The World Economic Order

...This event also marks the beginning of the twentieth century in international economics: the end of British supremacy and the start of seventy years during which the United States, having been a debtor through most of its history, was the most important international creditor and bore the chief responsibility of the world economy...

...The unexpected crisis of this system in the seventies struck a blow from which progressive movements have yet to recover...

...At a time of unprecedented technological advances, we hear on every side the cries that economic problems are SUMMER • 1990 • 383 The Global Economy caused by lazy and greedy workers...

...the U.S.-Canada Free Trade Zone could be the nucleus of a third...

...New movements with new agendas have broadened the traditional agenda of the Western democratic left with calls for gender justice, environmental control of industry, and a better ordering of North-South relations...

...As countries with less to offer in terms of markets, technology, and capital, they will not be as effective as the developed market economies in building the kinds of favorable trade and investment relations at the state-to-state level that will be essential in such a system...

...The benign exceptionalism of the postwar system, however, rested on the assumption that developing countries would remain relatively insignificant factors in the world economy...

...The International Monetary Fund (IMF) and the World Bank (its official name, the International Bank for Reconstruction and Development, reflects the World Bank's original postwar mission) were funded to reduce the necessity for austerity in Europe...

...During the Bretton Woods era, the social democratic vision of the economic and democratic agendas was the consensus that guided societies...

...Nevertheless, of the three international orders in living memory, the Bretton Woods system worked best, lasted longest, and offers the most useful lessons for the future...

...they were forced to earn foreign currency through a trade surplus...

...Collective security without collective prosperity proved unattainable...

...The British Labour party, like its continental allies, is able at best to offer "Thatcherism with a human face...

...agricultural and then increasingly industrial exports from developing countries were admitted to world markets under a series of tariff exemptions—to Europe under the Lome Agreements and to the United States under the Generalized System of Preferences...

...there are signs of another in the Eastern Pacific...

...Dickensian conditions mark the industrialization of the developing world...

...Winter issue, 1990) and in Mortal Splendor: The American Empire in Transition (Houghton Mifflin, 1987, 1988...

...The competition among the world's manufacturers for the remaining market niches intensified...

...The "progressive" agenda refers to those interested in modernizing the economy: making it function more effectively, produce a broader range of goods and services at a lower cost, and so on...

...As the decision of French and German socialists to follow their respective nationalist elites into the trenches marked the end of Marx's dream of international socialism based on transnational class struggle, the new Fordist era would be increasingly characterized by a Grand Compromise between workers and capitalists within each of the advanced countries based on Fordist and, later, Keynesian principles...

...The IMF and the Western governments are proposing essentially that the governments of Poland and Czechoslovakia adopt the policies of Chile...

...SUMMER • 1990 391 The Global Economy The last time the world deprived two major countries of what each considered its rightful "place in the sun," the result was World War II...

...The international counterpart of Victorian capitalism was imperialism: the attempts of great capitalist societies to capture markets and raw materials through conquest and unequal treaties with lesser powers...

...Immense reparations were assessed against Germany, and to pay them, in the words of Britain's Lloyd George, Germany was to be squeezed "until the pips squeaked...

...The promising free trade proposals of the twenties collapsed...

...Democratic forces find themselves overwhelmed by economic changes and without a convincing economic alternative...

...On a regional scale, something like this is beginning to happen in the European Community...

...How could markets be found for the unprecedented masses of goods that the new industrial system was able to produce...

...The international revival of Victorian economics is the most dangerous, as well as the 390 • DISSENT The Global Economy most pronounced, feature of the contemporary scene...

...This Great Compromise has not completely broken down...

...The third era in international economic relations dates from the breakdown of the Bretton Woods covenant in the seventies, and it is best understood as a reversion from the principles of Bretton Woods to those of Versailles...

...The United States is the Texas of the industrial world...

...Markets grew more slowly...

...Versaillesstyle policies of austerity and restriction were applied to developing debtors...

...The other great contemporary agenda is the democratic one: opening cultural, social, economic, and moral opportunities to those formerly shut out...

...capitalist society had now to absorb the somewhat counterintuitive concept that a system of high wages and mass consumption would create more benefits than costs...

...said Calvin Coolidge when questioned on the subject...

...For forty years the world trading order, under the auspices of the General Agreement on Tariffs and Trade (GATT) prospered...

...After a few months of negotiation, even this plan was scornfully rejected by the new German chancellor, Adolf Hitler...

