UC Berkeley - HIST 186 - 2012 Spring - Sargent - International and Global History Since 1945 - Lecture 05 - The Keynesian Era - 01h 19m 46s

Political Economy

[0:00]

Talking about political economy. What is political economy? It's not economics as such rather it's that set of political, institutional and sort of ideological factors that determine how the economy is structured and how it operates. We're talking not about economic history as such but rather about sort of the larger political and institutional circumstances that framed the operation of the global economy. We're not talking exclusively about the international economy. We're also going to talk about sort of domestic economies and in particular about the relationship between the international economy, what you might call the international regime, and the domestic economies that exists within it.

Lectures Structure and Schedule

[0:50]

Just to be really clear at the outset, today I'm going to be talking about the advanced industrial and capitalist world. We're going to talk on Thursday about the developing world. So on Thursday, we'll deal with the circumstance of nations that are primarily agrarian but which want to industrialize and to develop and to modernize. That waits for Thursday. We're not going to talk about the communist world for another couple of weeks. You can look up on the syllabus and see exactly when that is. I couldn't tell you off the top of my head but we are going to do it.

[1:20]

Today, we're talking about the advanced capitalist economies of the West. So if it seems like I'm omitting important regions of the world, all I can say is that I am but we're going to deal with them when it's time to do so. For the purposes of analytical clarity, it makes sense I think to break up the discussion of global political economy into a regional framework that aligns with the organic organization of the world economy as it was in the time which we're dealing with it which is the early postwar era.

Postwar Economic Boom

[1:56]

With that disclaimer let me begin. How to define the period of economic history that we're dealing with -- which is to say the first decade or so after the Second World War. What should we make of the postwar years? What makes this a remarkable or distinctive phase in the economic history of the world?

One of the most remarkable characteristics of the first two postwar decades, the 1950s and the 1960s, is really clear when we look at this slide. These are a period of world history that saw remarkable economic growth. Average annual growth rates between 1950 and 1973 were just a little bit under 3%. This is very, very impressive when you're situated in broader historical context.

[2:48]

I mean, look, between the beginning of the Common Era and the early 19th century, the world economy barely grows at all. Average annual growth rates are close to zero. This is the long era of the Malthusian trap↗ which we've already discussed. With the industrial revolution, growth rates begin to pick up in the 19th century. Average annual growth rates approach 1.5% for the world as a whole in the last decades of the 19th century but this is nothing compared to what the world experiences in the two decades subsequent to the Second World War.

[3:26]

Let's zoom in a little bit on the 20th century. This will give us a closer perspective on the postwar decades. We can compare them to the prewar era and also to the sort of more recent post-1973 period in world economic history.

[3:46]

What this chart does is it breaks down growth by region -- in some cases by nation. This is important because when we deal with sort of global growth rates we're taking a very sort of crude aggregate perspective on the world economy as a whole. It's important to remember that the experiences of different nations and regions were potentially quite different and this chart tries to illuminate some of those differences.

Postwar Economic Growth in Western Europe

[4:14]

Let's look at Western Europe. In the case of Western Europe, we see fairly sluggish growth before the Second World War. The European economy does not grow all that much. It's after the Second World War that European growth rates are really, really impressive -- around 4% annual growth per year, but that doesn't quite compare with China's economic performance over the past decade, but it's nonetheless very impressive when you situate it in historical context. Europe's growth since the early '70s has not been nearly so rapid as that.

[4:46]

As a similar picture, intriguingly, in the case of the Soviet Union, the Soviet Union also grows fairly quickly after the Second World War. We'll talk about this in due course when we come to talk about sort of the communist world economy, but it's important to remind ourselves at the very outset that some key aspects of the Western capitalist experience are paralleled in the East Bloc.

Postwar Economic Growth in Japan

[5:10]

Japan is by far and away the most impressive example of postwar economic growth. Average annual growth rates in Japan between the early 1950s and the early 1970s top out at a little under 9% -- around 8% average annual growth. It's very, very impressive.

Postwar Economic Growth in the Developing World

[5:33]

When you come to the developing world, the story is somewhat more complicated. In Latin America, there is sort of an impressive rate of postwar growth which tails off as it does in Western Europe and the United States from the early 1970s. In China and India, it's a very different story. The growth of the early postwar decades is eclipsed by what comes next. This is you know sort of the history that leads us towards the present and to the rise of China as a global economic power, but I don't want to get too deep into that story today. That's a story that we'll pick up later on in the course of the semester.

Postwar Economic Growth in the Western Capitalist Economies

[6:15]

What I want you to focus on today is the experience of the West. What's particular about the early postwar decades, the '50s and the '60s, from a Western vantage point is that the economies of the Western capitalist world grow faster in this period than they had done before or than they would do since.

[6:37]

By consequence, Western publics, come to consider this period of history as a period of remarkable affluence and prosperity -- a golden era. It's sometimes described as sort of the postwar golden years. It's how it's described in English. The French will tend to describe the postwar decades as Les Trente Glorieuses↗ -- the thirty glorious years.

[7:04]

We can drill down a little deeper into the data if we want and consider the experiences of diverse nation-states. Was the story necessarily the same everywhere even within Europe? The basic narrative framework is fairly similar. Growth is much more impressive after the Second World War than it had been before. The general picture is one of sort of declining growth rates from the early 1970s. The reasons for that we'll come to sort of deal with in our discussion of the 1970s later in this semester.

Great Britain as an Anomaly

[7:42]

The only anomaly that I would point out at the very beginning which is something that you might want to bear in mind is that Great Britain's experience of postwar growth is much less impressive than is the rest of Europe's. Just hold that at the back of your heads and we'll sort of come back to that point as the lecture progresses.

Explanations for Postwar Growth Writ Large

[7:59]

But let's think not about the experiences of individual nation-states -- at least not initially. Let's try to think about the experience of postwar growth writ large. What hypothetical explanations might we be able to offer for it? Why does the industrial capitalist West, grow so impressively after the Second World War?

Necessity of Replacing Lost Infrastructure

[8:25]

Let's try to posit some sort of broad brushstroke explanations. First point that we might want to consider is the economic legacy of the Second World War. Insofar as the Second World War devastates Europe, destroys a great deal of capital stock, there is a great deal at the end of the war that has to be replaced. Factories have to be rebuilt. Railroad lines have to be sort of reconstructed. Highways that have been bombed have to be repaved and so on and so forth. So the replenishment of stock damaged and devastated in the Second World War is one explanation for the rapidity of postwar growth. It's a sort of rebuilding after a great and devastating conflict.

[9:12]

It's probably not a sufficient explanation. We don't see a comparable period of sustained growth after the First World War. There's a brief postwar boom as there often is following a major catastrophic war, but it's not sustained into the 1930s. Europe's post Second World War recovery would be sustained into the subsequent decade -- the 1960s.

