International regimes, transactions, and change: embedded liberalism in the postwar economic order

International regimes, transactions,

and change: embedded liberalism in

the postwar economic order

John Gerard Ruggie

A philosopher is someone who goes into a dark room at night,

to look for a black cat that isn't there. A theologian does the same thing,

but comes out claiming he found the cat.

Nick Philips, "The Case of the Naked Quark,"

TWA Ambassador Magazine, October 1980.

One of our major purposes in this volume is to establish whether we, as

students of international regimes, most resemble the philosopher, the

theologian or, as most of us would like to believe, the social scientist—

suspecting from the beginning that there is a black cat in there somewhere,

and emerging from the room with scratches on the forearm as vindication.

This article consists of another set of scratches, together with what I hope

will be persuasive reasoning and demonstration that a black cat put them

there.

My focus is on how the regimes for money and trade have reflected and

affected the evolution of the international economic order since World War

II.

Let me state my basic approach to this issue at the outset, for, as Krasner

shows in the Introduction, a good deal of the disagreement and confusion

I have benefited from the comments and suggestions of a large number of friends, colleagues,

and fellow travelers, and am particularly indebted to the detailed written remarks of Catherine

Gwin, Ernst Haas, Robert Keohane, Stephen Krasner, and Susan Strange, as well as to Albert

Fishlow's constructive criticism at the Palm Springs conference. Research for this article was

made possible by financial support from the Rockefeller Foundation and the Ira D. Wallach

Chair of World Order Studies at Columbia University.

International Organization 36, 2, Spring 1982

0020-8183/82/020379-37 $1.50

379

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380 International Organization

about international regimes stems from deeper epistemological and even

ontological differences among observers.

International regimes have been defined as social institutions around

which actor expectations converge in a given area of international relations.

Accordingly, as is true of any social institution, international regimes limit

the discretion of their constituent units to decide and act on issues that fall

within the regime's domain. And, as is also true of any social institution,

ultimate expression in converging expectations and delimited discretion

gives international regimes an intersubjective quality. To this extent, inter-

national regimes are akin to language—we may think of them as part of "the

language of state action."

The constituent units of a regime, like speakers of

a common language, generally have little difficulty in determining what even

an entirely new usage signifies. Should it be technically inappropriate or in-

correct, they nevertheless may still "understand" it—in the dual sense of

being able to comprehend it and willing to acquiesce in it. In sum, we know

international regimes not simply by some descriptive inventory of their con-

crete elements, but by their generative grammar, the underlying principles of

order and meaning that shape the manner of their formation and transforma-

tion. Likewise, we know deviations from regimes not simply by acts that are

undertaken, but by the intentionality and acceptability attributed to those acts

in the context of an intersubjective framework of meaning.

The analytical components of international regimes we take to consist of

principles, norms, rules, and procedures. As the content for each of these

terms is specified, international regimes diverge from social institutions like

language, for we do not normally attribute to language any specific "con-

summatory" as opposed to "instrumental" values.

Insofar as international

regimes embody principles about fact, causation, and rectitude, as well as

political rights and obligations that are regarded as legitimate, they fall closer

to the consummatory end of

the

spectrum, into the realm of political author-

ity. Thus, the formation and transformation of international regimes may be

said to represent a concrete manifestation of the internationalization of

political authority.

Oran R. Young, "International Regimes: Problems of Concept Formation,"

World Politics

32 (April 1980); and Stephen D. Krasner's introduction to this volume.

This phrase is taken from Bruce Andrews's application of the linguistic metaphor to the

study of foreign policy: "The Language of State Action," International Interactions 6

(November 1979).

Cf. Noam Chomsky, Current Issues in Linguistic Theory (The Hague: Mouton, 1964),

chap.

These are derived from the standard Weberian distinction between Wert- and Zweckra-

tional. Max Weber, Economy and Society, ed. by Guenther Roth and Claus Wittich (Berkeley:

University of California Press, 1978), pp. 24-26.

Discussions of political authority often fuse the very meaning of the concept with one of its

specific institutional manifestations, that expressed in super-subordinate relations. But, as

demonstrated repeatedly in organization theory and recognized by Weber, authority rests on a

form of legitimacy that ultimately can derive only from a community of interests. Chester Bar-

nard has carried this line of reasoning the furthest: "Authority is another name for the willing-

ness and capacity of individuals to submit to the necessities of cooperative systems." The

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International regimes, transactions, and change 381

What is the "generative grammar" that shapes the internationalization

of political authority? The most common interpretation has been stated suc-

cinctly by Kenneth Waltz: the elements of international authority, he main-

tains,

"are barely once removed from the capability that provides [their]

foundation. . . ."

On this interpretation others, in turn, have built what now

amounts to a prevalent model of the formation and transformation of inter-

national economic regimes. In its simplest form, the model makes this pre-

diction: if economic capabilities are so concentrated that a hegemon exists,

as in the case of Great Britain in the late 19th century and the U.S.A. after

World War II, an "open" or "liberal" international economic order will

come into being.

In the organization of a liberal order, pride of place is given

to market rationality. This is not to say that authority is absent from such an

order. It is to say that authority relations are constructed in such a way as to

give maximum scope to market forces rather than to constrain them. Specific

regimes that serve such an order, in the areas of money and trade, for exam-

ple,

limit the discretion of states to intervene in the functioning of

self-

regulating currency and commodity markets. These may be termed

"strong" regimes, because they restrain self-seeking states in a competitive

international political system from meddling directly in domestic and inter-

national economic affairs in the name of their national interests. And the

strength of these regimes, of course, is backed by the capabilities of the heg-

emon. If and as such a concentration of economic capabilities erodes, the

liberal order is expected to unravel and its regimes to become weaker, ulti-

mately being replaced by mercantilist arrangements, that is, by arrange-

ments under which the constituent units reassert national political authority

over transnational economic forces. If the order established by British eco-

nomic supremacy in the 19th century and that reflecting the supremacy of

the United States after World War II illustrate liberal orders with strong

regimes, the interwar period illustrates the darker corollary of the axiom.

I do not claim that this model is fundamentally wrong. But it does not

take us very far in understanding international economic regimes, and, by

extension, the formation and transformation of international regimes in gen-

Functions of the Executive (Cambridge: Harvard University Press, 1968), p. 184. See also the

important statement by Peter Blau, "Critical Remarks on Weber's Theory of Authority,"

American Political Science Review 57 (June 1963). An illustration (though unintended) of how

not to think of authority if the concept is to be at all useful in a discussion of international

relations is provided by Harry Eckstein, "Authority Patterns: A Structural Basis for Political

Inquiry," American

Political

Science Review

(December

1973).

More elaborate typologies of

forms of authority relations in international regimes may be found in my papers, "International

Responses to Technology: Concepts and Trends," International Organization 29 (Summer

1975),

and "Changing Frameworks of International Collective Behavior: On the Complemen-

tarity of Contradictory Tendencies," in Nazli Choucri and Thomas Robinson,

eds.,

Forecasting

in International Relations (San Francisco: W. H. Freeman, 1978).

Theory of International Politics (Reading, Mass.: Addison-Wesley, 1979), p. 88.

The relevant literature is cited in Robert 0. Keohane, "The Theory of Hegemonic Stability

and Changes in International Economic Regimes, 1967-1977," in Ole Holsti et al., eds.,

Change in the International System (Boulder, Col.: Westview Press, 1980).

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382 International Organization

eral.

This is so precisely because it does not encompass the phenomeno-

logical dimensions of international regimes.

From this vantage point, I develop three theoretical arguments; each

yields an interpretation of central features of the postwar international eco-

nomic order that is distinct from the prevailing view.

The first concerns the "generative grammar" or what I shall call the

"structure" of the internationalization of political authority. Whatever its

institutional manifestations, political authority represents a fusion of power

with legitimate social purpose. The prevailing interpretation of international

authority focuses on power only; it ignores the dimension of social purpose.

The problem with this formulation is that power may predict the form of the

international order, but not its content. For example, in the era of the third

hegemon in the complex of modern state-system and capitalist-world-

economy, the Dutch in the 17th century, the condition of hegemony

coexisted with mercantilist behavior,

and it would be straining credulity to

attribute this difference solely or even mainly to differences in the relative

economic supremacy of the three hegemons without discussing differences

in social purpose. Moreover, had the Germans succeeded in their quest to

establish a "New International Order" after World War II, the designs

Hjalmar Schacht would have instituted were the very mirror image of Bret-

ton Woods

—obviously, differences in social purpose again provide the

key. Lastly, the common tendency to equate the 19th century liberal inter-

national economic order and its post-World War II counterpart itself

obscures exceedingly important differences in their domestic and interna-

tional organization, differences that stem from the fact that the one repre-

sented laissez-faire liberalism and the other did not. In sum, to say anything

sensible about the content of international economic orders and about the

regimes that serve them, it is necessary to look at how power and legitimate

social purpose become fused to project political authority into the interna-

tional system. Applied to the post-World War II context, this argument

leads me to characterize the international economic order by the term "em-

Nor should it be expected to. As Waltz makes clear, his is a theory intended to predict that

certain conditioning and constraining forces will take effect within the international system as a

whole depending upon variation in its structure, not to account for such "process-level" out-

comes as international regimes. Some of the literature cited by Keohane attempts to do more

than this, however, though Keohane himself reaches a conclusion that is not at variance with

my own.

More accurately, it either assumes social purpose (as in Waltz, Theory of International

Politics),

or seeks to deduce it from state power (as in Krasner, "State Power and the Structure

of International Trade,"

World Politics

28 [April 1976]).

To my knowledge, the case of Dutch supremacy in the world economy has not been ad-

dressed in the "hegemonic stability" literature; but see Immanuel Wallerstein, The Modern

World System, vol. 2 (New York: Academic Press, 1980), chap. 2.

A brief description may be found in Armand Van Dormael, Brettoh Woods: Birth of a

Monetary System (London: Macmillan, 1978), chap. 1. The classic statement of how it actually

worked remains Albert O. Hirschman, National Power and the Structure of Foreign Trade,

expanded ed. (Berkeley: University of California Press, 1980).

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International regimes, transactions, and change 383

bedded liberalism," which I show to differ from both its classical ancestor

and its ignominious predecessor even as it has systematically combined

central features of both.

My second theoretical argument concerns the relationship between in-

ternational economic regimes and developments in the international econ-

omy, particularly at the level of private transaction flows.

Conventional

structural arguments, whether Realist or Marxist, see transnationalization as

a direct reflection of hegemony: high levels of trade and capital flows obtain

under the pax Britannica and the pa* Americana. The regimes for trade and

money are largely epiphenomenal adjuncts that may be invoked to legitimate

this outcome, but they have little or no real bearing on it. Conventional lib-

erals,

on the other hand, hold that high levels of trade and capital flows will

obtain only if there is strict adherence to open international economic re-

gimes, so that these become virtually determinative. Neither formulation is

satisfactory.

The relationship between economic regimes and international transac-

tion flows is inherently problematical, because the domain of international

regimes consists of the behavior of states, vis-a-vis one another and vis-a-

vis the market-place, not the market-place

itself.

Nevertheless, simply on

a priori grounds we may argue that because there is no direct relation-

ship,

it is highly unlikely that the character of international regimes would

have a determinative impact on international transaction flows; and yet,

because international regimes do encompass the behavior of states vis-

a-vis the market-place, it stands to reason that they would have some effect

on international transaction flows. I contend that the nature of this relation-

ship,

at least in the first instance, is one of complementarity. That is to say,

international economic regimes provide a permissive environment for the

emergence of specific kinds of international transaction flows that actors

take to be complementary to the particular fusion of power and purpose that

is embodied within those regimes.