...Never have human beings been more productive— yet that productivity is not directed to social ends...

...Forgive us our debts as we forgive those who are indebted to us" was the evangelical sentiment on the lips of the delegates at Bretton Woods...

...Holland's efforts to maintain its hold over what became Indonesia collapsed after the United States conditioned Marshall Plan aid on withdrawal...

...after the Second World War we generally—though not always— used our influence to break up the imperial blocs and make the Open Door the basis of the world economy...

...The first element of grace in the new dispensation concerned debts...

...The federal political system reinforces this orientation...

...John Maynard Keynes, a sharp critic of the Versailles settlement, played a major role at Bretton Woods...

...An order could hardly be said to exist, and with the economic aspects of the Versailles settlement crumbling, its security and political aspects were also vulnerable...

...Many objections can be raised against the economic assumptions underlying this strategic program, but as a matter of historical record the policies based on these approaches led to an unprecedented era of full employment, rising living standards, economic growth, and improved productivity—without excessive inflation...

...more profoundly, global economic integration limits the ability of all countries, not just the United States, to pursue policies of Keynesian stimulus...

...Workers lived relatively well...

...The return of conventional Victorian economics has reopened a gap between the progressive and democratic agendas...

...Kirkland is almost certainly correct, but in neither the East nor the West do today's democratic and leftist forces offer a realistic alternative to the Thatcherite agenda...

...There is no shortage of tasks that the democratic left believes must be accomplished...

...With workers in Asia and Latin America (and, soon, Eastern Europe) producing goods for export at 10 percent of the wages paid in the advanced industrial economies, it is becoming increasingly difficult for any country to pursue traditional Keynesian policies of stimulus at either the macro- or microeconomic level...

...Thatcher displaced Keynes because the Keynesian system was no longer working...

...The Covenant of Grace As they looked back at the disastrous aftermath of Versailles, the British and Americans believed that a more generous settlement would have been more secure...

...We are only beginning to realize the difficulties facing the former East bloc countries...

...Often this means that investment flows to developing countries with low labor costs—and these countries often maintain draconian anti-union policies to make sure wages remain low...

...The process of accommodation is not an impossible one...

...Lacking sufficient resources, these institutions can no longer promote demand in the central trading economies or even at the periphery...

...The financial tacticians who strove to operate and adjust the Versailles system were able men of goodwill...

...nevertheless, one senses the looming prospect that some day soon the sounds of sobbing may emerge from the suites of American officials in Tokyo or Berlin...

...government could oversee their activities...

...American statesmen were not interested in the forgiveness of debts...

...The Young Plan, hailed in 1929 as the definitive answer to the international debt crisis, vanished into thin air...

...lately many Americans have become uneasily aware that we are waiting for some similarly striking event to mark its end...

...In trade, developing countries found themselves exposed to new systems of quotas and restrictions...

...IOUs...

...At the same time, the competitive stimulus of free trade will offset the inflationary tendencies of full-employment policies...

...The left-of-center parties favored the rapid extension of the social democratic order...

...This problem is greatly exacerbated by the competitive pressures of low-wage manufacturing in developing countries...

...Taken together, the various elements of the postwar system constituted a program for achieving a noninflationary but Keynesian virtuous circle...

...it rested on spoken and unspoken agreements to coordinate domestic 388 • DISSENT The Global Economy and international policies in the leading countries...

...The current U.S...

...the right-of-center parties accepted the existence and even the extension of the social democratic state—they wanted only to move at a slower pace...

...As a result, the system works less well than it did at its peak of efficiency, and consequently countries are less committed to the global system...

...Once again chaos and darkness covered the earth, and plagues more monstrous than those visited on Egypt were unleashed on the world...

...We are, then, at the start of the twentieth century...

...The Allied soldiers had not spent four years in the trenches to be thrown out of work by the Hun...

...The new, Thatcherite world order attempts to combine the globalism of Bretton Woods with the economic orthodoxy of Versailles...

...If Versailles had been a Covenant of Law, the authors of Bretton Woods were determined to proclaim a Covenant of Grace...

...The U.S...

...There were countervailing impulses of a kinder and gentler sort...

...In these closing years of the century, that system no longer seems to work...

...Germany and Japan in the 1930s...

...Low-wage German labor would live poorly while it produced goods to be sold abroad, thereby earning money and Heaven's forgiveness as well...

...Essentially, all countries agreed to coordinate macro- and microeconomic policy along Keynesian lines while the United States would provide the liquidity on which such a system must rest...

