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The Economic Government of the World 1933-2023

An epic history of money, trade and development since 1933, shortlisted for the 2023 History Reclaimed Book of the Year Prize.

In 1933, Keynes reflected on the crisis of the Great Depression that arose from individualistic capitalism: ‘It is not intelligent, it is not beautiful, it is not just, it is not virtuous – and it doesn’t deliver the goods… But when we wonder what to put in its place, we are extremely perplexed.’ We are now in a similar state of perplexity, wondering how to respond to the economic problems of the world.

Martin Daunton examines the changing balance over ninety years between economic nationalism and globalization, explaining why one economic order breaks down and how another one is built, in a wide-ranging history of the institutions and individuals who have managed the global economy. In 1933, the World Monetary and Economic Conference brought together the nations of the world: it failed. Trade and currency warfare led to economic nationalism and a turn from globalization that culminated in war. During the Second World War, a new economic order emerged – the embedded liberalism of Bretton Woods, the International Monetary Fund and the International Bank for Reconstruction and Development – and the post-war General Agreement on Tariffs and Trade. These institutions and their rules created a balance between domestic welfare and globalization, complemented by a social contract between labour, capital and the state to share the benefits of economic growth. Yet this embedded liberalism reflected the interests of the ‘west’ in the Cold War: in the 1970s, it faced collapse, caused by its internal weaknesses and the breakdown of the social contract, and was challenged by the Third World as a form of neo-colonialism. It was succeeded by neoliberalism, financialisation and hyper-globalization. In 2008, the global financial crash exposed the flaws of neoliberalism without leading to a fundamental change.

Now, as leading nations are tackling the fall-out from Covid-19 and the threats of inflation, food security and the existential risk of climate change, Martin Daunton calls for a return to a globalization that benefits many of the world’s poor and a fairer capitalism that delivers domestic welfare and equality.

The Economic Government of the World is the first history to show how trade, international monetary relations, capital mobility and development impacted on and influenced each other. Martin Daunton places these economic relations in the geo-political context of the twentieth century, and considers the importance of economic ideas and of political ideology, of electoral calculations and institutional design. The book rests on extensive archival research to provide a powerful analysis of the origins of our current global crisis, and suggests how we might build a fairer international order.

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Expanded Transcript

My book The Economic Government of the World 1933-2023 published by Allen Lane in May tackles an issue which is currently high on the political and economic agenda: how to create a stable global economic order that strikes a balance between domestic welfare and global economic integration.

At some times in the past, the pendulum has swung in one direction or the other, in each case with serious political and economic consequences.

On the one hand, there could be a prioritisation for internationalism.  On the gold standard of the later nineteenth century, fixed exchange rates and free movement of capital limited the capacity for an activist domestic monetary policy.  Changing interest rates would lead to money flowing in or out, putting pressure on the exchange rate to appreciate or depreciate which was not possible with currencies fixed to gold.  The result was a nationalist or populist backlash.

On the other hand, economic nationalism could dominate, as in the 1930s: many countries abandoned gold, as did Britain in 1931; turned to protectionism or bilateralism as with imperial preference or the US’s Smoot Hawley tariff.   Everyone suffered from beggar my neighbour policies of currency and trade warfare.

How to strike a balance? I explore the intellectual, geopolitical and electoral circumstances which led to various outcomes over the last century.  I cannot set out the entire story here, so let me focus on the move from economic nationalism of the 1930s and the creation of the new international institutions of the Bretton Woods regime.

My starting point is the World Monetary and Economic Conference of 1933 held under the auspices of the League of Nation in the unlikely venue of the Geological Museum in South Kensington   It was a failure in which countries could not agree on the disease let alone the cure.  Countries talked past each other.

  • UK committed to leaving gold which allowed low interest rates, encouraged house building and recovery; and to imperial preference. Saw the problem as war debt to US which was not on the agenda.
  • France and other gold bloc countries, supported by Bank of International Settlements, wanted to stay on gold as a source of stability and avoid inflation.
  • Hitler just to power in Germany – committed to bilateral trade and gold, and to reducing debt payments.
  • FDR recently to office in US and not sure what to do – playing Secretary of State Cordell Hull who thought free trade created both prosperity and peace against belief of his Brains’ Trust that need to start by recovery in the domestic economy.

