388 International Organization "the same as what Dr.Funk offers,except that we shall do it better and more honestly."'24 He had reached the conclusion that only a refinement and improvement of the Schachtian device would restore equilibrium after the war."To suppose that there exists some smoothly functioning automatic mechanism of adjustment which preserves equilibrium if only we trust to methods of laissez-faire is a doctrinaire delusion which disregards the les- sons of historical experience without having behind it the support of sound theory.25 Polanyi's prediction of the end of capitalist internationalism does not stand up well against the subsequent internationalization of production and finance;White's views were altered considerably over the years as a result of negotiations within the bureaucracy and the adversarial process with Congress,before he was driven from Washington altogether in an anticom- munist witch-hunt;and American resistance scaled down even the multilat- eral variants of Keynes's ambitious vision.Yet each had been correct in the essential fact that a new threshold had been crossed in the balance between "market''and "'authority,''with governments assuming much more direct responsibility for domestic social security and economic stability.The ex- tension of the suffrage and the emergence of working-class political con- stituencies,parties,and even governments was responsible in part;but demands for social protection were very nearly universal,coming from all sides of the political spectrum and from all ranks of the social hierarchy (with the possible exception of orthodox financial circles).Polanyi,White,and Keynes were also correct in their premise that,somehow,the postwar inter- national economic order would have to reflect this change in state-society relations if the calamities of the interwar period were not to recur. Transformations in power versus purpose Changes in the distribution of power and in the structure of social pur- pose covaried from the pre-World War I era through to the interwar period, so that we cannot say with any degree of certainty what might have hap- pened had only one changed.However,by looking at the relationship be- tween the two in greater detail in a single,circumscribed domain,we may get closer to a firm answer.I focus on the monetary regime under the gold standard before World War I,and its attempted approximation in the gold- exchange standard of the interwar period. I begin with the domestic side of things,though this distinction itself would barely apply to currencies under a"gold specie"standard26 where 24 Quoted in ibid.,p.7. 2Quoted in ibid.,p.32. 2 Unless otherwise noted,this paragraph is based on League of Nations [Ragnar Nurkse], International Currency Experience:Lessons of the Inter-War Period (League of Nations,Eco- nomic,Financial and Transit Department,1944),chap.4.(Hereafter referred to as Nurkse.)
388 International Organization "the same as what Dr. Funk offers, except that we shall do it better and more honestly."24 He had reached the conclusion that only a refinement and improvement of the Schachtian device would restore equilibrium after the war. "To suppose that there exists some smoothly functioning automatic mechanism of adjustment which preserves equilibrium if only we trust to methods of laissez-faire is a doctrinaire delusion which disregards the lessons of historical experience without having behind it the support of sound theory. "25 Polanyi's prediction of the end of capitalist internationalism does not stand up well against the subsequent internationalization of production and finance; White's views were altered considerably over the years as a result of negotiations within the bureaucracy and the adversarial process with Congress, before he was driven from Washington altogether in an anticommunist witch-hunt; and American resistance scaled down even the multilateral variants of Keynes's ambitious vision. Yet each had been correct in the essential fact that a new threshold had been crossed in the balance between "market" and "authority," with governments assuming much more direct responsibility for domestic social security and economic stability. The extension of the suffrage and the emergence of working-class political constituencies, parties, and even governments was responsible in part; but demands for social protection were very nearly universal, coming from all sides of the political spectrum and from all ranks of the social hierarchy (with the possible exception of orthodox financial circles). Polanyi, White, and Keynes were also correct in their premise that, somehow, the postwar international economic order would have to reflect this change in state-society relations if the calamities of the interwar period were not to recur. Transformations in power versus purpose Changes in the distribution of power and in the structure of social purpose covaried from the pre-World War I era through to the interwar period, so that we cannot say with any degree of certainty what might have happened had only one changed. However, by looking at the relationship between the two in greater detail in a single, circumscribed domain, we may get closer to a firm answer. I focus on the monetary regime under the gold standard before World War I, and its attempted approximation in the goldexchange standard of the interwar period. I begin with the domestic side of things, though this distinction itself would barely apply to currencies under a "gold specie" standard26 where 24 Quoted in ibid., p. 7. 25 Quoted in ibid., p. 32. 26 Unless otherwise noted, this paragraph is based on League of Nations [Ragnar Nurkse], International Currency Experience: Lessons of the Inter-War Period (League of Nations, Economic, Financial and Transit Department, 1944), chap. 4. (Hereafter referred to as Nurkse.)
