How We Learned to Stop Worrying and Love Command Economies
Maybe the neoliberal world order is not the free market paradise we were promised
tldr: This book is a doorstop but it’s very good and it turns out ‘neoliberal international rules-based order’ is actually statism all the way down
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The propaganda bromide that describes a typical, Western, understanding of modern history is that we live in a liberal, rules-based international order. Governments around the world cooperate through internationally-ratified forums such as the WTO or the UN to settle disputes and regulate trade between each other. Benevolent institutions such as the IMF or the BIS take care of the world economy, assisting with development and intervening to help economies in moments of distress. Central banks are independent, technocratic, stewards, conscious of the heavy burden they manage on behalf of their citizenry. The growing realization one comes to, working through this excellent book, in its dense doorstop glory, is that there is far more to the story after all.
In Daunton’s framing, economic evolution starts from an established order of some kind. It then experiences a sudden change which leads to an interregnum. During this period of relearning and upheaval, leaders try and work out what new order is possible, and vie for control throughout it. Eventually, things click into place and a new order is established. The regime transitions that the book describes are organized in rough thirds, I) 1933-1946 and the ratification of the Bretton Woods agreement (Ch. 1-9), II) 1946-1973 and its abandonment (Ch. 10-18), III) 1973-2023 or the ‘floating world’ and the regime transition we find ourselves in at the moment (Ch. 19-27).
Unusually, it focuses almost entirely on the diplomats, technocrats and economists who would forge our modern model of economic cooperation. Typically, historical anthologies would focus on broad, sweeping changes or focus on key political leaders and their decisions. This one chooses to focus on the nerds and the economics wonks in a period of history which saw incredible turmoil and two World Wars. This provides us with a unique perspective into the motivations and machinations of the wonks and ideologues fueling economic regime change during this period.
Roughly speaking the trajectory of the book can be traced across Mundell-Fleming’s Impossible Trinity triangle. The theory states that economies are constrained to picking at most 2 of 3 conditions: stable exchange rates, free capital flows or monetary autonomy. When an economy features a stable exchange rate, for e.g. pegged to gold, it has to make a choice. If the government keeps control over interest rates, it must also introduce capital controls. If the government keeps capital flows open, it must relinquish control over interest rate policy. In either scenario, attempting to pursue all three would result in capital flows in or out of the economy to follow interest rates, either way placing enormous pressure on the stability of the exchange rate.
The period 1923-2023 traces the following moves across Mundell-Fleming triangle:
There is an insightful augmentation that’s possible with Dani Rodrik’s political economy triangle in How Far Will International Economic Integration Go? (Dani Rodrik, Journal of Economic Perspectives—Volume 14, Number 1—Winter 2000—Pages 177–186).
However, even in Rodrik's mind, the international order is composed of well-meaning technocrat mandarins constraining governments for the benefit of the free market.
“The institutions were indeed based in Washington, with a real risk that they would pursue the interests of the United States. [...], the new institutions have been portrayed by the political scientists John Ruggie as 'embedded liberalism' and by Dani Rodrik as 'shallow multilateralism'. Their argument is that the principles of open, multilateral markets were incorporated into formal institutions and rules to prevent a return to beggar-my-neighbour policies, while ensuring that the pursuit of international trade was combined with a concern for domestic welfare. This account is accurate as far as it goes. The multilateralism was unlike that of the 1930s, when economic nationalism was in the ascendant, and that of the later twentieth century when the pursuit of multilateralism went much further. It is also incomplete. A particular form of liberalism was being embedded. It did not follow the vision of the 'Genevan liberals' of the 1930s such as Hayek and Robbins, who wanted formal rules with federal or supranational bodies that limited the nation state and enabled the market. Instead, the new institutions were intergovernmental and gave more weight to the nation state and domestic welfare. The balance between internationalism and domestic welfare in the new multilateral institutions also prioritized the needs of the leading capitalist economies, and they came to define the 'West'.”
The big upset at the heart of the book is that the placid vision of a competent, rules-based international order is something of a mirage. Over the course of the past 100 years, our world economic order has rolled a lumbering policy triangle painfully along its sides. Each hard thud along the way was pushed by a new generation of technocrat hammers in search of a nail. Although many different economic regimes were tested in the last century, the common denominator among the winning sides have invariably actually been quite statist. This means that most of the push has been in the direction of increasing state control, rather than the creation of extra-national rules enforcers who could limit the power of the state.
