolute monetary primacy, but that strength led to no regime creation. In fact, the British appeared to be inexplicably indolent. In the 1930s, the greater powers, far less dominant relative to other nations, hobbled into attempts at regime building while holding out their hats. The U.S., which was considered a rising hegemon of the period, actually torpedoed both attempts at Genoa and London. At Bretton Woods the common visions of hegemony are supported with a rising power shouldering a disproportionate burden of regime building. But even here the supposed monetary primacy of the U.S. only created at best a bargain-​ basement regime, with its contributions falling far short of its relative economic

186  Reflecting on a century of guardianship superiority. In the 1970s and 1980s it was not hegemonic strength that was the catalyst for building regimes, but hegemonic vulnerability. In the feudal system after the 1980s, where the primacy of a hegemon is once more absolute (as in the 19th century with Britain), the U.S. dominance has not only failed to create a regime, but the U.S. has continually attempted to redistribute costs of adjustment onto less powerful nations. If anything, the hegemonic stability logic appears to be upside down. Greater relative monetary power seems to work against regime start-​up. Weakness has been more commonly associated with attempts at regime building. Throughout a number of these cases, it was the relatively weaker nations, which faced greater vulnerability, that picked up the gauntlet of regime start-​up and maintenance. It was the slightly weaker powers that tried to make multilateralism work.

Monetary regimes require cooperation and leadership rather than hegemony The case studies in this book have definitively shown that the key to regime creation and maintenance emanates more from multilateral than unilateral foundations. As just suggested, hegemonic visions of monetary primacy do poorly at explaining major attempts at building and sustaining monetary regimes. If we look closely at both the successes in building regimes and failures, we see that cooperation did or could have provided the requisite foundation for creation and sustainability, even Bretton Woods. Regimes did not really require strong hegemony, but did require strong leadership in encouraging mutual cooperation in what was historically a Prisoner’s Dilemma. As with many such mixed-​motive games, an ambitious actor is required to encourage other actors to achieve what is in their best collective interests, which is mutual cooperation. History suggests that it did not have to be a hegemonic actor enforcing a benevolent (it allows others to free ride on it) or malevolent (it free rides on others) equilibrium. In such cases, the regimes studied in this book, none were stable. In fact, the record of monetary diplomacy is quite poor in terms of building and sustaining stable regimes. Ongoing cooperation never emerged, and that was the key to start-​up and stability. The regimes built were either too difficult to support (Bretton Woods) even by a hegemonic actor, or were founded on a hegemonic predation that eventually doomed the regime (Smithsonian, Plaza and Louvre).The regimes that never emerged (all the other cases studied) lacked an effective leader. But in all cases, leadership states and non-​hegemonic resources would have been sufficient to forge and sustain those agreements. Britain in the conferences of the 19th century and Britain and/​or the U.S. in the 1930s could have cooperated in ways that did not require hegemonic resources in order for regimes to emerge and remain stable. The Bretton Woods regime was not supported by hegemonic resources with respect to the original stipulations of the Articles of Agreement. The U.S. led the regime in a rather ad hoc manner and mainly outside the diplomatic instruments forged in 1944. One could call U.S. resources abundant, possibly even hegemonic, but

