In many ways, Keynes’s loss of faith mirrors the course of events. The integrated economy of the prewar years did not collapse in one fell swoop but dribbled away. The aftermath of the First World War saw governments inventing a host of ingenious excuses for raising barriers of all sorts.[12] Curbs on immigration, imposed during the war, were kept in place, sometimes acquiring a racist edge. New industries that had grown up during the war needed to be protected from the shock of competition; the countries that had emerged from the wreckage of the Austro-Hungarian Empire needed to be given a fair start; and (just as in the American steel industry in 1999) industrialists in the more stable countries were pleading to be shielded from “exchange dumping”—the surge in exports from countries with seriously depreciated currencies.
Free traders made brave attempts to turn the disastrous tide. Resolutions issued from a succession of international conferences in places such as Brussels and Genoa recommended against the imposition of tariffs. In traditionally laissez-faire Britain, both the Liberal and Labor parties stuck to free trade, while the Tories sold their souls for imperial preference. And yet the protectionist tide proved far too strong. In Italy, Benito Mussolini imposed tariffs on wheat in 1925—with typical grandiloquence, he referred to this as the Battle for Wheat—and the French did the same a year later. Later, both countries added tariffs on motorcars.
In his 1928 U.S. presidential campaign, Herbert Hoover promised to raise tariffs to help farmers struggling with falling prices. In June 1930, eight p. 11 months after the Wall Street crash, the Smoot-Hawley Tariff Act imposed tariffs not just on agricultural goods but on a whole range of industrial ones, too, provoking retaliatory moves around the world. The powers that later became the Axis retreated as much as possible from the world economy, sometimes trading among themselves but usually pursuing policies of autarky. The death knell of the old economic order was sounded in 1931 when the British finally embraced protectionism, imposing a 10 percent tariff on almost all goods imported from outside the empire.
Throughout this period, Keynes had himself been wavering. His initial stance could be described as one of pragmatic liberalism: He supported free trade, but he believed that there were some instances in which tariffs were necessary. In the 1920s, he worried that free trade was inappropriate for Britain, with its rigid labor market, growing pool of idle labor, and official commitment to the gold standard. In a widely discussed newspaper article in 1931, Keynes insisted that, insofar as protectionism leads to “the substitution of home-produced goods for goods previously imported, it will increase the employment of this country.”[13] Keynes’s belief in free trade was also undermined by events. Britain saw not one but two depressions between the wars: the depression of 1920-1922, which led to a collapse of prices, output, and employment on a scale not seen since the Napoleonic Wars, and the great depression of 1929-1932. Unemployment was stuck at about 10 percent; what had once been regarded as a product of a downswing of the business cycle now seemed like a permanent fact of life.
The failure of free-market capitalism seemed even more evident in America. In the run-up to the 1929 crash, pundits had taken to boasting that America had discovered the secret of perpetual growth, so relentless had been the rise of the stock market and so huge the country’s lead in “new economy” industries, such as motorcars. But the establishment’s mishandling of the Wall Street crash threatened to turn perpetual growth into perpetual immiseration. By 1933—the year Franklin Roosevelt came to power and Keynes delivered his lecture—nearly thirteen million Americans were looking for jobs, and banks across the country had closed their doors.[14]
From this perspective, it seemed only logical to Keynes that the government needed to intervene where the market had failed—to prime the pump and create demand. Indeed, this became the bedrock not just of Roosevelt’s New Deal but of Keynesianism. Protectionism inevitably became part of the interventionist mix, though Keynes remained enough of a classical liberal to be nervous about it. Even now, the logic of the address in Dublin feels twisted. Can art and hospitality really remain international while manufacp. 12turing and finance are forced to become national? Do countries really have less to gain from free trade as their economies become more sophisticated? Keynes would no doubt have been disgusted if King’s College bought its wine from Cornwall and expected its fellows to take their holidays in Wales.