International regimes,transactions,and change 389 both domestic circulation and international means of settlement took the form largely of gold,and the domestic money supply therefore was deter- mined directly and immediately by the balance of payments.Under the more familiar"gold bullion'standard prior to World War I,where the bulk of domestic money took the form of bank notes and deposits,backed by and fixed in value in terms of gold,there still existed a strong relationship be- tween domestic money supply and the balance of payments,but it was more indirect.In theory,it worked via the effects of gold movements on the domestic credit supply:an expansion of credit in the gold-receiving country, and a contraction in the gold-losing country,affected prices and incomes in such a way as to close the balance of payments discrepancy that had triggered the gold movement in the first place.This was reinforced by an attending change in money rates,which would set off equilibrating move- ments in short-term private funds.In practice,gold movements among the major economies were relatively infrequent and small.Temporary gaps to a large extent were filled by short-term capital movements,responding to interest differentials or slight variations within the gold points.27 More fun- damental adjustments were produced by the impact of the balance of pay- ments not only on domestic money stock and the volume of credit,but also through the direct effects of export earnings on domestic income and effec- tive demand. In sum,even in its less than pristine form,the pre-World War I gold standard was predicated upon particular assumptions concerning the funda- mental purpose of domestic monetary policy and the role of the state in the process of adjusting imbalances in the level of external and internal eco- nomic activity.With respect to the first,in Bloomfield's words,the "'domi- nant and overriding''objective of monetary policy was the maintenance of gold parity."The view,so widely recognized and accepted in recent de- cades,of central banking policy as a means of facilitating the achievement and maintenance of reasonable stability in the level of economic activity and prices was scarcely thought about before 1914,and certainly not accepted, as a formal objective of policy.''28 Second,insofar as the adjustment process ultimately was geared to securing external stability,state abstinence was prescribed so as not to undermine the equilibrating linkages between the balance of payments,changes in gold reserves and in domestic credit supply, 27 Note,however,Bloomfield's cautionary remark:"While this picture is broadly accurate, the nature and role of private short-term capital movements before 1914 have usually been oversimplified and their degree of sensitivity to interest rates and exchange rates exaggerated. At the same time these movements have been endowed with a benign character that they did not always possess."Arthur I.Bloomfield,"Short-Term Capital Movements Under the Pre-1914 Gold Standard,"Princeton Studies in International Finance 11 (1963),p.34.Bloomfield pre- sents a more complex and balanced picture,which,however,does not contradict the basic generalization. 28 Arthur I.Bloomfield,Monetary Policy Under the International Gold Standard (New York: Federal Reserve Bank of New York,1959),p.23.Bloomfield shows that central banks did attempt partially to "sterilize"the effects of gold flows
International regimes, transactions, and change 389 both domestic circulation and international means of settlement took the form largely of gold, and the domestic money supply therefore was determined directly and immediately by the balance of payments. Under the more familiar "gold bullion" standard prior to World War I, where the bulk of domestic money took the form of bank notes and deposits, backed by and fixed in value in terms of gold, there still existed a strong relationship between domestic money supply and the balance of payments, but it was more indirect. In theory, it worked via the effects of gold movements on the domestic credit supply: an expansion of credit in the gold-receiving country, and a contraction in the gold-losing country, affected prices and incomes in such a way as to close the balance of payments discrepancy that had triggered the gold movement in the first place. This was reinforced by an attending change in money rates, which would set off equilibrating movements in short-term private funds. In practice, gold movements among the major economies were relatively infrequent and small. Temporary gaps to a large extent were filled by short-term capital movements, responding to interest differentials or slight variations within the gold points.27 More fundamental adjustments were produced by the impact of the balance of payments not only on domestic money stock and the volume of credit, but also through the direct effects of export earnings on domestic income and effective demand. In sum, even in its less than pristine form, the pre-World War I gold standard was predicated upon particular assumptions concerning the fundamental purpose of domestic monetary policy and the role of the state in the process of adjusting imbalances in the level of external and