The contextual specificity of this com-

plementarity makes equations of the variety "pax Britannica is equal to pax

Americana," as well as insistence on universal regime formulae to achieve a

given outcome, extremely dubious propositions.

Applying this argument to the postwar international economic order, I

conclude that the emergence of several specific developments in transna-

tional economic activities can be accounted for at least in part by their per-

ceived first-order contribution to the regimes for trade and money.

These

regimes, then, are neither determinative nor irrelevant, but provide part of

the context that shapes the character of transnationalization.

In this connection, see also Charles Lipson's chapter

this volume.

This is not to ignore the possibility that the same developments may have second-order

consequences or long-term effects that pose stresses or even contradictions for international

economic regimes, a problem which I take up in a later section.

The present formulation of this conclusion owes much to Albert Fishlow's commentary on

an earlier version at the Palm Springs Conference, for which I am obliged to him.

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384 International Organization

My third theoretical argument concerns the occurrence of change in and

of regimes. The prevailing model postulates one source of regime change,

the ascendancy or decline of economic hegemons, and two directions of re-

gime change, greater openness or closure. If, however, we allow for the

possibility that power and purpose do not necessarily covary, then we have

two potential sources of change and no longer any simple one-to-one corre-

spondence between source and direction of

change.

For example, we could

have a situation in which there exists a predominant economic power whose

economic program differs fundamentally from that of its leading rivals (e.g.,

Dutch supremacy in the 17th

century).

Or, we could have a situation in which

power and purpose covary negatively, that is, in which neither a hegemon

nor a congruence of social purpose exists among the leading economic pow-

ers (the interwar period approximates this case). We could have a situation

in which power and purpose covary positively (e.g., Bretton Woods). There

remains the situation of no hegemon but a congruence of social purpose

among the leading economic powers (albeit imperfectly, the post-1971 in-

ternational economic order illustrates this possibility).

It is the last possibility that interests me most. It suggests the need for a

more nuanced formulation of regime change than is currently available. If

and as the concentration of economic power erodes, and the "strength" of

international regimes is sapped thereby, we may be sure that the instruments

of regimes also will have to change.

However, as long as purpose is held

constant, there is no reason to suppose that the normative framework of

regimes must change as well. In other words, referring back to our analytical

components of international regimes, rules and procedures (instruments)

would change but principles and norms (normative frameworks) would not.

Presumably, the new instruments that would emerge would be better

adapted to the new power situation in the international economic order. But

insofar as they continued to reflect the same sense of purpose, they would

represent a case of norm-governed as opposed to norm-transforming change.

Applying this argument to the post-1971 period leads me to suggest that

many of the changes that have occurred in the regimes for money and trade

have been norm-governed changes rather than, as is often maintained,

reflecting the collapse of Bretton Woods and a headlong rush into mercan-

tilism. Indeed, in certain cases earlier acts by the hegemon had violated the

normative frameworks of these regimes, so that some post-1971 changes

may be viewed as adaptive restorations of prior sets of norms in the context

of a new and different international economic environment. Both occur-

rences may to taken to demonstrate what we might call "the relative au-

tonomy" of international regimes (with due apologies to the appropriate

quarters).

The various parts of my argument clearly stand or fall together. Ulti-

The

"hegemonic stability" school effectively demonstrates

why

this is so. See Keohane,

"Theory of

Hegemonic

Stability."

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International regimes, transactions, and change 385

mately, they lead back to my depiction of international authority as reflect-

ing a fusion of power and legitimate social purpose. An historical illustration

of this interpretation of the "structure" of international authority therefore

serves as my point of departure.

The structure of international authority

Karl Polanyi's magisterial work, The Great Transformation, was first

published in 1944. In it, he developed a distinction between "embedded"

and "disembedded" economic orders: "normally, the economic order is

merely a function of

the

social, in which it is contained. Under neither tribal,

nor feudal, nor mercantile conditions was there, as we have shown, a sepa-

rate economic system in society. Nineteenth century society, in which eco-

nomic activity was isolated and imputed to a distinctive economic motive,

was,

indeed, a singular departure."

The best known international forms

taken by this "singular departure" were, of

course,

the regimes of free trade

and the gold standard. What were their bases?

The internationalization of domestic authority relations

Charles Kindleberger, who is justly accorded a leading role in having

established the efficacy of the "hegemonic stability" model in his book on

the Great Depression,

subsequently managed to write an account of the

rise of free trade in western Europe without even mentioning British eco-

nomic supremacy as a possible source of explanation.

He focused instead

on a fundamental reordering of the relationships between domestic political

authority and economic processes. Free trade, he reminds us, was due first

of all to the general breakdown of the manor and guild system and the

so-called policy of supply, through which a complex structure of social

regulations rather than market exchange determined the organization of

economic activity at home and abroad. Indeed, the earliest measures under-

taken in order to free trade were to dismantle prohibitions on exports, pro-

hibitions that had restricted the outward movement of

materials,

machinery,

and artisans. The bulk of these prohibitions was not removed until well into

the 1820s and 1830s, and in some instances even later. A second part of the

stimulus "came from the direct self-interest of particular dominant groups.

Boston: Beacon Press, 1944, p. 71. The historical claims are backed up in Polanyi et al.,

eds.,

Trade and Markets in the Early Empires (Glencoe,

111.:

Free Press, 1957).

Charles P. Kindleberger, The World in Depression, 1929-1939 (Berkeley: University of

California Press, 1973), esp. chaps. 1 and 14.

"The Rise of Free Trade in Western Europe,

1820-1875,"

Journal of Economic History 35

(March 1975): 20-55.

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386 International Organization

. . ."

In the Netherlands, these were merchants, shipowners, and bankers;

in Great Britain, the manufacturing sectors backed by the intellectual

hegemony established by the Manchester School; in France, largely indus-

trial interests employing imported materials and equipment in production,

though they would not have succeeded against the weight of countervailing

interests had not Louis Napoleon imposed free trade for unrelated reasons of

international diplomacy; in Prussia, grain and timber exporters, though

Bismarck was not adverse to using trade treaties in the pursuit of broader

objectives and free trade treaties seemed to be au courant; in Italy, the ef-

forts of Cavour, which prevailed over disorganized opposition. Equally par-

ticularistic factors were at work in Belgium, Denmark, Norway, Sweden,

Spain, and Portugal. But how did such diverse forces come to converge on

the single policy response of free trade? In a certain sense, Kindleberger

contends, Europe in this period should be viewed not as a collection of sepa-

rate economies, but "as a single entity which moved to free trade for

ideological or perhaps better doctrinal reasons."

The image of the market

became an increasingly captivating social metaphor and served to focus di-

verse responses on the outcome of free trade. And unless one holds that

ideology and doctrine exist in a social vacuum, this ascendancy of market

rationality in turn must be related to the political and cultural ascendance of

the middle classes. In Polanyi's inimitable phrase, "Laissez-faire was

planned "

In sum, this shift in what we might call the balance between "authority"

and "market" fundamentally transformed state-society relations, by rede-

fining the legitimate social purposes in pursuit of which state power was

expected to be employed in the domestic economy. The role of the state

became to institute and safeguard the self-regulating market. To be sure, this

shift occurred unequally throughout western Europe, and at uneven tempos.

And of course nowhere did it take hold so deeply and for so long a period as

in Great Britain. Great Britain's supremacy in the world economy had much

to do with the global expansion of this new economic order, and even more

with its stability and longevity. But the authority relations that were insti-

tuted in the international regimes for money and trade reflected a new bal-

ance of state-society relations that expressed a collective reality.

These expectations about the proper scope of political authority in eco-

nomic relations did not survive World War I. Despite attempts at restora-

tion, by the end of

the

interwar period there remained little doubt about how

thoroughly they had eroded. Polanyi looked back over the period of the

"twenty years' crisis" from the vantage point of the Second World War—at

the emergence of mass movements from the Left and the Right throughout

Europe, the revolutionary and counterrevolutionary upheavals in central

Ibid., p. 50.

Ibid., p. 51, italics added.

Polanyi describes the parallel movements, in the case of Great Britain, of the middle

class into the political arena and the state out of the economic arena.

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International regimes, transactions, and change 387

and eastern Europe in the 1917-20 period, the General Strike of 1926 in

Great Britain, and, above all, the rapid succession of the abandonment of the

gold standard by Britain, the instituting of the Five Year Plans in the Soviet

Union, the launching of the New Deal in the United States, unorthodox

budgetary policies in Sweden, corporativismo in Fascist Italy, and

Wirkschaftslenkung followed by the creation of both domestic and interna-

tional variants of the "new economic order" by the Nazis in Germany.

Running throughout these otherwise diverse events and developments, he

saw the common thread of social reaction against market rationality. State-

society relations again had undergone a profound—indeed, the great—

transformation, as land, labor, and capital had all seized upon the state in the

attempt to reimpose broader and more direct social control over market

forces. Once this domestic transformation began, late in the 19th century,

international liberalism of the orthodox kind was doomed. Thus, it was the

singular tragedy of the interwar period, Polanyi felt, to have attempted to

restore internationally, in the form of the gold-exchange standard in par-

ticular, that which no longer had a corresponding social base domestically.

The new international economic order that would emerge from World War

II,

Polanyi concluded, on the one hand would mark the end of "capitalist

internationalism," as governments learned the lesson that international au-

tomaticity stands in fundamental and potentially explosive contradiction to

an active state domestically, and, on the other hand, the emergence of

delib-

erate management of international economic transactions by means of col-

laboration among governments.

Some of Polanyi's thoughts about the future had already been enter-

tained by the individuals who would come to be directly responsible for

negotiating the monetary component of the postwar international economic

order. In the depth of

the

Depression, Harry Dexter White had pondered the

problem of how to buffer national economies from external disturbances

without, at the same time, sacrificing the benefits of international economic

relations. "The path, I suspect, may lie in the direction of centralized control

over foreign exchanges and trade."

Indeed, in 1934 White had applied for a

fellowship to study planning techniques at the Institute of Economic Investi-

gations of Gosplan in Moscow. Instead, he accepted an offer to go to Wash-

ington and work in the New Deal. For his part, one of the first assignments

that Keynes undertook after he joined the British Treasury in 1940 was to

draft the text of a radio broadcast designed to discredit recent propaganda

proclamations by Walther Funk, minister for economic affairs and president

of the Reichsbank in Berlin, on the economic and social benefits that the

"New Order" would bring to Europe and the world. Keynes was instructed

to stress the traditional virtues of free trade and the gold standard. But this,

he felt, "will not have much propaganda value." Britain would have to offer

The Great Transformation, esp. chaps. 2 and

19-21.

Quoted in Van Dormael, Bretton Woods, p. 41.

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388 International Organization

"the same as what Dr. Funk offers, except that we shall do it better and

more honestly."

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."

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- 4

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" standard

where

"Quoted in ibid., p. 7.

Quoted in ibid., p. 32.

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.)

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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.

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."

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,

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.

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.

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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."

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."

The proportion of currency reserves held in the form of foreign

exchange more than doubled between

1913

and

1925,

percent; in 1928, it

stood at

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.

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.

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."

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

Nurkse, International Currency Experience,

213.