The Application of Technological Advances

[9:37]

To get a more substantive explanation for Europe's post-war prosperity, I would suggest, and here I'm sort of merely borrowing from what much more informed economic historians have had to say, I would suggest that you think about the ways in which European economies apply existing technological methods, methods of production, to the purposes of industrial production -- industrial output. Remember that the basic use of technological foundations for the postwar European economy already exists by the time of the Second World War, right? Insofar as Europe industrializes or Europe's industrialization is sort of completed after the Second World War, Europe is merely applying technological innovations that have already been developed -- often developed in the United States.

[10:33]

What are the core innovations that sort of drive and sustain European productivity after the Second World War? Some of these are technological but there are also institutional and procedural. Think about the organization of the factory for example. It's here in the United States that Henry Ford pioneers mass conveyor belt production. The production line is an innovation that is pioneered and improved in the United States.

[11:03]

After the Second World War, Europeans who had not previously embraced the principles of American style Fordist mass production can do so. They're able to take advantage of industrial techniques, techniques that provide for a greater efficiency and output, that have been developed elsewhere. This is one of the reasons for Europe's impressive postwar growth. Europeans are able to apply existing productive technologies, to take advantage of innovations that have been pioneered elsewhere, usually in North America.

The Role of Cheap Energy

[11:35]

We might also emphasize the role of cheap energy in the sustenance of Europe's postwar growth. At the beginning of the post-war era, Europe's economy is primarily coal-fired. Coal is not such as efficient fuel source as oil. The postwar decades will be decades of bountiful cheap oil. In real terms the price of oil declines between 1950 and 1970. Cheap energy inputs help to sustain Europe's rapid industrial growth through this period.

Transfer of Workers from the Farm to the Factory

[12:06]

Another really important factor that we should think about when we try to explain Europe's postwar growth is labor. In order for an economy to grow it needs new sources of labor. Where do the people come from? It's really important when we think about European economic growth, and let's take say France as a prototypical example, to remember just how agrarian Europe still was at the end of the Second World War.

[12:35]

This is not to say that Europe didn't have extensive industry but that many laborers still labored on the land at the end of the war. This substantial reservoir of agricultural labor contains within it the sort of capacity or the potential for rapid industrialization. If you can take workers off the land and transform them into factory workers then you can accelerate your rate of economic growth. Of course to do that is conditioned upon your capacity to improve agricultural productivity such that you can maintain constant or improving farm output with diminishing labor inputs. But that is something which improvements in agrarian productivity are well able to do.

[13:27]

By consequence, the sort of urbanization of European demographics, the movement of people from the countryside to the city, after the Second World War, goes hand in hand with the expansion of Europe's industrial economy. Farmers become factory workers and in the process propel and sustain economic growth.

The Postwar Baby Boom

[13:52]

Besides the transfer of agrarian labor to the industrial context, it's important to remember the major demographic bubble of the postwar era, the postwar baby boom.

[14:06]

After the Second World War Europeans like North Americans marry. They settle down and they have children. This is sort of a crude explanation but it's not entirely inaccurate as an explanation, as a framework, for postwar European demographic history. There are many more people after the Second World War, more young people, more potential workers. Demographic growth will help to explain economic growth.

Conclusion: Explanations for Postwar Growth Writ Large

[14:35]

So these are some of the very basic explanations for Europe's postwar prosperity. We want to think about the transfer of existing technologies and we want to think about abundant cheap energy inputs. We want to think about the one-time transfer of agrarian labor to industrial purposes and we want to think about demographic growth. All of these factors have explanatory value when we confront the question: "Why did Europe's economy grow so impressively after the Second World War?"

Extensive Growth in the Postwar Economic Boom

[15:07]

There is a name for this kind of growth -- growth that is driven by the adaption of preexisting technologies. It's called extensive growth↗. Think about it like this. You already have your basic industrial framework and you just expand its domain so as to include more and more people, more and more workers within it. Once all of your farm workers, all of your surplus of agricultural workers have become industrial workers, once all of the new technologies that exist out there have been adopted, once energy prices increase perhaps because demand for them, for energy inputs has risen, extensive growth hits a wall, right? You reach a limit at which you can no longer convert abundant inputs to industrial outputs because the inputs have been used up.

Europe Hits the Limits of Extensive Economic Growth in the Late 1960s

[16:04]

And this is in a sense what happens from the late 1960s in Europe. Europe hits that wall. It encounters a sort of crisis of extensive growth. What happens next? We'll come to this in due course but thinking about the question what comes next may help us to get a better handle on what happens in the 1950s. So let's just ponder it for a moment.

[16:29]

When extensive growth hits the wall an economy sort of reaches a historical moment in which further growth depends upon technological innovation. It comes to depend upon finding new ways to manufacture things more efficiently, more productively. The economy transitions from a phase of extensive growth to a phase of intensive growth↗.

[16:57]

And intensive growth is more difficult. It depends upon inventing new products. It depends upon devising more efficient ways to manufacture the products which you have previously been manufacturing. You can't simply build new factories that are sort of exactly the same as the factories that you already have manufacturing exactly the same goods. But we're not going to get too deep into that transition from extensive to intensive growth because it's something that we'll need to deal with much more substantively in due course, but at least thinking about what is to come next might help us to sort of grapple better with what we have to deal with today.

The Postwar Rise in Government Spending

[17:37]

So extensive growth is one defining characteristic of Europe's postwar economic boom. Another distinctive characteristic of Europe's postwar economic history will be the rise of government spending. This occurs almost everywhere. It's a universal theme of sort of postwar economic history throughout the advanced capitalist world. The Second World War, of course, ratchets up government spending in all of the belligerent countries. Governments tax their populations and they borrow in order to wage war.

[18:15]

In the British case for example, government spending by 1950 is well over 35% of GDP. This is much, much higher than it had been before the Second World War.

[18:29]

The war sort of transforms the relationship between the state and the economy, and after the war, it will be really hard to reverse that transformation. We're going to talk much more about why it is so difficult to reverse that transformation, but look at the data and you can see sort of the general pattern.

[18:45]

By 1950 state spending as a fraction of GDP is fairly high throughout Western Europe, in Great Britain, France, Germany, The Netherlands -- four cases here. It will be even higher by the early 1970s. The general trend after the Second World War is towards increased state activity in the economy.

Postwar Government Spending in the United States Comparatively Lower than in Western Europe

[19:07]

Let's just talk for a moment about the United States. This is a course in sort of world history not a course in American History but the US experience offers us an interesting counterpoint. In the United States, government spending is in broader comparative terms, relatively low. Compare the American case in the slide with the German case or the British case. Our government's spending as a fraction of GDP is much lower in 1950 and it's still much lower in 1973. Why is that?

The United States as a Composition of Separate Fiscal Authorities

[19:36]

In part, it has to do with a very basic institutional distinction. The United States is a federal system. The federal government is not the only fiscal authority that counts in the US context. In the West European states that appear on the slide, the situation is really different. The central government is really the prime sort of fiscal authority, the source of all public spending and the collector of taxes.