Indeed, the new barriers being erected around national economies only helped to prolong and deepen the worldwide slump, throwing global integration into reverse. Between the early 1890s and 1913, world trade had more than doubled; between the wars it stagnated and actually declined in some countries.[15] Between 1929 and 1938, for example, the ratio of foreign trade to domestic production declined by 10 percent in Britain, by nearly 20 percent in Canada, and by 25 to 40 percent in Japan, Germany, and Italy.[16] In the six years between 1927 and 1933, international lending dropped by over 90 percent. The decline in the flow of people was almost as dramatic. From 1899 to 1914, nearly fourteen million people emigrated to the United States. In the next fifteen years, thanks to anti-immigrant legislation, the flow of people was only five and a half million; in the 1930s, it shrank to less than a million.
In short, the world that Keynes had so admired in the first decade of the century had unraveled so much that, by the time the Second World War broke out, killing seemed to be the only global business left. In June 1940, Keynes wrote despondently that “we can regard what is now happening as the final destruction of the optimistic liberalism which Locke inaugurated. . . . For the first time for more than two centuries Hobbes has more message for us than Locke.” Yet in its own ghastly brutal way, the war, coupled with the economic tragedies of the 1930s, forced world leaders, including Keynes, to rethink. If the case for globalization had perhaps not been proved beyond doubt, the case for autarky had collapsed. Even before the end of the war, politicians and intellectuals began to talk about the reintegration of the world economy. Was there a way to end the beggar-thy-neighbor economic policies of the 1930s? Could the world’s banking system be made more sound? How should Europe be rebuilt? One of the first people consulted was Keynes.
For He’s a Jolly Good Fellow
If the speech to University College was the low point of Keynes’s contribution to globalization, then the meeting at Bretton Woods, New Hampshire, to map out the world’s financial future, was the high point. By 1944, Keynes had attained the sort of preeminence that is allowed to only a handful of inp. 13tellectuals in each century. He was not only the inevitable choice to lead the British delegation to the conference; he was one of the reasons why the conference was being held in such an obscure location in the first place. Keynes had a serious heart condition, and it was felt that the cool New Hampshire air would be good for him. (He did, indeed, suffer a minor heart attack during the conference but soldiered on.)
The gathering at Bretton Woods was one of a stream of meetings that occurred during the closing stages of the Second World War and in the years immediately after. (There were so many conferences, in fact, that one of the World Bank’s earliest memorandums complained that its people could not get their work done because they were spending all their time at international meetings.) The underlying aim was to create not a world government but a system for national governments to solve international problems by pooling their resources to prevent a repetition of a war that had left fifty-five million people dead and thirty-five million wounded. The phrase United Nations appeared first in January 1942 in an American-drafted treaty under which twenty-six nations pledged to overthrow the Axis powers. The UN itself finally came into being on June 26, 1945, when representatives from fifty countries, gathered in San Francisco, signed a distinctly American-sounding charter, the very first words of which are “We, the peoples.”
The institutions founded at Bretton Woods were to become part of the UN system, but they were to pay only nominal fealty to the UN. And to the extent that they ushered in the postwar boom, they arguably had m
ore immediate effect.
For Keynes in particular, the new institutions were not just a matter of financial architecture but of political philosophy and of his own legacy. Keynes’s spirit pervaded the proceedings in New Hampshire. “He has throughout dominated the Conference,” noted Lionel Robbins, a British delegate who had clashed sharply with Keynes when he had turned against free trade. When Keynes left the room on the final day of the conference, the delegates chanted “For He’s a Jolly Good Fellow.”
The unstated aim of Bretton Woods was to put Hobbes back in his box and breathe new life into “the optimistic liberalism which Locke inaugurated.” Keynes proposed to do that by binding the world to his new vision of globalization, in which trade in goods should be unfettered, but capital restricted.
