Robert Gilpin, "The Rise of American Hegemony," in Two Hegemonies:

Britain 1846-1914 and the United States 1941-2001 edited by Patrick Karl
O'Brien and Armand Clesse (Aldershot: Ashgate Publishing, Ltd., 2002), pp.
165-182

The dominant world role of the United States following the end of World War II
has been the subject of many scholarly and conflicting analyses. At the core of the
different views regarding America's central position in international affairs over
the past half century has been the relationship of American primacy and the world
economy. In the opinion of most American analysts, there is no connection
between the dominant political position of the United States and the nature of the
postwar international economy. Political and economic developments, according to
this position, may and do of course occasionally impinge on one another. However,
politics and economics are said to exist in two separate spheres and are not
logically connected to one another. In the opinion of Marxists and leftist writers,
on the other band, politics and economics are intimately linked. The insatiable
desire of capitalists for continuous accumulation has been the driving force behind
politics in every capital economy. The outstanding expression of this conception of
political and economic affairs is Immanuel Wallerstein's concept of the Modern
World System. A third interpretation, which will be set forth in this article, is that
politics and economics are indeed joined, but not in the way assumed by Marxists.
According to this position, the international political system has a profound
influence over the nature and functioning of the international economy. A principal
expression of the perspective is what has been called the theory of hegemonic
stability.
The Theory of Hegemonic Stability
According to 'the theory of hegemonic stability', as I am using it in this article, the
creation and maintenance of an open and liberal world economy such as the one
that has characterised most of the world economy since the end of World War II
requires a powerful leader. This leader uses its power and influence to promote
trade liberalisation and a stable international monetary system primarily in order to
advance its own political and economic interests. The leader, however, can seldom
coerce reluctant states to obey the rules of a liberal international economic order
and must seek their co-operation. These other states co-operate with the hegemon
because it is in their own economic and security interests to do so. For example,
although the American hegemon played a crucial role in establishing and managing
the world economy following World War H, it did so with the strong co-operation
of its Cold War allies.
The original idea that a liberal international economy requires strong political
leadership by the dominant economic power was initially set forth by Charles
Kindleberger in his book The World in Depression, 1929-1939 (1973). 1 The
existence of a liberal international economy, Kindleberger argued, required a
political leader that could and would use its influence to create the international
economic system and subsequently to perform a number of necessary economic
functions to keep the system working efficiently. In The World in Depression and
other writings, Kindleberger identified and discussed at length the tasks that the
leader of the world economy must carry out. These tasks of the hegemon that
include the creation and maintenance of a liberal trade regime, the establishment of
the international monetary system, and playing the role of 'lender of last resort' to
prevent financial crises.
A corollary of Kindleberger's hypothesis is that the relative economic decline of
the leader leads to a weakening of the regimes governing a liberal world economy.
The declining ability and willingness of the leader to enforce the rules of a liberal
world economy results in increasing trade protectionism and violations of the
regimes governing trade, monetary, and other forms of international commerce In
the 1990s, an extremely important manifestation of the relative economic decline
of American economic power has been the growing tendency for the world
economy to fragment into regional blocs centred on the major economic powers.
The dynamics of the rise and then of the steady erosion of a liberal world economy
can be demonstrated by an examination of the British and American eras of
international leadership.
Kindleberger's basic ideas on the importance of a political leader for international
economic affairs were appropriated (with proper acknowledgments) by American
political scientists including me. However, we made several modifications that
placed his basic insight in a realist or state-centric intellectual framework of
political analysis and thereby fashioned a realist version of the theory of
hegemonic stability. In the first place, we substituted the Greek word 'hegemon' for
'leader' to reflect the fact that the leader had to exercise power to achieve its
objective; more specifically, a hegemon is the leader of an alliance such as the one
organised by Sparta to defeat the Persians in the fifth century B.C. In addition,
whereas Kindleberger argued that the leader created a liberal international
economy for cosmopolitan economic reasons, political scientists argued that the
hegemon created a liberal international economy to promote its own interests.