[20:07]

In the United States, as those of you who file tax returns will know, you don't only pay taxes to the federal government, you also pay taxes to the state in which you reside. Unless you live in one of the half dozen states that doesn't require income taxes and even then you still pay sales taxes.

[20:23]

So when you situate the US in comparative context and you look at sort of the fiscal profile of the American state, you have to remember that you're comparing apples with oranges -- when you compare the United States to a more centralized political system. A more accurate representation of US government spending, as a fraction of overall economic activity, would also take account of state spending, right? Otherwise, you can't sort of make a fair comparison between the American experience and the West European experience.

[20:55]

But even with that said government spending in the United States is still fairly low by comparison with Western Europe. That's sort of an interesting problem and one that we will you know have to think about as this lecture progresses.

Similarities in Government Spending Between the US and Western Europe

[21:10]

Yet there are sort of key respects in which the American experience resembles that of Western of Europe. I'm going to show you a little bit more American data here just because the American data is really accessible and very easy to use.

Shift from Military Spending to Domestic Spending

[21:24]

One of the interesting aspects of sort of the economic history of the American state after the Second World War has to do with the shifting purposes of government spending over time. During the 1950s the primary purpose of American government spending is national defense -- military security functions.

[21:52]

By the mid-1950s, government spending on national defense is approaching 15% of GDP. This is really, really high. There's no precedent for this in the peacetime history of the United States. But during the history of the postwar era, military spending dwindles actually fairly impressively as a fraction of total US economic activity.

[22:16]

By the end of the century, by the end of the 20th century, the US spends about 3% of its GDP on military purposes. That increases a little bit after 9/11 but we see nothing like a return to the fiscal circumstance of the early Cold War.

[22:33]

Meanwhile, social spending, spending on human resources, spending on social security, Medicare, Medicaid, the whole panoply of welfare programs that the federal government sponsors increases fairly dramatically over the fifty years between sort of 1950 and 2000.

[22:52]

You can see that indicated in the chart by the green line. What's interesting about this story is that this is a story that replicates itself almost everywhere. In fact, by showing you the American data rather than say the British data or the French data or the West German data, I'm actually understating the case. This transformation from what you might call the warfare state to the welfare state is even more dramatic in Western Europe than it is in North America.

[23:20]

So the American data gives you a sense of the picture but it doesn't give you nearly such a strong sense of the transformation as you would get if you looked at West European data, especially if you looked at West European data over a broader time frame, say the entire 20th century.

[23:38]

But that's a really important shift -- the shift from the warfare state to the welfare state. It's one of the defining sort of developments of postwar European economic history.

State Spending and Economic Growth

[23:52]

So let's consider some key questions. Why did the state expand? Why did the state grow? That's one key question that we ought to think about. Why did Western Europe's economies grow so rapidly? Why did the advanced capitalist West experience such a sort of munificent phase of economic growth?

[24:15]

We might posit that the two questions are linked, that there is a relationship between the two things. Maybe the rise in public spending made the economy grow. That's one hypothetical explanation, but remember that correlation is not causation, right?

[24:33]

The fact that these two trend lines sort of parallel each other, the rise of government spending and the rise of growth, does not mean that the two things are causally linked, and we should remember that growth slows dramatically from in the early 1970s while state spending continues to increase. So if there was a causal link, then it's presumably broken at some point in the late 1960s or early 1970s.

The Relevance of Political Economy

[24:56]

As we answer these two questions, there are a number of different variables that we need to ponder. We should think about the evolution of European political economy. How are economies organized within individual nation-states? What kinds of institutional provision do governments provide for example to promote and sustain economic growth? How will the economic pie be divided amongst the multitude of claimants within the nation-state? It's one question that we want to think about -- has to do with transformations in political economy.

The Relevance of the Global Economy

[25:34]

We should also think about the larger global economy. That's a really important consideration. How does the world economy develop subsequent to the Second World War? It's one of the central themes that we should think about when we try to explain postwar growth in the capitalist world.

National Cases

[25:50]

And then we'll contemplate some national cases. After getting a sense of the big picture we should ask how does this look from the vantage point of particular nation-states? Do the experiences of individual nations vary broadly or is there more similarity than difference?

[26:08]

Having said all that let me just reiterate the point that the focus of today's lecture, which is on the advanced capitalist world, is deliberate. We'll come to the rest of the world in due course. So, don't remind me at the end of the lecture that I didn't say anything about Latin America. I'll talk about Latin America along with Africa and developing Asia in Thursday's lecture. We'll talk about the communist world -- I don't think next week -- but the subsequent week.

Vocabulary for Economic Ideas, Ideologies, and Practices

[26:37]

Okay. Before plunging deeper into the history, I wanted to talk with you just for a moment about the language that we used to describe economic ideas, economic ideologies and sort of economic practices -- because the vocabulary is a contested one. I know that some of you have in sections already been debating key terms like liberalism↗. What does liberalism mean? It's one of the most confounding words in the English language because there are many different meanings that you can ascribe to it.

[27:10]

Just to give you a quick sense of how contentious the language that we're going to be dealing with is I thought that I would show you a quick clip from a Republican presidential debate.

So, in case you've been hibernating for 12 months, then you'll know that the word socialist↗ is a contentious word in our present day political lexicon. If you have been hibernating I have a video clip for you just to bring you up to speed, so check this out.

Megyn Kelly↗: We've got plenty of questions for all the other candidates up here tonight, but I want to stick with you on this, one Governor Romney. Congresswoman Bachmann has said that President Obama has "ushered in socialism" during his first term. Governor Perry says that this administration is "hell-bent" toward taking America towards a socialist country. When Speaker Gingrich was asked, if he believes President Obama is a socialist, he responded, "Sure. Of course, he is." Do you, Governor Romney, believe that President Obama is a socialist?

Mitt Romney↗: Let me tell you the title that I want to hear said about President Obama, and that is, "Former President Barack Obama". That's the title I want to hear. Let me tell you this. What President Obama is, is a big-spending liberal and he takes his political inspiration from Europe and from the socialist democrats↗ in Europe. Guess what? Europe isn't working in Europe. It's not going to work here. I believe in America."

There you saw Mitt Romney almost hold on to his intellectual integrity but not quite. (laughter from the class)

[28:52]

But at least, he didn't go so far as to call President Obama a socialist. What are the key terms that we need to think about? We should remember this language is loaded even sort of toxic.

Liberalism

[29:08]

What is liberalism? Who is a liberal? What is a liberal? I know some of you have been discussing this in sections so let me pose the question: What is a liberal? Who is a liberal? Would anyone hazard a guess? The illustrations on the slide are sort of designed to be suggestive, but...

[29:33]

Look, we can take the genealogy of liberalism all the way back to Adam Smith↗. You've all heard of Adam Smith, right? Small government, free markets. A mantle that Mitt Romney today would presumably be proud to claim. Liberalism in its sort of classical definition has to do with a political economic philosophy that emphasizes individual initiative, free markets, entrepreneurship, the rule of law as a sort of framework in which the capitalist economy can function.

