Chinatopix via AP
Driverless vehicles move shipping containers at a port in Qingdao in eastern China’s Shandong province, January 6, 2022.
A version of this article appears in the June 2022 issue of The American Prospect magazine. Subscribe here.
In 1978, facing inflation, unemployment, oil shortages, and a looming Third World debt crisis, Paul Volcker, then president of the Federal Reserve Bank of New York, described the “controlled disintegration of the world economy.”
When Volcker became chair of the U.S. Fed shortly thereafter, he hiked interest rates and slayed inflation. In the process, Volcker oversaw a debt crisis in Latin America, a slowdown in productive investment, and a pivot to financial profits. If the world economy did not quite disintegrate in the 1980s, financial globalization overtook bread-and-butter national investment priorities.
Today, the double whammy of virus and war has brought the world economy of physical goods back with a vengeance. The postmodern myth of lightweight digital exchange has slammed into the reality of semiconductors, shipping liners, and energy shortages. The Odd Lots podcast, where nerdy analysts explain arcane movements in commodity markets, is all the rage. Talk of supply chains is commonplace.
Perhaps, then, we are looking at the end of the 50-year period that subordinated goods and trade to the interests of capital. Policymakers in the West are showing new support for public investment and industrial policy. The U.S. could seize this moment to reshape international finance in favor of working people, and compete with China by investing in allies’ sustainable growth.
There are at least gestures in that direction. Ahead of this week’s meetings of the International Monetary Fund (IMF) and World Bank, Treasury Secretary Janet Yellen invoked the Bretton Woods Conference, where Treasury officials sat down to design the postwar financial architecture even “as World War II raged in Europe.”
Yet despite praising FDR’s geoeconomic leadership during wartime, the Biden administration has so far shown little intent to use this upheaval to channel global capital flows toward real growth. Two development researchers have published a book outlining how this could be accomplished. But its lukewarm reception on the liberal left reveals a fatalism about the persistent dominance of finance—and a lack of imagination about political alternatives.
PLANS FOR THE IMF AND WORLD BANK to patrol roving capital and encourage state-led reconstruction were drawn up from a hotel in New Hampshire in July 1944. Richard Kozul-Wright and Kevin Gallagher retell that history in The Case for a New Bretton Woods, their short and readable volume on the urgency of reforms to global finance and trade.
The authors draw on historical research by the political scientist Eric Helleiner, who uncovered the radical early vision for the Bretton Woods institutions. It turns out these were not intended to be the leg-breakers of international capital. The IMF was set up to provide short-term financing for states facing shocks under the new fixed exchange rate system, and the World Bank to promote investment, but both were conceived with heavy input from developing countries and meant to go far beyond immediate postwar reconstruction.
As the dominant industrial and creditor economy, the U.S. negotiated from a position of power but was wary of being accused of economic imperialism. Initial drafts of articles proposed by Harry Dexter White detailed the need to encourage capital movement from “capital-rich to capital-poor countries.” Business leaders, including the president of the U.S. Chamber of Commerce, also supported industrialization in the Global South to increase purchasing power and foreign demand for U.S. products.
And while “Good Neighbor” policies were sold domestically as serving American interests, there was also a streak of solidaristic radicalism in the wake of the Great Depression: an unusual coalition of liberals in the U.S. and U.K., interested in achieving social democracy at the international level.
U.S. sponsorship of overseas industrialization had its skeptics, such as Rep. Jesse Wolcott (R-MI), who remarked after conferences on the creation of the World Bank, “I sense in our conversations with all of these countries that they have a vision of their country being just covered with smokestacks.”
The U.S. could be sponsoring future competitors, Wolcott pointed out: “What is going to happen when the Arabian desert is covered with factories?” White shot back, “Some of us are going to be dead a long time.”
The most radical development aims were shelved soon after the conference ended, however, and FDR’s death in 1945 triggered further shifts in foreign policy. Under the Truman administration, White was passed over as the first managing director of the IMF in favor of a more finance-friendly Belgian banker.
Still, the founding of the IMF and World Bank inaugurated a new era in which the interests of finance were made answerable to national priorities. To that end, one key achievement was the creation of capital controls. British negotiator John Maynard Keynes famously boasted: “Not merely as a feature of the transition, but as a permanent arrangement, the plan accords to every member government the explicit right to control all capital movements. What used to be a heresy is now endorsed as orthodox.”