Reflecting on a century of guardianship  187 the U.S. could not sustain the regime without a collective solution. After 1970 the hegemony of the U.S. manifested itself in free riding and none of those arrangements lasted very long because it was not a cooperative contributor to the resources and compliance required for sustainability. In fact, neither Plaza nor Louvre had the same ambitions as those of the Smithsonian Agreement in terms of longevity. These lessons from monetary diplomacy suggest that a necessary and sufficient condition for starting and sustaining regimes is cooperation among the leading economic powers in a system. Without it, hegemony will fail because no hegemon could be in a position to truly support the system. The historical record shows that no hegemon was able to sustain a regime without at least a little help from its friends. Accommodation in terms of resources and compliance on the part of non-​hegemonic actors was absolutely necessary for the regime to function. And in a guardian age, willingness to provide the public goods of stability would be even more diminished among even hegemonic actors. This suggests that in the search for monetary stability in the future, the recipe must be sound cooperation initiated and maintained by some perspicacious leader. Hence, this book suggests the preferability of a theory of leadership over hegemony as a foundation for establishing monetary order on either a regional or a global scale. So rather than talking about hegemonic stability, we should be thinking about cooperation and leadership. This vision resonates with existing treatments of monetary stability. Gallarotti (2001), Eichengreen (1990), Frieden (1993) and Reti (1998) have all explored the efficacy of leadership within the context of international monetary regimes. Cohen (1977, p. 251), Kindleberger (1993, p. 276) and Cooper (1987, p. 194) have suggested the possibility of price leadership in a group of non-​hegemonic central banks substituting for a larger hegemonic lender of last resort. Williamson and Henning (1994) explored the role of such price leadership among lesser powers in the maintenance of parities in fixed and target-​zone exchange rate regimes. Bergsten and Henning (1996, pp. 68–​77) have averred the importance of leadership in facilitating economic cooperation within the OECD, with this leadership being dynamic, that is, shifting among both stronger and weaker nations. Eichengreen (1990 and 1992) and Frenkel, Goldstein and Masson (1996) have shown that supposedly hegemonized international economic systems were less reliant on hegemonic resources, and more on cooperation and coordination among nations and central banks, with the hegemons serving mainly as price leader. Eichengreen (1990 and 1992) has argued that no nation was preponderant enough to stop the Great Depression. Rather a viable solution required cooperation among important monetary actors. Solomon (1982) attributes stability under the Bretton Woods system to the coordination on monetary policies. In a number of these cases, price-​setting functions were played by both hegemons and non-​hegemons. In a study of the classical gold standard, Gallarotti (2005) has demonstrated that the Bank of France as a leader was much more responsible for financial stabilization during the period than the Bank of England. The Bank of

188  Reflecting on a century of guardianship France undertook initiatives to avert financial crises by going out and building cooperative schemes among other leading financial actors. In these cases, it was collective arrangements perspicaciously engineered by the Bank of France that provided the resources to avert destabilizing crises. Such an approach to monetary stability differs significantly from visions of monetary hegemony as a stabilizing force. Table 7.1 elucidates the components of such a logic and shows how it differs from visions of monetary hegemony. The components of leadership in the table reflect the actions taken by the Bank of France during the period of the classical gold standard, but they interface very well with broader properties that could be applied under any historical circumstances. A dominant theme of leadership across the various functions necessary for monetary stability void of hegemonic support is that leaders coax the various important actors in the monetary system to contribute the necessary resources and compliance to support the regime. In this case, it is a type of collective support that is activated whenever resources are required to stabilize a regime, especially in the face of crises. The crisis strategies draw on the key participants to distribute responsibilities of support in an equitable and sustainable way. Management need not be systematic and ever-​present. The collective strategy just requires firm understandings of the boundaries of compliance and timely actions in need. Hence, regime maintenance can be conditional and intermittent.

Moving forward in the guardian age The lessons from this book suggest that monetary regimes with hard rules will be difficult to forge and sustain, especially in a guardian age where nations are most reluctant to sacrifice domestic economic sovereignty in order to pony up resources for regime building and maintenance. In terms of exchange rate regimes we continue to be brought back to Eichengreen’s (1996) celebrated statement that going forward the world will be caught between monetary union and floating. Because only a hard contract can subordinate internal objectives to external targets, any other middle arrangement will crumble under the quest for national economic sovereignty. So it is either monetary contractarianism or a free-​for-​all. The guardian posture in economic policy will grow all the stronger with the spread and deepening of democracy. As argued above, the rise of the guardian state was a function of the expanding enfranchisement of the late 19th and early 20th centuries. As populations were placed in a stronger political position, their economic needs became all the more important for political leaders who depended on their support at the polls. Growth and employment became a beacon for those that sought political office. It would appear that in the present period with the rise of rightist populism, the imperatives of guardianship are at a high point. Both the Left (which has always embraced guardianship) and the Right (which has now increasingly embraced the needs of the masses over elites) are taking similar positions on economic policy. Both poles of politics have joined in the chorus for domestic prosperity over globalized capitalist internationalism. There has emerged a sort

newgenrtpdf

Table 7.1 Conventional leadership functions of monetary hegemons versus leadership functions of secondary monetary powers Function

