Be Careful What You Wish For

Toward the end of the Second World War, at a conference in Bretton Woods, New Hampshire, the United States put forward a radical—some said utopian—plan for world peace. Having watched the worst war in history follow on the heels of the worst economic crisis in history, American policy makers were convinced that the answer to global peace lay in spreading global prosperity. Or as President Franklin D. Roosevelt put it, “we cannot succeed in building a peaceful world unless we build an economically healthy world.” The bold aim of the Bretton Woods architects was to construct an open, integrated and dynamic world economy on the foundations of a triumvirate of new international organizations. An international monetary fund would restore exchange rate stability and encourage monetary cooperation—preventing a return to the currency wars and financial chaos of the 1930s. A world bank would provide soft loans for rebuilding war-torn countries and for accelerating economic development in poorer ones—the opposite of the revanchist, make-them-pay spirit that had poisoned relations after the First World War. And a new international trade organization, to be negotiated at a later date, would lower tariff barriers and strengthen trade rules—unwinding the sky-high protectionism and hostile regional blocs that had suffocated the world economy in the interwar years. Posterity has tended to see the launch of the United Nations at the San Francisco Conference in July 1945 as signalling a new chapter in international relations, but in reality it was the launch of the post-war economic system at Bretton Woods the year before that laid the groundwork for the globalized world we find ourselves in today.

That Bretton Woods was largely an American show was inevitable. If wars destroy international systems, they also create them—and no conflict has prompted such a major realignment and reimagining of the global order, and so rapidly, as did the Second World War. With the world’s largest economy, gold reserves and trade surpluses, the United States found itself in a position of unparalleled economic dominance that, in contrast with the post–First World War period, it was not shy about wielding. Meanwhile, potential challengers for economic leadership were either exhausted (Britain and France) or utterly devastated (Germany and Japan). One power is the easiest international system to coordinate, and the United States was “the One.” Although the United States included Britain, Canada and other allied countries in its post-war planning—to give the exercise a “United Nations” imprimatur—and although the British liked to see themselves, as Harold Macmillan later put it, playing Greece to America’s Rome, there was never really any doubt about who was paying the piper. J.M. Keynes, head of the British delegation and at the height of his prestige, arrived in Bretton Woods with a hugely ambitious plan for an international clearing house that would oversee its own global currency—not least to blunt Britain’s desperate dependency on dollars—but it was assistant treasury secretary Harry Dexter White’s dollar-backed International Monetary Fund that emerged triumphant, securing the dollar’s privileged placed in the Bretton Woods monetary system, and thus U.S. economic leadership, thereafter. It is one of the ironies of the post-war birth of multilateralism that it depended so much on unilateral American power.

The central argument of Eric Helleiner’s important and original new book, Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order, is that economic development was a core goal of the Bretton Woods architects, and in this he is surely right. He quotes a 1942 memorandum by White that nicely encapsulates the U.S. vision. “Rich and powerful countries can for long periods safely and easily ignore the interests of poorer or weaker neighbors or competitors,” he observes, “but by doing so they only imperil the future and reduce the potential of their own level of prosperity.” He goes on to argue that “the lesson that must be learned is that prosperous neighbors are the best neighbors; that a higher standard of living in one country begets higher standards in others, and that a high level of trade and business is most easily attained when generously and widely shared.” New Dealers such as Harry Dexter White, Treasury Secretary Henry Morgenthau, Vice-President Henry Wallace, not to mention Roosevelt himself, were not interested in pursuing fixed exchange rates and trade liberalization for their own sake, still less in making the world safe for capitalism. Their goal rather was to spread the benefits of economic growth and development worldwide, thus neutralizing what they saw as the key sources of international conflict: namely, poverty, unemployment and economic insecurity. Not without reason, the Roosevelt administration trumpeted its plan as a “New Deal for the world.” That an open and expanding world economy would also suit America’s economic and foreign policy interests was seen as part and parcel of the deal. “Our nation cannot enjoy sustained and satisfactory prosperity unless adequate foreign markets exist for our exportable surpluses” was how Roosevelt succinctly summarized the national interest in May 1940. A globalizing world economy—one that, in fact, resembled America itself—was good for peace, good for democracy and, not least, good for the United States.