As with all uses of state power to check finance, this victory was neither absolute nor everlasting. In the 1960s, countries began to find their ways around controls with eurodollar markets, in which non-U.S. banks speculated in dollars outside American jurisdiction. And in the early 1970s, when officials in the U.S. and Germany decided to let the world’s major currencies float against each other, the IMF could no longer serve its original purpose—to ensure smooth functioning of the fixed exchange rate system. Instead it became an enforcer of structural adjustment programs. Throughout the next decades, the function of the Bank and Fund would evolve further.
FOLLOWING THE 1973 OIL SHOCK, the Bretton Woods institutions began to be overtaken by private banking. High oil prices drove higher demand for capital, while “petrodollars” paid to oil-exporting countries caused a surge in roving dollars seeking investment opportunities, and banks stepped up as intermediaries. Writing in 1976, researchers at the IMF noticed in real time that they were being overtaken: “Commercial banks have been carrying out some of the functions which have often been thought of as more in the province of central banks, governments, and international organizations.”
Volcker then raised interest rates—necessary medicine perhaps, but a treatment that rewarded lenders at the expense of industrial investment, encouraging capital owners to pull back from building businesses and hiring workers and keep their money liquid. President Reagan’s concurrent efforts to crush labor only accelerated this shift.
Around the same time, surprisingly perhaps, the president could be found promoting more funding for the IMF. Stipulating that the money would not flow to “Communist dictatorships,” Reagan pushed for a more than $8 billion quota increase for the IMF. This wasn’t an act of international charity. After the Mexican sovereign debt crisis in 1982, more defaults were looming on the horizon, and American creditors like Bank of America and Citibank were getting jittery. All told, Mexico owed American banks some “$20 odd billion,” the Fed’s vice chairman estimated. “Well, that’s big,” Volcker remarked.
As some Democrats recognized at the time, Reagan’s push for a higher quota for the American-led lender of last resort would not ease the impact of the debt burden on the world’s poor—it was “all going back to the banks.” But Reagan won the funding, securing a lifeline for American creditors to Latin America. With IMF backing secured and restructuring under way, banks were free to make fresh loans.
That history doesn’t make it into Gallagher and Kozul-Wright’s slim book, but they survey the ’80s and ’90s succinctly. Instead of serving their original purpose of enabling global economic growth and stability, over this period the Bank and Fund became the now-notorious enforcers of austerity in the Global South, demanding reforms compliant with the “Washington Consensus”: privatization, trade liberalization, and deregulation of finance and utilities. These measures largely failed to deliver growth (and even set off some financial crises). Instead of development, poorer countries’ economic fortunes were increasingly tied to unpredictable commodity booms and the expansion of extractive industries.
Kozul-Wright and Gallagher skirt the controversial question of just how much the Bretton Woods institutions should carry forward their recent emphasis on attracting private capital to finance their undertakings—some of which is probably required to fund a green transition at the necessary scale. But they are emphatic that financial globalization has been a failure for the developing world and for workers in deindustrializing advanced economies alike.
TODAY, A RISING DEBT BURDEN in the developing world again threatens crisis. The war in Ukraine drove up prices for basic commodities like oil and grain, as rate hikes and controversial efforts to tamp down inflation in rich countries have raised the cost of debt servicing in countries such as Sri Lanka.
Officials in many emerging economies now fear a “taper tantrum” in which investors rapidly pull back from risky stakes overseas. So far, that hasn’t happened; capital outflows are less than half of what they reached during the 2014 taper tantrum, according to Lazard. But even if we don’t see a similar exodus, Gallagher and Kozul-Wright’s point is that the unpredictable entry and exit of capital has prevented real growth. Instead, they write, “slower growth, weak overall demand, and saturated markets led to new alliances between ever larger financial and industrial firms with unprecedented access to private credit and a growing propensity to replace long-term productive investment with rent-seeking behavior.”
Meanwhile, they say, trade deals are increasingly deals for finance instead. “The contemporary trading system has become a shock absorber of the economic and political tensions originating from the unregulated flows of footloose capital,” they write. “An aspect of the new generation of ‘free trade’ deals that is lost to many analysts is that they are seldom any longer about trade.” The authors propose to “make trade agreements about trade again” by enforcing antitrust laws, curbing abuses of intellectual-property rights, and using the WTO model of bilateral dispute settlement, rather than corporate dispute resolution in private shadow courts.