Finally, in contrast to Kindleberger's assumption that the interests of the leader
were primarily economic, political scientists argued that these interests were not
only economic but also political. Despite these differences between Kindleberger's
liberal version of the theory and the political scientist version, both versions state
that the provision of international collective (public) goods such as free trade and
monetary stability requires a dominant power with an interest in a liberal world
economy and a willingness to expend economic and political resources to achieve
and maintain this goal.
The world has known only two eras of economic liberalism based on a hegemonic
power. From the late nineteenth century to the outbreak of World War I, Great
Britain led the efforts for trade liberalisation and monetary stability. Similarly, the
United States led the world economy following World War II. However, it should
be noted that there were several fundamental differences between the two periods.
In the first place, the liberal world economy in the late nineteenth century was truly
global and was characterised by non-discrimination in trade, unrestrained capital
movements, and a stable monetary system based on the gold standard; the
American system comprised only the 'Free World' and has been characterised by
trade discrimination, capital controls until the mid-l970s, and monetary instability
after 1971. Whereas the British promoted and inspired free trade through a series
of bilateral agreements, the United States championed trade liberalisation through
multilateral negotiations in the GATT. International security considerations, that is,
the forging of the Western alliance against the Soviet Union, played a crucial role
in America's promotion of free trade. Although the Bank of England played a
central role in the management of the gold standard, the nineteenth century
monetary system was largely denationalised. The post World War II system was
based on the dollar and was subject to American influence.
British economic decline began in the late nineteenth century as other countries,
especially Germany and the United States, industrialised. Britain responded to new
developments with a gradual retrenchment of its global position and initiation of
numerous measures to strengthen its security. Although Great Britain modified a
number of its economic policies, its huge dependence on trade forestalled a retreat
into protectionism. British leadership in trade liberalisation slackened, and by the
1930s Britain bad retreated to a system of imperial preferences. As early as the
mid-1970s, concerns over the relative decline of the American economy and the
damaging effects of international competition on American industry were
expressed by American political leaders, business interests, and scholars. These
changes produced the New Protectionism; as formal tariffs were reduced through
trade negotiations, the United States erected such non-tariff barriers as those
embedded in the Multi-Fiber Agreement, in which many nations were assigned
quotas, and imposed 'voluntary' export restraints on Japanese automobiles. In
response to the ballooning American trade deficit intensifying fears of
deindustrialisation, and rising protectionist pressures, the Reagan Administration in
the mid-1980s significantly modified America's postwar commitment to
multilateralism. The Administration began to pursue a multitrack trade policy that
has not only de-emphasized multilateral negotiations, but also increased
unilateralism and bilateralism (especially 'managed trade' with Japan) and
economic regionalism as well (in the North American Free Trade Agreement with
Canada and Mexico). My concern in this article, however, is the rise of American
hegemony following World War II and its implications for the world economy.
The American System
The United States emerged from World War I with a clear vision of the new
international order that it wished to create. The so-called Rooseveltian vision,
named after President Franklin Delano Roosevelt, had several elements. The
United Nations and particularly the Security Council (including the five permanent
members) would be responsible for guaranteeing the peace. In addition, the Bretton
Woods conference (1944) proposed that a constellation of novel economic
institutions, which were to include the International Monetary Fund (IMF), the
International Bank for Reconstruction and Development (World Bank), and the
International Trade Organisation, should be responsible for promotion and
administration of an open and multilateral world economy; with the eventual defeat
of the International Trade Organisation by the United States Congress, the United
States and its economic partners established the General Agreement on Tariff and
Trade (GATT) as a negotiating forum although not as a full-fledged international
organisation. The postwar international order was to be based on the Atlantic
Charter and its Four Freedoms (today's 'human rights') in whose name the United
States and its allies had fought the war. Within this structure, the victors would
build the peaceful, prosperous, and humane world that had eluded mankind after
World War I. As we know at the turn of the century, not all of these worthy
objectives would be achieved.