This is actually in sharp contrast to the vision for the international order that Friedrich Hayek wanted to pursue, along with their liberal colleagues from the Mont Pelerin Society. It is one of the many ideological tensions that battle for supremacy in the forums of conferences and international agreements. This group of so-called “Geneva liberals” didn’t really end up having their way as much as people think. At the heart of every international rules-based order institution is in fact a statist apparatus at the mercy of one government or another.
There is a palpable difference between the common perception that capitalism is a free market, and the mundane self-serving drudgery of bureaucratic reality built between government wonks, one international summit at a time. The “Geneva liberal” vision would likely more closely align with the earlier state of affairs prior to the Great War, with a fixed exchange rate and capital mobility essentially constraining the scope of government intervention into monetary policy/ The ‘golden straitjacket’ as a feature (preventing malicious government interventions into the market for money), rather than a bug.
Franklin Delano Roosevelt is another example of this difference between perception and reality. The common image (at least in my educational experience) of the New Deal as the saving grace to the world economy stands in stark contrast to the fickle, authoritarian and often clueless statist portrayed through verbatim quotes and retellings by Daunton. FDR torpedoed international summits, made his cabinet members fight against each other and, crucially, unwound the gold standard back in 1933 with the swift sledgehammer of an authoritarian (though not before vacillating a number of times before committing).
“Roosevelt removed opponents of his monetary policy at the Treasury and the Federal Reserve and pressed ahead with an aggressive policy of devaluation. In August 1933, Warren reported to the Treasury that 'I believe there is only one way to end the depression, and that is an adequate devaluation of the dollar. Other things may help, but they cannot succeed without a reduction in the gold value of the dollar.' […] Roosevelt worried about an agrarian revolt if he did not increase prices. He decided to act.
On 29 August 1933, Executive Order 6261 authorized the Treasury to buy new minted gold for sale to foreigners at 'the best price obtainable in the free gold markets of the world'. The intention was to increase the price of gold and hence raise domestic prices but the limited amount of gold available for purchase within the United States would not affect the world price of gold, the exchange rate of the dollar, or the price of commodities. After a couple of months, it was clear that the plan was not working, and Roosevelt decided to take drastic action by setting the price of gold. In his 'fireside chat' of 22 October 1933, he announced his new gold policy:
‘Our dollar is now altogether too greatly influenced by the accidents of international trade, by the internal policies of other Nations and by political disturbance in other continents. Therefore the United States must take firmly in its own hands the control of the gold value of our dollar. This is necessary in order to prevent dollar disturbances from swinging us away from our ultimate goal, namely, the continued recovery of our commodity prices.’”
Roosevelt dealt with the implementation with capricious frivolity and had to circumvent laws and violate constitutional constraints. When exploring a legal challenge to a law that allowed commercial contracts to be honored in gold, FDR waited for the outcome with the petulant exasperation of a tyrant: “If the policy of the government,… is to be irrevocably fixed by decisions of the Supreme Court ... the people would have ceased to be their own rulers”.
“In January 1934, the Gold Reserve Act gave Roosevelt the power to fix the dollar at between so and 60 per cent of the current value of $20.67 for an ounce of gold. He immediately set the new price of gold at $35, which was to be maintained by an Exchange Stabilization Fund on the British model. The dollar was devalued to 59.06 per cent of its pre-1933 value, and stayed at the same gold price until 1971”.
In “Two Treatises of Government”, John Locke describes that the natural state of man is a “state of perfect freedom to order their actions, and dispose of their possessions and persons, as they think fit, within the bounds of the law of nature, without asking leave, or depending upon the will of any other man”. This is to say that governments only emerge as a result of citizens, rather than the other way around. The defining feature of statism is the implicit assumption that the reverse is true.
Keynesian orthodoxy–the ideological victory of Keynes and the behavioral quirks of objectively a brilliant mind are also described in deep detail–is thus not only not a framework for an unregulated free market in the slightest, but is instead the coercive subservience of interventions into the business cycle to the political needs of the state. This is often misconstrued as the government acting to soften the blow of the market to serve the wellbeing of capitalist enterprise and its citizens. In reality, the picture throughout the 20th century has been one form of neighbor beggaring after another, with the victors gaining greater management rights over interventions in the world economy.