internal economic activity. With respect to the first, in Bloomfield's words, the "dominant and overriding" objective of monetary policy was the maintenance of gold parity. "The view, so widely recognized and accepted in recent decades, of central banking policy as a means of facilitating the achievement and maintenance of reasonable stability in the level of economic activity and prices was scarcely thought about before 1914, and certainly not accepted, as a formal objective of policy."2s Second, insofar as the adjustment process ultimately was geared to securing external stability, state abstinence was prescribed so as not to undermine the equilibrating linkages between the balance of payments, changes in gold reserves and in domestic credit supply, 27 Note, however, Bloomfield's cautionary remark: "While this picture is broadly accurate, the nature and role of private short-term capital movements before 1914 have usually been oversimplified and their degree of sensitivity to interest rates and exchange rates exaggerated. At the same time these movements have been endowed with a benign character that they did not always possess." Arthur I. Bloomfield, "Short-Term Capital Movements Under the Pre-1914 Gold Standard," Princeton Studies in International Finance 11 (1963), p. 34. Bloomfield presents a more complex and balanced picture, which, however, does not contradict the basic generalization. 28 Arthur I. Bloomfield, Monetary Policy Under the International Gold Standard (New York: Federal Reserve Bank of New York, 1959), p. 23. Bloomfield shows that central banks did attempt partially to "sterilize" the effects of gold flows
390 International Organization income,and demand.This was not incompatible with partial efforts at sterilization.As Nurkse put it,"all that was required for this purpose was that countries should not attempt to control their national income and outlay by deliberate measures-a requirement which in the age of laissez-faire was generally fulfilled.'2 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 make international monetary policy con- form to domestic social and economic policy and not the other way round."'30 The proportion of currency reserves held in the form of foreign exchange more than doubled between 1913 and 1925,to 27 percent;in 1928,it stood at 42 percent.And international reserves increasingly came to serve as a"buffer''against external economic forces rather than as their"transmit- ter'';Nurkse found that throughout the interwar period the international and domestic assets of central banks moved in opposite directions far more often than in the same direction.31 After the collapse of the gold-exchange standard in 1931,exchange stabilization funds were established in the at- tempt to provide more of a cushion than"neutralization''had afforded. Mere stabilization was followed by direct exchange controls in many in- stances,with the gold bloc countries attempting to achieve analogous insu- lation through import quotas.Governments everywhere had developed increasingly active forms of intervention in the domestic economy in order to affect the level of prices and employment,and to protect them against exter- nal sources of dislocation.32 The international monetary order disintegrated into five more or less distinct blocs,each with its own prevailing currency arrangement. On the international side,there is little doubt that the pre-World War I gold standard functioned as it did because of the central part Great Britain played in it.In general terms,"if keeping a free market for imports,main- taining a flow of investment capital,and acting as lender of last resort are the marks of an'underwriter'of an international system,then Britain certainly fulfilled this role in the nineteenth-century international economy.''33 More specifically,in the domain of monetary policy it was the role of sterling as the major vehicle currency,held by foreign business,banks,and even cen- tral banks,that gave the Bank of England the influence to shape international monetary conditions consistent with the fundamental commitments and 3 Nurkse,International Currency Experience,p.213. 30Ibid.,p.230. 31Ibid.,pp.68-88. 3 For a good global overview of these policy shifts,see Asa Briggs,"The World Economy: Interdependence and Planning,"in C.L.Mowat,ed.,The New Cambridge Modern History, vol.12 (Cambridge:Cambridge University Press,1968). 35 Robert J.A.Skidelsky,"Retreat from Leadership:The Evolution of British Economic Foreign Policy,1870-1939,"in Benjamin M.Rowland,ed.,Balance of Power or Hegemony: The Interwar Monetary System (New York:New York University Press,1976),p.163.Cf. Kindleberger,The World in Depression,chap.1
