In April 2009, the leaders of the world’s major developed and emerging economies – the Group of 20 – met in London under the chairmanship of the British prime minister, Gordon Brown. At a critical time, a year after the global financial crisis, Brown turned to the past for inspiration and warning: “There was a world economic conference in 1933, and it took place in Britain. People came to London to get agreement, partly on trade, partly on other aspects of the economy. It failed. And partly as a result of that failure the rest of the ‘30s was blighted by protectionism.” It was excellent rhetoric with which to urge cooperation and prevent a repetition of the downward spiral into trade and currency wars that had marred the 1930s.
In 1933 and 2009, politicians gathering in London faced the two largest economic crises thus far in the 20th and 21st centuries, respectively. In 1933, leading politicians from 66 nations brought radically different perceptions of the causes of the crisis and its solution, and they left in disarray. The new American president, Franklin Delano Roosevelt, sent a delegation to London that was itself riven by disagreement. He stayed at home and tried to make up his mind what to do.
In 2009, a smaller group of 20 nations assembled in London. The new US president, Barack Obama — somewhat reluctantly — travelled to London and announced that America would take an active role. “Leaders of the Group of 20 have a responsibility to take bold, comprehensive and co-ordinated action that not only jump-starts recovery, but also launches a new era of economic engagement to prevent a crisis like this from ever happening again.”
The geopolitics of 2009 gave more cause for optimism than 1933, when Mussolini was in power in Italy, Hitler had recently become Chancellor of Germany, Stalin had embarked on a forced march to industrialization in the Soviet Union, China was in a state of chaos, and Japan had invaded Manchuria. By contrast, in 2009 Paul Kennedy — a leading historian of international relations — remarked that “I don’t think anyone is busy with revengeful, pre-war militaristic feelings. Certainly not any in the G20.”
At the end of the G20 summit, Brown and Obama proclaimed success, and the Financial Times predicted that “historians will record the summit as the moment when a world in the throes of economic and geopolitical upheaval took a first, hard look in the mirror,” helping to preserve multilateralism and avoiding a headlong rush towards “economic Armageddon.”
By 2022, such optimism had dissipated. The world again faced economic crisis after the pandemic of 2020 and Russia’s invasion of Ukraine. Revengeful feelings once more threatened war and the ability of the world to respond to economic crisis and the existential threat of climate change. Rather than hope of a better outcome than in 1933, by 2022 there was danger that geopolitical tensions and economic problems could not be resolved by the nations of the world.
In both 1933 and 2009, the nations of the world gathered to ask not only how to avoid a crisis but how to govern the world economy, above all how to balance national interests with international cooperation. During the 20th and 21st centuries, there have been two full cycles of economic government and a third, through which we are now living, that is still incomplete, with uncertainty about how it will be resolved.
The first cycle starts with the breakdown of the economic order that existed before the First World War that many countries tried to restore after 1918. The failure to reestablish the global economic order after the First World War led to a loss of legitimacy and a search for new solutions.
During the 1930s, leading liberal capitalist democracies came to realize that national self-interest required co-operation, not least in response to the challenge of authoritarian regimes. During this interregnum, new approaches to global economic government were emerging which crystallized during the Second World War. International institutions laid down rules for the global economy — the International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD) at Bretton Woods in 1944, the Food and Agriculture Organization (FAO) in 1945, and the General Agreement on Tariffs and Trade (GATT) in 1947. The new institutions became part of an ideological battle between Communist and capitalist views of the economy.
Although the less developed countries of Latin America and the newly independent countries of Asia and Africa were members, they complained, with justice, that shallow multilateralism allowed the survival of a world economy based on the interests of the advanced industrial economies and ignored the primary producers’ demand for structural change in the world economy. The new institutions and their rules did not emerge fully formed at the conference at Bretton Woods in 1944, and there was a complex process of adaptation and implementation in the 10 to 15 years after the war.
During the 1960s, there were tensions between the developed economies as the relative economic weight of the United States declined and Europe and Japan recovered. There were also challenges from a more assertive Third World or Global South.
Crisis hit in the early 1970s, with the decision of President Richard Nixon on 15 August 1971 to suspend the Bretton Woods system of exchange rates. Demands from the developing world for a New International Economic Order that would give a better deal to primary producers and low-income countries were expressed in the oil shock of 1973, which led to hopes of distributive justice. Meanwhile, the developed economies faced economic stagnation and inflation. The final abandonment of pegged rates in 1973 removed monetary discipline and the need for wage restraint: if a country became uncompetitive, the exchange rate could depreciate; if the economy faced recession, monetary policy could be loosened. The result was stagflation: low growth and inflation.