...With free global markets for capital and goods, investment will flow to the places where goods can be made most cheaply...

...labor movement had won certain basic rights in the old industrial centers, especially in New England, but economic development opened regions like the South to industrialization and plants began to move to low-wage sectors of the country...

...Here too their freedom of action was limited...

...Demand As the Great Compromise on Demand was the core of Bretton Woods, the breakdown of that compromise is the key to its collapse...

...There are two modernizing agendas in the world today...

...That social project broadly defined the objectives of democratic and progressive forces in both the First and Third Worlds...

...but until it was too late, and the system broke down amid the bitterness and recriminations of the thirties, they could never bring themselves to acknowledge that the problem was not one of application but design...

...Finally, this painful encounter signaled the era of a new kind of socioeconomic organization...

...That world is as badly in need of constructive compromise as was the strife-tom world of Victorian capitalism...

...Instead I would like to close with a few thoughts on the political implications of the Thatcherite world order...

...Developing countries were to enjoy special benefits and to labor under special restrictions...

...With the end of the original Bretton Woods fixed-exchange-rate system, the IMF lost its mandate to help countries cope with short-term exchange rate problems...

...Since then, international economic relations have been so complex, and the sums involved so large, that the active participation of national governments and of multilateral agencies chartered by contracting states has remained essential to the routine operation of the international economic system...

...The Marshall Plan was one aspect of this unfolding policy, but there were others...

...In vain did Sir Edward Holden, the leader of the British delegation, protest against this lack of confidence in Britain's standing...

...Trade We have already seen what the Europeans gave up in the postwar compromise on trade: they abandoned their colonial empires in exchange for participation in a U.S.-funded and stimulated global order...

...Within the strict limits of their mandate, they were magnanimous and flexible...

...The emerging Thatcherite world order is not a stable one...

...The Versailles system failed to produce the sustained demand on which the new industrial economy depended...

...The United States can no longer serve as the locomotive of world growth, and no other economy can replace it...

...The newly industrializing countries (NICs) and countries like Malaysia, India, and the People's Republic of China, on the brink of similar startling advances, will be frustrated by the deceleration in global demand and the high real interest rates that are likely to accompany this kind of world...

...The other side of the Great Compromise on Demand has also fallen into disrepair...

...it benefits from an expansionary, easy-money climate...

...We have already seen why the system can be called Keynesian...

...Development This and the right of all nations to equal treatment in the world economy weighed heavily on the minds of those who shaped the postwar system...

...The Great Compromise on Development at Bretton Woods rested on the principle of exceptionalism...

...I have made some suggestions in this direction in World Policy Journal (Winter and Summer issues, 1989...

...Today, the left finds itself unable to challenge Thatcherite economic logic directly...

...Britain, and therefore France and Israel, had to withdraw from the Suez in 1956 when Washington mounted an attack on the pound...

...A global economic crisis is reviving the confrontational aspect of Victorian capitalism at the moment when Bolshevism, which conceived of itself as capitalism's great antagonist, is collapsing...

...Peronism in Argentina, the PRI compromise in Mexico, the iron rice bowls of China and the Comecon, the social democratic systems in Europe and North America: these are universally in retreat...

...In an integrated world economy with open trade in capital and goods, countries following stimulative economic policies often stimulate the economies of their trading partners rather than their own...

...Even under the most favorable conditions we are headed for years, perhaps decades, of turmoil and instability in this part of the world...

...Farmers, small businesses, and homeowners like easy money...

...Animating the Versailles Covenant was the spirit of Moses—at least the Mosaic spirit as presented by early Christian controversialists...

...Less developed countries will find their freedom of action even more seriously compromised...

...The British fought hard at Bretton Woods to preserve their imperial preferences, the system of tariff and trade legislation that helped cement their wobbly empire, but the American position was firm: the end of imperial preference was the price for American assistance to Britain after the war...

...Both the Dawes Plan, which reorganized the German economy in a successful attempt to encourage U.S...

...The new financial superpower was the home of Fordism—mass production and mass consumption by relatively well-paid industrial workers...

...The Keynesian Compromise provided the democratic left with a program that was both progressive and democratic...

...the result was a hybrid system best called unilateral global Keynesianism...

...in the future the United States will be increasingly unwilling to sink deeper into debt for the sake of the global economy, and the rest of the world will be less willing to lend us the money to support our consumption...