[30:16]

It's a economic philosophy that sees private property and the pursuit of individual self-interest as sort of forces for positive good in the world, as forces that are sort of dynamos of growth, development and prosperity. This is an economic philosophy that Adam Smith is sort of closely associated with but there's a long sort of genealogy of liberal, economic and political philosophers running through the 19th century into the 20th century that we could get into if we had the time. We won't because it's not really what the class is about.

Transformation of Liberalism in the United States

[30:53]

But let's just sort of think about the transformation in the definition of liberalism that occurs during the course of the 20th century, particularly in the United States, because that's a transformation that we are going to be dealing with today. It's really important to think about if we're to understand why the word liberal, a word which in its initial meaning seems to come very close to the kind of free market philosophy that Mitt Romney embraces, ends up being a term of political abuse, one that Mitt Romney deploys against his political opponent, Obama.

[31:26]

What happens to liberalism in the 20th century is that the heirs of Adam Smith, particularly Keynes, who we're going to talk about a great deal more, end up embracing a somewhat different version of liberal political and economic philosophy, one which accepts the provision of sort of basic welfare goods to working and unemployed men and women as a necessary function of state power in the economy.

[32:01]

So liberalism comes to sort of assume a set of commitments to welfarism that makes 20th century liberalism distinct from 19th century liberalism.

Keynes and the Transformation of Liberalism

[32:15]

Keynes↗ is the sort of key theoretical figure in this transformation. Franklin Roosevelt↗, who we're going to talk about more, is the key sort of political figure. But let's just sort of put that transformation out there and remember that the word liberalism does not have a consistent meaning over two centuries. So it's important when we use the word liberal to be specific as to what exactly we mean.

Socialism

[32:39]

Alright, now let's come to the word socialist. Who is a socialist? What does the word socialism↗ mean? Is it fair, legitimate to call Barack Obama a socialist? Of course, it's not. It's a sort of political insult. But when we try to pin down the word socialist to a specific and precise meaning, we still encounter sort of major definitional obstacles -- definitional obstacles that are not so different from those which confound the term liberalism.

[33:09]

After all, how did Marx define socialism? Socialism for Marx is a stage of history in which a revolutionary proletariat seizes control of the means of production, makes public all private property, and in which the state manages the economy.

[33:30]

So socialism does mean in the Marxist lexicon a type of sort of economic framework in which private property is abolished, in which the state is all powerful, and in which the workers, the proletariat rules. It's a very radical thing -- at least in the Marxist definition.

The Bifurcation of Socialism

[33:51]

Yet socialism experiences a series of transformations from the late 19th century that will ultimately alter sort of the working definition of that word, "socialism", as it comes to be understood, particularly in Europe. From the late 19th century, and we're going to talk about this much more, a current of reform socialism develops within the socialist movement.

[34:14]

Leading socialists give up on the agenda of revolutionary transformation. They argue that this really isn't going to happen. It may not be necessary. We can do good things to improve the lives of working people within the framework of a capitalist democratic system.

[34:34]

So socialism sort of bifurcates, early in the 20th century, arguably even as early as the late 19th century. A revolutionary model of socialism endures, represented of course in the East Bloc in the Soviet Union, and in the West, socialists become sort of reformists. That is to say they accept the basic institutional framework of capitalist democracy. These socialists are socialists for whom reform socialism and capitalism are not necessarily incompatible.

[35:06]

So it's sort of complicated but if you think about the evolution of the political and ideological movements you'll get a sense of how the meaning of the words themselves have changed over time. Though some European socialists still call themselves socialists, the French socialist party is just the socialist party, it may be useful to use the term "social democrat" to distinguish reformed socialism as it comes to be in Europe from the revolutionary socialism that Marx propounds, and which the Soviet Union continues to represent.

[35:43]

You don't have to do that. I'm just suggesting the terminological distinction as a useful one insofar as it helps us to be you know more specific about what we're talking about when we use the word "socialist".

[35:55]

There are key differences between Marxist revolutionary socialists and European style social democrats. These differences are really profound. Social democrats accept the legitimacy of capitalism, which is to say they accept the legitimacy of an economic system in which most property resides in private hands. They don't want the state to appropriate private property for a public purpose; rather, they simply want the state to sort of to intervene to ameliorate socially undesirable outcomes like gratuitous poverty or mass unemployment.

[36:32]

Social democrats are fundamentally committed to democracy. They're absolutely committed to the rule of law. They don't believe in a dictatorship of the proletariat; rather they want to operate within parliamentary institutions, those which the 19th century sort of consecrates in Europe.

[36:50]

Most important, we should remember that there is a profound animosity between revolutionary socialists and social democrats. The revolutionary socialists hate social democrats much more than they hate conservatives. Lenin famously described reform socialists as false friends of the people, as stooges of capitalism, who, by ameliorating the conditions in which the working classes exist, make the revolution harder to accomplish.

[37:22]

So if you're a revolutionary socialist, you would rather see a conservative government in power than a social democratic government, because the conservative government will presumably do things which...or it will not do things that would make life better for working people, and would thereby make sort of a revolutionary uprising more likely than would a social democratic government, that would, by sort of ameliorating conditions in which the working classes live and labor, forestall or potentially prevent revolutionary transformation of the social order from ever coming to pass.

[37:58]

So this is a sort of crude synopsis but it should give you some sense of just how distinct the various meanings of these terms can be.

[38:08]

Student Question: I didn't catch the difference between the 20th century liberals and the social democrats. Are they essentially the same but in different regions?

[38:15]

They're extremely similar. There are distinct intellectual genealogies, right? They come from different places but I would suggest that there is a convergence in the mid-20th century of what you might call social democracy and progressive liberalism. There are probably still different accents, but that's a terrific question because one of the key points that I want to make in the lecture and I think you anticipate it really nicely; and this is that reformed socialists and progressive liberals are coming from different places. They're coming from quite different intellectual traditions, but they ultimately end converging around a sort of a more or less consensual set of institutional and policy-based solutions.

[39:01]

This is something which is really kind of important to remember and it's central to the history, to the economic history, of the capitalist world in the middle of the 20th century.

Revolutionary Socialism and Reform Socialism

[39:15]

So let's think sort of just a little bit more detail about some of these historical narratives. I'm given you a sense of the big picture, now let's delve into each of these intellectual streams and think about how the progression from revolutionary socialism to reform socialism for example gets made.

Marx and Socialism

[39:39]

The history of socialist thought of course doesn't begin with Marx but we might as well take it as if it did. Marx is a historical determinist. We've already sort of talked about that aspect of Marxist political philosophy. All history is the history of class struggle leading through a progression of sort of historical phases or orders leading ultimately to a socialist revolution and then the creation of a communist utopia. Historical determinism and the preeminence of class struggle are sort of crucial aspects of Marx's political philosophy.