Conventional Hegemon

Non-​hegemonic Leader

Trigger mechanism for stabilization Lending and liquidity

Either rising absolute (benevolent strand) or rising relative (coercive strand) power Larger-​scale lender in last resort; Unconditional access to one large pool of liquidity; The hegemon lends directly to nations or banks in need One or more public (nations or central banks) institutions

Relative weakness in influencing international capital flows

Crisis lenders

Rules are systematic, consistent and clearly stated in advance; They are dictated and maintained by hegemon;

Mechanism which abates moral hazard Confidence

Penalty rates or conditionality

Countercyclical lending

Direct hegemonic function of engaging in countercyclical lending Free trade for hegemon Direct

Distress goods Nature of stabilization functions

Created from above: hegemon makes its own resources available

Source: From Gallarotti 2005, p. 639, reprinted with permission from Taylor & Francis.

Reflecting on a century of guardianship 189

Rules for crisis lending

Smaller-​scale lender of first resort (i.e. preemptive or preventive intervention); Conditional access to various smaller pools of liquidity; The leader both lends directly and serves as a price leader in organizing lending consortia Multiple actors which include both public and private institutions; Strongly dependent on cooperation Conventions rather than formal rules; Initiated and carried out in an ad hoc manner by perspicacity and persuasion rather than by force or authority; They vary from bailout to bailout Absence of formal commitments to lend in last resort; Conditional and ad hoc crisis lending Created from below: domestic monetary orthodoxy keeps nations on trajectories of low inflation, thus preserving convertibility; Leader reinforces this sanctity by working to create conditions that encourage nations to maintain convertibility Leadership in encouraging other nations to maintain open capital markets Leadership in encouraging others to trade freely Both direct and indirect

190  Reflecting on a century of guardianship of guardian intersectionality across the global political landscape. Different political philosophies have found common ground in demanding economic protection for the people. Main street has strongly accosted the position of Wall Street in the policy lexicon. Recent scholarship has certainly chronicled this development.5 But this does not mean a descent into the 1930s with rising mercantilism devastating the international economy. Perforce nations are on guard, but in a context that has been called the marketization of the state or the entrepreneurial state: leaders have been ready to embrace the free market in increasing domestic prosperity. The move toward market liberalization in the 1980s and 1990s was largely founded on beliefs that greater capitalist integration could serve guardian objectives. Another glaring manifestation of the entrepreneurial state overlapping with guardianship is the rise of sovereign wealth funds: states making money through investments in global financial markets (Cerny 1995, 2010 and Fraser 2014). Going forward the manifestations of a bipolar monetary order vacillating between the wild-​west show of the anti-​Plaza posture and monetary sovereignty on one hand and the hard-​rule associations (monetary unions, pegging blocs and dollarization) on the other hand are becoming more pervasive (Cohen 1998 and Frankel 2015). But as we have seen, cooperation is the key to stability under any scenario of monetary relations. Hegemony is not enough to stabilize a system. Cooperation does not require a hegemon, but can be effected by a leader of somewhat lesser monetary power. But no stable order can persist without cooperation. The more recent trajectory away from de jure codes of conduct, or rules, has been disconcerting for good reason. There have been abundant calls for a return to the Plaza model of rules for coordination, or at least some sort of rules-​based regime for managing economic relations.6 In reality, as we have seen in the case studies, the factors driving regime behavior have been principally dictated by power. But contracts still mean something. This situation may be similar to marriage. Any union between two people is mostly independent of rituals or contracts required to sanctify or legalize the union.Vows are usually not very specific, and couples do not carry contracts to the dinner table at night. But the presence of some sort of written constitution is psychologically comforting and instrumentally important. There is at least some metric or baseline of actions that individuals can agree on, even if the boundaries of behavior are flexible or murky. Those that call for a new Plaza initiative are quite cognizant of the absence of such a set of guidelines today. Ultimately the regime would have to face the dreaded trilemma of delivering on all the economic objectives when the objectives themselves are not completely compatible: open markets to maintain investment, independent monetary policy to attend to domestic economic priorities and consistent exchange rates so as to lubricate trade and investment flows. Obstfeld and Taylor (2017) have translated hopes for this new regime into a “financial trilemma”: sovereignty over monetary policy, integration into global capital markets and financial stability (Bergsten 2015).

