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Most histories of the World Bank focus on the relative contributions (and power) of the United States and Great Britain at the Bretton Woods Conference and/or their two principal negotiators, John Maynard Keynes and Harry Dexter White.1 This chapter analyses the Bretton Woods’ negotiations in the context of the broader social, political, economic and theoretical developments of the Second World War era. In Gramscian terms, it explores shift from British to American hegemony through analysis of their associated historic blocs. The Articles of Agreement of both the IBRD and IMF, finalised at Bretton Woods, New Hampshire in July 1944, are revealed as the product of the change in global hegemony and the shift in thinking about international economic management. This latter shift was the outcome of a range of challenges including the Great Depression, the seeming success of Russian economic planning, the New Deal and the ‘revolution’ in liberal economic thought known as Keynesianism.

The chapter commences with a brief exploration of the shifts in the historic blocs that led to the end of British international hegemony and the rise of pax americana. It also explores in some detail the economic ideas connected to these hegemonic forces, as they are the basis of the ideas about development implicit in the IBRD’s Articles of Agreement. They also underpin the early operations of the Bank. Finally, it explores the IBRD’s Articles of Agreement and the debates that took place in finalising them in order to shed light on the hegemonic principles underlying the Bank’s role and mission.

1 See George and Sabelli, Faith and Credit, Devesh Kapur, John P. Lewis and Richard Webb, The World Bank Its First Half Century, Volume 1: History (Washington D.C.: Brookings Institution Press, 1997), Mason and Asher, World Bank since Bretton Woods and Robert W. Oliver, Early Plans for a World Bank (Princeton, New Jersey: Department of Economics, Princeton University, 1971). Equally many of the general histories of the Bretton Woods negotiations have a similar focus, see: Richard N. Gardner, Sterling-Dollar Diplomacy in Current Perspective: The Origins and the Prospects of Our International Economic Order (New York: Columbia University Press, 1980) and Armand Van Dormael, Bretton Woods: Birth of a Monetary System (London: Macmillan Press Ltd, 1978).

The Changing International Order from the First World War

Where to commence analysing the hegemonic shift that took place in the first half of the twentieth century is a fraught question. Giovanni Arrighi, using a Marxist model of capital accumulation, traces the origins of the rise of the United States and the decline of Great Britain to the mid-nineteenth century, linked by the rise of the German state.2 However, the First World War is a useful starting point for this discussion as it sealed the fate of the British Empire and fundamentally reordered the debtor/creditor relation-ship between Great Britain and the United States — the two key players in the establishment of the Bretton Woods institutions. The First World War also saw the

‘birth’ of Russian and international communism and the war’s settlement initiated the Great Depression. Both communism and the Great Depression were central to the changing view of the role of the state that led to new ideas and practices in economic planning at an international level. The liberation movements in the former colonial dependencies are also touched upon, because they are part of the overall global shifts central to the argument of the thesis.

If the First World War disrupted Britain’s hegemonic position in the international economy, the Second largely ended it.3 During the First World War, Britain’s imports increased at an unprecedented rate — mainly armaments and basic goods, primarily from the US. This reduced the large US foreign debt, which had been mostly owed to Britain, and reduced Britain’s foreign investments by one quarter. Britain’s losses were compounded by the Russian revolution followed by its abrogation of war debts, many of which were owed to British investors. Britain as well as other European industrial countries lost traditional export markets, including those centred on colonial empires as most of the colonies became increasingly self-sufficient during the war.4 Finally and importantly, Britain lost its capacity to organise the international monetary system in its own interests. On the positive side, at the end of the war Britain still had significant (though reduced) gold reserves, considerable claims on foreign incomes, German war reparations and an extensive and profitable colonial empire, which the war in fact

2 Giovanni Arrighi, The Long Twentieth Century: Money, Power, and the Origins of Our Times (London:

Verso, 1994), p. 269. See also Arrighi, "Three Hegemonies of Historical Capitalism," pp. 175-177.

3 Arrighi, Long Twentieth Century, p. 270.

4 François Crouzet, A History of the European Economy, 1000-2000 (Charlottesville and London:

University Press of Virginia, 2001), p. 177.

expanded.5 By the end of the First World War, the US had purchased many British owned assets in the US and had accumulated large war credits. It had increased its invisible earnings, becoming a net creditor and developed a large trading surplus leading to a significant net current account surplus.6 From the First World War, the US integrated itself into the world economy and assumed an unprecedented dominance; one upshot of this was that the US dollar became a major international reserve currency.