The Rise of Reform Socialism

[40:14]

But by the late 19th century many people sort of within the international Marxist movement were beginning to question the necessity of revolution. While true revolutionaries like Lenin continued to argue vociferously in favor of a revolution, a revolution that would accomplish the kind of socialist state that Marx prophesied, critics of revolutionary socialism particularly within Western Europe argue that things are really going pretty well for the working class within the framework of the capitalist system. New protections to limit working hours are being introduced, prohibitions on child labor are being passed, wages are in relative terms improving. It looks as if life is improving for workers and thus a new genre of reformist socialism begins to emerge within the international worker's movement reformist strand that will seek to reconcile the working class to the basic institutional framework of liberal capitalism.

Reform Socialist Eduard Bernstein, Revolutionary Socialist Rosa Luxemburg

[41:24]

One of the most influential reform socialists will be Eduard Bernstein↗, a German socialist who becomes a sort of social democrat subsequent to the First World War.

[41:36]

Whereas revolutionary socialists like Rosa Luxemburg↗, another German socialist thinker, continue to emphasize the imperatives of class-based revolution, Bernstein argues that, you know, there's no need to overthrow the existing political order. Socialists can work within the framework of the political status quo; moreover, Bernstein accepts the legitimacy of parliamentary democracy. He doesn't want to overthrow democracy in a violent revolution.

[42:09]

So there's a fundamental sort of political commitment that distinguishes reformists like Bernstein from revolutionaries like Luxemburg. That has to do with a sort of commitment to work within the institutional framework of parliamentary democracy.

[42:24]

Another key factor that distinguishes the revolutionaries from the reformers has to do with their willingness to work with liberals. Bernstein is perfectly happy to cooperate with economic liberals where cooperation can serve a progressive end.

[42:41]

So even in the early decades of the 20th century, you begin to see this synergy of reform socialism and liberalism beginning to emerge. Luxemburg, on the other hand, will denounce all cooperation with liberals as sort of class treason.

[42:58]

Reform Socialism in Germany

What are the consequences of reform socialism's emergence in the early 20th century? One will be the rise of socialism or social democracy as a mass political movement. The German Socialist Party becomes the majority party in the Reichstag in 1912. This is a really big deal. This is the first time that a socialist party has become the majority party in a European parliament.

[43:23]

But the socialist party that wins the Reichstag majority in 1912 is not a revolutionary socialist party. It's a reformist party and that is in large part why it is able to win a majority. There wouldn't be political support in the democratic context for a radical revolutionary party such as Lenin's -- a party preaching the overthrow of the existing political and social order.

[43:45]

But reformers can win through political means as the German socialists demonstrate two years before the Second World War.

The Division of the Left

[43:53]

Another really important consequence will be the division of the left. This is a really profound division. It's a division that ultimately the Cold War will consecrate but it has a long prehistory which I've sort of alluded to here.

The Rise of Fascism

[44:08]

Of course, the rise of reform socialism is not the only major political economic development of the first half of the 20th century that has consequences for what comes next. We might think also about the rise of fascism as another sort of reaction to the collision of mass politics and the sort of economic crisis of the interwar years.

[44:37]

The First World War does not only compound the division of the left, the division between reformists and revolutionaries, it also provides for the emergence of what you might call a socialist right wing. It's not a good sort of terminological way to link fascism↗ and socialism, but there are sort of familial similarities that are worth sort of pointing out.

Mussolini and the Rise of Italian Fascism

[45:02]

Mussolini↗ here is a good sort of prototypical case in part because he's the first fascist to come to power in Italy in 1922, but also because his fascism is not quite so tainted by sort of racism and anti-Semitism as the Nazi variant will be.

[45:22]

Mussolini propounds a sort of pseudo-political philosophical synthesis that emphasizes that leading role of the state in the organization of the economy. So Mussolini is not by any means a free market liberal.

[45:41]

On the contrary he believes that government has a sort of vital role to play in marshaling and manhandling the economy to produce growth and sort of politically desirable economic outcomes.

[45:53]

Mussolini is also an international imperialist. He believes that the Italian nation-state, the state that he leads, should try to sort of conquer and accumulate as much wealth for itself as it can within the international arena. In pursuit of imperial aggrandizement, Mussolini will invade Ethiopia in 1935.

[46:17]

Mussolini, is also anti-individualist, and here you see a really stark break with the tenets of 19th century liberalism. Insofar as 19th century liberalism exalted the rights of the individual, vis-à-vis the state, Mussolini pronounces that the individual has no rights against the state, that the state is omnipotent and all-powerful and that the individual exists sort of only to serve the state.

Totalitarianism on the Left and on the Right

[46:41]

So in Mussolini's fascism, you see a different kind of statist agenda develop, a statist politics and economics of the right, not as a statist politics and economics of the left.

[46:56]

These are very different movements, but at the same time there are some sort of resemblances in the sort of repudiation of liberal democracy that fascism makes in the 1920s and the 1930s and the repudiation of liberal democracy that revolutionary socialism makes in the Soviet Union.

[47:19]

These familial resemblances lead some political scientists and political theorists to concoct the conceptual framework of totalitarianism↗ as a way of sort of describing and analyzing sort of both fascism and revolutionary socialism within the same analytical framework.

[47:42]

So that's fascism. We're not going to drill too deep into it but it's worth, you know, just setting it on the table as a different kind of sort of reaction to the crisis of liberalism in the early 20th century.

The Survival of Liberalism

[47:55]

But what of liberalism's saviors? Why does liberalism ultimately survive the crisis of the 1930s and prevail? To answer that question, we might begin by sort of thinking about some of the individuals who are most responsible for reinvigorating liberalism, for energizing it, and ultimately for sustaining it through the sort of crisis, the grievous crisis of the 1930s.

John Maynard Keynes and Liberal Economic Theory

[48:26]

None is more important than Keynes↗. We've already talked a little bit about Keynes, but let's just remind ourselves of what Keynes's major contributions to liberal economic theory are.

[48:37]

Whereas the classical liberals, including say Alfred Marshall↗, who was Keynes's mentor at Cambridge, markets were self-correcting, what goes down must go up and vice versa, Keynes' vital contribution to economic theory is to sort of develop the argument that in a complex industrial economy, markets are not always self-correcting -- that a recession can be sticky. This is, this was, in the context of the 1930s, a really valuable insight.

[49:09]

The economy that crashed in the late 1920s did not restore itself in the early 1930s, and Keynes offered a persuasive theoretical explanation as to why not. I'm not going to try to drill too deep into the details of Keynesian theory right now because if I would do so, it will probably take the rest of the lecture, and we don't want to sort of get distracted.

[49:32]

But the key sort of takeaway point from Keynes's general theory, which was published in 1936, is that economic downturns are not always self-correcting. The economy does not always fix itself.

[49:47]

The corollary of this for Keynes is that government has a role of paramount responsibility to play as a corrector of economic downturns. If the economy won't mend itself, then somebody has to mend it, and that somebody for Keynes can only be central government authorities.

[50:09]

Governments are the only sort of actors in the economic world with the requisite power to be able to correct a cyclical downturn in the real economy.