...Institutions The final compromise brokered at Bretton Woods concerned the institutional framework of the postwar settlement— the nature and mandate of the international economic institutions...

...Unemployment rates doubled in the United States and tripled in Europe...

...Since the world shifted away from the Keynesian perspectives of Bretton Woods in the early seventies we have had less growth, more unemployment, more protectionism, more inflation, and larger government budget deficits than in the halcyon days of the Covenant of Grace...

...This stance not only reflected the conviction of American statesmen that international growth was essential for peace, it reflected the continuing views and interests of a powerful domestic coalition...

...These blocs are expected to consolidate and protect large consumer markets...

...And since both the IMF and the World Bank were to be headquartered in Washington, the U.S...

...The struggles of race, nation, and class that the old system generated and exacerbated have the power to be more destructive than ever today, and the need for constructive cooperation is greater than it ever was in the past...

...Something similar happened in American history in the past...

...The policies of these institutions, it was agreed, would ensure the greatest possible expansion of economic demand while maintaining currency stability...

...As the Allies considered how they were to pay, the answer seemed clear: they would take it from Germany...

...Argentines, SUMMER • 1990 • 389 The Global Economy Mexicans, and Brazilians are still being squeezed "until the pips squeak...

...The global economic system established under the aegis of the United States in the forties appears to be giving way to a new system of blocs in Europe, East Asia, and the Americas...

...Europe often resented these displays of American power, but the economic system survived these frictions...

...This is a depressing and disturbing change from the classic postwar political alignment in the West...

...So long as the American stock and real estate markets continued to boom, such capital was plentiful, but when markets SUMMER • 1990 385 The Global Economy crashed in 1929, American lenders wanted their money back...

...Wall Street raised half the requested amount, but given the magnitude of the sum and the political risks involved in lending to belligerents, it insisted on adequate collateral against any future advances...

...In the end, Germany made payments to the Allies with money it borrowed from the United States, and the Allies in turn repatriated these credits to service their own debts...

...There is no higher priority than developing—and building support for—a new global covenant of grace...

...But the relationship between full employment and free trade was forgotten in the seventies...

...Like the successive dispensations of divine favor in Wilson's Calvinistic faith, the postwar economic covenants defined relationships between unequal partners across a broad range of issues...

...trade rivalries are growing among the three major blocs of North America, Europe, and East Asia...

...The nations of the earth assembled and swore with straight faces that they would never use poison gas, never admit aggression, never oppress workers and ethnic minorities, never negotiate in secret, and finally, in the Kellog-Briand Pact, they forswore war itself...

...At a time when technological revolutions are vastly increasing social productivity in the advanced countries and the full force of the industrial revolution is being felt in more non-Western societies than ever before, the left is unable to show how these economic gains can be effectively harnessed to serve democratic ends—and it has also lost its sense of how democratic social reform provides the basis for continuing economic advances...

...At the same time, these newly industrializing societies will find themselves disposing of much greater reserves of force—economic, military, and political—than they have been accustomed to wield...

...The decline of social-welfare capitalism is the most important feature of contemporary economics from Sweden to Swaziland...

...The resulting stresses fomented social conflict within countries and international conflict between them...

...The continuing budget and trade deficits have undermined world confidence in the long-term value of the dollar...

...But Kirkland warns that free trade-union movements are essential to the creation of Western-style middle-class democracies in the East, and that the austerity and rigor for which the East seems destined threaten the consolidation of both the free trade-union movement and democracy itself...

...Woodrow Wilson's Covenant of Law In deference to the language and the theology of the first global lawgiver of the century, we shall speak of the postwar orders created in 1919 and again in the forties as covenants...

...Achieve a trade surplus —but not by forcing the Allies into deficit...

...As long as this system worked, social democracy dominated the political agenda...

...In response to these unfavorable conditions, nations have begun to turn away from the global multilateralism of Bretton Woods and have begun to return to the older idea of regional blocs...

...a new system based on the principles of Bretton Woods would have a multilateral rather than a unilateral structure...

...Output, productivity, purchasing power, and investment would all continue to rise, while the need for state stimulation would decline...

...This in turn would generate a constant demand for new investment and thus, in the Keynesian view, reduce the necessity for government intervention in the economy to stimulate such investment...

...Like the Versailles order, it suffers from chronic problems of oversupply and weak demand...

...As the importance of developing producers grew, especially following the successes of exportoriented economies in creating powerful industrial sectors in the seventies and eighties, the exceptionalism became less benign...