Ibid.,

230.

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.

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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."

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.

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."

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.

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."

The con-

sequences of course were counterproductive: just as the rhetoric of the

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).

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.

Cleveland, "International Monetary System," p. 57.

"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.

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).

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392 International Organization

League concerning collective security and disarmament sought and in some

measure served morally to undermine the balance of power system, without

providing a viable alternative, so too did the League and successive interna-

tional gatherings in the monetary sphere seek to undermine the legitimacy of

domestic stabilization policies while offering only the unacceptable gold-

exchange standard in their place.

It is hardly surprising, therefore, that apart from Britain, seized by its

own ideology and institutional past and willing to pay the domestic social

cost, there were few takers among the major countries.

In sum, efforts to

construct international economic regimes in the interwar period failed not

because of the lack of a hegemon. They failed because, even had there been

a hegemon, they stood in contradiction to the transformation in the mediat-

ing role of the state between market and society, which altered fundamen-

tally the social purpose of domestic and international authority. As Ragnar

Nurkse observed in 1944,

There was a growing tendency during the inter-war period to make in-

ternational monetary policy conform to domestic social and economic

policy and not the other way round. Yet the world was still econom-

ically interdependent; and an international currency mechanism for the

multilateral exchange of goods and services, instead of primitive bilat-

eral barter, was still a fundamental necessity for the great majority of

countries. The problem was to find a system of international currency

relations compatible with the requirements of domestic stability. Had

the period been more than a truce between two world wars, the solution

that would have evolved would no doubt have been in the nature of a

compromise.

Ultimately, it was. The liberalism that was restored after World War II dif-

fered in kind from that which had been known previously. My term for it is

"embedded liberalism."

The most trenchant critique of the moral failure of the League remains that of Edward

Hallett Carr, The Twenty Years'

Crisis,

1919-1939

(1939,1946; New York: Harper Torchbooks,

1964).

For example, France decided in 1928 to accept only gold in settlement of the enormous

surplus it was accruing; and in 1929 the U.S. "went off on a restrictive monetary frolic of its

own" even though it was in surplus" (Cleveland, "International Monetary System," p. 6). Four

years later, in his inaugural address, President Roosevelt proclaimed the primacy of domestic

stabilization, as he did again a few months later when, on the eve of the World Economic

Conference of 1933, he took the U.S. off gold.

International Currency Experience, p. 230. Note that Nurkse was speaking of "the great

majority of countries." Those who chose bilateralism as an instrument of economic warfare and

imperialism were unlikely to be accommodated within any multilateral regime. However, mere

state trading or even the participation of centrally planned economies, while posing special

problems, were not seen to be insuperable obstacles to multilateralism; see Herbert Feis, "The

Conflict Over Trade Ideologies," Foreign Affairs 25 (July 1947), and Raymond F. Mikesell,

"The Role of the International Monetary Agreements in a World of Planned Economies,"

Jour-

nal of Political Economy 55 (December 1947). I think it is fair to say, though, that reconciling

the many variants and depths of state intervention would have been a difficult task in the best of

times,

which the 1930s of course weren't. We are justified, therefore, in "coding" the interwar

period as "no hegemon, no agreement on purpose."

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International regimes, transactions, and change 393

The compromise of embedded liberalism

Liberal internationalist orthodoxy, most prominent in New York finan-

cial circles, proposed to reform the old order simply by shifting its locus

from the pound to the dollar and by ending discriminatory trade and ex-

change practices.

Opposition to economic liberalism, nearly universal out-

side the United States, differed in substance and intensity depending upon

whether it came from the Left, Right, or Center, but was united in its rejec-

tion of unimpeded multilateralism.

The task of postwar institutional recon-

struction, as Nurkse sensed, was to maneuver between these two extremes

and to devise a framework which would safeguard and even aid the quest for

domestic stability without, at the same time, triggering the mutually de-

structive external consequences that had plagued the interwar period. This

was the essence of the embedded liberalism compromise: unlike the eco-

nomic nationalism of the thirties, it would be multilateral in character; unlike

the liberalism of the gold standard and free trade, its multilateralism would

be predicated upon domestic interventionism.

If this was the objective of postwar institutional reconstruction for the

international economy, there remained enormous differences among coun-

tries over precisely what it meant and what sorts of policies and institutional

arrangements, domestic and international, the objective necessitated or was

compatible with. This was the stuff of the negotiations on the postwar inter-

national economic order. The story of these negotiations has been told by

others, in detail and very ably.

1 make no attempt to repeat it here. I simply

summarize the conjunction of the two themes that constitutes the story's

plot. The first, which we tend to remember more vividly today, concerned

Professor John H. Williams, vice-president of the Federal Reserve Bank of New York, was

a leading spokesman for the New York financial community, which resented having lost control

over international monetary affairs when authority shifted from the FRBNY to the U.S. Trea-

sury under Secretary Morgenthau. Their plan, which had some support in Congress, called

simply for a resurrection of the gold-exchange standard, with the dollar performing the role that

sterling had played previously. They opposed the New Deal "gimmickry" of the White Plan,

and of course they liked Keynes's Clearing Union even less. See Van Dormael,

Bretton

Woods,

chap.

In the case of Britain, the other major actor in the negotiations concerning postwar eco-

nomic arrangements, opposition from the Left was based on the desire to systematize national

economic planning, which would necessarily entail discriminatory instruments for foreign eco-

nomic policy. Opposition from the Right stemmed from a commitment to imperial preferences

and the imperial alternative to a universal economic order. Speaking for many moderates,

Hubert Henderson was opposed because he doubted the viability of a "freely working eco-

nomic system," that is, of laissez-faire. "To attempt this would be not to learn from experience

but to fly in its face. It would be to repeat the mistakes made last time in the name of avoiding

them. It would be to invite the same failure, and the same disillusionment; the same economic

chaos and the same shock to social and political stability; the same discredit for the international

idea." (Richard N. Gardner, Sterling-Dollar Diplomacy in Current Perspective [New York:

Columbia University Press, 1980], chap. 1; the quotation is from a memorandum prepared by

Henderson in December 1943, while serving in the British Treasury; reproduced in Gardner, p.

30.)

The following account draws heavily on Gardner's classic study, as supplemented by the

greater detail on the monetary side presented in Van Dormael.

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394 International Organization

multilateralism versus discrimination. It was an achievement of historic pro-

portions for the United States to win adherence to the principle of mul-

tilateralism, particularly in trade. It required the expenditure of enormous

resources. Still, it would not have succeeded but for an acceptable resolution

of the dilemma between internal and external stability, the story's second

theme. Here, history seemed not to require any special agent. True, the

United States from the start of the negotiations was far less "Keynesian" in

its positions than Great Britain. Within the United States, the social and

economic reforms of the New Deal had lacked ideological consistency and

programmatic coherence, and opposition had remained firmly entrenched.

The transformation of the full-employment bill into the Employment Act of

1946 demonstrated the country's continuing ambivalence toward state inter-

vention. This, of course, affected the outcome of the negotiations. Indeed,

the United States would come to use its influence abroad in the immediate

postwar years, through the Marshall Plan, the Occupation Authorities in

Germany and Japan, and its access to transnational labor organizations, for

example, to shape outcomes much more directly, by seeking to moderate the

structure and political direction of labor movements, to encourage the exclu-

sion of Communist Parties from participation in governments, and generally

to discourage collectivist arrangements where possible or at least contain

them within acceptable Center-Left bounds.

But these differences among

the industrialized countries concerned the forms and depth of state interven-

tion to secure domestic stability, not the legitimacy of the objective.

In the event, on the list of Anglo-American postwar economic objec-

tives,

multilateralism was joined by collaboration to assure domestic eco-

nomic growth and social security as early as the Atlantic Charter, issued in

August

1941.

Indeed, progress on multilateralism seemed to be made contin-

gent upon progress in expanding domestic production, employment, and the

exchange and consumption of goods in Article VII of the Mutual Aid

Agreement (Lend Lease), which was signed in February 1942.

On the monetary side, however different White's Stabilization Fund

may have been from Keynes's Clearing Union (and there were considerable

differences on instrumentalities), they shared a common purpose: intergov-

Charles S. Maier, "The Politics of Productivity: Foundations of American International

Economic Policy After World War II," International Organization 31 (Autumn 1977), and

Robert W. Cox, "Labor and Hegemony," International

Organization

31 (Summer 1977).

Interesting in this regard is the role played by Leon Keyserling, appointed in 1949 a? the

first Keynesian on the Council of Economic Advisers, in helping to undermine the previous

"economy-in-defense" policy by providing economic support for the proposed rearmament

program contained in NSC-68 (Fred M. Kaplan, "Our Cold-War Policy, Circa '50," New York

Times Magazine, 18 May 1980). Radicals have implied that "military Keynesianism" was the

only kind of Keynesianism acceptable in the U.S. at that time (cf. Fred L. Block, The

Origins

International Economic Disorder [Berkeley: University of California Press, 1977], pp. 102-8).

But this interpretation slights the substantial state involvement in the U.S. in the postwar years

in infrastructural investment (interstate highways, for

example),

agricultural price supports, and

even in social expenditures, well before the full impact of Keynesian thinking was felt on mon-

etary and fiscal policy in the 1960s.

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International regimes, transactions, and change 395

ernmental collaboration to facilitate balance-of-payments equilibrium, in an

international environment of multilateralism and a domestic context of full

employment. Early in 1943, Adolf Berle foresaw that the compromise on the

means to achieve these ends would have to "free the British people from

their fear that they might have to subordinate their internal social policy to

external financial policy, and to assure the United States that a share of its

production was not claimable by tender of a new, 'trick' currency, and that

the economic power represented by the US gold reserves would not be sub-

stantially diminished."

By the time of the Anglo-American "Joint State-

ment of Principles," issued not long before the Bretton Woods Conference,

the consensus that had emerged provided for free and stable exchanges, on

the one hand, and, on the other, the erection of a "double screen," in

Cooper's words,

to cushion the domestic economy against the strictures of

the balance of payments. Free exchanges would be assured by the abolition

of all forms of exchange controls and restrictions on current transactions.

Stable exchanges would be secured by setting and maintaining official par

values, expressed in terms of gold. The "double screen" would consist of

short-term assistance to finance payments deficits on current account, pro-

vided by an International Monetary Fund, and, so as to correct "fundamen-

tal disequilibrium," the ability to change exchange rates with Fund concur-

rence. Governments would be permitted to maintain capital controls.

In devising the instruments of the monetary regime, the most intense

negotiations were occasioned by the functioning of

the

"double screen." On

the question of the Fund, Keynes had argued for an international overdraft

facility. This would have created some $25 billion to $30 billion in new li-

quidity, with the overall balance of credits and debits in the Fund being ex-

pressed in an international unit of account, which was to be monetized. The

arrangement would have been self-clearing unless a country were out of bal-

ance with the system as a whole, in which case corrective measures were

called for on the part of creditors and debtors alike. The White plan origi-

nally called for a $5 billion Fund, though the U.S. ultimately agreed to $8.8

billion. However, these funds would have to be paid in by subscription. Ac-

cess to the Fund as well as total liability were strictly limited by quotas,

which in turn reflected paid-in subscriptions—the initial U.S. contribution

was $3,175 billion. And a country that sought to draw on the Fund had to

make "representations" that the particular currency was needed for making

payments on current account. Thus, with the United States, the sole major

creditor country, seeking to limit its liabilities, the first part of the "double

screen" was both more modest and more rigid than the United Kingdom and

other potential debtor countries would have liked. But there was no question

about its being provided. On the second part, exchange rate changes, the

Paraphrased by Van Dormael, Bretton Woods, p. 103.