[50:20]

How do governments do this? Well, they do it through the exercise of macroeconomic policy functions: through fiscal policy, taxing and spending; and monetary policy, printing bank notes.

Monetary Policy and Fiscal Policy

[50:36]

Do all of you have a sense of the distinction between monetary↗ and fiscal policy↗? Does anybody not know the difference between the two? Because I can talk about it for a moment, but I won't ... Okay, a few of you.

[50:51]

So let me just try to give a really succinct overview keeping my eye on the clock.

Keynes and the Role of Fiscal Policy to Stabilize Economies

[50:56]

Fiscal policy, as I just mentioned, has to do with a state's power to tax and spend. Taxing and spending have consequences for the real economy. Insofar as the government taxes it takes dollars out of circulation. It takes dollars out of private hands, and by doing so reduces consumption. If the government taxes you, then you've less money to spend. That can slow down economic activity because consumer demand is diminished by taxation.

[51:27]

If you turn on the TV to the Republican debates this is the point that they make again and again and again.

[51:33]

But the government can also spend, and spending increases demand in the real economy and thereby stimulates growth. That's the point which is less easily conceded in the Republican debates -- is that government spending through the fiscal power can have a stimulative effect on the economy writ large.

[51:53]

And what Keynes argues is that government fiscal policy ought to be sensitive to the macroeconomic circumstances in which it's made. Keynes argues that in a recession a government should not increase taxes. If anything it should cut taxes in a recession in order to stimulate growth.

[52:10]

A government should also spend to stimulate growth in the context of a recession. Government policy should, in other words, be countercyclical.

[52:18]

Now, for Keynes, the injunction to pursue countercyclical fiscal policy applied to bubbles as well as to busts. It was not only in a recession that government policy should be countercyclical but also in moments of irrational exuberance such as, say, the period between 2001 and 2008.

[52:42]

Keynes would argue that in that time, cutting taxes was not prudent, that government policy should have tried to sort of dampen irrational exuberance, say, in the housing market by increasing taxes, perhaps by implementing regulatory solutions that would have sort of discouraged the expansion of price bubbles.

[53:07]

Government should not have done what it did and sort of poured gasoline on the fire by cutting taxes and continuing to spend at high rates.

[53:17]

So Keynes is not just a proponent of big government spending. That's sort of a caricature of Keynes. The real Keynes was sort of the architect of a much more sophisticated argument that had to do not just with government's role as a motor of growth but more profoundly with the role that government can play as a stabilizer of macroeconomic conditions.

[53:45]

So Keynes tries to make capitalism more stable, to level out the troughs and peaks, which had been so characteristic of the capitalist economy in the 19th century.

Keynes and the Role of Monetary Policy

[53:54]

Though Keynes emphasized fiscal policy, he also allowed a substantial role for monetary policy, in the management of the macroeconomy.

[54:04]

You know, monetary policy doesn't have to do with the government's power to tax and spend, it has to do with the government's power to print money. And this is really important for the real economy because if you print more money then money becomes cheaper -- simple supply-demand curve, right?

[54:22]

And why does the price of money matter for the real economy, for growth? Because what is the price of money in the economy?

I'm sorry?

That's right -- the interest rate. The interest rate is the price of money. And if the price of money is low borrowing is incentivized and that helps to stimulate growth. If you're an entrepreneur you're more likely to borrow more money to create a new business venture if the interest rate is low. If the interest rate rises and the cost of borrowing becomes higher then that disincentivizes investment and ultimately subdues growth.

[55:01]

So monetary policy provides a second crucial lever of policy control over the macroeconomy. Though Keynes emphasize fiscal policy and is known for emphasizing fiscal policy, he also accorded a substantial role to monetary policy in the management of real economic conditions.

[55:24]

By sort of reinventing the role of government in relation to the economy, Keynes substantially transforms the sort of liberal economic philosophy of which he is such an important kind of interpreter in the 1930s. As a student of Alfred Marshall, one of the great late 19th century liberals, Keynes takes that inheritance and sort of molds it into something new.

Franklin Roosevelt and the New Deal

[55:51]

Perhaps even more influential than Keynes; however, at least in the world of politics, is Franklin Roosevelt. Roosevelt probably never read Keynes's general theory. It didn't come out until 1936 and it was a sort of complicated technical text. I would be very surprised if Roosevelt read it with any care or particular attention. But Roosevelt nonetheless implements a set of economic policies in the United States that could be described as sort of practical Keynesianism -- Keynesianism without the theoretical apparatus and super structure. This is really interesting.

[56:32]

In some ways the American experience of the 1930s is unique. Whereas Britain and France continue to adhere to sort of classical policy prescriptions, the British and French governments do not implement countercyclical responses to the Great Depression, the Roosevelt administration in the United States does. In the 1930s at least, the United States is the cutting edge of progressive liberalism in the capitalist world.

[56:57]

The New Deal↗ tries to do a number of things. It tries to create employment as in, say, the Civilian Conservation Corps↗ among other public employment initiatives. It tries to regulate prices, the Agricultural Adjustment Act↗. It tries to stimulate industrial growth, the National Recovery Administration↗, and it even tries to provide public goods. The Tennessee Valley Authority↗ builds hydroelectric plants on the Tennessee River.

[57:23]

The government in effect sort of takes over a vast area of the Tennessee Valley and runs it as a state-owned enterprise. The New Deal does a lot of different experimental things all with the ulterior purpose of getting the economy moving again.

[57:39]

I don't want to go so far as to suggest that there is a coherent theoretical or philosophical purpose underlying the New Deal. The New Deal does not unfold according to some strategic plan. It's much more a sort of process of experimentation, but there is ultimately a logic to this experimentation. And the logic is a logic of sort of tempering liberalism through the power of the state -- of deploying the authority of the state so as to ameliorate economic and social outcomes particularly as they afflict the working class, and by doing this Roosevelt stabilizes capitalism and transforms liberalism.

The Synthesis of Socialism and Liberalism

[58:21]

And here we sort of get to our synthesis, a synthesis that emerges in the mid-20th century, of democratic reformist currents within socialism and of socially reformist currents within liberalism. They're coming from different places but they're ultimately pointing in the same direction.

International Regimes of the International Economy

[58:39]

Alright, let's think about the international economy. What we might call the international regime that takes shape at the end of the Second World War.

[58:48]

What is an international regime? How many of you have had a chance to read John Ruggie↗'s article? Okay. The rest of you will presumably be reading it at some point really soon. It's a really, really useful piece for understanding sort of the idea of an international regime in general and the Bretton Woods↗ international regime in particular. I think it's one of the most important essays written on 20th century international history.

[59:17]

An international regime, to put it succinctly, is the set of institutional arrangements that determines how the world economy functions. Rather than describing an international regime in the abstract it may be more useful to think about the evolution of international regimes in history.

[59:38]

Prior to the First World War, the prevailing international regime was that of the gold standard↗ about which I'm going to talk more in just a moment. The gold standard regime collapses with the First World War. It's briefly restored in the 1920s.