When they’re not busy dissolving into a vat of moral nihilism, Jacobin writers would have you believe that we are currently in an unregulated neoliberal-capitalist feeding frenzy of a system at the expense of national self-determination. But the cunning Marxist sleight of hand here is conflating ordinary, hard-working people with their agents, or rulers. Democracy is not, in fact, the same as a government's autonomy over the economy. Daunton's deeply researched autopsy of 100 years of economic government show the extent to which the international order has in fact deferred to select national interests. International order impinges on self-determination to the extent that one group of governments interferes with the narrow interests of another in an international forum. But at no point is the wellbeing of the individual citizen ever seriously taken as a barometer for measuring the merit of an idea. Often, ideological differences emerge as the battleground for one type of statism over another.
The conclusion ends on something of an optimistic note with nebulous belief that the emergence of a more multilateral system in the near future will prove to offer more stable equilibria than the past 100 years. Cryptocurrencies are disappointingly given a cursory glance and discarded, which feels like a missed opportunity as they could help reset the geopolitical order to precisely this aim. Omid Malekan, in “Rearchitecting Trust”, goes through a similar exploration of economic history but from the angle of trust assumptions. His conclusion is that the world will indeed drift towards greater situations of political tension between geopolitical blocks. But crucially, you can still trust your peers if you have a way to transact with them in a credibly neutral way.
P.S.: An incredible anecdote about the murky WWII history of the Bank for International Settlements:
“The future of the Bank for International Settlements was questioned at Bretton Woods. Although board meetings were suspended at the outbreak of war, the BIS continued to operate from Switzerland, where it claimed to follow a policy of neutrality under the presidency of the American banker Thomas McKittrick. The wartime activities of McKittrick and the BIS were, in fact, deeply contentious. McKittrick was friendly with Emil Puhl, the vice-president of the Reichsbank and a director of the BIS who visited Basel during the war. Puhl was closely involved with the BIS in recycling Nazi gold that was acquired from occupied countries and from the victims of the Holocaust to buy raw materials and to assist allies of the Third Reich. The Third Reich was granted the holdings of the occupied countries at the BIS, which gave the Axis powers 67.4 per cent of the bank's shares and about 80 per cent of the BIS's income came from interest on German investments, It is true that McKittrick did supply information gleaned from Puhl to the American intelligence service.
Equally, Per Jacobsson visited Puhl at the Reichsbank in 1942 and noted that 'the future of the BIS depends on Puhl's possibilities of holding the fort in Berlin'. Jacobsson returned to Berlin to discuss the Keynes and White plans in May 1943. The wartime record of the BIS was at the very least questionable. At Bretton Woods, the Norwegian delegation proposed that the BIS be abolished 'at the earliest possible moment'. The resolution was supported by Morgenthau and White in their campaign against international bankers, and White proposed that no country could join the IMF unless its central bank agreed to take steps to liquidate the BIS. Some delegates felt that the issue was not a matter for the conference, but the resolution passed as a compromise between immediate liquidation and continuation as Keynes saw, 'the earliest possible moment' might be some time off. Indeed, Wall Street bankers and the Federal Reserve Bank of New York doubted the wisdom of abolishing an institution that could support monetary and financial orthodoxy.
Similarly, European central bankers welcomed it as a forum for central bank co-operation in the difficult post-war period. Although Hugh Dalton, Chancellor of the Exchequer in the post-war Labour government, thought the BIS 'smells of the Schacht-Norman period' and should be liquidated, the British Treasury was aware of the technical complexities in winding it up and felt there were more pressing issues [...].
Pressure for liquidation subsided, and in November 1946 the new president of the BIS–the governor of the National Bank of Belgium–established a working arrangement with the IBRD. Jacobsson's annual report to the BIS explained the need for international financial organizations and claimed that the BIS was the only body to cover the whole of Europe. Attitudes at the US Treasury also shifted. The European central bankers resumed their regular monthly meetings in December 1946, and it became the agent for post-war schemes for European recovery.
Astonishingly, in 1947 a report by the Federal Reserve Bank of New York found no evidence of the BIS's conniving with Germany during the war. In 1960, the Federal Reserve rejoined the organization and the BIS played a leading role arguably more important than the IMF's in maintaining the international monetary system (see chapters 16, 18 and 21). Despite its morally reprehensible wartime record the BIS was too useful to abolish.”
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