Helleiner marshals impressive new evidence to show that, in the lead-up to Bretton Woods and at the conference itself, U.S. policy makers focused as much—or more—on the development needs and aspirations of poorer countries as on the future reconstruction requirements of war-torn Europe and Asia. U.S. officials were particularly keen to involve Latin America in post-war planning, a region that had been a growing focus of U.S. foreign affairs since its successful “Good Neighbor” policy was launched in 1936 to counter Nazi Germany’s attempts to expand its influence in America’s backyard, namely in Argentina and Chile. When Roosevelt met Keynes at an earlier planning meeting to begin drafting the joint Anglo-American Atlantic Charter of August 1941, he complained that British language was “too exclusively European” and that it was critically important to pitch post-war plans to a developing world, and especially a South American audience. Helleiner also points out that White had initially wanted to launch his fund proposals at an inter-American meeting of foreign ministers at Rio de Janeiro in January 1942—over two years before Bretton Woods—in part to link new U.S. loans to Latin American governments to an agreement to deepen security cooperation and sever diplomatic ties to the Axis powers. Led by the abrasive and blunt-talking White, U.S. negotiators insisted on building a range of pro-development policies into the Bretton Woods architecture, including development loans, adjustable exchange rates, capital controls, commodity agreements and infant industry protection. Moreover, it was the U.S. Treasury that designed the World Bank and insisted on its creation, alongside the IMF, at Bretton Woods. Helleiner reminds us that the design of the IMF and the World Bank, although audacious and innovative, borrowed heavily from previous U.S. policy experiments and initiatives, including the Good Neighbor Financial Partnership between 1939 and 1940, American’s abortive effort to launch an inter-American bank in 1939–40, and the creation of the U.S. financial advisory missions to Cuba and Paraguay in the early 1940s, as well as the negotiation of the Tripartite Agreement in 1936 designed to stabilize currency relations among Britain, France and the United States. His fascinating description of the detailed policy work that went into these less glamorous projects, what he calls the “forgotten foundations of Bretton Woods,” is a salutary reminder that, at least when it comes international economic policy, there is nothing new under the sun.

Developing countries, according to Helleiner, played a much more active and important role in the design of the Bretton Woods system than previous histories have suggested. Of course, the titanic clash of egos between Keynes and White provided a compelling narrative for the conference—neatly personifying the power shift away from the old hegemon of Britain to the new one of the United States. But with 44 countries negotiating over a short three weeks, the storyline was bound to be more complex than a simple Anglo-American tug-of-war. Again, it was the United States that insisted that developing countries, as well as the Soviet Union, have a seat at the negotiating table, partly to counterbalance Britain’s imperial leverage, and partly to ensure that the resulting agreement had as many countries’ fingerprints on it as possible. Helleiner notes that China, Brazil, Cuba, India and others arrived with surprisingly large delegations—China’s included 33 officials. Latin Americans, often operating as a bloc, influenced the final design of the IMF and the World Bank in a number of key areas, including stronger IMF provisions for balance-of-payments lending, adjustable exchange rates and capital controls, and a strengthened development mandate for the World Bank, while India, backed by China, urged that the new financial system should not only allow but actively support ambitious state-led development goals. Foreshadowing the powerful role model that India would become for the developing world after independence in 1947, Helleiner points out that the Indian delegation at Bretton Woods, despite operating under nominal British authority, was considered one of the most “brilliant.” Particularly interesting is his observation that the Bretton Woods dramatis personae included, not just Keynes, White and other western luminaries, but also leading thinkers from the developing world, such as China’s Sun Yat-sen and Argentina’s Rael Prebisch, whose dependency theories profoundly influenced generations of politicians, officials and economics faculties. In fact, Canada’s Auto Pact, Foreign Investment Review Agency and National Energy Program owe not an insubstantial intellectual debt to Prebisch’s ideas about the need to break out of resource export dependency, to shield infant manufacturing industries and to encourage technology transfers.