[59:51]

The 1930s bring something like an anti-regime period. Nation-states sort of breakaway from the global economy and pursue their own national economic self-interest. The international regime, as it were, collapses. It's restored in the Bretton Woods system, a system that functions for about three decades, a little less than three decades, and is substantially transformed in the early 1970s when a transition to what we might call a post Bretton Woods international regime occurs.

[60:25]

We're going to talk about that much more in due course so I'm not going to belabor it right now. The international regime is important not only because it structures the operation of the international economy but also because it has serious consequences for domestic economic policies, for the institutional configurations of domestic political economy within the nation-states that comprise the international regime, and this we're going to talk about right now with regard to the gold standard.

The Gold Standard

[60:52]

What was the gold standard? The gold standard was an international economic regime that developed in the second half of the 19th century. What was it? How did it function? I'm going to give you a really quick and superficial overview.

[61:07]

In the gold standard system governments tied the value of their currencies directly to gold. The British government was the first to do it. In 1821 it linked the value of the pound sterling directly to the value of gold -- the precious metal. Other governments would eventually follow course. In 1873, Germany, France and the United States all joined the gold standard. The Scandinavian countries did so a couple of years later. Russia not until the very end of the 19th century.

[61:41]

What did the gold standard do? What were the consequences of fixing the value of your currency in direct relation to gold? One of the things that this does is to facilitate international trade. If the value of currencies is always fluctuating trade becomes uncertain. How do you know what the relationship of value between two currencies will be at the end of a transaction that takes six months to complete? It's difficult to predict in a world of fluctuating currency values.

[62:13] The gold standard provides a basic monetary stability for the international economy. It makes prices predictable into the future. It also has serious consequences for the economic policies of individual nation-states because there are costs to fixing the value of your currency in stable relation to gold. If you do that you have to be able to maintain the value of your currency against gold.

The Gold Standard and International Stability Versus Domestic Stability

[62:50]

What happens if you are a country on the gold standard and you import much more than you export? If your balance of payments is imbalanced? If you run a balance of trade deficit?

[63:09]

Doing that could sort of undermine the capacity of your currency to maintain its stable valuation in relationship to gold. If you input more than you export then you have to pay for those imports somehow, and how are you going to pay for them? You could pay for them in paper currency, but if you do that, you will experience an outflow of money that ultimately can serve to undercut the credibility of your currency's valuation in relationship to gold specie.

[63:48]

The mechanism, the price-specie mechanism, that connects the value of gold to the value of individual currencies is something which has to be defended and the defense of it imposes strict restrictions on government policy, and the restrictions go something like this.

[63:48]

If you're on the gold standard and you experience a trade deficit, you have to finance that deficit through the export of monetary reserves -- namely gold. This is more how the system works in the abstract than the practice but the abstract is probably more useful for illustrating the basic principles of the system and the restrictions that it imposed on national governments. So, you run a trade deficit. You have to pay for that by exporting gold, a store value to pay for your deficit. This has real consequences for your national macroeconomy.

[64:44]

Insofar as your currency, the value of your currency, is fixed to gold in sort of a stable relationship, exporting gold diminishes the monetary base of your economy, right? The supply of money in your economy is linked to gold. You have to export gold to pay for your trade deficit thus the supply of money in your economy contracts and that inhibits growth, slows growth. We talked about the role of monetary policy in the management of a macroeconomy just a few minutes ago.

[65:19]

What the gold standard does, and this is really what you need to remember, is it makes that monetary function sort of automatic. Governments don't have much of a role in the determination of monetary policy in a gold standard system. The system sort of regulates itself, and this is part of the appeal. It's self-correcting.

[65:39]

But there's very little latitude for government to ameliorate undesirable outcomes. You run a trade deficit. That deficit has to be paid for. You pay for the deficit by exporting gold specie. Your monetary base contracts, you experience a recession.

[65:58]

Well, that's all fine in theory because it's ultimately self-correcting because the recession pushes down prices and pushing down prices makes your goods more competitive in world markets and thereby the trade deficit will sort of correct itself. So, it works well in theory but there's a price to be paid. A recession is socially undesirable. It throws people out of work. It pushes down the price of labor.

[66:22]

So what the gold standard does is it sacrifices macroeconomic stability within nation-states to the ulterior purpose of international stabilization. It sort of puts the global economy first and the national economy second, and that's something which is politically costly to do. Because if workers keep on getting thrown out of work and you tell them this has to happen in order for our balance of payments to be stable, they might start voting for revolutionary socialists or for fascists.

[66:50]

So the sustenance of political stability in the context of the gold standard system comes to be in tension with the maintenance of economic stability, so that's a real problem for the gold standard order.

The Bretton Woods System Seeks to Improve on the Gold Standard

[67:03]

And it's this problem, this relationship, potentially destabilizing relationship, between economics and politics that the Bretton Woods system tries to resolve. The Bretton Woods system is the set of institutional arrangements that are created at the Bretton Woods Economic Conference in New Hampshire in 1944↗. The key institution here is the International Monetary Fund↗ -- the IMF.

The International Monetary Fund

[67:29]

What does the IMF do? The key innovation is a sort of dollar exchange standard. Everybody at Bretton Woods agrees that the basic principle of fixed exchange rates needs to be preserved. One of the things that the gold standard did --I may not have made this point clearly enough so let me just make it again -- one of the things that the gold standard does is it fixes the value of currencies in relation to each other, but it does so indirectly. Insofar as the deutschmark, the pound, the yen and the dollar are all fixed in this diagram in direct relationship to gold, their values are fixed in indirect relationship to each other.

[68:07]

So there's a stability of exchange rates that the system provides. Everybody at Bretton Woods wants to retain the basic stability of exchange rates.

Student Question: How is the determination made?

By the national government in question. So If you're Britain, you decide what the value of your currency in relation to gold is going to be.

[68:23]

So there's no international sort of organization or institution that surveils parities. Those are for national governments to decide.

[68:32]

Bretton Woods tries to preserve the basic principle of fixed exchange rates. Nobody in 1944 wants to do away with fixed exchange rates. Everybody still believes that fixed exchange rates are vital in order for trade to flourish.

[68:47]

But the International Monetary Fund tries to make fixed exchange rates more palatable. One of the ways it does this is by supplanting gold as the sort of monetary center of the international system with the United States dollar. Bretton Woods makes the dollar a system-wide reserve asset. Henceforth, national governments can hold not only gold but also US dollars as reserve assets -- as assets on which the value of their paper currencies will be sort of predicated.

Limitations of the Gold Standard

[69:24]

This is really important in a number of respects but probably the most important benefit of the dollar exchange standard is that it allows the monetary base of the whole system to grow much faster than it had done in the past. In a gold standard system, the growth of the money supply at the system level is limited, by what?

[69:48]

By the amount of gold in the world. Right, if there's a direct relationship between gold and the money supply, then literally digging stuff up out of the ground is what monetary growth depends upon. That's not terribly rational -- With all due apologies to Ron Paul↗ (class laughs).