...For Keynes, as for most midcentury economists, demand was the great economic problem...

...The construction of a Keynesian mass consumption society offered rapid economic growth as well as providing new opportunities for most of society's members...

...This event marks the end of the era in which international economic relations appeared to be managed directly by the invisible hand without the interposition of sovereign governments...

...Also like the Versailles order, this new world order is subject to speculative bubbles and collapses on its volatile financial exchanges...

...Essentially, the democratic left must raise its sights from the national to the international level...

...Poor countries that refuse to follow these policies lose their access to international sources of capital...

...Indeed, it constricted demand...

...The crisis passed, and throughout the eighties the world's financiers eagerly bought up unprecedented amounts of Treasury debt...

...While its anti-imperialist sentiments rarely prevented the United States from advancing its own imperial interests, American statesmen have generally preferred an "Open Door" policy to one that divides the world into rival closed blocs...

...The response of the international system to the debt crisis was the most striking, and dangerous, example of the new attitude...

...each nation pursued narrow interests...

...Nor were these kinder and gentler impulses entirely absent from the economic negotiations of the twenties, although efforts to reform Versailles stopped well short of structural change...

...Although heavily influenced by Keynes, the Bretton Woods system was the product of international relations, not a Cambridge common room...

...After a period of reconstruction, Germany and Japan were to return to the family of nations and were to enjoy a greater freedom of buying and selling in markets controlled by other powers than ever before...

...A study of the economic orders of the twentieth century is therefore not without interest today...

...In response to the collapse of the Bretton Woods exchange-rate system and the resulting bouts of inflation, governments everywhere retreated from full employment...

...An attempt in the late 1960s to give the IMF a constructive new role as a major source of credit failed, and since then the fund has been relegated to the margins of economic activity—acting as the police officer and enforcer in the international debt crisis...

...Germany was not the only debtor in the world of Versailles...

...it does not depend on unknown or untested principles...

...What made this a compromise was that, initially, the exceptionalism was often benign...

...Americans did not hesitate to use economic pressure at other key junctures to force European retreats from the rest of the globe...

...It was fortunate that this interest coincided with that of others and that, at least in the forties, what was good for the United States was good for the world...

...The road to prosperity, we are told, lies through sacrifice...

...Illiberal trade, competitive blocs: the world has seen these before...

...Today, the United States no longer can or will fund the international institutions at the necessary level...

...The Third World, too, faces crisis and upheaval...

...The Bretton Woods order was based on Keynesian principles...

...The United States, the major source of funds for these institutions, could veto their actions...

...the democratic left needs to take the lead in developing and articulating an international agenda for the world taking shape around us...

...From an economic standpoint, we have seen three distinct eras since the First World War: The first, the Versailles order, was established in the wake of the Great War...

...Economic crisis, competitive meddling from foreign blocs, restricted markets, and chronic hard-currency shortages are almost guaranteed to reawaken the forces of nationalism and hate so deeply rooted between the Volga and the Elbe...

...The compromise was a complex and finely balanced system...

...They hired the 384 • DISSENT The Global Economy money, didn't they...

...National governments may be incapable today of presiding over Keynesian social compromises, but international agreements can provide the framework in which the classic Western compromise can once again make economic sense...

...Infusions of dollars would prime the pump of the international economy in the same way that stimulative policies had helped national economies recover from the depression...

...The other Allies, too, had large war debts, generally to the United States...

...Instinct and experience had previously taught that increases in worker pay meant decreases in factory profits...

...budget and trade deficits are the ghosts of the Bretton Woods system...

...Given that the essential thing could not be done—cancellation of debts was politically impossible—what remained was to adjust the reparations to Germany's ability to pay and to enhance that ability by attracting private American bank capital to the Weimar Republic...

...Two great developments will be placing new strains on the international economic system in the nineties: the return of the Comecon (East European) nations to the world market economy and the continuing industrial revolution in much, though not all, of the developing world...

...Wall Street insisted on collateral, and collateral it got...

...Forgiving debts and stimulating demand were the keys, Keynes believed, to the establishment of the stable prosperity the world had not known since 1914...

...workers and plants were idled...

...it is, if anything, more dangerous today than it was fifty yeas ago...

...capitalists kept the more desirable means of production...

...The Crisis of the Covenant The Bretton Woods system worked well in part because it rested on four "Great Compromises": on demand, on development, on trade, and on institutions...