Kozul-Wright and Gallagher argue that the Bretton Woods institutions should abandon austerity lending conditions, rein in speculative finance, and boost capital available for the green transition. Their preferred means would be a central financing authority—perhaps a “remodeled” World Bank, or, drawing on an idea proposed by the international New Dealers, an agency modeled on the Tennessee Valley Authority that would channel public capital into physical infrastructure for underdeveloped regions.
LIBERAL SKEPTICS OF BRETTON WOODS renewal find it distracting—if not faintly embarrassing—that some leftists keep bringing this up. Adam Tooze, an influential economic historian, has long opposed proposals to revive Bretton Woods, arguing that they miss where the action is really happening.
Responding to a similar proposal in 2019, Tooze admonished left-internationalists for their “vain battle to seize what might appear to be the ‘commanding heights’” of the global economy. Instead, he urged the left to prioritize the work of “scholar-technician-activists” working on reshaping macroprudential financial rules. According to this view, the bank rules laid out in the Basel III international financial accords—not Bretton Woods—are the relevant zone of struggle.
“There was no new Bretton Woods in 2008 and that absence is telling,” he wrote. “The world economy today is not divided up into national economic zones structured by the imperatives of mid-century total war. It really is the amorphous global conglomerate that we for so long have been saying it is. To hark back to earlier moments of concerted government-led cooperation under present circumstances is to indulge in gestural rather than real politics.”
That was 2019. Last month, Treasury dispatched Wally Adeyemo to brag about the value of U.S.-led multilateral action and to assert that political will underpins the global financial system. It turns out that the only government that produces dollars can still write the rules: When Russia launched a war of aggression in Ukraine, the U.S. moved swiftly to reshape the “amorphous global conglomerate.” Perhaps the Bretton Woods institutions would be blunt instruments for policing finance. But the extraordinary use of sanctions over the past several months has at least shown up the myth that Western governments can no longer reshape trade and capital flows at will.
What about the charge of “gestural” politics? Harking back to Bretton Woods sure is laying on the nostalgia thick. But if calls in the U.S. and U.K. for a Green New Deal have gone stale, there is plenty of energy behind popular yearning for the real economy of the mid-20th century. Everyone from JPMorgan’s CEO to a populist-protectionist Senate candidate in Missouri is calling for a new Marshall Plan. Left-realists should meet the moment and spell out their own visions for government-led redesign of capital, energy, and commodity flows. It is surprising, then, to find Tooze continuing to dismiss Gallagher and Kozul-Wright’s proposal as well-meaning but geopolitically naïve.
“Finance is not going to roll over and agree to measures that restrict its own practices,” Kozul-Wright acknowledged in an interview with the Prospect. However, he added, it “isn’t the complexity of the financial world that is the obstacle, but where the political class, in the countries that matter, can break away from their dependence on financial market actors.”
WAR IN EUROPE has upset elite expectations about the possibilities for “concerted government-led cooperation.” The IMF is now gesturing toward reforming finance and trade flows, pointing out in its latest financial stability report that energy-trading firms are “largely unregulated, mostly privately owned, and highly reliant on financing by dealer banks.” It has even introduced “capital flow management measures,” a rebrand meant to destigmatize capital controls, though it has not done much with that guidance. Meanwhile, Wall Street openly acknowledges the metastasis of a private shadow banking system where private equity, hedge funds, asset managers, and unregulated fintech are edging out public companies and banks.
Why should reforms pursued through the Bretton Woods institutions be dismissed as dreamy idealism? These are precisely the sorts of institutions the U.S. could leverage to compete in the new cold war left-realists say should be harnessed to take on the climate crisis. Priorities at the Bank and Fund have always reflected the interests of the big shareholders—the U.S. above all—but could also be put toward the more radical objectives contemplated at their founding.
The Biden administration has so far shown little interest in leadership of multilateral financial institutions. Key posts at development banks and Treasury, such as the undersecretary for international affairs, have been left vacant, and the administration has instead appeared to prioritize bilateral lending through domestic agencies like the Export-Import Bank. It is an unforced error.
Left-realists who see competition as the most promising driver for sustainable development should take the IMF and World Bank seriously as a potential lever for enacting those ambitions. They might begin by pointing out that it is Chinese president Xi Jinping whom the Financial Times now quotes when warning about the coming crisis in emerging markets. “If major economies slam on the brakes or take a U-turn in their monetary policies,” Xi chided this year at Davos, “developing countries would bear the brunt of it.”
