REMAKING THE GLOBAL ECONOMIC ORDER: Lessons for today from reconstruction after 1945

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25 Mar 2015

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The institutions that now govern the world economy were produced in response to the Great Depression and the disasters of the Second World War. It was a time of radical thinking about the future shape of the world economy and distributive justice, before options were closed down.

Delivering this year’s Tawney Lecture at the Economic History Society’s annual conference, Martin Daunton will argue that now is the time to open them up again, and to face new challenges, above all climate change where ‘beggar-my-neighbour’ policies threaten the future of the planet.

How was the world economy rescued from the depth of the Great Depression of the 1930s? The question is highly relevant today as we face the issue of how to recover from the Great Recession, and many politicians and economists draw lessons from the earlier experience.

Ben Bernanke wrote his thesis on the Great Depression and blamed weak monetary policy by the Federal Reserve; not surprisingly, he turned to quantitative easing in response to the Great Recession. History is used to justify current policies – whether austerity and balanced budgets, or public works and spending.

A lesson drawn by contemporaries was that institutional structures were needed to limit self-interested national economic policies that were detrimental to the wider international community, leading to beggar-my-neighbour policies of competitive devaluations and trade barriers.

A lesson from the Great Recession is that the international institutions created in the 1940s (the International Monetary Fund, the World Bank and the General Agreement on Trade and Tariffs/World Trade Organisation) have prevented the return of beggar-my-neighbour policies and the collapse of the world economy. One of the major problems today is how to ensure that institutions are able to deal with self-interested policies that might threaten recovery.

The institutions now dealing with aftermath of the Great Recession were the products of the Great Depression. To understand how they function, we need to understand their origins and why they took the form they did. There were many contested options that were marginalised at the time, and have since been overlooked.

Understanding how these approaches were excluded offers insight into the making of policy then and now: why are some options accepted and others marginalised? And can some of these marginalised approaches be revisited as we deal with the aftermath of the Great Recession?

The International Monetary Fund was created at the Bretton Woods conference in 1944 to create currency stability and prevent competitive devaluations. Most accounts see it as the creation of technical discussions between experts from the United States (Harry Dexter White) and Britain (John Maynard Keynes), with White taking a narrow line, requiring the burdens to fall on the debtor nation (Britain) compared with Keynes who wanted creditor nations (the United States) to bear some of the burdens of readjustment.

But White was in fact more radical than Keynes: his monetary scheme arose from involvement in Latin America where he wanted to stimulate development through an active monetary policy and rescheduling debt. White was pursuing New Deal policies abroad, turning away from the rigid ‘money doctors’ such as Edwin Kemmerer (an orthodox Princeton economist) who on earlier missions to Latin America insisted on strict money policies, debt repayment and austerity.

These debates continued in the International Bank for Recovery and Development set up to complement the IMF. In the field, New Deal economists such as Lachlan Currie argued for activist developmental policies and investment, but they faced opposition from the directors in Washington who were largely drawn from conservative Wall Street bankers. Instead, they insisted on debt repayment and sound finances, with investment in assets that were commercially viable rather than social infrastructure such as sanitation or schools. The issues continue today – should Greece adjust or should Germany assist? Should debt be rescheduled or repaid?

At the same time as these debates were proceeding over money and finance, two other international conferences were held that took a different view of the reconstruction of the world economy: the conference on food and nutrition at Hot Springs in 1943, which eventually led to the creation of the Food and Agricultural Organisation; and the International Labour Organisation in Philadelphia in 1944.

These meetings were inspired by the policies of the Australian government for the full use of the resources of the world, which could only be achieved through full employment. In the United States, Vice-President Henry Wallace argued powerfully for full employment policies.

The debate over these approaches to the world economy culminated in the conference over the abortive creation of an International Trade Organisation at Havana in 1947/8. The inspiration for the ITO came from Secretary of State Cordell Hull and later the under-secretary Will Clayton, who believed that the recovery of the world economy would be achieved through free trade.

But the Australians argued that free trade did not make sense without full employment of the resources of the world; the Indians argued that their economy had been distorted by colonial rule, and that Britain should surrender some of its markets; and the Latin Americans pointed out that trade should rest on minimal labour conditions and permit protection of infant industries.

Not surprisingly, the conference failed and all that was left was the General Agreement on Trade and Tariffs. The World Trade Organisation was eventually established, and has tried – and failed – to incorporate trade and development into the Doha round.


Contesting Reconstruction: Remaking the Global Economic Order after 1945
Tawney Lecture 2015
Martin Daunton

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