Richard N. Cooper, "Prolegomena to the Choice of an International Monetary System,"

International Organization 29 (Winter 1975), p. 85.

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396 International Organization

U.K. was more successful in assuring automaticity and limiting intrusions

into the domain of domestic policy. The Fund was required to concur in any

change necessary to correct a "fundamental disequilibrium," and if the

change was less than 10 percent the Fund was given no power even to raise

objections. Most important, the Fund could not oppose any exchange rate

change on the grounds that the domestic social or political policies of the

country requesting the change had led to the disequilibrium that made the

change necessary. Lastly, the final agreement did include a provision to shift

at least some of the burden of adjustment onto creditor countries. This was

by means of the "scarce currency" clause, which Keynes, in the end,

thought to be quite important. It empowered the Fund, by decision of the

Executive Directors, to ration its supply of any currency that had become

scarce in the Fund and authorized members to impose exchange restrictions

on that currency.

Once negotiations on postwar commercial arrangements got under way

seriously, in the context of preparations for an International Conference on

Trade and Employment, the principles of multilateralism and tariff reduc-

tions were affirmed, but so were safeguards, exemptions, exceptions, and

restrictions—all designed to protect the balance of payments and a variety of

domestic social policies. The U.S. found some of these abhorrent and sought

to limit them, but even on so extraordinary an issue as making full employ-

ment an international obligation of governments it could do no better than to

gain a compromise. The U.S. Senate subsequently refused to ratify the

Charter of the International Trade Organization (ITO), as a result of which a

far smaller domain of commercial relations became subject to the authority

of an international regime than would have been the case otherwise. The

regulation of commodity markets, restrictive business practices, and inter-

national investments were the most important areas thereby excluded.

But

within this smaller domain, consisting of the more traditional subjects of

commercial policy, the conjunction of multilateralism and safeguarding

domestic stability that had evolved over the course of the ITO negotiations

remained intact.

Jacob Viner summarized the prevailing consensus in 1947, at the time of

the negotiations for a General Agreement on Tariffs and Trade (GATT):

"There are few free traders in the present-day world, no one pays any atten-

tion to their views, and no person in authority anywhere advocates free

trade."

The United States, particularly the State Department, was the

The provisions of the ITO Charter became internally so inconsistent that it is difficult to

say just what sort of a regime it would have given rise to. See William Diebold Jr., "The End of

the ITO," Princeton Essays in International Finance 16 (Princeton, N.J., October 1952).

The following account draws heavily on Gardner, Sterling-Dollar Diplomacy, and on

Gerard and Victoria Curzon, "The Management of Trade Relations in the GATT," in Andrew

Shonfield, ed., International Economic Relations of the Western

World,

1959-1971, vol. I

(London: Oxford University Press for the Royal Institute of International Affairs, 1976).

Jacob Viner, "Conflicts of Principle in Drafting a Trade Charter," Foreign Affairs 25

(January 1947), p. 613.

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International regimes, transactions, and change 397

prime mover behind multilateralism in trade. But this meant nondiscrimina-

tion above all. The reduction of barriers to trade of course also played a role

in American thinking, but here too the concern was more with barriers that

were difficult to apply in a nondiscriminatory manner. Tariff reduction was

subject to much greater domestic constraint. For their part, the British made

it clear from the beginning that they would countenance no dismantling of

imperial preferences unless the U.S. agreed to deep and linear tariff cuts.

The proposed Commercial Union, put forward by James Meade on behalf of

Britain, contained such a formula, together with an intergovernmental code

of conduct for trade and machinery to safeguard the balance of payments.

But the U.S. Congress could not be expected to accept linear tariff cuts.

The General Agreement on Tariffs and Trade made obligatory the

most-favored-nation rule, but a blanket exception was allowed for all exist-

ing preferential arrangements, and countries were permitted to form customs

unions and free trade areas. Moreover, quantitative restrictions were pro-

hibited, but were deemed suitable measures for safeguarding the balance of

payments—explicitly including payments difficulties that resulted from

domestic policies designed to secure full employment. They could also be

invoked in agricultural trade if they were used in conjunction with a domes-

tic price support program. The substantial reduction of tariffs and other bar-

riers to trade was called for; but it was not made obligatory and it was

coupled with appropriate emergency actions, which were allowed if a

domestic producer was threatened with injury from import competition that

was due to past tariff concessions. The Agreement also offered a blanket

escape from any of its obligations, provided that two-thirds of the contract-

ing parties approved. Lastly, procedures were provided to settle disputes

arising under the Agreement and for the multilateral surveillance of the invo-

cation of most (though not all) of its escape clauses. The principle of reci-

procity was enshrined as a code of conduct, to guide both tariff reductions

and the determination of compensation for injuries suffered.

To repeat my central point: that a multilateral order gained acceptance

reflected the extraordinary power and perseverance of the United States.

In the spring of 1947, the U.S. delegation arrived in Geneva armed with congressional

authorization for an overall tariff reduction to 50% of their 1945 levels (which, however, would

still have left U.S. tariffs relatively high), in return for elimination of preferences. But, at the

same time, the United States entered into preferential trade agreements with Cuba and the

Philippines. Though mutual concessions on several important items were made in Geneva, in

the end some 70% of existing British preferences remained intact (Gardner, Sterling-Dollar

Diplomacy, chap. 17).

At the Palm Springs Conference, Peter Kenen argued that this is true more for trade than

for money. He maintains that, with the exception of the particulars of the credit arrangement

(and the future role of the dollar, which I take up below), the general outlines of Bretton Woods

would not have differed appreciably had there not been an American hegemon present. This is

so because the basic design rested on a widely shared consensus. However, in trade, Kenen

suggests, it is unlikely that nondiscrimination would have been accepted as a guiding principle

had it not been for American "muscle." Keep in mind that even here the U.S. was forced to

accept the indefinite continuation of all existing preferential trade agreements.

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398 International Organization

But that multilateralism and the quest for domestic stability were coupled

and even conditioned by one another reflected the shared legitimacy of a set

of social objectives to which the industrial world had moved, unevenly but

"as a single entity." Therefore, the common tendency to view the postwar

regimes as liberal regimes, but with lots of cheating taking place on the

domestic side, fails to capture the full complexity of the embedded liberalism

compromise.

Complementary transaction flows

The postwar regimes for trade and money got off to a slow start. The

early GATT rounds of tariff negotiations were modest in their effects. As a

lending institution, the IMF remained dormant well into the 1950s. Mean-

while, bilateral currency arrangements in the late 1940s and early 1950s be-

came far more extensive than they had ever been in the 1930s, doubling to

some four hundred between 1947 and 1954.

But by the late 1950s, the

Europeans had "the worst of their post-war problems behind them—and

new ones had not yet come to take their place." Both Europe and the United

States were poised "on the brink of a decade of phenomenal expansion which

imperiously demanded wider markets through freer trade."

This in turn

demanded the elimination of exchange restrictions on current account.

Liberalization in trade and money soon followed.

Preoccupation with the fact of subsequent liberalization has tended to

detract from consideration of its precise characteristics, at least on the part of

political scientists.

The questions that have dominated discussion concern

the impact of liberalization on the expansion of international economic

transactions, or the effects on both of U.S. hegemony (with a time lag),

operating directly by means of

the

exercise of American state power or indi-

The third panel of the Bretton Woods triptych was the World Bank, which to some extent

may also be said to reflect this conjunction of objectives. True, the grandiose concept of an

international bank to engage in countercyclical lending and to help stabilize raw materials

prices, which both White and Keynes had entertained at one point, was shelved due to opposi-

tion on both sides of the Atlantic. Nevertheless, for the first time, international public responsi-

bility was acknowledged for the provision of investment capital, supplementing the market

mechanism. For Secretary Morgenthau's strong views on this subject, see Gardner, Sterling-

Dollar Diplomacy, p. 76.

Of the

1954

total, 235 existed in Europe. Margaret G. De Vries and J. Keith Horsefield, The

IMF, 1945-1965, vol. 2 (Washington, D.C.: International Monetary Fund, 1969), chap. 14.

Curzon and Curzon, "Management of Trade," pp. 149-50.

A notable exception is Kenneth N. Waltz, "The Myth of National Interdependence," in

Charles P. Kindleberger, ed., The International Corporation (Cambridge: MIT Press, 1970).

However, Waltz considers the characteristics of an international division of labor at any given

point in time to be a product solely of international polarity. And this, in turn, requires that he

consider Great Britain in the 19th century to have been but one among several coequal members

of a plural system. He concludes that the international division of labor in the present era has

been less extensive in kind and degree than in the pre-World War I setting because o/bipolarity

today and multipolarity then.

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International regimes, transactions, and change 399

rectly through the internationalization of American capital. These of course

are interesting questions, but they are not the questions that concern me

here.

Having argued that the postwar regimes for trade and money in-

stitutionalized the normative framework of embedded liberalism, I now ex-

amine whether and how this framework is reflected in the character of the

international economic transactions that emerged when imminent expansion

"imperiously" demanded liberalization.

I proceed by way of hypothesis. Imagine a world of governments seized

by the compelling logic of David Ricardo; following a bout with mercan-

tilism, this world is poised "on the brink" of liberalization. What kinds of

international economic transactions are governments likely to encourage?

Under a system of perfectly free trade each country naturally devotes

its capital and labour to such employments as are most beneficial to

each. This pursuit of individual advantage is admirably connected with

the universal good of the whole. By stimulating industry, by rewarding

ingenuity, and by using most efficaciously the peculiar powers bestowed

by nature, it distributes labour most effectively and most economically;

while, by increasing the general mass of productions, it diffuses general

benefit, and binds together, by one common tie of interest and inter-

course, the universal society of nations throughout the civilised world.

It is this principle which determines that wine shall be made in France

and Portugal, that corn shall be grown in America and Poland, and that

hardware and other goods shall be manufactured in England.

In short, our governments are likely to encourage an international division of

labor based on the functional differentiation of countries that reflects their

comparative advantage. Trade among them therefore would be socially

highly profitable.

Now imagine the same governments under similar circumstances, the

only difference being that they are committed to embedded liberalism rather

than to laissez-faire. What sorts of international economic transactions

would we expect them to favor? The essence of embedded liberalism, it will

be recalled, is to devise a form of multilateralism that is compatible with the

requirements of domestic stability. Presumably, then, governments so

committed would seek to encourage an international division of labor which,

while multilateral in form and reflecting some notion of comparative advan-

tage (and therefore gains from trade), also promised to minimize socially

disruptive domestic adjustment costs as well as any national economic and

political vulnerabilities that might accrue from international functional dif-

ferentiation. They will measure collective welfare by the extent to which

these objectives are achieved. However, as neoclassical trade theory defines

the term, the overall social profitability of this division of labor will be lower

than of the one produced by laissez-faire.

David

Ricardo,

Works,

ed.

by Piero

Sraffa

(Cambridge:

Cambridge University

Press,

1955),

1:133-34.

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400 International Organization

Let us return from the world of hypothesis and review briefly the

character of postwar transaction flows.

The great bulk of international economic transactions since the 1950s

shows very definite patterns of concentration. The growth in trade has ex-

ceeded the growth in world output, and the most rapidly growing sector of

trade has been in manufactured products among the industrialized countries.