Reflecting on a century of guardianship  191 The calls continue for an institutionalization of stability: more cooperation between debtors and creditors, greater safety nets for nations in external difficulties both regional and global and expanded sources of liquidity through the expansion of reserve-​currency status (Furusawa 2017). Obstfeld and Taylor (2017, p. 4) posit three principal concerns in building a new international monetary regime. “How should exchange rates between national currencies be determined? How can countries with balance-​of-​payments deficits reduce these without sharply contracting their economies and with minimal risk of possible negative spillovers abroad? How can the international system ensure that countries have access to an adequate supply of international liquidity—​financial resources generally acceptable to foreigners in all circumstances?” One thing is certain about the trinity or trilemma in looking over the history of international monetary diplomacy from 1867 to the present: the very last thing to be compromised of the three was domestic sovereignty or independence of domestic monetary and fiscal policy. Capital controls and fixed exchange rates popped in and out of existence over the last century and one-​ half. The one thing that was never completely compromised was domestic economic sovereignty. Even when accommodations were made on this sovereignty, they were always bounded by some limits, and even the hard rules about behavior could be circumvented or relaxed by the various loopholes and safety mechanisms across the negotiations we have studied. The dominant nations in each of the cases set the tone for how diplomacy would play out, and their approach to regime building in all cases was completely convivial with their most guarded domestic objectives. The British torpedoed the conferences of the 19th century through a recalcitrance based on long-​venerated monetary orthodoxy. Their monetary practices had served them well in becoming the dominant industrial power on Earth. Even small accommodations in supporting the price of silver were anathema with respect to changing monetary practices. At Genoa and London it was the U.S.’s turn to be the hegemonic veto power. Clearly the American resistance to regime building came from a deeply pathological domestic economic guardianship in periods of crisis. Under Bretton Woods, the U.S. supported everyone else’s freedom to pursue independent domestic economic policies by leveraging and safeguarding nations out of the need to adjust. The U.S. found the regime most convivial with its own interests in pursuing growth and employment on one hand and underwriting the regime on the other hand. As a future surplus nation, there would be plenty of liquidity to lubricate the system and finance their exports. Also, as a surplus nation there was no need to adjust. Hence, the U.S. had no constraints in the rules of the regime that would crimp their macroeconomic independence. We saw that toward the end, when the strong external position of the U.S. crumbled, the tension between the regime and America’s domestic economic objectives became an issue. Under the regimes of the 1970s and 1980s, the U.S. once more guarded its domestic economic objectives, but this time in a much more imperialistic way. But the imperialism was not outright slavery