The delegates left London without any solution.   Intellectual debate followed at the League about what to do.

Genevan liberals: Hayek and others who worked on trade cycles at League feared their collection of statistics could be used to plan the economy.  William Rappard emphasized the need for world unity against the ‘wicked folly of absolute national sovereignty’.  On this view, electors in a single nation state might adopt protection to assist their own industry; in a federation, French voters would oppose tariffs that protected a British industry and imposed a cost on French consumers. Hence a superior political power could protect the global economy from the misuse of sovereignty by nation states that harmed prosperity in general. In their view, the economy was spontaneous and unknowable, a matter of market signals that should be left to work without interference, but within a framework of laws and institutions that should serve the market by guarding ‘providential planlessness’ from the delusions of planners who thought they knew the economy and were therefore tempted to adopt ‘totalitarian methods of economic management’.  To them, international organizations should set rules and not extend state planning to the international level.

Others at the League of Nations took another approach: positive security that would ‘demonstrate that democratic countries can achieve for their people greater comfort and well-being than can the Fascist and Communist states’. Better pay and conditions of labour would spread purchasing power and ensure global economic stability, by minimum wages, social insurance, income redistribution, and through direct assistance to supplement diets such as school meals. Nutrition was linked with international action by the ILO on pay and conditions, and with national policies on pensions, family allowances, and distribution of food to the poorest. Nutrition policies ‘could bring about an expanding need for the products of international trade in which all countries may find full outlets for their energies and full employment for their people’.

In the book, I analyse the debates over these approaches and the contingencies that led to the new international institutions at Bretton Woods – the IMF and IBRD – and after the war the failure of the ITO and the emergence of GATT in 1947.  New institutions did not follow the approach of the Genevan liberals – but neither did they adopt the entire agenda of positive security.

The result was “thin multilateralism” – a global economic order that would both restore multilateralism and allow the pursuit of domestic welfare and maintain the nation state.

Discussions started from monetary policy:

  • This was technical, could be negotiated by monetary experts in US and British Treasuries.
  • Trade policy was deeply contentious: the British coalition government was split between supporters of imperial preference (Leo Amery) and Atlanticists like Anthony Churchill did not want to expose the divisions.

The Bretton Woods agreement of 1944 reached a solution that would – so it was hoped – provide a basis for a return to multilateral trade and offer a balance between internationalism and domestic welfare:

  • Exchange rates would be fixed but not so rigidly as on the gold standard. Currencies could devalue when in ‘fundamental disequilibrium’, as the pound did in 1949.  This combined stability for international trade with flexibility for domestic welfare.
  • Controls were permitted on international capital flows which was not welcome on Wall Street which opposed the Bretton Woods agreement. Secretary of the Treasury Henry Morgenthau wanted to limit the power of finance. Allowed an active domestic monetary policy.
  • Hoped to include the Soviet Union and preserve the wartime coalition

Once the Bretton Woods agreement was reached, attention turned to a trade agreement – but this proved much more difficult – not least because it involved debates over positive security.

The plan for a new commercial system was set out by James Meade who moved from the League, where he was involved with positive security, to the Economic Section of the Cabinet Office.  He pointed out that British trade had been multilateral: surpluses with less developed areas – above all India – were used to buy goods from the US where Britain had a deficit.  But  Britain could not ‘afford unconditionally to abandon all protective devices . . . so long as we are faced with acute problems of restoring equilibrium to our international balance of payments’.  Of course, the US insisted on the end of imperial preference as a condition for Lend Lease and a postwar loan: Hull saw it as an unfair restriction of trade.

There were deep divisions over what approach to adopt.

  • To supporters of positive security – above all in primary producing countries – multilateral trade would only possible with full employment, especially since more dependent on an unstable US economy. Reducing tariffs needed confidence that world economy would be stimulated by countercyclical policies, international buffer stocks to maintain stable demand and prices, and international public works funded by the International Bank for Reconstruction and Development to offset fluctuations in employment.  This departed from Genevan liberals and also led to tensions with United States which was less committed to planning for full employment.
  • Two worlds of a dollar and sterling area – maintain imperial preference and look to Africa as an expanding market.
  • One world working with the United States in a dollar economy – neither turning to he empire nor to Europe.

