Opinion

 

In the summer of 1944 technocrats, economists, and policymakers from the United States and Great Britain gathered at Bretton Woods, New Hampshire, to begin creating the institutional framework that would guarantee an "orderly world economy" for the post-war world. One of the members of the British delegation was the esteemed British economist, John Maynard Keynes.   

 

Keynes was not the normal economic technocrat. Keynes sought to probe the study of economics with the precision and logic of mathematics. Keynes embodied the rare combination of gifts: mathematician, historian, statesman, philosopher; he embodied that rare combination of an engineering mind with the hopeful heart of a spiritual prophet. Keynes, for example, was not a champion of Ricardian economic theories. (Ricardian economics has been the economic cornerstone of American foreign policy for the past one hundred years. For a more complete analysis of this see my InsiderIowa.com article of 5/11/11.) Writing in 1933, Keynes challenged such nineteenth century Ricardian theories that emphasized countries: specialize in their comparative advantages; eliminate trade barriers; and trade with those countries for those goods that a country did not produce itself as efficiently. The Ricardian theory suggested that such a world system would bring forth world peace. Keynes, however, argued otherwise. According to Keynes, based upon the historical evidence, it seemed that the maximization of international specialization only enhanced economic imperialism, since it drove nations into protecting their existing foreign interests and into capturing new markets.  

 

Even more iconoclastic Keynes sympathized with those individuals who advocated minimizing rather than maximizing economic entanglements among nations. Indeed, Keynes went so far as to advocate that nations should seek relative self-sufficiency. Keynes believed, for example, that ideas, knowledge, science, hospitality, and travel were all entities that demanded international exchange: “But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.” Keynes believed that the “decadent international but individualistic capitalism” that the world found so enticing after World War I, was "not a success”: “It is not intelligent, it is not beautiful, it is not just, it is not virtuous -- and it doesn’t deliver the goods.” Keynes concluded that the efficiency of modern technological technique now made national self-sufficiency a luxury that nations could “afford, if we happen to want it.”  National self-sufficiency would give each country the freedom to pursue their own favorite experiments towards the ideal social republic of the future. Greater national self-sufficiency was not to be considered an ideal in and of itself; rather national self-sufficiency could create an environment where "other ideals can be safely and conveniently pursued,” where a country can pursue their own unique happiness.

 

Keynes also believed that the Great Depression was easily explained: insufficient aggregate demand. In other words, the people - the masses - had insufficient buying power. To correct this, Keynes urged governments to implement policies that would stimulate aggregate demand through either fiscal policies -- lowering taxes, increasing government spending -- or monetary policies -- lowering interest rates. For Keynes equilibrium was the key, particularly in terms of the global economy. Keynes felt that all countries shared responsibility in maintaining such equilibrium. Consequently, Keynes envisioned the IMF not only as the institution that could loan funds to countries running trade deficits in order to allow them to increase their demand, but also as the institution that could pressure countries that were running trade surpluses to increase their demand for foreign goods through greater consumption. Keynes also believed that governments should be given the authority to restrict the movement of capital between countries. In other words, Keynes believed that the IMF and national governments should have the authority to implement whatever rules and regulations were necessary to maintain equilibrium, both domestically and internationally.   

 

One of the things Keynes feared most was the propensity of financial markets “to convert long-term assets into short-term commitments for investors.” Keynes maintained that when this occurred, “a speculative mentality” arose, a mentality in which investors were no longer concerned about productive profitability of a company. Instead, investors were far more interested in whether the perception of  “a company’s fortunes will be strong enough in the present and immediate future to drive the stock price up.” Thus, Keynes strongly advocated strict regulation of financial flows, both domestically and internationally, to avoid such speculative investment. 

 

Keynes, however, was not a radical, for, ultimately, his theories  -- “increasing expenditures, reducing taxes, or lowering interest rates to stimulate the economy” -- sought a “more expansionary” economy. What made Keynes’ theories somewhat iconoclastic was his recognition that markets often failed, and, when they did fail, governments had a responsibility to intervene into the economy in order to stimulate more expansionary growth. Keynes also believed that all countries had a responsibility for promoting expansionary growth, rich and poor alike. Keynes also strongly supported government control and regulation over the wealthy; particularly those individuals who sought to enhance their wealth through speculative short-term manipulation of market forces. Keynes, while still a committed capitalist, presented an alternative to the dogmatic free market, free trade godhead that passes for economic thought today. 

 

Keynes was not the only voice at Bretton Woods, however. The leading spokesperson for the United States was Dexter White, a Ph.D. Harvard economist, who began working for the Treasury Department in 1934. After Pearl Harbor White was appointed as a special assistant to Secretary of the Treasury Henry Morgenthau. White's main duties were to serve as a liaison between the Treasury and State Departments. In this position White became the principal author of the so-called Morgenthau Plan, a plan on how to deal with Germany in the postwar world. The Morgenthau Plan called for the "pastoralization" of the German economy after the war; in other words, Germany was to be made into an agricultural economy by completely stripping Germany of its industrial capacity. By doing this, it was believed, Germany's potential for starting World War III would be destroyed. White's views marked him as one of the earliest champions of severe austerity measures as a way of disciplining a recalcitrant nation's economy. 