Within this general category, some two-thirds of the increase in trade from

1955 to 1973 is accounted for by "intracontinental" trade, that is, trade

within western Europe and within North America.

What is more, it appears

that trade in products originating in the same sector, or "intra-industry"

trade, is growing far more rapidly than trade involving products of different

sectors.

This in turn reflects a secular decline of specialization in different

sectors of manufacturing activity among the industrialized countries.

Lastly, there is evidence to suggest that trade among related corporate par-

ties,

or "intrafirm" trade, accounts for an ever-larger portion of total world

trade.

On the financial side, international investments have been rising

even more rapidly than world trade, and they conform roughly to the same

pattern of geographical, sectoral, and institutional concentration.

This is

also true of international transfers of short-term funds.

What kind of division of labor among the industrialized countries do

these patterns portray? It is, in Cooper's words, one characterized by a

The facts are well enough known, but not enough is made of them. For example,

find that

much

what

have

to say is

implied

in if

not anticipated

the locus classicus

liberal

interdependence theorists: Richard N. Cooper,

The

Economics of Interdependence (1968; New

York: Columbia University Press, 1980). However, Cooper was concerned with telling

differ-

ent story,

so he

chose

not to

take

issues and conclusions that, from

the

present vantage

point, appear more scintillating. To cite but one illustration, Cooper demonstrates

converging

cost structure among the industrialized countries. His major concern

is to

argue that this con-

tributes

the increasing marginal price sensitivity of rapidly growing foreign trade—that is,

interdependence

as he

defines

the

term.

passing,

mentions another implication

this

convergence, but one "which will not much concern

here."

It is

"that international trade

becomes less valuable from the viewpoint

increasing economic welfare" (pp. 75-76). This

striking departure from the textbook case for free trade, amidst an explosion

world trade,

left unexplored.

Richard Blackhurst, Nicolas Marian, and Jan Tumlir, "Trade Liberalization, Protectionism

and Interdependence," GATT Studies

International Trade

(November 1977), pp. 18-19.

Ibid., pp.

10-11,

15-16; and Charles Lipson's article

this volume.

Richard Cooper has traced this back

1938, and finds that ten of thirteen manufacturing

sectors show declines

variation among countries, and none shows

sharp increase. Cooper,

Economics

Interdependence, pp. 74-78.

In a

further refinement, Blackhurst, Marian,

and

Tumlir, "Trade Liberalization," add that the proportion

imports and exports consisting

intermediate manufactured goods,

opposed

goods destined for final use,

rising rapidly,

particularly

in the

category

engineering products. This reflects, among other things,

"the

growth

intra-branch specialization, foreign processing and sub-contracting" (pp. 15-16).

Gerald K. Helleiner, "Transnational Corporations and Trade Structure: The Role of

Intra-Firm Trade," in Herbert Giersch, ed., Intra-industry Trade (Tubingen: J. C. B. Mohr,

Paul Siebeck, 1979).

For a historical overview, see John H. Dunning, Studies in International Investments

(London: Allen & Unwin, 1970).

A recent survey may be found

Joan Edelman Spero,

The

Failure

of the

Franklin

National

Bank (New York: Columbia University Press, 1980), chap. 2.

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International regimes, transactions, and change 401

"narrowing of the economic basis" on which international transactions rest.

By this he means that international economic transactions increasingly reflect

the effects of marginal cost and price differentials of similar activities and

products, rather than the mutual benefits of divergent investment, produc-

tion, and export structures. Moreover, within this division of labor there is a

critical shift in functional differentiation from the level of country and sector

to the level of product and firm. And the economic gains from trade are

correspondingly smaller.

All of this stands in stark contrast to the half-century prior to 1914.

Intercontinental trade was higher.

Intersectoral trade dominated.

Long-

term capital movements favored capital-deficient areas, and were concen-

trated overwhelmingly in the social-overhead capital sector of

the

borrowing

countries.

Marginal cost and price differentials appear to have had only

limited bearing on the pattern of trade and investment flows;

the require-

ments of international functional differentiation and, later, absorptive

capacity, account for much more of the variance.

Lastly, the large dif-

Economics of Interdependence, p. 68.

Ibid., p. 76. Cooper adds that both product differentiation and economies of scale may

modify this conclusion, "but several of the countries under consideration have sufficiently large

domestic markets to reap most benefits likely to flow from large scale production even without

trade."

A. G.

Kenwood

and A. L.

Lougheed,

The

Growth

of the

International Economy,

1820-

1960 (London: Allen

Unwin, 1971), chap.

For

example,

in 1913

Great Britain imported

87% of the raw

materials

consumed

(excluding coal),

and

virtually

much

of its

foodstuffs. Moreover,

the

primary prod-

ucts

world trade from 1876-1913 remained steady

about

62%,

even though total world

trade trebled.

And

right

up to

World

War I,

Germany, Great Britain's main industrial rival,

remained

major source

supply

manufactured materials

for

Great Britain, including

chemicals

and

dyestuffs. Kenwood

and

Lougheed, Growth of International Economy, chap.

and Briggs, "World Economy,"

p. 43.

"During

the

fifty years preceding

1914, the

Americas received

51% of

British portfolio

foreign investment (North America

34%,

South America 17%); overall, some

69% of

British

portfolio foreign investment went into transportation, public utilities,

and

other public works;

12%

into extractive industries; and only 4% into manufacturing. Matthew Simon, "The Pattern

of New British Portfolio Foreign Investment, 1865-1914," in A. R. Hall, ed., The Export of

Capital from Britain (London: Methuen, 1968), p.

23;

cf. A. K. Cairncross, Home and

Foreign

Investment,

1870-1913

(Cambridge: Cambridge University Press, 1953). A broader survey of

the various forms of investment from all sources may be found in Kenwood and Lougheed,

Growth of International Economy, chap. 2.

For trade, see ibid., chap. 5; for investment, A. I. Bloomfield, "Patterns of Fluctuations in

International Investment Before 1914," Princeton Studies in International Finance 21 (1968),

esp.

pp. 35-40. Cooper (Economics of Interdependence, pp. 151-52), concerned to show that

interdependence in the pre-1914 world economy "was something of an illusion," argues that

despite the freedom of capital to move, "it did not in fact move in sufficient volume even to

erase differences in short-term interest rates." (Emphasis added, to underscore his looking at

the pre-1914 world through post-1960 lenses).

"The industrialization of Europe and the growth of

its

population created a steadily growing

demand for raw materials and foodstuffs, much of which had to be imported. At the same time,

important advances in technical knowledge, especially in transportation and communications,

and the existence of underpopulated and land-rich countries in other continents provided the

means whereby these demands could be met. The greater part of

the

foreign investment under-

taken during the nineteenth century was concerned with promoting this international speciali-

zation between an industrial centre located in Europe (and, later, in the United States) and a

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402 International Organization

ferences in comparative cost structures meant that trade was socially very

profitable.

To explain fully the differences between the pre-1914 and the post-

19508 international division of labor would require linking them to a number

of potentially causal factors. Among these, the most frequently invoked are

differences in the relative levels of economic and technological development

of the major countries concerned;

the evolution of the global organization

of capital over the course of the past century;

the effects of differences in

the configuration of interstate power in the two eras;

and the respective

external consequences of shifts in domestic state-society relations.

Inter-

national regimes thus do not determine these outcomes. At the same time,

however, the close similarity between our hypothesized expectations of

laissez-faire liberalism and embedded liberalism and actual patterns of trans-

action flows suggests that regimes do play a mediating role.

This mediating role of the postwar regimes for trade and money, and the

complementary transaction flows to which they gave rise, have come to be

recognized even by those most consistently espousing conventional liberal

orthodoxies. As Charles Lipson points out, GATT negotiations have

strongly favored intra-industry specialization.

And a recent GATT study

notes that liberalization has produced "surprisingly few adjustment prob-

lems"

among the industrialized countries because there has been "no aban-

donment of whole industrial sectors." Instead, specialization is "achieved

mainly by individual firms narrowing their product range. . . ."

As a result,

national export structures among the industrialized countries are becoming

ever more alike.

On reflection, however, this outcome should not cause

surprise. For governments pursuing domestic stabilization, it is quite safe to

liberalize this kind of trade. Adjustment costs are low. It poses none of the

vulnerabilities that a true Ricardian specialization among sectors would

pose.

Whatever political vulnerabilities might arise from it are more or less

shared by all parties to it, so that it is unlikely to lead to a contest for political

periphery of primary producing countries." Kenwood and Lougheed, Growth of International

Economy, p. 48.

Cooper, Economics of Interdependence, p. 152.

This is generally considered to be the driving force by liberal economists, as exemplified by

Cooper, ibid.

Marxists have tended to stress this factor; see, for example, Christian Palloix, "The

Self-

Expansion of Capital on a World Scale," Review of Radical Political Economy 9 (Summer

1977),

which is drawn from his larger work, L'internationalisation du capital (Paris: Maspero,

1975).

This is the realists' explanandum, as developed in Waltz, "Myth of National Interde-

pendence," though most realists, unlike Waltz, would characterize the distribution of power in

the pre-1914 world political economy as having been hegemonic. Cf. Robert Gilpin, U.S. Power

and the Multinational

Corporation

(New York: Basic Books, 1975).

See Polanyi's Great Transformation for one expression of this social-organicist position;

for another, from a different location on the political spectrum, see Gunnar Myrdal, Beyond the

Welfare State (New Haven: Yale University Press, 1960).

His article in this volume.

Blackhurst, Marian, and Tumlir, "Trade Liberalization," p. 11.

See Lipson's article in this volume, and the references he cites.

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International regimes, transactions, and change 403

advantage among them. And all the while it offers gains from trade. In con-

trast, there has been no progress in liberalizing agricultural trade. Further-

more, where trade in industrial products is based on a more classical notion

of comparative advantage, as it is with imports from the so-called newly

industrializing countries, the trade regime has encountered difficulty.

Apart from oil, North-South raw materials trade has posed few problems for

the industrialized countries, both because of their overall domination of

world trade and because of the characteristics of the raw materials sector.

International financial flows may be expected to follow closely the

evolving patterns of production and trade. Since the liberalization of pay-

ments facilities at the end of the 1950s and the loosening of capital controls in

the early 1960s, they have done so. Two additional features of international

financial transactions bear on my argument. First, international investments

in social overhead capital, which provided the great bulk of private flows in

the 1865-1914 period, now are almost the exclusive domain of national and

international public institutions, acting alone or in cofinancing arrangements

with private capital.

This has meant a welcome supplement to the vagaries

of the market mechanism for recipient countries, and for donor countries as

well, though in a different sense. For the donor countries, it has meant an

ability to exercise far greater discretion over patterns of investment deci-

sions in this leading sector than governments in the 19th century either en-

joyed or sought. Second, the international financial markets that emerged in

the 1960s, above all the Euromarkets, offered governments an important

supplement to the monetary regime. Under Keynes's Clearing Union, capi-

tal controls were combined with generous overdraft allowances and parity

changes as needed. In their absence or, more accurately, under the more

modest forms of each that came to prevail in the 1960s, these markets of-

fered the prospect of an adjustment mechanism to cushion both surplus and

deficit countries (at least in the short run). Accordingly, governments did

little to control and much to encourage the formation and growth of these

markets.

Today, they constitute the main source of balance-of-payments

financing.