192  Reflecting on a century of guardianship in that even though nations were extorted into making concessions on their macroeconomic policies, the concessions were usually consistent with policies that were already favored internally (i.e. growth and tax reform). Moreover, the stipulations on these concessions were so vague as to give nations extensive latitude in complying with the rules while guarding their own economies. Whatever else occurs, we can be certain that domestic economic independence will always be guarded first and foremost.7 Domestic sovereignty will get a short-​term boost from Covid-​19 and the movement to the populist Right, both of which have placed independence over monetary and fiscal policy squarely into a status that is all the more exalted.Where hopes of cooperation and coordination are limited in an age of domestic guardianship, maybe the best hope is symmetrical prudence. So where does that leave us? Perhaps that leaves us in the same place we would be even if we did have a formal international regime. Ultimately, whether a regime exists or not, a necessary condition for sustainable stability is for nations to follow prudent macroeconomic trajectories.8 If nations are moving out of responsible boundaries on monetary and/​or fiscal policies, then the results would generate instabilities, rules or no rules. We have clearly seen in the cases analyzed above that the inability of nations to avoid unstable trajectories (whether on the part of many nations during the interwar years or the U.S. during and after Bretton Woods) has impacted on every aspect of regime building and monetary stability: it led to the need to create regimes, has been responsible for the failure to create regimes and has also been responsible for breaking down regimes. In fact, the regime building of the 20th century can be said to have been founded on some hope that the rules would create some sort of convergence in both domestic and international economic policy.9 Long ago under the classical gold standard, a principal foundation for its stability was the fact that macroeconomies of the leading nations were convergent in fairly balanced states. This convergence kept the seams of the prevailing parities fairly safe and sustainable. External balances also showed more favorable outcomes on average than later periods would (Gallarotti 1995). However, there was also an absence of extraordinary crises like war or sustained economic meltdowns. The history of the period might have shown a far different regime performance had we had major global crises. We have continued to face turbulent events in the 20th and 21st centuries. The Twin Towers, the financial meltdown of 2008–​2009, the shift to the Right in recent years which has reared the ugly head of mercantilism, America’s wars in the Middle East and Covid-​19 have all demonstrated that some events should be expected, and that any regimes that are sought should be prepared to withstand the shock waves.10 But more importantly we must confront the more constant of secular challenges presented by the guardian state. Economic nationalism as manifest in the form of protecting domestic sovereignty is not going anywhere, and will be a constant challenge to decision-​makers who are trying to navigate the trilemma. Can nations ever do so successfully in the face of such trade-​offs between internal prosperity and external stability? According to the lessons of this book, they can do so only by taking account of the macroeconomic policies of one

Reflecting on a century of guardianship  193 another, that is, compatibility. Does such a thing require extensive cooperation? Certainly such cooperation would be helpful. But history has shown us that effective compatibility was never delivered by the highest levels of monetary diplomacy. Perhaps the only viable path to solving the trilemma problem short of monetary union might actually be to indeed embrace macroeconomic guardianship and deliver domestic prosperity, but to do so in a sustainable way would also be to pursue macroeconomic trajectories that are responsible. Avoiding excesses across domestic monetary and fiscal policies over longer periods may indeed be an indirect way of effecting satisfactory international compatibility. Notwithstanding lower levels of domestic prosperity during the classical gold standard, there emerged in that period a far greater policy compatibility as a result of prevailing norms of fiscal and monetary orthodoxy. Eichengreen’s (2019, p. 236) vision of a stable system echoes this logic. Such a system, he avers, would be “backed by sound and stable policies on the part of the central banks and governments of the reserve currency issuers.” He goes on to say that “[t]‌his is not a perfect world. But it is at least a feasible one.”11 We started this story at the beginning of this book with democracy, and hence it is only fitting we end it with democracy. In a sense, over the past one and half centuries, democracy has ultimately delivered what we could call an international paradox of cooperation.While democracy itself encourages nations to pursue their foreign relations in a fair and equitable manner, and hence cooperate with one another in creating sustainable regimes, the protective posture that democracy imparts onto its leaders indeed makes optimal cooperation impossible. But all is not lost if nations can indeed, even if independently, find a way to collectively pursue prudent economic policies.