 

By the time of Bretton Woods White was arguing that the preservation of global financial equilibrium fell entirely upon those countries running deficits, and not on those nations running trade surpluses. In the words of the economist Noreena Hertz, White felt "that not only should the burden of preserving global financial equilibrium fall on the deficit countries alone, but that any loans should only be temporary and be accompanied by demands for ‘adjustment’ -- a process in which deficit countries are forced to deflate and cut imports, so as to restore their balance of payments position.” Keynes, on the other hand, felt that any loans given to deficit countries should have minimal restrictions, "including no time limits as to when they should be repaid." 

 

In the end, however, as Hertz writes, it was "White's vision ... that won" over the World Bank and the IMF. This meant a Ricardian economic model; this meant deficit running nations needed to make "adjustments" in order to get their own houses in order. This meant that trade surplus nations shared little responsibility in establishing equilibrium. By the 1950s, however, a growing resistance to such a Ricardian economic model began to arise. As the countries of Africa and South Asia began to become free of their European colonial masters, they quickly realized that the specialization in one's comparative advantages that the Ricardian model advocated would relegate them back to positions of subservience. Since they had first been colonized by the European powers centuries ago, they had only been producers of natural resources. For centuries this was all that they had done: offer up their natural resources to their European masters. This was their only comparative advantage, for this was all that they had done. These newly independent nations realized that to join a Ricardian global economic system, now, in the post-war world, would, once again, relegate them to becoming producers of natural resources and to buying their manufactured goods from those more developed, industrialized nations. These nations argued that such trade relationships would always put them at a disadvantage, for the value of the natural resources that these countries would export would always be at a lesser value than the manufactured goods that they would import. Thus, such an economic model would place them in a perpetual state of economic inferiority. As this realization began to set in, more and more countries began to question the value of joining the global economic system being promoted by the World Bank and the IMF.

 

In the Middle East, for example, Arab nations began to listen more intently to a young military colonel who had just taken power in Egypt, a man named Gamel Abdel-Nasser. Nasser began preaching the virtues of Pan-Arab Nationalism, a nationalism that would see Arab countries reclaim their destinies by reclaiming their oil resources. Western influence would be replaced by Arab cultural traditions. Nasser partnered with Syria to form the first stages of the United Arab Republic (UAR). Nasser's goal was to join all Arab nations together into the UAR, thereby, creating an Arab version of the European Union. Nineteen-sixty-one also saw the creation of the Organization of Petroleum Exporting Countries (OPEC). The purpose of OPEC was to form an oil cartel in which member nations would regulate their production of oil in order to assure higher world market prices for oil, and, thus, greater income revenue for member nations. 

 

Also, in the early 1960s, the New International Economic Order (NIEO) was created. In conjunction with the Non-Aligned Movement (NAM) – an organization of under developed countries seeking a third option between western capitalism and Soviet communism - the NIEO formed, within the United Nations, the United Nations Conference on Trade and Development (UNCTAD).  The demands of all of these movements, in the words of Dr. Robert Looney, former “Distinguished Professor” at the Department of National Security Affairs, could be summarized quite succinctly: “fairer terms of trade and more liberal terms for financing development.” The North (the developed industrialized countries) insisted that these developing countries work within the framework established at Bretton Woods. The members of UNCTAD, however, responded by declaring that any “economic relations with the developed countries under the existing rules of the game” would lead to the further subservience of UNCTAD members. Instead, UNCTAD demanded participation in the decision-making process that determined international economic policy. In the words of Dr. Looney, UNCTAD members demanded nothing more than: “Participation …not merely to ensure that the developing countries’ interests were safeguarded, but equally as an assertion of their rights as members of an international community and as a desired feature of a just international order.”  

By the early 1970s, however, American policymakers saw things much differently, particularly Zbigniew Brzezinski. Brzezinski, a long-time member of the Council of Foreign Relations, co-founder of the Trilateral Commission, and soon to be National Security Advisor for President Jimmy Carter, feared that these demands of UNCAD were nothing less than a “rejection of an integrated world economy...” This, according to Brzezinski, was a “very major threat to the nature of the international system and ultimately to our own societies.”         

For Brzezinski the best way to confront such threats was to make sure that such “weaker developing nations” have “its economic system and thus its political policy ... directed from outside.”  Through such combinations as “Western governments ... the International Monetary Fund, banking consortiums, global corporations” weaker developing nations could be regulated, for such nations could hardly engage within the international economic system without encountering some sort of relation with at least one such entity. When such encounters occurred this regulating entity could mandate that before any such relationship could begin, the “weaker developing country” must agree to abide by certain rules and regulations, rules and regulations that guaranteed the cooperation of the weaker country in an “integrated world economy.”  Refusal to agree to such conditions would result in the “weaker developing nation” finding itself economically quarantined from the world economy.  

 

If any of these “weaker developing nations” were ever to find themselves in debt to one of these entities, then these regulating entities could easily pressure them into participating in this global economy. By falling into debt, these nations would have no other choice but to negotiate some type of new debt arrangements. In such renegotiations the “weaker developing nation” would be offered more favorable debt terms only if the “weaker nation” agreed to full integration into the world economy. If a nation should attempt to resist agreeing to such conditions, then “the debt leash can be pulled in tight -- as part of an economic and political destabilization campaign -- to strangle a rebellious nation into submission.” Either way the “weaker developing (indebted) nation” would have found its proper place back into the new world economy. The stage was now set for the World Bank's and the IMF's Structural Adjustment Programs. (To Be Continued)    

 

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