...The dilemma is clear in Eastern Europe, where longtime democratic foes of communism, including Lane Kirkland, are warning against the political consequences of the economic policies being adopted by the new governments...

...to know why Versailles failed, why Bretton Woods broke down after a generation of great success, and to understand the system that replaced it is to grasp the economic aspects, at least, of the central issues of our time...

...it meant the international triumph of the Keynesian Compromise...

...We are already seeing reviving tension between the United States and Japan over economic issues...

...the second, the Bretton Woods order, after the failure of Versailles had brought on another conflict...

...The growth in real wages slowed, and, in countries like the United States, real wages never returned to the peak levels reached in the early seventies...

...Belgian consumers are likely to buy French or British rather than homemade goods...

...it confines itself to offering to manage the process of Thatcherite adjustment more humanely and prudently than the true believers...

...real wages and job security are falling in much of the West...

...Victorious France emerged from the war with a debt four times larger than the indemnity she was forced to pay Bismarck after the Franco-Prussian War...

...The coalition between organized labor and other popular movements on the one hand and the financial and business elites on the other that marked the later Roosevelt years in the United States set the agenda throughout the Western world...

...In some respects the allied reparations commissions of the 1920s were in advance of the debt managers of our own times...

...The commitment to international Keynesianism can therefore be seen as part of a postwar American effort to create a world in which the United States, specifically, would be certain to prosper...

...High wages, short work weeks, and a culture of consumption are now seen as the obstacles to growth, rather than as its natural and beneficent outcomes...

...If Franklin D. Roosevelt was the dominant figure of the rise of the Keynesian system, Margaret Thatcher is the doyenne of its demise...

...Reparations from Germany would service the debt to the United States—a good idea, perhaps, had it been workable...

...In those sunny days it seemed that all the Western world was moving, so to say, toward Stockholm...

...In the First, Second, and Third Worlds economists and politicians are busily dismantling the stable systems of mass production and consumption that defined the twentieth century...

...Although the United States became a creditor nation during the First World War, the international creditor interest in American politics remained relatively restricted to Wall Street...

...in return, the Allies were not forced to squeeze compensating sums from the Axis after the war...

...Low wages, the abandonment of costly regulations, and a scaling back of redistributory taxes and expenditures are now all seen as the keys to national prosperity...

...debt-oriented, underpopulated "developing" states like Arizona and Wyoming are heavily represented in the national government...

...It turned out, however, that neither of these measures worked as planned...

...The commitment of our major trading partners to Keynesian policies at home is weaker than it used to be...

...As debt and reparations posed the most vexing questions of the interwar system, so they brought out the best and the worst in interwar policy...

...The competitive pressures and comparative advantages of international trade would keep prices low, while the combination of high wages at full employment and international competition would induce employers to search for ways of improving productivity...

...The United States is still stimulating international demand by acting as the world's consumer of last resort, but the costs and the risks have become unacceptable both here and abroad...

...The answer for the labor movement and its allies was to move from the state to the national level: to establish national rather than state minimum-wage and labor-protection laws...

...countries now try to "compete" by keeping costs of production as low as possible...

...Glutted markets in basic industries like steel and automobiles increase political pressures for protection...

...The left, however, has only the most limited sense 392 • DISSENT The global Economy of how, economically, its goals can be reached...

...Economic modernizers find themselves calling for programs that can barely, if at all, be reconciled with democratic politics...

...For different reasons and to different degrees all four Great Compromises have come unraveled...

...As the Treasury Department of the United Kingdom noted in its 1943, Keynes-authored proposal for what became the International Monetary Fund, "If active employment and ample purchasing power can be sustained in the main centers of world trade, the problem of surplus and unwanted exports will largely disappear...

...In 1932 the Allies offered to write down Germany's debts by 95 percent and to make the remainder payable to a European conservation fund rather than to the Allies...

...However, there is an alternative to Thatcherism...

...386 • DISSENT The Global Economy The second element in the new covenant was composed of two factors that today we often forget were once considered complementary: full employment and free trade...

...The first element in the postwar plan was to channel dollars to Europe to stimulate purchasing power without creating burdensome repayment obligations...

...protectionist pressures rose in the major industrial countries...

...Western socialist parties now concede that they have little control over their economic policies...

...banks to make extensive loans, and the Young Plan, which reduced Germany's ultimate reparations and debt burden, showed signs in places of a more generous spirit than the one that animates their latter-day heirs —the Baker and Brady plans...