[70:08]

And the gold standard system will be plagued by crisis -- a series of troughs and peaks.

[70:15]

Now the really interesting thing about the troughs and peaks is that you can line them up on a chart and connect them fairly precisely to major gold discoveries. The opening of the Klondike in the late 19th century helps to sustain a sort of economic boom because it increases the money supply available in the gold economy. There's an economic boom in the 1850s that accompanies the California gold rush because the more gold you have in the economy the more monetary growth that can be.

[70:46]

Now this works in the 19th century well enough but it's clearly not the most sensible or rational basis on which to organize the post Second World War economy.

[70:57]

By supplementing gold with dollars as, at the sort of heart of the global economy, the Bretton Woods framework tries to improve upon this deficiency of the old gold standard system. Monetary growth can be accomplished now simply by printing dollars. It's a solution that is sort of key to the production of growth in a way that the old gold standard framework never had been.

IMF Assistance to Nations with Trade Deficits

[71:26]

Besides accommodating growth at the system level the Bretton Woods system also tries to facilitate the process of adjustment as individual nation-states experience it.

[71:40]

Under the old gold standard system, if you run a trade deficit, you had to experience a macroeconomic contraction in order to balance the books. The International Monetary Fund tries to mitigate the consequences of trade imbalances. One of the ways it does so is by providing loans to countries that find themselves experiencing trade deficits. You have a trade deficit, you have to pay for it. Well, you could experience a loss of gold or dollars which would contract your economy, but never fear because the IMF will simply lend you the money to tide you over.

[72:17]

This provides governments with the space to implement solutions of their own devising to mitigate and correct sort of the circumstance that produce deficits over the medium to long term.

[72:32]

So, the IMF, far from sort of imposing discipline on nation-states tries to mitigate the consequences of the discipline that the gold standard system had imposed much more harshly. So the IMF is an institution that tries to compromise between the rather stark and sort of automated discipline that the gold standard had required and the imperatives of allowing individual countries to pursue their own national economic policies.

[73:06]

All this is complicated and technical. The Ruggie article will help to explain it. But these were issues that are worth thinking through because they have real consequences for the ways in which the world economy functions in the second half of the 20th century.

[73:21]

If anybody wants to work through a written description of the Bretton Woods system which goes over the ways in which Bretton Woods improves upon and modifies the gold standard system, I can certainly circulate one. So write to me if you would like me to circulate a written discussion of this and I will do so.

The International Bank

[73:43]

Besides the International Monetary Fund, which serves as the primary sort of institutional framework for adjustment, the Bretton Woods institutions will include the International Bank for Reconstruction and Development. The purpose of the IBRD, which later becomes known as the World Bank↗, is simply to lend money to countries, particularly countries that have been devastated by the Second World War in order to facilitate postwar reconstruction.

General Agreement on Tariffs and Trade (GATT)

[74:13]

The last so-called Bretton Woods institution is not created at Bretton Woods at all. It's created three years later. It's the General Agreement on Trade and Tariffs↗. The issue of trade liberalization was simply too contentious to really be dealt with at Bretton Woods in 1944. So the issue is deferred. The can is kicked down the road, and three years later, the GATT, the General Agreement on Trade and Tariffs is negotiated.

[74:41]

What does the GATT do? The GATT does not provide for the immediate reduction in tariffs. Following the Second World War, tariffs are still pretty high. What the GATT does is it provides a sort of multilateral framework in which signatory nations agree that the benefits of tariff reduction will be universally shared.

[75:05]

If for example the United States and Great Britain, after 1944, agree to reduce tariffs on, say, automobile parts, the benefits of that tariff reduction will have to be shared with all other countries with whom Britain and the United States maintain full trading relations.

[75:30]

So rather than sort of tariffs being reduced on a bilateral basis, which is slow, the GATT ensures that tariff liberalization will proceed in a multilateral manner. In other words tariff reduction will be faster and more comprehensive than it would be in the absence of the GATT. In a world in which all tariff reduction is bilateral, it takes a long, long time to introduce use of trade liberalization and doing so will always be substantially incomplete.

Later Trade Negotiations in the 1950s and 1960s

[76:04]

Through the '50s and particularly in the 1960s, there will be a series of major rounds of multilateral tariff negotiations that do substantially succeed in bringing down levels of trade barriers among the advanced industrial countries. This is something that we'll talk about a little bit more in due course.

[76:24]

The basic institutional framework is all that is created in the 1940s but it is consequential for what comes next.

The Politics of Bretton Woods

[76:32]

What about the politics of Bretton Woods? Who supports Bretton Woods? Who opposes Bretton Woods? What the slide shows you is the Bretton Woods resort in New Hampshire. It's a hotel in the White Mountains where the Bretton Woods institutions were conceived.

[76:47]

Bretton Woods is not popular on Wall Street. This is really important to remember. Wall Street opposes Bretton Woods. They argue that Bretton Woods in effect consecrates government intervention, government macroeconomic management, as a permanent feature of economic life in the capitalist world.

[77:08]

The opponents in Wall Street were not wrong. They perceived an essential truth about Bretton Woods. The Bretton Woods represented an effort to make globalization safe for social democracy or for progressive liberalism. Bretton Woods aspired to carve out space for governments to manage their own macroeconomies and then it tried to protect that space.

[77:36]

This is what Bretton Woods did. It struck a very delicate compromise between the restoration of globalization on the one hand and the sustenance of autonomous national economic policies on the other.

The United States on the World Stage and the Implementation of Bretton Woods to Balance Globalization with Internal Domestic Prosperity

[77:50]

One of the grand ironies of Bretton Woods is that the United States, a sort of superpower which historians often associated with the promotion of globalization, with the promotion of sort of free market solutions -- the United States was the principal power behind this compromise between the market and progressive governments.

[78:16]

The United States was the orchestrator of the Bretton Woods Conference and it would be the sort of primary power on which the Bretton Woods system would depend in practice. The dollar was of course a system-wide reserve asset under the Bretton Woods system. The growth of dollar liquidity was essential for the sustenance of system-wide liquidity.

[78:37]

The United States also underwrites the recovery of its allies. It underwrites European recovery through the Marshall Aid↗. Thereafter, the Mutual Defense Act↗ provides for military spending that will help to sustain the growth of the capitalist economy writ large.

[78:53]

There's less US support from the non-European world. That's something that we'll deal with in due course.

[78:58]

But American hegemony is a key institutional legacy of Bretton Woods. This is very, very different from the experience of the 1920s in which the United States had disdained the role of economic hegemon for the world economy as a whole.

[79:13]

In the 1940s, the United States gleefully accepts the responsibilities of hegemonic power and it exercises those responsibilities in ways that try to sort of reconcile globalization with the emergence of the postwar welfare state.

[79:29]

The question of course is: How long this can endure? That's a question that we'll come to in due course. Let me know if you have any questions about the technical aspects of this because I'll be glad to talk them through.