390 International Organization income, and demand. This was not incompatible with partial efforts at sterilization. As Nurkse put it, "all that was required for this purpose was that countries should not attempt to control their national income and outlay by deliberate measures-a requirement which in the age of laissez-faire was generally fulfilled. "29 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 make international monetary policy conform to domestic social and economic policy and not the other way round."30 The proportion of currency reserves held in the form of foreign exchange more than doubled between 1913 and 1925, to 27 percent; in 1928, it stood at 42 percent. And international reserves increasingly came to serve as a "buffer" against external economic forces rather than as their "transmitter''; Nurkse found that throughout the interwar period the international and domestic assets of central banks moved in opposite directions far more often than in the same direction.31 After the collapse of the gold-exchange standard in 1931, exchange stabilization funds were established in the attempt to provide more of a cushion than "neutralization" had afforded. Mere stabilization was followed by direct exchange controls in many instances, with the gold bloc countries attempting to achieve analogous insulation through import quotas. Governments everywhere had developed increasingly active forms of intervention in the domestic economy in order to affect the levelof prices and employment, and to protect them against external sources of dislocati~n.~~ The international monetary order disintegrated into five more or less distinct blocs, each with its own prevailing currency arrangement. On the international side, there is little doubt that the pre-World War I gold standard functioned as it did because of the central part Great Britain played in it. In general terms, "if keeping a free market for imports, maintaining a flow of investment capital, and acting as lender of last resort are the marks of an 'underwriter' of an international system, then Britain certainly fulfilled this role in the nineteenth-century international economy."33 More specifically, in the domain of monetary policy it was the role of sterling as the major vehicle currency, held by foreign business, banks, and even central banks, that gave the Bank of England the influence to shape international monetary conditions consistent with the fundamental commitments and Nurkse, International Currency Experience, p. 213. 30 Ibid., p. 230. 31 Ibid., pp. 68-88. For a good global overview of these policy shifts, see Asa Briggs, "The World Economy: Interdependence and Planning," in C. L. Mowat, ed., The New Cambridge Modern History, vol. 12 (Cambridge: Cambridge University Press, 1968). Robert J. A. Skidelsky, "Retreat from Leadership: The Evolution of British Economic Foreign Policy, 1870-1939," in Benjamin M. Rowland, ed., Balance of Power or Hegemony: The Interwar Monetary System (New York: New York University Press, 1976), p. 163. Cf. Kindleberger, The World in Depression, chap. 1
International regimes,transactions,and change 391 dynamics of the regime.And yet,the critical issue in the stability of this regime was not simply some measure of material"supremacy''on the part of Britain,but that"national monetary authorities were inclined to 'follow the market'-and indirectly the Bank of England-rather than to assert in- dependent national objectives of their own.''3 Thus,the international gold standard rested on both the special position of Great Britain and prevailing attitudes concerning the role of the state in the conduct of national monetary policy.It reflected a true "'hegemony,''as Gramsci used the term. What of the interwar period?Counterfactual historiography is little bet- ter than a parlor game under ideal circumstances;it should be especially suspect when an outcome is as overdetermined as institutional failure in the international economy between the wars.35 It seems reasonable to assume, though,that with the end of monetary laissez-faire,"the monetary leader would need to dispose of more monetary influence and political authority than Britain ever possessed,except within its own imperial system.'36 And where British hegemony lingered on,as in the Financial Committee of the League of Nations,the outcome was not salutary.For example,the eastern European countries that had their currencies stabilized by the League and were put under the gold-exchange standard before the major countries had fixed their currency rates did so at considerable domestic social cost.37 And virtually every effort at constructing a viable international monetary regime in the interwar period,in which Britain took a leading role,did little more than decry the newly prevailing social objectives of state policy while pleading for a speedy return to the principles of"sound finance.''38 The con- sequences of course were counterproductive:just as the rhetoric of the 34 Harold van B.Cleveland,'The International Monetary System in the Interwar Period,"'in Rowland,Balance of Power,p.57,emphasis added.Note,in addition,that major primary- producing countries,who may well have borne more than their share of the international ad- justment process under the gold standard,by and large did not establish their own central banks until the 1930s-this includes Argentina,Canada,India,New Zealand,and Venezuela.The argument that the adjustment process worked disproportionately on primary-producing coun- tries is made by Robert Triffin,"National Central Banking and the International Economy,"in Lloyd A.Metzler et al.,eds.,International Monetary Policies (Washington,D.C.:Board of Governors of the Federal Reserve System,1947). as There is almost no end to the number of