...the Allies were gracious because they believed Keynes when he told them that grace would lead to peace and wealth...

...Today, no single country can be the locomotive of world growth, but the leading economic powers can pool their resources to create a multilateral locomotive and then can all ride together on the train...

...From playing an expansionary role in the Covenant of Grace, the IMF has been converted into an organization like the Allied reparations commissions of the Versailles era, mandating austerity in the interests of an unpayable debt...

...A simple return to the welfare state at home and Bretton Woods abroad would not work...

...I have no wish to romanticize the domestic and international compromises of the twentieth century...

...Hands rough from the plough grasp the levers of the tractor, then the tank, and soon, perhaps, they will reach for the control panels of the ICBM...

...A look at the problems with each of the four compromises will explain why the system is in trouble and suggest the kind of action that can put the world once again on the path to sustained growth...

...The United States was the international lender of last resort, functioning as a de facto central bank for the Western world...

...Once again the world's leaders went up to the mountains—in New Hampshire, not Sinai—and this time they descended from the heights with a more comprehensive and workable code...

...Now capital has gone global, and labor must do the same thing...

...An eye for an eye and a tooth for a tooth was the spirit of Versailles...

...The major factor shaping the postwar world was the overwhelming, unprecedented economic supremacy of the United States, the greatest economic powerhouse in the world and the one great industrial society to have escaped the war's destruction...

...As the world's central banker, it was prepared to be more openhanded than SUMMER • 1990 • 387 The Global Economy such banks generally are...

...These sentiments found expression in the long succession of New Year's resolutions that adorned the diplomacy of the 1920s...

...This challenge called forth some of the most sophisticated financial maneuvers ever conducted...

...With this door closed, the Germans were forced to rely on others...

...The French and Spanish socialists have openly linked their economies to the Bundesbank, the most rigorously orthodox of the world's central banks...

...Sir Edward wept in his hotel suite at the news, but the British government deposited its Suez Canal stock in the vaults of the Farmer's Loan and Trust...

...A new international economic order built on the principles of Bretton Woods should be the keystone of any genuine international initiative of the democratic and progressive left...

...We have resented European efforts to limit our trade since the Bostonians rioted against the colonial Navigation Acts...

...Sacrifices that would be inconceivable in advanced countries were routinely imposed on developing countries heavily in debt as the price of international assistance...

...For the first time, the industrial development of less developed regions of the world became a stated objective of international economic policy, and the responsibility for facilitating investment in poor countries fell to the World Bank...

...Thatcherism has come to mean a belief that the liberal welfare state is a cause of economic difficulties, rather than the solution to them...

...Sins too were to be forgiven...

...That moment almost came when the United States government was forced to issue "Carter bonds" in foreign countries because other nations temporarily refused to purchase more dollardenominated U.S...

...Threatened constantly with internal chaos, unstable regimes composed of inexperienced reformers and veteran party officials must tack uneasily between popular enthusiasms and cold realities as they perform a task never undertaken successfully anywhere in the world—the dismantling of communist command economies and their conversion into viable market societies...

...The scheme was worthy of the Hall of Mirrors at Versailles, but the question of debt continued to loom over the world economy in the brief interwar era...

...SUMMER • 1990 • 393...

...the masses would grow richer, more leisured, and better educated in perpetuity...

...These countries will find it difficult to evade the strangling embraces of the developed world embarking on a sophisticated version of its nineteenth-century imperial rivalries...

...Even the parties of the right supported the Keynesian system in its heyday...

...Despite these advantages, the economic health and the financial balance of the world system continued to depend on transatlantic capital flows from the United States—the Japan of the twenties...

...a world of slow growth and politicized trading relations will further test the relationship of the three blocs rising on the ruins of the Bretton Woods system...

...The key to understanding the condition of the world economy today is to see that this complex system has broken down in each of its parts...

...on other fronts, the climate turned even more hostile to their aspirations...

...The Bretton Woods system rested on American supremacy...

...Keynesian macroeconomic stimulus no longer helps the countries that apply it...

...The Germans tried this, briefly, after World War I; the result was the hyperinflation that still makes sensitive Germans shudder...

...China, Indonesia, Malaysia, Pakistan, Korea, Thailand, Brazil, and India in the 1990s...

...Historians report that not all of these promises were kept...

...The United States would provide the rest of the advanced market economies with the capital and markets they required...

...Lend-Lease was only one weapon in Franklin D. Roosevelt's arsenal to ensure that inter-allied debt would not return to haunt the peace settlement...