This is not to suggest that the trade regime has encountered no other difficulties. One of the

more serious is surplus capacity, which shows that the apparent ease with which liberalization

has been accommodated was also dependent upon unprecedented rates of economic growth.

Paul Bairoch,

The

Economic Development of the Third World since 1900 (Berkeley: Uni-

versity

California Press, 1975), chap.

Dunning, International Investments, chap. 1. Governmental loans were largely confined

Continental Europe

in the

19th century,

and

were small

comparison with private loans.

Today, the situation

reversed

each respect.

good discussion of the role of governments

triggering the expansion of these markets

may

found

Susan Strange, International Monetary Relations, vol.

2 of

Shonfield, ed., Inter-

national Economic Relations of the Western

World,

esp. chap.

Strange's primary concern

to show how the Euromarkets transformed from "good servant"

"bad master,"

making

difficult the conduct of domestic monetary policy and generally eroding national monetary sov-

ereignty. The good servant role received rather more attention again

the mid

late 1970s,

following

the

enormous payments imbalances produced

by oil

price increases. More

this

general problem below.

Benjamin

Cohen's article

this volume.

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404 International Organization

In sum, international economic regimes do not determine international

economic transactions. For determinants we have to look deeper into basic

structural features of the world political economy. But, as we have seen, nor

are international economic regimes irrelevant to international economic

transactions. They play a mediating role, by providing a permissive envi-

ronment for the emergence of certain kinds of transactions, specifically

transactions that are perceived to be complementary to the normative

frameworks of the regimes having a bearing on them. This conclusion does

not imply that perceptions are never mistaken, that "good servants" never

go on to become "bad masters," that complementarity is never condemned

to coexist with contradiction—or, indeed, that international regimes have a

bearing on the entire range of international transactions. Nor does it suggest

that the effectiveness of international regimes may not become undermined

by such disjunctions. The question of possible responses to second-order

consequences of this sort takes us into a different analytical realm, that of

regime change.

Norm-governed change

The 1970s witnessed important changes in central features of the post-

war regimes for money and trade. Among political scientists and some

economists, the decline of U.S. hegemony is most often adduced as the

causa causans of these changes. Terms such as "erosion" and even "col-

lapse" are most often invoked to describe them. Triffin depicted the Jamaica

Accords as "slapstick comedy" rather than monetary reform, while for a

former U.S. trade official the Tokyo Round "performed the coup de grace"

on liberal trade.

The sense of discontinuity is pervasive. Is it justified?

Once again I take temporary refuge in hypothesis. If we allow that in-

ternational regimes are not simply emanations of the underlying distribution

of interstate power, but represent a fusion of power and legitimate social

purpose, our cause and effect reasoning becomes more complex. For then

the decline of hegemony would not necessarily lead to the collapse of re-

gimes, provided that shared purposes are held constant. Instead, one ought

to find changes in the instrumentalities of

regimes,

which, under hegemony,

are likely to have relied on disproportionate contributions by and therefore

reflected the preferences of the hegemon.

At the same time, one ought to

find continuity in the normative frameworks of regimes, which would still

Robert Triffin, "Jamaica: 'Major Revision' or Fiasco," in Edward M. Bernstein et al.,

"Reflections on Jamaica," Princeton Essays in International Finance 115 (Princeton, N.J.,

1976),

as cited in Benjamin J. Cohen,

Organizing

the World's Money (New York: Basic Books,

1977),

chap. 4, fn. 24; and Thomas Graham, "Revolution in Trade Politics,"

Foreign

Policy 36

(Fall 1979), p. 49.

Supporters of the hegemonic stability position speak of "burdens of leadership"; critics, of

"exorbitant privileges." The empirical referents are the same.

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International regimes, transactions, and change 405

reflect shared purposes. And the new instrumentalities ought to be more

appropriate to the new power distribution while remaining compatible with

the existing normative framework. In short, the result would be "norm-

governed" change.

Let us turn back to the post-1971 changes in the regimes for money and

trade. On the monetary side, the major changes at issue are the end of the

dollar's convertibility into gold and the adoption of floating rates of ex-

change, both in violation of

the

original Articles of Agreement. On the trade

side,

no discrete event fully symbolizes the perceived discontinuities,

though they are characterized generally as "the new protectionism" and

include the proliferation of nontariff barriers to trade and violations of the

principle of nondiscrimination, in the form of domestic interventions as well

as internationally negotiated export restraints. In both cases a weakening of

the central institutions, the IMF and the GATT, is taken to reflect the same

syndrome.

It is my contention that, on balance, the hypothesis of norm-governed

change accounts for more of the variance than claims of fundamental dis-

continuity.

Base-line

The base-line against which change is here to be compared consists of

two parts. First, if we compare changes in the monetary and trade regimes

against some ideal of orthodox liberalism, then we are bound to be disap-

pointed if not shocked by recent trends. But we are also bound to be misled.

For orthodox liberalism has not governed international economic relations at

any time during the postwar period. My starting point, of course, is the in-

stitutional nexus of embedded liberalism. Within this framework, it will be

recalled, multilateralism and domestic stability are linked to and conditioned

by one another. Thus, movement toward greater openness in the interna-

tional economy is likely to be coupled with measures designed to cushion the

domestic economy from external disruptions. At the same time, measures

adopted to effect such domestic cushioning should be commensurate with

the degree of external disturbance and compatible with the long-term expan-

sion of international transactions. Moreover, what constitutes a deviation

from this base-line cannot be determined simply by the "objective" exam-

ination of individual acts in reference to specific texts. Rather, deviation will

be determined by the "intersubjective" evaluation of the intentionality and

consequences of acts within the broader normative framework and prevail-

ing circumstances.

The second component of my base-line is the peculiar relation of the

United States to the institutionalization of embedded liberalism immediately

after the war. The United States was, at one and the same time, the

paramount economic power and the country in which the domestic state-

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406 International Organization

society shift remained the most ambivalent. This had several complex con-

sequences, with differential effects on the two regimes. The United States

would have to provide the bulk of the material resources required to trans-

late the negotiated compromises into institutional reality. This would give

the U.S. influence that it could be expected to exercise in keeping not only

with its own interests, but also with its preferred interpretations of both the

compromises and how they were to be realized. The impact on the in-

stitutionalization of the trade agreement, once the ITO was abandoned, on

the whole supported the basic design and need not detain us. But the in-

stitutionalization of the monetary agreement was profoundly skewed by the

asymmetrical position of the

U.S.

At Bretton Woods, through a combina-

tion of stealth and inevitability, the dollar had become equated with gold and

was recognized officially but apparently without the knowledge of Keynes as

the key currency.

Once the IMF came into existence, the U.S. insisted on

terms of reference and a series of "interpretations" of the Articles, as well

as decisions of the Executive Directors, that had the effect of launching what

would come to be known as "IMF orthodoxy" and, inadvertently or other-

wise,

guaranteeing that there would be no intergovernmental alternative to

U.S.

payments deficits as the major instrument of international liquidity cre-

ation.

Thus, the monetary regime that emerged in the 1950s already dif-

fered in several important respects from the intent of Bretton Woods.

It is against this starting point that subsequent developments must be

assessed.

The differential impact on the two regimes is explained largely by the total asymmetry that

prevailed in the monetary domain and the relatively more balanced configuration in trade. In the

case of money, the U.S. possessed the fungible resources that everyone required, including

some two-thirds of the world's monetary gold supply, which it acquired as an unbalanced cred-

itor country before World War

II.

At the same time, the U.S. saw no situation in which it might

become dependent upon the regime as a debtor. The case of trade is inherently somewhat more

symmetrical, since the mutual granting of access to markets is the key resource. It is also a

domain in which the domestic constraints within the United States differed little from domestic

constraints elsewhere.

Harry Dexter White and his staff had complete control over the organization of meetings,

scheduling

subjects, rules

procedure, and drafting

all official documentation including

daily minutes

and the

Final Act.

addition, White headed

the

so-called special committee,

which resolved ambiguities and elaborated operational details. According

Van Dormael,

whose account

draw here, this committee "prepared for inclusion in the Final Act

number of

provisions that were never discussed

nor

even brought

up"

(Bretton Woods,

pp. 202-

3).

Even senior members

the American delegation were

not

always fully aware

what

White was

to; Dean Acheson, normally

slouch, expressed confusion, and what

sus-

pected he didn't much care for (ibid., pp. 200-203). In any case, Van Dormael attributes several

features

the Fund

these organizational and procedural manipulations, the most important

of which was an equation that no one else became aware of until after the fact, between gold and

the U.S. dollar. This was

clear violation

the Joint Statement

Principles. Keynes had

rejected any special role for the dollar;

favored the monetization

an international unit

account,

and he

assumed

multiple-currency reserve system.

But in the

final analysis,

the

major consequence of White's maneuverings on this issue was simply to give de jure expression

to what surely would have occurred de facto and have been sanctified by subsequent practice.

At the inaugural meeting of the Boards of Governors of the IMF and IBRD, held

Savan-

nah, Georgia,

the

United States succeeded

having both institutions located

Washington,

which could be expected

amplify day-to-day influence by Congress and the Administration,

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International regimes, transactions, and change 407

The evolving monetary regime

The post-1971 inconvertibility of the dollar into gold may be usefully

framed within the broader rubric of liquidity problems and floating rates of

exchange within adjustment problems. I take up each in turn, and conclude

with a comment on the IMF.

As noted, the liquidity provisions of Bretton Woods proved inadequate,

even though, as Cohen points out elsewhere in this volume, an adequate

supply of international liquidity was one of its cardinal principles. The

growing volume of international trade increased liquidity requirements, as

did the growing magnitude of speculative pressure on exchange rates. The

dollar exchange standard, which had "solved" this problem in the short run,

was already in trouble when the monetary regime first began to function

without the protective shield of the postwar transitional arrangements. In

1958,

just as the Europeans were resuming full convertibility of their curren-

cies,

U.S. gold reserves fell permanently below U.S. overseas liabilities.

And before the next year was out, Professor Triffin had articulated his fa-

mous dilemma.

Throughout the 1960s, a seemingly endless series of stop-

gap measures was tried in an effort to devise what Robert Roosa, former

and in having the Executive Directors be full-time and highly paid officials, which was seen by

the British as assuring greater Fund meddling in the affairs of members when they applied for

assistance. They were not mistaken. In May 1947, the United States pushed through a meeting

of the Executive Directors an "interpretation" of the Articles of Agreement, to the effect that

the Fund could "challenge" the representations made by governments that a currency was

presently needed for balance-of-payments purposes, and that the Fund had the authority to

"postpone or reject the request, or accept it subject to conditions. ..." (Reproduced in

Horsefield,

The

IMF, 3: 227, emphasis added.) This interpretation was confirmed by decision of

the Executive Directors in 1948. And thus was IMF conditionality born. In a further decision,

taken in 1952, conditionality was elaborated to include "policies the member will pursue" to

overcome payments deficits. (Ibid., 3: 228.) In the meantime, once the Marshall Plan went into

effect, the United States secured further agreement that recipients of Marshall Plan aid could

not also draw on the Fund. With the Europeans effectively excluded from the Fund, its only

clients were developing countries. And it was during this period, on initiatives by the United

States and in response to requests for assistance by developing countries, that the Fund de-

veloped its program of "stabilization" measures: exchange depreciation, domestic austerity

measures, reduced public spending, rigid conditionality. Total drawings from the Fund dropped

to zero in 1950, and did not exceed 1947 levels again until 1956. With respect to liquidity, the

provisions of Bretton Woods were modest and proved inadequate. The European Reconstruc-

tion Program took care of Europe's needs. But the IMF repeatedly turned aside requests for

new measures to increase its own capacity to supply liquidity, maintaining that the real need

was for adjustment. The dollar exchange standard emerged as a "solution" to this problem.