The 730 conference delegates at the Mount Washington Hotel debated a plan that was already the result of two years of negotiation between Keynes and Harry Dexter White, an assistant secretary at the U.S. Treasury. Keynes and White proposed removing barriers to foreign trade but at the same time p. 14 imposing strict rules on the flow of speculative capital. Speculative capital could “shift with the speed of the magic carpet,” in Keynes’s phrase, thereby “disorganising all steady business”; the magic carpet needed to be tied down in order to provide those steady businesses with a stable environment. Exchange rates were to be fixed at agreed levels, pegged to the American dollar, and tight controls were to be imposed on the movement of investment capital.
The system would be overseen by a Stabilization Fund (later known as the International Monetary Fund), which would lend money to countries that ran into temporary financial difficulties, discipline countries that adopted irresponsible policies, and alter the exchange rates of countries that suffered permanent economic dislocations. In addition, an International Bank for Reconstruction and Development (later known as the World Bank) would help rebuild war-shattered economies and, in the longer term, finance investment into developing countries.
Keynes’s direct influence over the third arm of the international economic order was minimal: He was plagued by illness in his last years and died in 1946. Bretton Woods was his bequest to the world. He would naturally have preferred a system run by decent English chaps, rather than one dominated by Washington. He even tried to put the IMF in New York to remove it from direct political influence. Nevertheless, he left behind a legacy: a system that was much more global than the prewar one, yet one in which intervention by governments was still the norm.
The attempt to create an international trade body was put off until 1948, when representatives from fifty-seven countries gathered in Havana. The International Trade Organization was based on a revolutionary principle—multilateralism—that forced all the participants in the treaty to police each other. The Americans balked, not over free trade (the United States had pointedly made Marshall Plan aid to Europe contingent on the Continent progressively lowering internal barriers to trade) but over institutional mechanics. Both Congress and the State Department disliked the idea of a permanent trade organization. Fortunately, President Truman used his executive authority to create a “temporary” organization to oversee the General Agreement on Tariffs and Trade (GATT), which twenty-three of the industrialized nations had signed in Havana. This temporary organization was to last for forty-seven years, when it became the World Trade Organization.
The end of the war and the forty-five thousand tariff concessions negotiated in the first round of GATT had ushered in a period of breathtaking economic integration.[17] World trade, which had actually contracted by 3 percent in the early 1930s, grew over the quarter of a century after 1948 at p. 15 an annual rate of 7.25 percent. With many countries short of workers, migration surged, particularly in Europe. Businesses once again began to spread around the world. By the 1960s, the word multinational had become something of an established swearword in France. Meanwhile, the Yankee imperialist bosses of such firms fantasized publicly about their companies’ becoming so global that they would have to situate their headquarters on some uninhabited island to reflect the fact that they had no real nationality.
But fantasy was all that this was. For all the increase in trade, businesses remained stubbornly national. As companies such as General Motors and Ford rebuilt their international networks, they discovered that, after years of turmoil and tariffs, their local subsidiaries had become more or less autonomous, with their own products and cultures. Cars made by Vauxhall, General Motors’ British division, were aimed squarely at the middle class of Dulwich rather than that of Detroit. Meanwhile, in the developing world, the subsidiaries of American multinational giants were if anything too passive to be called global; they acted purely as distribution networks for American products, their sales merely a small bonus for the booming American market. Big European firms were arguably a little more genuinely multinational, particularly those that had dual nationality, such as Royal Dutch/Shell and Unilever. But as staff at Unilever readily admit, the firm never really thought of the world as a single market until, at the earliest, the mid-1980s; the integration of production on a worldwide basis did not really begin until the 1990s.
What kept businesspeople back? Technological backwardness is hardly a convincing answer. Postwar managers had access to technology of which the large trading empires of the late nineteenth century could have only dreamed: Imagine, for instance, what John Jacob Astor might have achieved with a telephone. Rather, the two barriers that held back the reintegration of the global economy were both political. (Commerce is rather like water: It will flow wherever it is allowed.) The more obvious barrier was the Iron Curtain, behind which one third of the world’s population had been consigned to regional autarky. But the second barrier was equally obstinate: the postwar consensus in the West that stressed state intervention.