...The Covenant of Grace worked for all the major industrial economies, not just for the United States, and when the Bretton Woods system began to fall apart, the consequences were grim for all parties...

...Two world wars have broken out already in Eastern Europe in this century, and the kindling exists to ignite yet a third...

...If this process takes place under adverse global conditions—if interest rates are high, global growth is slow, markets are glutted, and a world dividing into economic blocs erects barriers to the free flow of goods—then the difficulties of the centrally planned economies will be that much greater...

...Keynesian consumer society saw the apotheosis of alienation into an entire mass culture...

...rich ones suffer capital flight and the deterioration of their international position...

...These four compromises made up an overall system, and countries accepted less favorable terms of compromise in one field for the sake of more attractive terms in another...

...neocolonialism was a less than satisfactory condition for developing nations emerging from colonialism...

...Beyond Thatcher This article is not the place for a detailed description of an international economic alternative to Thatcherism...

...beggar thy neighbor became the cardinal rule in the international economy...

...Although negotiations for liberalized trade continued, especially in the Uruguay Round of GATT negotiations, by the 1980s most observers were convinced that the world was well on the way to a new and illiberal trading order...

...Keynes and his colleagues were resolved that the new system would provide opportunities for stable, longterm growth in a more peaceful atmosphere...

...This combination proved explosive in the past...

...The Bretton Woods system was global because the United States used its opportunity at the end of the war to intervene decisively against the prewar European system of empires...

...Their international holdings had already been confiscated and their bullion reserves were under the jealous supervision of the Allies...

...The country as a whole retained the instincts and characteristics of a debtor society...

...The European Community is one such bloc...

...The Thatcherite World Order With the United States unable to serve as an effective locomotive for world growth and with no other national economy able to take its place, we find ourselves increasingly in the world of Versailles—a world of slow growth, relatively high interest rates, depressed purchasing power, and economic blocs...

...The United States, Europe, and Japan would cooperate to renew the expansionary and accommodative mandates of the international institutions and to re-create a noninflationary global climate hospitable to development and growth...

...A further examination of the structure of the Bretton Woods system will help us see why it broke down...

...Yet Versailles was not all darkness and wrath...

...It was not only debts that Bretton Woods aimed to forgive...

...The unthinkable, too late, became suddenly thinkable...

...As the depression deepened, what remained of international economic cooperation broke down...

...The twentieth century meant more than American supremacy...

...these countries in turn would stimulate domestic demand to the extent possible...

...The new system was unilateral because the United States took responsibility for its overall direction, providing the hard money that primed the European pump but exercising a veto over the subsequent development and pace of international stimulus...

...This is the first of the four shadows hanging over the world economy as we head into the nineties...

...so do the banks and thrifts that hope to lend to them...

...The tight labor market would enable workers to press successfully for their due proportion of the benefits of enhanced productivity, creating new purchasing power and stimulating the circle of growth once again...

...This was the program for Germany, and it was an impossible one...

...International debts can be paid in only a handful of ways...

...If Belgium stimulates domestic demand, there are no guarantees that Belgian manufacturers will benefit...

...Globalism, like easy money, is a longstanding interest of the United States...

...The early steps in this direction in Hungary, Poland, Yugoslavia, China, and the Soviet Union all suggest that this process will, at best, be slow and difficult...

...Barriers to trade came down, tariffs fell, and international trade expanded to the benefit of all...

...There are at least some signs that imperialism is reviving today...

...In 1945 it was the considered opinion of most world leaders that these blocs created the international tensions that led to war...

...Furthermore, although no country today can successfully create a regulatory environment that differs too broadly from the general level of conditions prevailing in the world, cooperation among countries can establish a global floor for wages, working conditions, the social wage, and environmental protection...

...The American policymakers of the forties sought to combine Keynesian ideas with policies designed to advance traditional American interests...

...The easiest is the one brought to such perfection by the United States in the Reagan years: foreigners can be bullied or coaxed into accepting dubiously denominated paper certificates as payment in full...

...Part of the reason has to do with the increasing economic costs of the welfare state associated with midcentury Keynesianism...

...Once again the world must accommodate new powers or face incalculable dangers...

...its other features were just as important...

...A retreat into protection and isolation would be disastrous from every point of view...

...German imports were to be curtailed—no champagne for the Hun—while Germany's standard of living fell and its exports increased...

...With full employment in the major trading countries, the political pressure for protection will be low...