(Strange, International Monetary Relations, pp. 93-96; Block, Origins of

International

Eco-

nomic

Disorder,

chap.

Richard Cooper, "Prolegomena

the Choice," p.

86;

and Benjamin J.

Cohen, in this volume.)

In essence, Triffin argued that if

the

United States corrected its balance of payments deficit,

the result would be world deflation because gold production at $35 an ounce could not ade-

quately supply world monetary reserves. But if the United States continued running a deficit,

the result would be the collapse of

the

monetary standard because U.S. foreign liabilities would

far exceed its ability to convert dollars into gold on demand. Robert Triffin,

Gold

and

the Dollar

Crisis (New Haven: Yale University Press, 1960), which was largely a reprint of two journal

articles that appeared the year before.

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408 International Organization

under-secretary of the treasury, called "outer perimeter defenses" for the

dollar. Roughly speaking, these measures were designed to make gold con-

version financially unattractive, to increase the capacity of the IMF to sup-

ply liquidity, and to increase the capacity of central banks to neutralize the

flow of speculative capital. The U.S. also undertook limited domestic mea-

sures to reduce its payments deficits and pressured surplus countries to re-

value their currencies. By 1968, however, the dollar had become in effect

inconvertible into gold; it was declared formally inconvertible in 1971.

The rise and fall of the gold-convertible dollar has placed the monetary

regime in a paradoxical predicament from beginning to end. It has altered

profoundly central instruments of the regime having to do with the creation of

international liquidity, the system of currency reserves, and the means of

ultimate settlement. It has also violated procedural norms, as unilateral ac-

tion usurped collective decision. But, at the same time, it seems to have been

understood and acknowledged all around that, under the material and politi-

cal conditions prevailing, the substantive norms of Bretton Woods, the com-

promise of embedded liberalism, would not have been realized in the first

place by any other means. So the regime today remains stuck with the unde-

sired consequences of means that helped bring about a desired end. What of

the long-term alternatives? Several have emerged in embryonic form. Were

they to be instituted more fully, all would imply a reduced official role for the

dollar and a return to the kinds of mechanisms anticipated by Bretton

Woods. An internationally created reserve asset exists in the form of the

special drawing right (SDR). A multiple-currency reserve system is slowly

coming into being, and a dollar-substitution account has been under negotia-

tion in the IMF. The U.S. views the SDR with disfavor and actively opposes

the substitution account. It has no objection to other currencies playing a

larger reserve role. As they do, however, the pressure may be expected to

increase both for a substitution facility covering all reserve currencies and for

a noncurrency reserve asset.

With respect to the problem of adjustment, as we saw, few provisions

for international measures to affect the economic policies of deficit or

surplus countries survived the Bretton Woods negotiations. And once the

new creditor-debtor relationships became established in the late 1950s, the

mechanism of exchange rate changes also failed to operate effectively. There

existed no means to compel surplus countries to appreciate, and among the

largest deficit countries, Great Britain resisted depreciation fiercely in a vain

attempt to preserve an international role for sterling while the United States,

as the "Nth country," necessarily remained passive. Thus, the only real

international leverage for adjustment was the conditionality provision de-

veloped by the Fund. The burden of domestic adjustment measures, there-

fore,

fell disproportionately on the developing countries. The adjustable peg

system became intolerable when imbalances in the external trade account

came to be overshadowed, both as a source of problems and as a response to

them, by massive movements of short-term speculative funds. This made it

increasingly difficult for governments to conduct domestic macroeconomic

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International regimes, transactions, and change 409

policy, and to support exchange rates under pressure. When, in the late

1960s, the full attention of these funds came to be focused on the dollar as a

result of dramatic deficits in the U.S. trade balance and current account, the

system of fixed rates of exchange was doomed.

Shifting to floating rates required formal amendment of the Articles of

Agreement of the Fund, the "slapstick comedy" act of which Triffin spoke.

This is prima facie evidence of discontinuity. However, living within the

Articles provided the international monetary system with an adjustment

mechanism that neither functioned effectively nor fulfilled the expectations

of Bretton Woods. What of

the

present arrangement? Three aspects bear on

the argument. First, it is important to keep distinct the instrument of fixed

rates from the norm of outlawing competitive currency depreciation and thus

providing a framework for relatively stable exchanges. There is a good case

to be made that the norm had become sufficiently well institutionalized and

recourse to competitive depreciation sufficiently unnecessary given other

means of influencing domestic macroeconomic factors that reliance on an

increasingly burdensome instrument, which itself had begun to contribute to

currency instability, could no longer be justified.

Moreover, experience

since has shown the managed float to be capable of avoiding serious

disorderliness—the early months of new administrations in Washington

providing the major exceptions—and to have few if any deleterious conse-

quences for international trade. Second, floating rates were widely perceived

to provide a greater cushion for domestic macroeconomic policy, which was

increasingly subjected to dislocation from speculative capital flows that were

often quite out of proportion to underlying economic reality. It is clear now

that the degree of insulation is less than was advertised, but in the absence of

uniform and fairly comprehensive capital controls it is probably as much as

can be secured. Third, as an adjustment mechanism, the managed float ap-

pears to function more symmetrically than fixed rates did. Not only have

surplus countries been forced to take notice, but the precipitous depreciation

of the U.S. dollar caught the attention of American policy makers in the au-

tumn of 1978 more effectively than past balance-of-payments deficits had

done.

On the evolution of

the

IMF we can be

brief;

its tendency seems to be to

come full circle. One does not want to exaggerate recent changes in the

Fund, especially in relation to the developing countries. Nevertheless, its

financing facilities have been considerably expanded, repayment periods

lengthened, and conditionally provisions relaxed somewhat as well as now

requiring the Fund "to pay due regard to the domestic social and political

objectives" of borrowing countries.

Moreover, decision-making power

within the Fund has been reapportioned, at least to the extent of distributing

Richard Cooper enumerates the pros and cons of these and related issues in "Prolegomena

to the Choice," esp. pp.

80-81.

Reported in The New York Times, 5 February 1980. In exploring the reasons for this

change, the Times cites a "Washington wit" who "once said that the monetary fund had top-

pled more governments than Marx and Lenin combined."

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410 International Organization

veto power more equitably. These changes began in the late 1950s, to make

the Fund more acceptable to the Europeans once they accepted the full obli-

gations of IMF membership; they continued in the 1960s to reflect the eco-

nomic status of

the

European Community and Japan; and they were acceler-

ated and aimed increasingly at the developing countries in the 1970s, as a

result of the massive payments imbalances produced by new energy terms of

trade and subsequent fears about the stability of the international financial

system.

The evolution of

the

trade regime

The sense of discontinuity concerning the international trade regime is

illustrated in the following excerpt from a Wall Street Journal article, entitled

"Surge in Protectionism Worries and Perplexes Leaders of Many Lands":

After three decades of immense increase in world trade and living

standards, exports and imports are causing tense pressures in nearly

every nation and among the best of allies. The U.S. sets price floors

against Japanese steel, Europe accuses the U.S. of undercutting its

papermakers, the Japanese decry cheap textiles from South Korea,

French farmers have smashed truckloads of Italian wine, and AFL-CIO

President George Meany rattles exporters world-wide by calling free

trade—'a joke.'

By now, even its most severe critics realize that "the new protectionism" is

not simply the latest manifestation of "old-style" protectionism. "The

emergence of the new protectionism in the Western world reflects the vic-

tory of the interventionist, or welfare, economy over the market econ-

omy."

However, they continue to have difficulty appreciating that the new

protectionism is not an aberration from the norm of postwar liberalization,

but an integral feature of it.

Today, tariffs on products traded among the industrialized countries are

an insignificant barrier to trade. The Tokyo Round managed to institute fur-

ther tariff

cuts,

and began to cope with nontariff barriers for the first time. It

produced codes to liberalize such barriers resulting from domestic subsidies

and countervailing duties, government procurement, product standards,

customs valuation, and import licensing. All barriers to trade in civil aircraft

and aircraft parts were removed. And preparations for a new GATT round,

on investment and services, have commenced. What is more, the volume of

world trade continues to increase and its rate of growth, though declining,

still exceeds economic growth rates in several OECD countries. In sum,

liberalization and growth have continued despite the erosion of postwar

14 April 1978, as cited

Melvyn B. Krauss,

The New

Protectionism:

The

Welfare State

International Trade (New York: New York University Press, 1978), pp. xix-xx.

Ibid.,

p. 36.

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International regimes, transactions,

and

change

411

prosperity,

and

despite

the

erosion

American willingness

absorb

dis-

proportionate shares

liberalized trade.

Restraints

trade have also grown. Much

the time they take one

two forms: domestic safeguards,

and

"voluntary"

negotiated export

re-

straints. Under

the

GATT, domestic safeguards

may be

invoked

for

balance-of-payments reasons (Article XII),

or to

prevent injury

domestic

producers caused

by a

sudden surge

imports that can be attributed

past

tariff concessions (Article XIX). The first of these has caused little difficulty,

notwithstanding several deviations from prescribed procedure.

Article

XIX lends itself to greater abuse.

permits alteration

suspension

past

tariff concessions

in a

nondiscriminatory manner, provided that interested

parties

are

consulted.

It has

been invoked with growing frequency, particu-

larly

by the U.S. and

Australia.

It is

quite clumsy, however, because

by-

standers

are

likely

to be

affected

and

because

may involve renegotiation

even retaliatory suspension of concessions. As

result, "most governments,

on most occasions, have simply short-circuited Article

XIX

altogether,

going straight

to the

heart

the problem

negotiating

minimum price

agreement,

or a

'voluntary' export restraint with

the

presumably reluctant

exporter who has previously been 'softened'

threats

emergency action

under GATT."

Many

these agreements

do not

involve governments

all,

but are

reached directly between the importing and exporting industries

concerned. They take place beyond the purview

the GATT and therefore

are

not

subject

official multilateral surveillance.

attempt, made during

the Tokyo Round,

conclude

safeguards code that would have provided

detailed rules

and

procedures

was

unsuccessful, though negotiations

are

continuing. However, these problems do

not

afflict the entire trading order,

but

are

sectorally specific,

and a

close sectoral analysis will show that there

not "any

decisive movement toward protectionism.

. . .""

Lastly,

so-

Stephen D. Krasner, "The Tokyo Round: Particularistic Interests and Prospects for Sta-

bility in the Global Trading System," International Studies Quarterly 23 (December 1979).

For

example, Article

XII

calls

for

quantitative restrictions,

but

time

has

passed import

surcharges have usually been imposed.

In an

extremely peculiar "non-use"

Article

XII,

France imposed emergency measures against imports after the 1968 disturbances, while enjoy-

ing

strong reserve position and only fearing

potential balance-of-payments problem. France

asked for "sympathy and understanding" from

its

partners

the GATT and got it. The excep-

tional circumstances were stressed

all

around,

the

danger

precedent

was

flagged,

and the

measures were approved and soon thereafter discontinued. The case shows, according

Cur-

zon and Curzon, "the complicity which exists between governments when one of them is forced

to take unpopular trade measures because

has

domestic problem

on its

hands" ("Manage-

ment

Trade,"

222). Their characterization

the reaction

others

complicitous cap-

tures

the

very essence

an international regime.