In the book, I analyse the shifting debate between these options within Britain – and also in the international discussions over trade and employment – the linking of the two was significant – at Geneva and Havana in 1947 and 1948.  The aim was to establish an International Trade Organisation which failed, and left only the interim General Agreement on Tariffs and Trade.  Hull’s commitment to a more narrow definition of free trade collided with demands for positive security which could now be voiced by less developed countries from India and Latin America who had been marginalised at Bretton Woods.  They pressed for protection of local industries, increase in primary product prices, right to nationalise resources.  In attempting to crate support for the charter in Havana, the US negotiators made concessions which were not accepted on Capitol Hill.  The ITO was never ratified.  Instead, GATT became a cold war bloc, excluding state-traders of the Soviet Union and marginalising less developed countries who turned to other bodies – UNCTAD and NIEO – in opposition to GATT.

Meanwhile, American policy towards Europe also changed.  They had misjudged the extent of damage in Europe: rather than a short transitional period to a multilateral economy, needed to encourage recovery by a European Payments Union, Marshall Aid, and a customs union.  It meant adjusting American policies by accepting a more social democratic or ordoliberal approach than had been intended.  And the Americans wanted the British government to take part in this new European order.

The outcome after the Second World War was ‘thin multilateralism’: a balance between economic nationalism and global multilateralism.

  • Pegged but adjustable exchange rates;
  • Controls over capital flows and finance;
  • Above all, a social contract between capital, labour and state: in return for modest increases in wages and profits, social safety net, allow investment and growth. It was liked with a major reduction in equality.
  • Contained inflation which was helped by productivity growth.

The next part of the book explains how this ‘thin multilateralism’ ended with the collapse of the Bretton Woods regime after 1971.

  • The US balance of payments weakened, feared a loss of competitiveness with the EEC – it had created a threat.
  • Floating exchange rates allowed the rate to take the strain to make exports competitive: were pegged rates needed to impose discipline on wages? This influenced debates in Britain about joining the EEC to stimulate competitiveness and join the European monetary system as a discipline.
  • Return of capital flows with the eurodollar market. The IMF now – despite the agreement in 1944 – encouraged financial liberalisation, and Wall Street and City recovered.
  • Voice of third world: 1973 oil shock and NIEO seemed a serious threat to west. How to react? Giscard: alliance with primary producers. Nixon: fuzz it up, don’t go for outright opposition but divide and rule.

The result was a shift to deeper multilateralism and hyper-globalisation after 1979, growing power of finance; IMF encouragement of financial liberalisation; creation of WTO which seen by critics as pursuing trade liberalisation with scant regard for national welfare.

Was this a turn from domestic welfare to internationalism?

  • Still scope for domestic social policies – even increase spending to compensate for impact rather than a race to the bottom, and to remove the need for trade unions
  • Major issue was deindustrialisation and structural change in the economy which hit welfare of those with specific skills learned on the job and benefited those with more formal education.
  • Re-emergence of inequality within advanced economies with convergence but a reduction in the gap between the Global North and emerging markets.

Now at another turning point: President Trump tweeted on 2 March 2018 that ‘trade wars are good and easy to win’.  Jake Sullivan, National Security Adviser to President Biden, sees a new Washington consensus of balancing internationalism with domestic industrial policy which some see as a continuation of Trump’s protectionism.

At this point, we are moving from history to current politics.  Where will the initiative come from – can the existing international institutions take a lead, or are they no longer capable of action?  If a rules-based system is pursued, how inclusive should it be?  Should those countries who are willing pursue plurilateral deals on particular issues in the hope that other will join – or is the solution a network of preferential agreements?  Or will the result be a collapse into economic nationalism with hostile blocs as in the 1930s?

The review in the Financial Times suggested that the book is ‘post-heroic and disillusioned, a history for our time.’  I do not hold up the establishment of Bretton Woods as a model to follow – some commentators call for a new Bretton Woods, but the circumstances then were different.  What I do hope is that the book offers a mode of analysing the interplay between ideas, geopolitics, domestic electoral calculations, changing economic structures that can help us think about the issues now facing the world.

About the author


Martin Daunton