Potentially, the shock of 2007–8 was a legitimacy crisis of neoliberalism with the power to reshape economic policy and create a new structure of global economic government. In fact, change was slight and existing problems remained or were even intensified. The policy response after 2008 rescued the economy in the short term by bailing out bankers and embarking on austerity. The result was growing inequality and a failure to remove the fundamental causes for crises, creating political and social problems that were exposed when Covid hit in 2020. Another possible response — better than either clinging to neoliberalism or retreating into economic nationalism — would be a turn to a progressive economic policy based on moving away from financialization and inequality to a more inclusive and fairer capitalism. Maintenance of the status quo threatens economic and social stability.
The impact of Covid in 2020, the energy crisis caused by Russia’s invasion of Ukraine, and the challenge of climate change should provide the motivation for a change in economic policy. Unlike at Bretton Woods, when two countries — Britain and the United States — could devise a plan, the world is now multipolar with different political systems. Finding a common approach to the urgent problems of the collective good of the world is more difficult than ever. The ultimate outcome of this third cycle is unclear — but there is no doubt that the world is at a critical moment.
The collapse of the Soviet Union marked, to some American commentators, the end of history and the triumph of western liberal capitalism — a delusion, as the world moved to a new geopolitical conflict between China and the United States, and with the aggression of a resentful Russia. Economic issues were, and remain, vital to wider geopolitical considerations. The agreement at Bretton Woods in 1944 concentrated on technical monetary issues and left more contentious matters of trade, commodities and development for another occasion.
By contrast, the World Monetary and Economic Conference of 1933 or the World Trade Organization’s Doha Development Agenda after 2001 attempted (and failed) to combine a large number of contentious issues. The narrower approach is more effective but can be criticized for avoiding fundamental issues of equity and distributive justice, so undermining the legitimacy of any agreement and provoking opposition. Setting the agenda for negotiations, and so the order for consideration of issues, is therefore vitally important. International bodies take a variety of forms, and their governance and rules are contested. Should they provide an intergovernmental forum for domestic politicians to meet and discuss issues, such as the G20 that met in London in 2009, or larger gatherings to discuss climate change such as the meeting of COP26 in Glasgow in 2021?
Large-scale gatherings often produce declarations of good intent without formal means of enforcement, though this is not to say they are valueless because action often results. By contrast, ‘supranational’ institutions exist apart from individual nation-states, with powerful secretariats and binding rules. Even so, it is one thing to have rules and quite another to ensure that there is a credible commitment to compliance, with realistic penalties for failure. Members of an organization hope that everyone will follow the spirit as well as the letter of agreements, but electoral calculations sometimes lead a government to ignore an international agreement, confident that it cannot be enforced or that any sanctions would be worth the price. Political calculation can also lead politicians to use international organizations as a convenient scapegoat for unpopular policies, by calling in an IMF mission to provide a cover for what the government wished to do anyway, for example. Enforcement can be achieved by financial assistance as well as legal rulings. The IMF’s provision of assistance to countries facing balance of payments crises, or the World Bank’s loans to developing economies, come with conditions on economic policies, often reflecting a particular ideology. Countries that do not seek support are largely exempt from oversight. By contrast, the General Agreement on Tariffs and Trade could not enforce rules by financial assistance or penalties, and it was not until the creation of the World Trade Organization in 1995 that there was a formal legal machinery to adjudicate between countries. The nature of rules and their enforcement therefore differ between institutions and over time.
The postwar international institutions were devised in a somewhat ad hoc manner, with overlapping and uncoordinated functions. The IMF lost most of its role in overseeing international exchange rates from the early 1970s. It then started to move into the sphere of the IBRD in making loans. On one view, the two organizations should have merged in the 1970s. Similarly, the relationship between the GATT and the IMF was never clear, though a country’s balance of payments was affected both by trade restrictions and by exchange rates, and less developed countries criticized both bodies for ignoring wider structural explanations of inequalities between developed and less developed economies. In principle, all these bodies were agencies of the United Nations; in practice, they were largely independent and uncoordinated, with tensions between their staffs in Washington (the IMF and IBRD), Geneva (GATT/WTO and UNCTAD), and the General Assembly in New York. International negotiations were sometimes deadlocked until a resolution was reached at the last minute, as in the Kennedy Round of trade talks in 1967, or the talks collapsed in acrimony and exhaustion, as with the Doha Round of trade talks which dragged on from 2001 to 2015.
Excerpted from The Economic Government of the World: 1933 – 2023 by Martin Daunton. Published by Farrar, Straus and Giroux in the United States, November 2023. Copyright © 2023 by Martin Daunton. All rights reserved.