Ibid.,

225.

Krasner, "Tokyo Round,"

507. Krasner examines sectoral crosspressures

and

finds

roughly this pattern: little pressure for protectionism where there is high intrasectoral trade, and

even less if the sector is highly internationalized; protectionist pressures from import-competing

sectors, which, however, may

balanced off by countervailing pressure from export sectors;

high protectionist pressure when import competition

largely asymmetrical (pp. 502-7). Lip-

son, elsewhere

this volume, relates protectionist pressures

the production characteristics

of sectors and finds that "sectoral protectionism is most likely in standardized, basic industries,

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412 International Organization

called orderly marketing arrangements, of which the Longterm Textile

Agreement of 1962 was the first multilateral variant, have also proliferated

vastly. However, each of these has provided for a regular expansion of ex-

ports,

though of course more limited than would have been obtained under

conditions of "free" trade. In sum, the impact of these restraints on interna-

tional trade, even by the GATT's own reckoning, has been relatively mod-

est.

100

Their purpose, moreover, has not been to freeze the international di-

vision of labor but to slow down structural change and to minimize the social

costs of domestic adjustment.

With respect to the institutional role of the GATT, legal scholars in par-

ticular have lamented the passing of "effective and impartial" dispute set-

tlement mechanisms.

101

However, these mechanisms had begun to fall into

disuse by the late 1950s—that is, just as production and trade began to soar

and serious tariff reductions were contemplated. Bilateral consultations and

negotiations among instructed representatives of the disputants have since

been the norm.

102

It requires an extremely optimistic view of the possibilities

for international law and conciliation to expect interventionist governments

to behave otherwise.

Assessment

This review does not argue that the world it describes is the best of all

possible worlds. I have only argued that the world has to be looked at as it is:

when the regimes for money and trade are viewed in this light, the hypothe-

sis of norm-governed change accounts for more of the variance than claims

of fundamental discontinuity. Much of the observed change has been at the

level of instrument rather than norm. Moreover, in most cases the new in-

struments are not inimical to the norms of the regimes but represent adapta-

tions to new circumstances. And in some cases the collective response by

governments to changing circumstances reflects a greater affinity to the ex-

or those with high capital requirements. It is least likely in industries where R&D is high and is

oriented to changing market opportunities, where innovation in products and processes is rapid,

and where the rents attributable to proprietary knowledge are short-lived" (draft manuscript).

100

Two figures are pertinent here. First, the GATT estimated in the late 1970s that import

restrictions already in place or seriously threatened would affect some 3%-5% of world

trade—which its Director General took to represent a threat to "the whole fabric of postwar

cooperation in international trade policy." IMF Survey,

December 1977, p. 373. The second

concerns the declining portion of world trade subject to MFN principles; here it must be pointed

out that the overwhelming share of this decline is accounted for by customs unions and free

trade areas, which, for better or for worse, have been sanctioned by the GATT. A more funda-

mental problem could emerge as a result of the Tokyo Round, insofar as the codes for govern-

ment procurement, subsidies, and safeguards (if the last materializes) will apply only to

signatories of each individual code. At this point, however, the long-term significance of this

proviso remains unclear.

101

See the literature cited in Lipson's article in this volume.

102

Curzon and Curzon, "Management of Trade," chap. 3.

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International regimes, transactions, and change 413

pectations of original regime designs than did the arrangements that pre-

vailed in the interval.

This analysis suggests that far more continuity can attend hegemonic

decline than would be predicted by the hegemonic stability thesis, provided

that social purposes are held constant.

103

And, since social purposes in turn

reflect particular configurations of state-society relations, it suggests further

that fundamental discontinuity in these regimes would be effected by an ero-

sion in the prevailing balance of state-society relations among the major eco-

nomic powers. Ironically, then, the foremost force for discontinuity at pres-

ent is not "the new protectionism" in money and trade, but the resurgent

ethos of liberal capitalism.

5. Stress, contradiction, and the future

One question remains. How enduring is embedded liberalism? Spe-

cifically, will it survive the current domestic and international economic mal-

aise? A central ingredient in the success of embedded liberalism to date has

been its ability to accommodate and even facilitate the externalizing of ad-

justment costs. There have been three major modes of externalization: an

intertemporal mode, via inflation; an intersectoral mode, whereby pressure

on domestic and international public authorities is vented into the realm of

private markets; and what, for the sake of congruity, we might call an in-

terstratum mode, through which those who are "regime makers" shift a dis-

proportionate share of adjustment costs onto those who are "regime tak-

ers."

Each of these has emerged virtually by default as a means to avoid a

still worse outcome.

104

The accumulated effects of these practices, however,

have produced severe stresses in the world political economy. As a result,

some manner of renegotiating the forms of domestic and international social

accommodation reflected in embedded liberalism is inevitable. Its future,

then, depends on how this is brought about. I take up the three modes of

externalization in reverse order.

The compromise of embedded liberalism has never been fully extended

to the developing countries. They have been disproportionately subject to

the orthodox stabilization measures of the IMF, often with no beneficial re-

sults in export earnings but substantial increases in import bills and con-

103

The fit between hypothesis and real world obviously is not perfect, because factors other

than those examined here are also at work in the evolution of

the

postwar regimes. Moreover,

the notion of declining American hegemony itself is very imprecise and, indeed, easy to exag-

gerate. See, respectively, Keohane, "Theory of Hegemonic Stability," and Susan Strange,

"Still an Extraordinary Power: America's Role in a Global Monetary System" (unpublished

ms.,

n.d.).

I am here generalizing from Fred Hirsch's brilliant dissection of the social functions of

inflation: "The Ideological Underlay of Inflation," in Fred Hirsch and John H. Goldthorpe,

eds.,

The Political Economy of Inflation (Cambridge: Harvard University Press, 1978), esp. p.

278.

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414 International Organization

sequent increases in domestic prices. Moreover, the liberalization produced

by the GATT has benefited relatively few among them. On the whole, the

developing countries did well in the 1960s, as an adjunct to expansion in the

OECD area; in the 1970s, they suffered as much from export losses to OECD

markets as they did from the direct impact of increased oil prices. For a time

in the mid 1970s, the developing countries managed to sustain both rates of

growth and imports from the industrialized countries through additional pri-

vate borrowing (their upper tranches in the IMF were left virtually un-

touched). However, neither could be continued indefinitely. Recent IMF

reforms are important, as we have noted, but they cannot initiate economic

recovery in the Third World. Nor are other means forthcoming in abun-

dance. Thus, unlike the pattern under laissez-faire liberalism in the 19th

century, under embedded liberalism lending and investment in the peripheral

areas has been both relatively lower and positively correlated with core ex-

pansion rather than counterpoised to it. From the point of view of the future

of embedded liberalism, the accumulated effects of this practice are not

fatal—though they may prove to be very nearly fatal for some of

the

poorer

developing countries.

105

From the point of view of

the

established system as

a whole, these effects are more in the nature of lost opportunities whose

realization could have contributed to the resolution of the current economic

malaise.

A second mode of externalizing adjustment costs in recent decades has

been to channel pressure away from domestic and international public au-

thorities into the domain of private markets. A prime example is the vastly

increased role of international financial markets in balance-of-payments

lending, as analyzed by Cohen in this volume. I argued above that the suc-

cess of the monetary and trade regimes may be said to have depended in

some measure on this practice, even before the recycling problems of the

1970s. But it has also come to pose a source of serious stress and potential

contradiction for the monetary regime, particularly as the control of inflation

has become the leading economic objective of

governments.

One of

its

con-

sequences, discussed by Cohen, is at least a partial loss of control by gov-

ernments over the process of international liquidity creation. Perhaps even

more important, in attempting to achieve significant restraint in the expan-

sion of credit and money stock effected by these markets, governments may

find that the domestic economy now must shoulder a disproportionate share

of the burden of adjustment. Higher domestic interest rates may have to be

employed than would be warranted by domestic conditions alone, in order to

compensate for the more rapid rate of expansion of the Eurofund component

the

consolidated domestic and international markets. "Today the mass is

still relatively small, but the speed is high. Mass times speed, as the physi-

105

Hollis

Chenery notes this exception in his otherwise optimistic outlook, "Restructuring

the World Economy: Round II," Foreign Affairs 59 (Summer 1981).

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International regimes, transactions, and change 415

cists like to say, equals momentum."

106

From the vantage point of our con-

cerns,

then, what has served as a handy and even necessary vent is

threatening to undergo a means-ends reversal, with potentially serious con-

sequences for domestic and international financial stability.

Lastly, I turn to the most pervasive and the most serious mode by which

adjustment costs have been externalized, inflation. It is the most serious

because it is the most likely to lead to a direct renegotiation of the modus

vivendi that has characterized embedded liberalism. The international re-

gimes for money and trade have increasingly accommodated inflation, in

parallel with inflation's becoming the dominant domestic means of dealing

with distributional strife in advanced capitalist societies.

107

On the monetary

side,

the release of domestic and international money supplies from their

metallic base established the essential permissive condition, facilitated by

subsequent developments in the monetary regime. The primacy of domestic

objectives over external financial discipline was established in the interwar

period. The Bretton Woods adjustment process, when it worked, worked

primarily to devalue the currencies of deficit countries and consequently to

increase their domestic prices. With inconvertible reserve currencies and

floating

rates,

whatever counterforce may have existed in the pressures that

previously led to gold outflows now leads to a fall in exchange rates and thus

to increases in prices and costs. On the side of the trade regime, the structure

of trade that it has encouraged and the minimization of domestic adjustment

costs that it allows have both had inflationary consequences, by sacrificing

economic efficiency to social stability. Hirsch's conclusion concerning the

monetary regime is equally applicable to both: "Critics who see these inter-

national . . . arrangements as embodying a ratchet effect for world inflation

are probably right. But the relevant question is whether a liberal interna-

tional economy could have been purchased at any more acceptable

price."

108 T

his dilemma will not be easily resolved.

109

However, so long as it

remains understood that it is a dilemma, both parts of which have to be

accommodated, the normative framework of embedded liberalism will en-

dure as a central institutional feature of the international economic order.

106

Henry C. Wallich, "Why the Euromarket Needs Restraint,"

Columbia

Journal of

World

Business

(Fall 1979), p. 17. Wallich estimates that the Euromarkets are expanding at two to

three times the rate of growth of the domestic markets of major countries (p. 23).

107

Hirsch and Goldthorpe,

Political

Economy of Inflation, especially the chapters by Hirsch;

Goldthorpe, "The Current Inflation: Towards a Sociological Account," pp. 186-214; and

Charles S. Maier, "The Politics of Inflation in the Twentieth Century," pp. 37-72. The follow-

ing discussion of the monetary regime draws heavily on Hirsch.

108

Ibid.,

p. 279.

109

Recent enthusiasm for simply discrediting Keynesian management and reverting to earlier

monetary and fiscal "discipline" has begun to dampen under the weight of its apparent conse-

quences. For example, in a postmortem of the 1981 summer riots across England, a junior

member of the Tory government chose words that could have been taken directly from Polanyi:

"This is what happens when you separate economic theory from social policy and pursue the

one at the expense of the other." (Cited by David S. Broder, "Britain Offers a Grim Re-

minder," Manchester

Guardian

Weekly, 26 July 1981, p. 16.)

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