Notes 1 Historians have often noted that the one glaring example of a nation not shamelessly trying to push costs of adjustments onto others was the U.S.’s supposed benevolent hegemonic actions at Bretton Woods. But as was very apparent in the negotiations, especially the jockeying with Britain in the lead-​up to the conference, the U.S. was anything but a hegemonic doormat, to the dismay of Britain and Keynes. In fact, given its recalcitrance to providing ample public resources to the regime (as Keynes continued to seek) and the loose constitution regarding compliance, the U.S. left itself in a fairly well-​guarded position. And as we saw latter in the fallout of the 1960s and 1970s, the U.S. as a manager of the resources of the regime put itself in a quite favorable position vis-​à-​vis the other regime members. The most obvious manifestation of this privileged role under Bretton Woods and beyond was the benefits it gained from seigniorage. 2 Of course, there was quite a bit of deal making between larger monetary powers.This was not just an American attempt to limit concessions to all other nations. Many of the stipulations manifest an oligopolistic agreement, such as the deal allowing Britain to shield its sterling balances and the loose oversight of domestic macroeconomies. 3 On scholarship regarding monetary hegemony, I refer the readers to Gallarotti (2005) for discussions and citations to the literature.

194  Reflecting on a century of guardianship 4 Walter (1991) and Benassay-​Quere (2015) suggest that a hegemon may use its monetary power to serve internal goals, and in doing so destabilize the system. 5 Rodrick (2017), Stiglitz (2007) and Eichegreen (2018) have analyzed the manifestations of guardian populism in the modern age, both from a normative and analytical perspective. Even the bulkwork of capitalism, the Business Round Table (2019), a committee of the CEOs of America’s richest corporations, came out with a statement affirming a new capitalist mandate that would depart from a strict focus on profits, and protect the quality of life for the greater groups impacted by corporate operations: the stakeholders (consumers, employees and communities). 6 Bergsten (2015) talks of prospects for a new Plaza or what he calls “Plaza II.” On the need for rules-​based systems, see also Gagnon (2015) and Taylor (2015). 7 Bergsten (2015, p. 7) contends that the lessons of Plaza suggest “domestic politics… drive most major international monetary initiatives.” 8 What sort of structure is most conducive to stability is very much contested. There have been arguments that support the stability of both multipolar and unipolar monetary structures (see Benassey-​Quere 2015 and Eichengreen 2019). 9 Of course, you could have responsible trajectories and still experience instabilities on the external side. This is especially true under the highly integrated world economy in a globalized environment. Such problems would require “macroeconomic-​plus external” solutions (currency alignments and trade agreements). But we have also seen in our cases that macroeconomic trajectories have a strong impact on the current account. So the “plus” side of the solutions would be greatly aided by macro trajectories that did not spill over into trade and monetary disturbances. Moreover, getting back to prudent trajectories could help ameliorate the external imbalances. 10 Such events might very well produce counterintuitive outcomes and quite unexpectedly generate stabilizing elements, such as the financial meltdown and recent Covid-​19 bringing interest rates into convergence at low levels. But this would hold true under systemic shocks, and not for regional or national shocks. Moreover, even convergence under systemic shocks would not be sustainable. Planning a regime, however, should not depend on finding silver linings in destabilizing shocks (Obstfeld and Taylor 2017, p. 21). 11 Aizenman et al. (2009 and 2010) suggest that solutions to the trilemma would lie in amassing large international reserves. But such an outcome is indeed elusive for many nations, and reserve levels could vary significantly depending on conditions prevailing in the international economy (e.g. recession and financial crises).