The tragedy, says Helleiner, is that despite initial good intentions, the Bretton Woods system ultimately failed to live up to its developmental promise. Post-war idealism was soon eclipsed by Cold War realities, leaving the IMF and the World Bank as tools, not of global development, but of western anti-communist crusaders and free market ideologues. Not only did America’s strategic attention shift from the development of poorer regions to the containment of Soviet aggression, he argues, but the “ideological polarization of the Cold War eroded US support for the kinds of interventionist development policies—international and national—discussed in the Bretton Woods negotiations.” Meanwhile, the Soviets chose not to join the IMF and the World Bank, with its eastern bloc allies and China soon following suit, while much of the developing world, increasingly frustrated with the World Bank and the IMF’s lack of support for their development goals, gradually turned in the 1950s and ’60s to the United Nations and the dream of building a New International Economic Order institutionally and philosophically separate from Bretton Woods. The result, Helleiner argues, was widening global inequality, serial debt crises and growing North-South, as well as East-West, splits.

The truth is that the Bretton Woods system was under strain even before the Cold War complicated matters. Whereas war-ravaged Britain and Europe were preoccupied with immediate domestic problems—food and raw material shortages, mass unemployment, deepening recessions, looming balance-of-payments crises—the United States, which emerged economically strengthened from the war, was focused on moving brusquely toward building the New Jerusalem it envisaged. Even before the war ended, Europe and America clashed repeatedly over the speed with which European tariffs, import quotas and exchange controls should or could be reduced. A more fundamental tension in the Bretton Woods design arose over the attempt to reconcile international rules with national policy flexibility. On both sides of the Atlantic, governments were split between those who gave primacy to restoring world trade (by fixing exchange rates and binding tariffs) and those who gave primacy to restoring domestic growth and employment (by preserving governments’ freedom to manage interest rates, fiscal policies and trade and capital flows). Meanwhile, developing countries had their own ideas about what constituted an acceptable trade-off between a rules-based international order and domestic economic sovereignty. “No sooner, however, was the [Bretton Woods] edifice in place,” observes Derick Unwin, a historian of the period, “than doubts began to be raised about its viability.” By the early 1970s, these strains had become unsustainable, and the system of fixed exchange rates quickly unravelled, leaving the IMF to reinvent itself as the overseer of floating currencies.

Yet in many ways the biggest problem facing the Bretton Woods system is the result, not of its failures, but of its successes. For all its inherent flaws and tensions (in spite of its many reforms and reiterations), the Bretton Woods system’s great achievement was to institutionalize a commitment to open trade, economic cooperation and shared global prosperity that has endured, despite the inevitable ups and downs, to the present day. The big economic story of recent decades is not how the developing world has been shut out of growth by a biased and unaccommodating international economic system, but rather how emerging giants have leveraged liberal capital markets, free-flowing technology and open world trade to achieve historically unprecedented rates of growth. China, with its 1.3 billion people, has grown at 10 percent a year for the past three decades. This alone represents the biggest economic miracle in history. India, with its 1.2 billion people, has grown at almost 8 percent a year since 1995. While these emerging giants have captured the lion’s share of attention, this remarkable story of widening and accelerating economic development includes countries of all sizes and regions—from Indonesia, Ethiopia and Chile to Ghana, Cambodia and Qatar. Economic growth is not the only condition for development, but it is a necessary one—which explains why many of these same countries are also making enormous strides in improved health, educational attainment and living standards. It is no exaggeration to say that we have achieved a level of economic development and integration—of “globalization”—that the Bretton Wood architects could only dream of.

The irony is that having achieved its foreign policy vision—having helped shape a world in which billions can now dream of achieving American standards of affluence and advancement, where new powers such as China and India are reaching U.S. levels of sophistication and influence, where the United States will no longer be number one but rather one of a number of equals—America is having second thoughts. The resistance to giving China and other emerging economies a greater say in the IMF and the World Bank, the new enthusiasm for regional trade blocs at the expense of the World Trade Organization, and the general sense of drift and aimlessness in U.S. foreign policy are all symptoms of weakening American, and indeed western, commitment to the kind of world we once claimed we wanted. As the saying goes, be careful what you wish for, because it might come true.