For at least the first forty years after the Second World War, most governments outside the United States (and many critics would include the United States as well) refused to leave business alone.[18] In adopting this interventionist consensus, nobody imagined that they were contradicting the spirit of the Bretton Woods settlement, which had been designed to free the world trading system only in a carefully controlled way. (Besides, it was thought, p. 16 Bretton Woods was the brainchild of the world’s most famous interventionist.) Governments wanted to provide better lives for the people who had sacrificed so much in the war, and most of the intelligentsia told them that measured state intervention was much better at generating prosperity than was the free play of global markets. For that they had to thank not just Keynes but also Sidney and Beatrice Webb, whose ideas fused with those of Keynes to provide much of the backing for the postwar consensus.
The Curse of the Fabians
The Webbs, the spiritual parents of British socialism, were much more parochial figures than Keynes. A rather odd couple—she was a renowned beauty; Sidney quite the opposite—they were known in intellectual circles for a seriousness that went well beyond humorlessness. Dinner with the Webbs often consisted of a few sprigs of lettuce washed down with water. Trade unionists were dismissed not just as “nitwits” but also “boozers.” The Webbs inevitably disapproved of the Bloomsbury group. (Keynes did admit to having a “deeply spiritual” lunch with Beatrice in 1913, but he did not repeat the experience until 1926.) Despite these social handicaps, the Webbs’ Fabian Society still managed to gather in many of the most influential writers of the first part of the twentieth century, including George Bernard Shaw and H. G. Wells.
If the Webbs stood for anything, it was the assumption that “government knowledge” was superior to market knowledge—that dispassionate experts (most of them sitting in national capitals) were much better at allocating goods and services than self-interested businessmen and shortsighted consumers. Capitalists were myopic oafs, the Webbs argued in a series of books including The Decay of Capitalist Civilization (1923); the best chance for economic efficiency lay in handing decisions to intelligent and benevolent people like themselves. (Beatri
ce once described herself as “the cleverest member of one of the cleverest families in the cleverest class of the cleverest nation in the world.”)[19] They created the London School of Economics to supply these experts and helped to form Britain’s Labor Party, to put their ideas into practice.
Some of the events of the 1930s—not to mention the unfolding nightmare behind the Iron Curtain—might be expected to have turned Europeans against socialism. Yet from the perspective of many Europeans in 1945, recent history had conclusively vindicated the Webbs. The Wall Street crash had destroyed faith in the rationality of markets. The Soviet Union, which p. 17 the Webbs idolized in Soviet Communism: A New Civilization, had enjoyed both double-digit growth rates and full employment. During the war, governments had seized control of basic industries, demonstrating to many people’s satisfaction that the state could run things more efficiently than the private sector could. One wartime best-seller, James Burnham’s Managerial Revolution (1941), proclaimed that “the capitalist organization of society has entered its final years.” And the experience of the war itself, which involved everybody pulling together for the national good, created widespread hope for the creation of a more just and egalitarian society.
Fabian political ideas chimed well with Keynesian economics, which quickly became orthodox in the West’s universities and finance ministries after the Second World War. Keynes himself had always been sympathetic to the Webbs’ stress on experts (“We have little faith in the average sensual man,” Beatrice decided. “We do not believe that he can do much more than describe his grievances.”)[20] After the war, Keynes’s followers, expanding his notion that government could have prevented the interwar disaster by spending more, generated the idea that economies needed to be micromanaged, with “expert” economists pulling appropriate levers. The Keynesians also leaned toward national rather than international solutions. Nation-states, they believed, played a crucial role in saving the capitalist system from itself, and anything that threatened to shift power too far away from national governments needed to be treated with the greatest suspicion.
A Future Perfect: The Challenge and Promise of Globalization Page 5