Statistical appendix

Data Income data from 1880 to 1989 in Table 1.1 represent real gross national product (GNP) per capita for all nations except France and Britain, for which real gross domestic product (GDP) and real net national product (NNP) per capita, respectively, were used, and are taken from Bordo (1993). Figures in Table 1.1 for the years 1990–​2016 represent real GDP and are taken from the World Bank. Figures on business cycles for the period 1880–​1913 in Tables 1.2 and 1.4 were estimated from reference cycles in Thorp (1927, pp. 94, 95). Figures on business cycles for the period 1948–​2016 in Tables 1.3 and 1.4 were estimated from reference cycles provided by the Economic Cycle Research Institute. For the years 1881–​1989 inflation in Table 1.5 is measured using the GNP deflator and is taken from Bordo (1993). The years 1990–​2016 report figures for the GDP deflator and are taken from the World Bank. For the years 1881–​1989 money supplies (Table 1.6) are measured as follows: M2 for Germany, Canada, Britain and the U.S.; M3 for Italy; and M1 for France and Japan, and come from Bordo (1993). For the years 1990–​2016 money supplies are measured in M2 for all the nations except Canada for which M2+ was used, and come from Data Insight and FRED. After 1998, given their transition to the Euro, money supply data are not available for Italy, Germany and France. Figures for 1881–​1989 on government size and fiscal balance in Tables 1.7 and 1.8 were estimated using data from central government expenditure, central government revenue and income series from Mitchell (1992, 1993 and 1995). Figures for 1990–​2016 in Tables 1.7 and 1.8 were estimated using data from the IMF World Economic Outlook Database and FRED. Unemployment data (Table 1.9) for the years 1880–​1989 come from Mitchell (1992, 1993 and 1995) and Liesner (1985). Unemployment data for the years 1990–​2016 are taken from the World Bank. Tables 1.1, 1.5 and 1.6 are presented in the format of Table 1.1 in Bordo (1993). Permission to use data in Tables 1.1, 1.5 and 1.6, and the format from Table 1.1 in Bordo (1993), was granted by the University of Chicago Press, © 1993 by the National Bureau of Economic Research.

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Index

Agricultural Adjustment Act of 1933 92 anti-​Plaza Accord 165, 167, 178, 190 Atlantic City Meeting of 1944 109, 116, 117, 120

economic growth theory 26, 27, 46 economic voting 28 embedded liberalism 12, 13, 20, 28, 41, 99, 124

Baker, J. 151–​53, 158–​60, 163, 164, 168 bancor 105, 106, 108, 123 Bank of International Settlements 88, 125, 138 bimetallism 49–​75, 87, 100, 105, 172 Bland-​Allison Act of 1878 56, 63, 70, 74 Bonn II Summit of 1985 152, 153, 157 Bretton Woods 3, 13, 14, 30–​33, 36–​40, 89, 100, 103–​30, 132, 134, 136–​38, 144–​50, 164, 165, 167, 174–​76, 178, 182, 183, 185–​87, 191–​93 Brussels Conference of 1920 79, 80, 85

financial trilemma 190 focal points 27, 115, 138, 145, 147 free riding see prisoner’s dilemma

Cannes Conference of 1922 76, 85, 99 chicken game 142, 143, 184 clearing union 106, 107, 109 Concert of Europe 104 Conference of 1867 13, 14, 51–​56, 59, 61, 73, 74, 172, 178–​80 Conference of 1878 13, 14, 51, 56–​63, 66, 70–​72, 171, 172, 178, 179, 181 Conference of 1881 13, 14, 63–​68, 70–​72, 178, 179, 181 Conference of 1892 13, 14, 51, 68–​71, 172, 178, 179, 181 Connolly, J. 134, 140 coordination of macroeconomic policy 82, 89, 131–​33, 137, 147, 152–​55, 158, 165, 169, 187, 190, 192, 193 COVID-​19 192–​94 crisis of 2008–​2009 4, 5, 166, 167, 192 cross of gold 58, 102 crucial-​case analysis 8 Cunliffe Report of 1918 77, 79, 85, 86

G-​3 159 G-​5 150–​57, 159–​61, 168, 175–​78 G-​7 30–​34, 36–​40, 159–​65, 168 G-​10 138–​40, 142, 143 General Agreement on Tariffs and Trade 152, 153, 158, 161, 167 Geneva Agreement of 1930 89, 101 Genoa Conference of 1922 3, 13, 14, 76–​88, 90, 97, 99, 100, 102, 125, 132, 133, 136, 138, 144 147, 164, 173, 179, 181, 185, 191 globalization 4, 5, 7, 125 gold standard 30–​33, 36, 40, 50, 59, 61, 65, 68, 69, 71, 73, 74, 79, 81, 85–​87, 92, 100, 102, 125, 136, 157, 171, 173, 181, 187, 188, 192, 193 Gramm-​Rudman Bill 162 great depression of the 1870s 58 great depression of the 1930s 20, 24, 25, 29, 80, 83, 99, 101, 174, 180, 187 Gresham’s Law 50, 61 hegemony 3, 4, 7, 12, 50, 73, 96, 110, 112–​18, 127, 130, 142, 144, 146, 152, 154, 164–​66, 174–​76, 180–​91, 193, 194 Hull, C. 91, 92, 95, 96, 101, 102, 112, 113, 182 impossibility theorem see trilemma International Bank for Reconstruction and Development 116, 125, 140