Russia suffered enormous losses during the First World War and economic and social chaos continued during and after the revolution through to 1921. Thereafter, economic growth rapidly took off, in part, because the chaos destroyed much production and growth started from such a low base.7

The inter-war years saw the re-establishment of the gold standard and a fixed exchange rates system, which, by the mid to late 1920s, included US and most European countries. European efforts at creating an international financial system were rebutted by the US government, which was not yet hegemonic and thus did not have the institutional capability or the interest to organise it.8 The fixed exchange rate system made adjustments to shocks difficult. The tendency to overvalue exchange rates and deflationary monetary policy resulted in frequent balance of payments crises.9 Even during the years of relative prosperity, 1925 – 1929, the whole system was ultimately reliant on large capital flows from the US, especially to Germany, which used these flows for reparation payments and investment. In the 1920s, US productivity grew significantly faster than in debtor countries, making it very difficult for them to service, let alone repay, their debts. Dependence on the US dollar increased and the US acquired foreign assets at an unparalleled rate.10 When the flow of US dollars slowed in 1928 and further in 1929, the effects across the entire West were extensive and severe.

5 Arrighi, Long Twentieth Century, p. 271.

6 Ibid. See also G. John Ikenberry, "A World Economy Restored: Expert Consensus and the Anglo-American Postwar Settlement," International Organization, Vol. 46, No. 1 (1992), p. 306.

7 Paul Kennedy, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000 (New York: Vintage Books, 1989), p. 323.

8 Arrighi, Long Twentieth Century, pp. 271-272, Richard Peet, Unholy Trinity: The IMF, World Bank and WTO (London: Zed Books, 2003), pp. 30-32.

9 Crouzet, History of the European Economy, p. 176.

10 Arrighi, Long Twentieth Century, p. 273.

With the drying-up of short-term capital flows, most governments put in place a range of protectionist measures to stabilise their currencies.11 They turned inwards looking for solutions, leading to a structural collapse in world trade and finance. The scale of the disaster was extraordinary: in Europe from 1929 to 1932/3 industrial output fell by 27 per cent, in the US it fell by 45 per cent.12 Unemployment was on “…an unimagined and unprecedented scale,” in 1932-33 unemployment in Britain was 22-23 per cent and in most of Europe it exceeded 24 per cent reaching a staggering 44 per cent in Germany.13 In the US, unemployment was around 27 per cent and, as in much of Europe, it remained high (over 20 per cent) for the rest of the 1930s.14 The full scale of the Great Depression is beyond the scope of this work but there were two important outcomes. First, the Depression persuaded policy-makers that the unprecedented rate of unemployment could produce social and political chaos or indeed revolution. The growth in organised labour in the West and the Russian Revolution were further proof of this possibility. Second, it provided concrete evidence of the inadequacies of ‘free markets’ in achieving optimal economic and social outcomes, let alone maintaining political stability.

Commitment to planning was strengthened by the example of Russian communism from the late 1920s — workers and policy-makers looking to Russia saw an economy unaffected by the Depression. Rapid industrialisation took place under the Five Year Plans, industrial production tripled between 1929 and 1940 and there was no unemployment, though the social and personal costs of Stalinism were immense. The economic achievements “…impressed foreign observers of all ideologies...”15 Equally, Nazi Germany utilised strong state planning models to eliminate unemployment by the end of the 1930s. Thus, as Hobsbawm notes, “…‘Plan’ and ‘Planning’ became buzz-words in politics.”16

11 Ibid, p. 274. See also Eric Hobsbawm, Age of Extremes: The Short Twentieth Century 1914 - 1991 (London: Abacus, 1999), pp. 98-99.

12 Crouzet, History of the European Economy, p. 179.

13 Hobsbawm, Age of Extremes, p. 92.

14 Ibid.

15 Ibid, p. 96. Kennedy notes the considerable human toll of Russian industrialisation especially during the 1933 famine. Only 51-2 per cent of GNP went to private consumption, which left substantial resources for investment in production and education. But this was achieved through a large degree of coercion, particular towards peasants and it left severe deficiencies in agricultural production, Kennedy, Rise and Fall of the Great Powers, pp. 321-325.

16 Hobsbawm, Age of Extremes, p. 96.

Politicians, intellectuals, policy-makers and citizens in the US and other Western liberal capitalist countries had overwhelming evidence that ‘free markets’ did not necessarily achieve full employment and that state planning could work.17 The case for government planning (utilising the knowledge of experts) and an expanded role for the state, solidified when economic theory caught up with practice via ‘Keynesianism’, which developed from John Maynard Keynes’s, General Theory (1936).18 The economic theory is discussed in some detail in the following section. However, the point here is that there was a profound change in the approach of liberal capitalist states to the role of government intervention in the economy — there was a new openness to the idea of economic planning and of state participation in the economy. This receptiveness to national economic planning at a state level also influenced thinking about the possibilities for economic cooperation at an international level — a development that eventually resulted in the establishment of the World Bank. Keynesianism thus underpinned the Bank’s development theory and practice for decades.

