The International Economy since 1945

It is just over a hundred years since Bagehot, writing his Lombard Street and looking out upon the world scene, drew attention to features which we now recognise as distinctive of the modern international economy. In the forty years which separate the publication of Lombard Street (1873) from the First World War, the international economy established itself. As distance shrank with the revolution in transport and communication, international trade grew swiftly in volume. Financial services for payments and the mechanisms of foreign exchange ramified. Loans and investment, both direct and portfolio, moved with increasing ease along smooth channels from the affluent savers of the old world to the risk-takers and entrepreneurs of the new. The financial centres — London, Paris, Frankfurt, Amsterdam — became institutional nerve centres for an increasingly self-conscious international community. Gold, long recognised as a leading form of national money, became established as an international unit of account and a vehicle for the holding of reserves in world payments.

The international situation in the summer of 1945 was unique in modern history; unique in that it gave to nations and to the world as a whole an opportunity for a completely new start. In certain fields, notably the economic, it was possible not only to reform international relations, but to start again virtually from scratch. This was the case with the international payments system, redrafted by the United States and Britain while the war was still in progress. In other fields changed relationships and relative strengths called for complete reassessment of policy aims and for different criteria of economic judgement. It is, therefore, a necessary preliminary of any examination of the postwar international economy to examine this problem of realignment.

The international payments system between 1945 and 1955 was dominated by what quickly came to be called ‘the dollar problem’. Sir Dennis Robertson, writing in 1954, defined it as ‘a persistent tendency on the part of the populations of the world outside North America to spend more in that region than the sum of what they are earning in that region and what the inhabitants of that region are disposed to lend to them or invest in their borders under the play of ordinary economic motive. The symptoms of the disease are a continuous pressure on the monetary reserves of the extra-North American countries. …’¹

Commercial policy has a dual motivation. Its creators pursue, or believe they pursue, the economic welfare of their countries by influencing the direction and flow of trade. There are few aspects of international economic affairs so mystifying, so traditional. While economic theory demonstrates the welfare-superiority of free trade, only Britain, in the late nineteenth century, has tried it. From the dawn of the nation state it has been the area in which power politics and economics have mingled to the detriment of both. In the century of liberal experiment free trade was the declared objective of the great countries while each manipulated trade impediments as bargaining counters in the game of the balance of power. As the world shrank in size in the twentieth century realisation grew that the classical economic optimum of free trade could only be achieved at costs in domestic economic adjustment which few countries would accept. At the same time the traditional commercial policy weapon of the tariff was augmented by a formidable battery of direct and monetary controls, often more potent and flexible for trade manipulation. From the high tide of trade liberalism marked by the Cobden Treaty of 1860, under the influence of industrial rivalry and competition in the 1930s for declining markets, protectionism and trade and payments control became an accepted fact of economic life in which the great powers differed only in the degree to which they made use of protective devices.

The Second World War marked many changes. In a broad perspective none is more striking in the economic field than the beginning in 1948 of a long period of unprecedented economic growth for the industrial countries. Although somewhat obscured in its early phase by the effects of the war this strong growth trend emerged clearly in the late forties and was continued through the fifties and sixties, in varying degree for countries and at varying rates over time, but always strong and apparent — a dynamic background to the economic history of the period. Table 5.1 gives some indicators of this growth.

It is appropriate at this point to notice certain changes in the political relations which had taken place in the world economy during the first decade of peace. The power alignments and relationships which had emerged were in some cases discernible from the end of the war; others were new. In any event they were, in essence, to remain throughout the next fifteen years and were to have great influence on economic events. In order to sketch in the outlines on this very large canvas we give our attention in turn to (a) the global scene, (b) the pattern of the new Europe and (c) other changes not within the first two categories but important in themselves.