208 Index International Monetary Fund 82, 83, 103–​28, 131–​33, 136–​38, 140, 146, 147, 161, 164, 174, 175, 183, 195 international paradox of cooperation 3, 193 Keynes, J.M. 18, 20, 24–​27, 31, 42, 45–​47, 71, 96, 103–​11, 113, 115, 116, 118, 121, 123, 125–​27, 128, 174, 175, 182, 193 Kindleberger, C. 14, 83, 96, 100, 187 Latin Monetary Union 49–​54, 58–​61, 64, 66–​69, 74, 171, 172 Lausanne Conference of 1932 86, 87, 99, 101, 102 leaning against the wind 153 levels of analysis 7, 10, 12, 181 Levy Plan 70 Lloyd George, D. 76, 77, 79, 80, 99, 173, 181 London Conference of 1933 2, 13, 14, 85–​101, 113, 125, 126, 132, 133, 136, 138, 144, 147, 164, 174, 179, 182, 185, 191 Louvre Accord of 1987 3, 13, 14, 130, 149, 177–​79, 157–​68, 175, 177–​79, 184–​87 methodology 8–​13 monetary geography 130, 165 Morgenthau, H. 111–​13, 126, 127 Napoleon III 50, 51, 54, 171 Nash equilibrium see prisoner’s dilemma New Deal 21, 45, 91, 95, 96, 112, 114 Nixon, R.M. 129, 133–​37, 139, 141–​45, 147, 176, 184 non-​system 149, 165–​67, 179 Ouchy Convention of 1932 89, 101 Phillips curve 29 Plaza Accord of 1985 3, 13, 14, 130, 149–​57, 159–​65, 167, 168, 175–​179, 184, 186, 187, 190, 194

Polanyi, K. 12, 13, 16, 18–​20, 22, 41, 47, 98, 99 political entrepreneur 1, 13, 28, 72 prisoner’s dilemma 2, 3, 13, 14, 60, 62, 88, 95, 97, 100, 114, 127, 135, 138, 140, 144, 146, 149, 152, 153, 164, 170–​80, 186 public choice 28 rationality of irrationality 142, 184 Reagan, R. 150–​54, 162, 176, 184 realism 7 regimes 3, 4, 14, 15, 85, 125, 164, 176, 178, 179, 185–​93 Roosevelt, F.D. 25, 42, 45, 91, 94–​96, 101, 102, 110, 112, 113, 126, 147, 182 Rothschild Plan 69–​71, 75 Ruggie, J.G. 12, 20, 29, 41, 97–​99, 124 Scandinavian Monetary Union 50, 51 Schelling, T. 142 Sherman Act of 1890 69–​71 silver 49–​75 Smithsonian Conference of 1971 3, 13, 14, 100, 129–​51, 164, 166, 167, 175, 176, 178, 179, 183, 185–​87 Soot-​Hawley Tariff of 1930 86 sucker’s payoff see prisoner’s dilemma Thomas Amendment 92, 94, 95, 97 Tokyo Summit of 1986 158, 161–​63 Treaty of Rapallo of 1922 76 Treaty of Versailles 76 Triffen dilemma 123, 129 trilemma 46, 82, 129, 170, 190–​94 Tripartite Agreement of 1936 104, 125 unitas 105, 108 Vienna Monetary Union 49 Volcker, P. 139, 142, 146, 160 White, H.D. 103, 105, 108–​10, 113, 115, 116, 121, 125–​27, 175, 182