The Great Depression was also a “…landmark in the history of anti-imperialism and Third World liberation movements.”19 Although Britain had already been dealing with independence movements in some of its colonies, especially those with large expatriate populations, it was really only with the large-scale economic dislocation of the Depression that these movements became widespread.20 The effects of the Depression were even more profound in many of the dependent economies than in the Western liberal states because given their fixed exchange rate regimes and their reliance on exports of primary products, their terms of trade deteriorated dramatically.21 Some industrialisation did take place in settler colonies during the First World War and again

17 Ikenberry, "A World Economy Restored," p. 292.

18 Keynesianism here is used as per John Davis’ definition — a tradition arising from reformulation and translation (Keynes’s The General Theory is notoriously difficult to read) of Keynes’ key ideas and concepts in the domains of economic theory and government policy. John B. Davis, "Introduction: The Interpretation of Keynes's Work," in John B. Davis (ed.), The State of Interpretation of Keynes (Boston:

Kluwer Academic Publishers, 1995), p. 1. This definition acknowledges the vital contribution of both economists (e.g. Alvin H. Hansen in the U.S.) and policy-makers in developing the Keynesian tradition. It also helps to separate the renewed proliferation of interest from the mid-1980s in Keynes’s life and writings and the interpretation of his thought per se. For examples of these later trends see, D.E.

Moggridge, Maynard Keynes, an Economist's Biography (London: Routledge, 1992), R. Skidelsky, John Maynard Keynes, Volume I Hopes Betrayed 1883 - 1920 (London: Macmillan, 1983), R. Skidelsky, John Maynard Keynes, Volume II the Economist as Saviour (London: Macmillan, 1992).

19 Hobsbawm, Age of Extremes, p. 204.

20 Ibid, p. 211. Canada, New Zealand, Australia and South Africa already had dominion status and the southern counties of Ireland achieved home rule. There were also sizeable movements in Egypt and India.

21 Ibid, p. 213.

during the protectionist era of the Depression, nevertheless, most colonies remained or, were reduced to, overwhelmingly agrarian and rural societies. The severe impacts radicalised many local elites, who had previously supported and had been implicated in colonial rule. The independence movements already underway in Egypt and India expanded and, by the mid-1930s, there were powerful movements organising in French North Africa and Indochina and in Dutch controlled Indonesia.22

In the US, the commitment to planning was taken up in the mid-1930s with the New Deal policies of the Roosevelt administration. However, these policies were only partially implemented and “…were insufficient to stimulate the economy and take advantage of this underutilized productive capacity.”23 Further, in 1937 when the US finally seemed to be undergoing a slow recovery from Depression, Department of Treasury economists (the “men of sound judgement” as John Kenneth Galbraith ironically labelled them) successfully convinced the Roosevelt administration to follow classical economic prescriptions — spending was cut and taxes increased in order to bring the Federal budget into balance.24 This led to a new slump and a renewed increase in unemployment. The 1937 recession made Keynesianism respectable in Washington.

However, as Galbraith argues, policy actions continued to be “half-hearted” and in 1939 unemployment was still at 17 per cent, until “[t]he war then brought the Keynesian remedy with a rush.”25

The shift in hegemony that was heralded by the First World War was solidified by the Second. The Keynesian “rush” provided by the Second World War unleashed a massive expansion in US productive capacity:

[i]ts standard of living was higher than any other country's, but so was its per capita productivity. Among the Great Powers, the United States was the only country which became richer — in fact, much richer — rather than poorer because of the war.26

22 Ibid, p. 215.

23 Kennedy, Rise and Fall of the Great Powers, p. 331.

24 John Kenneth Galbraith, The Age of Uncertainty (London: British Broadcasting Company, 1977), p. 218.

25 Ibid, p. 221. See also Kennedy, Rise and Fall of the Great Powers, p. 331.

26 Kennedy, Rise and Fall of the Great Powers, p. 358.

US gold reserves at the end of the war were around two thirds of the world’s total. It had half of the world’s manufacturing production and a third of all production; it was also the world's greatest exporter.27 For the first time, the US had a net current account surplus that was significantly larger than its trade surplus. It had near complete control over international liquidity and world financial power became centralised in the city of New York.28

Along with enabling the US to become the hegemonic economic power in the postwar world, the Second World War changed its internal political alliances (as Gramsci would say, its historic bloc), by the blow it dealt to the isolationist element in the US Congress.