This chapter will examine, through the story of the two main participants, the evolution of payments and the international monetary system between 1955 and 1964. This period must first be set in its total postwar context. The opening date, 1955, is chosen because it marks the end of what we may call the ‘first dollar problem’. At, or near to, that time the American balance of payments changed from surplus to the deficit which was to increase and dominate the payments situation throughout the sixties and seventies. American accommodating finance to the rest of the industrial world ceased as it became unnecessary and the dollar became readily available either as a transactions or a reserve currency. Three years later, on 31 December 1958, the Western European currencies became convertible into dollars, thereby establishing, several years later than had been hoped,¹ the currency system agreed to at Bretton Woods. This tardiness in establishing the Bretton Woods system was, in great part, due to the delay in making sterling convertible. Our first task in this chapter then is to examine briefly the transition from the regionalised currency system of the fifties to the Bretton Woods world of the sixties.

In 1957 the signing of the Treaty of Rome by six European nations¹ was probably the most important single economic event in the period spanned by this book. It marked a new stage in international co-operation. It redistributed economic power and influence, giving to the group a total industrial output matching that of the United States and exceeding that of the Soviet Union, and a foreign trade with other countries greater than any other power. It gave potential for growth to an area already registering at that time, in its constituent countries, the fastest economic growth in the world. It held remote but exciting promise of a single European super-power which would replace the national mercantilism of four centuries.

In its century or so of self-conscious existence the international economy has shrunk its distances, speeded its communications, widened the scope of its goods and money markets and made the first halting steps towards international decision-making. In the public sector international action has appeared in government-negotiated financial and commercial arrangements and in the activities of international functional agencies. In the private sector national business has spawned international business through the operations of multinational enterprises — large corporations with headquarters in one country and pursuing their activities, in the manufacturing, extractive, or service fields, in several others. Such enterprises are a result of the drive of corporations to extend their international transactions within their own networks of control and influence distinct from the operations of governments in their operational areas. By nature they are large and powerful and they touch the interests of governments and international agencies at many points. Although large firms with diverse foreign interests are by no means new, the postwar period, from the fifties, has seen such growth in their numbers and influence, and they are so changing the nature of the international economy that the multinational corporation must be regarded as the most striking feature of institutional change in the world economy since the war. It is our purpose in this chapter to examine the economics and some of the political implications of this development.

In early 1964 the first session of the United Nations Conference on Trade and Development (UNCTAD) was held in Geneva¹ signalising the emergence of a view among the developing countries that the time had come for changes in the trade policies of the developed countries. At the three-months-long conference the objectives of these policies and the institutional arrangements which must give expression to them were subjected to severe and continuous criticism by the delegates of developing countries.

The international monetary crisis, associated with the seventies, began much earlier. The devaluation of sterling in 1967 is a convenient date from which to trace its derivation. Prior to that date the world monetary system operated with two key currencies, the pound and dollar — the latter the more important because of its increasing liquidity role and its link with gold. During the sixties certain basic weaknesses in the Bretton Woods system revealed themselves: the difficulty of adjusting balances of payments under a system of virtually fixed exchange rates, the problem of providing a world stock of international liquidity appropriate to fixed exchange rates and, most destabilising of all, the problem of preserving international confidence in key currencies when the economies of the key currency countries themselves were in difficulties and when large amounts of international money were free to move from centre to centre in an international capital market. These problems were countered, as we have seen,¹ by extending the world liquidity base, first by the GAB arrangements of the IMF and in 1969 by the Agreement to set up the Special Drawing Rights (SDRs) scheme for the systematic creation and issue by the IMF of a new international reserve unit.

By the end of 1975 the first oil crisis was over. It seemed that shortage and the price of oil was not to bring capitalism to its knees. OPEC, after its initial successes, was following the behaviour pattern of any other cartel. The ambitions of other primary producers to cartelise their products to the detriment of the industrial countries were seen to be vain. Inflation, although still high, was declining and a slow, fitful recovery from the recession was under way. Doomsday, although still to be thought of, had perhaps been postponed. But there was to be no early return to the heady days of growth and rising real income. A harsher, squally, less predictable climate set in. There was to be, it seemed, a period of uncomfortable adaptation.