dislocating features of the post-World War I international economy that can be adduced as part of the explanation for its institutional failure. Kindleberger,The World in Depression,chap.1,briefly recounts most of them. 36 Cleveland,"'International Monetary System,"p.57 7"The deflationist's ideal came to be'a free economy under a strong government';but while the phrase on government meant what it said,namely,emergency powers and suspension of public liberties,'free economy'meant in practice the opposite of what it said:...while the inflationary governments condemned by Geneva subordinated the stability of the currency to stability of incomes and employment,the deflationary governments put in power by Geneva used no fewer interventions in order to subordinate the stability of incomes and employment to the stability of the currency."Polanyi,The Great Transformation,p.233.For French skepti- cism concerning the"dogma of Geneva,"'see Judith L.Kooker,French Financial Diplomacy: The Interwar Years,"'in Rowland,Balance of Power. 38 For summary descriptions of the major conferences,see Dean E.Traynor,International Monetary and Financial Conferences in the Interwar Period (Washington,D.C.:Catholic Uni- versities Press of America,1949)
International regimes, transactions, and change 391 dynamics of the regime. And yet, the critical issue in the stability of this regime was not simply some measure of material "supremacy" on the part of Britain, but that "national monetary authorities were inclined to 'follow the market'-and indirectly the Bank of England-rather than to assert independent national objectives of their own."34 Thus, the international gold standard rested on both the special position of Great Britain and prevailing attitudes concerning the role of the state in the conduct of national monetary policy. It reflected a true "hegemony," as Gramsci used the term. What of the interwar period? Counterfactual historiography is little better than a parlor game under ideal circumstances; it should be especially suspect when an outcome is as overdetermined as institutional failure in the international economy between the wars.35 It seems reasonable to assume, though, that with the end of monetary laissez-faire, "the monetary leader would need to dispose of more monetary influence and political authority than Britain ever possessed, except within its own imperial system."36 And where British hegemony lingered on, as in the Financial Committee of the League of Nations, the outcome was not salutary. For example, the eastern European countries that had their currencies stabilized by the League and were put under the gold-exchange standard before the major countries had fixed their currency rates did so at considerable domestic social cost.37 And virtually every effort at constructing a viable international monetary regime in the interwar period, in which Britain took a leading role, did little more than decry the newly prevailing social objectives of state policy while pleading for a speedy return to the principles of "sound finance."38 The consequences of course were counterproductive: just as the rhetoric of the 34 Harold van B. Cleveland, "The International Monetary System in the Interwar Period," in Rowland, Balance of Power, p. 57, emphasis added. Note, in addition, that major primaryproducing countries, who may well have borne more than their share of the international adjustment process under the gold standard, by and large did not establish their own central banks until the 1930s-this includes Argentina, Canada, India, New Zealand, and Venezuela. The argument that the adjustment process worked disproportionately on primary-producing countries is made by Robert Triffin, "National Central Banking and the International Economy," in Lloyd A. Metzler et al., eds., International Monetary Policies (Washington, D.C.: Board of Governors of the Federal Reserve System, 1947). 35 There is almost no end to the number of dislocating features of the post-World War I international economy that can be adduced as part of the explanation for its institutional failure. Kindleberger, The World in Depression, chap. 1, briefly recounts most of them. 36 Cleveland, "International Monetary System," p. 57. 37 "The deflationist's ideal came to be 'a free economy under a strong government'; but while the phrase on government meant what it said, namely, emergency powers and suspension of public liberties, 'free economy' meant in practice the opposite of what it said: . . . while the inflationary governments condemned by Geneva subordinated the stability of the currency to stability of incomes and employment, the deflationary governments put in power by Geneva used no fewer interventions in order to subordinate the stability of incomes and employment to the stability of the currency." Polanyi, The Great Transformation, p. 233. For French skepticism concerning the "dogma of Geneva," see Judith L. Kooker, "French Financial Diplomacy: The Interwar Years," in Rowland, Balance of Power. 38 For summary descriptions of the major conferences, see Dean E. Traynor, International Monetary and Financial Conferences in the Interwar Period (Washington, D.C.: Catholic Universities Press of America, 1949)