It was clear that US security was no longer inviolable. As Arrighi puts it: “US political isolationism had reached the point of diminishing returns.”29 Many policy-makers felt that the failure of the US to take a leadership role in the interwar period had encouraged the turn to protectionism that they identified as the prime cause of the war. Further, they considered that the level of mal-distribution of income across the (liberal capitalist) globe would hurt US foreign trade and investment. As Franz Schurmann highlights, Roosevelt administration foreign policy was fundamentally an extension of the New Deal philosophy:

[t]he essence of the New Deal was the notion that big government must spend liberally to achieve security and progress. Thus, postwar security would require liberal outlays by the United States in order to overcome the chaos created by the war.... Aid to ... poor nations would have the same effect as social welfare programs within the United States — it would give them the security to overcome chaos and prevent them from turning into violent revolutionaries. Meanwhile, they would be drawn inextricably into the revived world market system.30

The debates and discussions in the US Administration and Congress are returned to below, when postwar planning and the ratification of the Bretton Woods agreements are

27 Ibid.

28 Arrighi, Long Twentieth Century, p. 275.

29 Ibid, p. 276.

30 Franz Schurmann, The Logic of World Power: An Inquiry into the Origins, Currents, and Contradictions of World Politics (New York: Patheon, 1974), p.67. Quoted in Arrighi, Long Twentieth Century, p. 277.

discussed. Initially the chapter explores the ideological terrain of the period especially the shift in economic thinking that took place prior to and during the Second World War. Starting with a brief description of neoclassical economics, to which Keynes was reacting, this analysis aims to locate Keynesianism as the theoretical justification for the Keynesian, welfare, modernisation model of nation-state development.31

Changing Economic Theory: Neoclassical Economics and Keynesianism

Economics was well established as a discipline by the inter-war period. Neoclassical economics largely superseded classical economics in the 1870s and had developed a set of central assumptions, concepts and theories, which formed the basis of its teachings.32 However, many of the underlying assumptions of neoclassical economics still bore the direct impact of classicism. When John Bates Clark identified the key postulates of neoclassical economics as:

…private property, individual freedom, a limitation of government activity to those fields which Adam Smith had laid down as proper to it, the mobility of capital and labour according to the stimulus of varying remuneration, and, finally the desire of the individual to satisfy certain objective wants33

he could equally have been summarising the key postulates of classical economics.

However, neoclassical economics was clearly a break from classicism, starting with its more individualistic approach to society, through to its consequent emphasis on consumption, demand and utility (of conglomerations of individuals), which replaced classical economics’ emphasises on production, supply and costs.34

The operational form of the new individualism was a psychological and subjective approach to value, ‘utility,’ which replaced the classical Labour Theory of Value. The utility approach, in both its hedonistic and more common utilitarian version posited that

31 Fine, Social Capital Versus Social Theory, p. 133.

32 Eric Roll, A History of Economic Thought (London: Faber and Faber Ltd, 1973), p. 369 and 455.

33 As summarised by ibid, p. 427.

34 Ibid, p. 368.

value is determined by a subjective estimate of utility, tied to quantity. The focus on utility went hand-in-hand with the so-called ‘marginal revolution,’ which focused economics on measuring small changes in economic quantities. The research agenda was formed by Gossen’s Law on diminishing returns and the theory of marginal utility, which provides a measure of the “…alteration in the subjective conditions which would be occasioned by either the disappearance or the addition of some object.”35 Thus the focus was on deriving optimal utility by examining marginal increases in consumption.

The other main element of the neoclassical research agenda was its focus on equilibrium, at the level of individual and markets and at the aggregate social level.

With the neoclassical basis in individualism, general equilibrium is simply the sum of individual equilibriums, thus the key question for economists was: is there theoretically a price configuration for commodities at which supply equals demand? And if “…there is such a theoretical price configuration, can general equilibrium be obtained... and would the general equilibrium state be stable?”36 One of the first neoclassical economists to deal with this issue was Léon Walras (1834 – 1910). Walras’s solution built on the work of Jean-Baptiste Say, in particular, Say’s Law, which posits that supply creates its own demand, and therefore there is no oversupply or undersupply of commodities. Examining general equilibrium, Walras theorises that every demand, or desire to purchase something at a particular price, involves giving up money in order to do so; thus when consumers realise demand they supply someone with money of equal value. Every realised demand is also, effectively, a supply. At the aggregate level, therefore, the aggregate of all demand equals the aggregate of all supply at the general equilibrium price. This is the point of general equilibrium. 37 Walras demonstrated that a general equilibrium price theoretically exists, however, the problem of demonstrating whether general equilibrium can be attained in the real world remained.38 Walrus’s model posited that it could occur via an auctioneer who, taking bids on commodities, could adjust prices so that supply equals demand. General equilibrium models rely on the following assumptions: individuals are price takers implying perfectly competitive

35 Ibid, p. 426.

36 J.M. Alec Gee, "The Neoclassical School," in Douglas Mair and Anne G. Miller (eds.), A Modern Guide to Economic Thought: An Introduction to Comparative Schools of Thought in Economics (Aldershot: Edward Elgar, 1991), p. 83.

37 Or as economists today put Walrus's Law, “…the sum of the value of all excess demands for both individuals and firms equals zero.” Ibid, pp. 84-85.

38 Ibid, p. 85.