Within a brief period, the Rooseveltian concept of 'one world' was shattered. The
Soviet-American confrontation over the territorial settlement in Central and
Eastern Europe destroyed the wartime spirit of Allied collaboration. The ideal of a
reunited world economy collided with the realities of the economic devastation
wrought by World War II and the ensuing Cold War; the world economy soon was
ideologically driven into what Stalin called the two antagonistic 'systems' of
capitalism and socialism. Responding to this situation, the United States and its
allies assumed the task of fashioning economic, political, and security
arrangements that would restore the shattered economies of Japan and Western
Europe and provide for their common security. The American System emerged
from this joint effort of the United States and its allies.
At the core of the American System, including its associated military alliances,
was a shared perception of the overriding danger of the Soviet threat. In the interest
of political unity, the United States and its allies tacitly agreed to subordinate their
short-term economic and other differences to the long-term political priority of
containing Soviet power. The Soviet danger provided the political glue that helped
hold together the postwar international economy and facilitated compromise
solutions to a number of serious economic problems throughout the postwar
period. Although the economic and political structure created by the United States
and its allies between 1946 and 1950 still stands, the tensions within the System
have become increasingly pronounced with the end of the Soviet military threat.
The American System has included both the American relationship with Western
Europe and the American relationship with Japan. Although these two principal
components of the American system have certain common features, these
relationships are fundamentally different regarding a number of economic,
political, and security matters; these differences have become increasingly
important in determining the economic and political relations between the United
States and its two major allies. My principal concern here, however, is with the
differences in the economic relations between America and its principal allies.
The American-West European Component of the System
As relations with the Soviet Union deteriorated after 1945, the United States
realised that there were urgent fundamental problems related to the security of
Western Europe. The most pressing need was to assist in the revival of the West
European economy while also finding a way to guarantee the military security of
the West Europeans against the threat from the Soviet Union. To achieve an
American commitment to the pursuit of these goals, the American people had to be
linked psychologically to Western Europe. It was vital to prevent a retreat into
isolationism like that which had followed World War I and contributed to the
outbreak of World War II. With the strong cooperation of its Western European
allies, the United States undertook several initiatives.
The first important initiative was the launching in 1947 of what became known as
the Marshall Plan. The Marshall Plan transferred huge capital resources from the
United States to Western Europe, while basing American financial assistance on
the premise of intra-European cooperation. By one estimate, the cost of Marshall
Plan to the United States was approximately $13 billion over four years or
approximately about 1.5 per cent of the American Gross National Product. In 1994
dollars, this amount would be $100 billion. The United States was able to finance
the system because, at the end of World War II, it was the world's major creditor.
Like Great Britain in the late nineteenth century and like Japan in the late twentieth
century, the United States used its accumulated wealth to help create a world that
American leadership believed would serve both American economic and political
interests.
Another major initiative strongly supported by the United States was the formation
of what would become the European Common Market or European Economic
Community (EEC). While the primary responsibility for this truly extraordinary
initiative lay with the West Europeans themselves, the United States gave the
project its complete backing. Although the political goal of reconciling France and
Germany was the principal purpose of the EEC, its proponents believed that the
creation of a huge market in Western Europe would give the West Europeans the
economic strength to resist their domestic Communist Parties and the
blandishments of the Soviet Union. In addition, the European Economic
Community was conceived as a means to anchor West Germany firmly to the West
despite the fact that historically the industrial Ruhr and other areas of West
Germany had looked eastward for their export markets. These markets were now in
Communist hands and alternative markets had to be found to decrease the feared
West German temptation to strike an independent deal with the Soviets.
Although the Common Market represented a violation of the American ideal of a
multilateral world and entailed European discrimination against American exports,
American policymakers accepted these economic costs as necessary for security
reasons. The United States could tolerate European protectionism because of its
immense economic superiority over the Europeans and other countries. However,
the United States assumed that the Common Market with its external tariff and
protective Common Agricultural Policy would be a short-term expedient and that it
would, over the longer term, become a stepping-stone to a multilateral system.
American officials believed that, when Western Europe had regained its economic
strength and self-confidence, the West Europeans would lower their external
barriers and participate in the open world economy envisioned by the United States
at Bretton Woods.
American officials, however, did demand an economic quid pro quo from the West
Europeans that would become of considerable importance in defining the long-
term economic relationship between the United States and Western Europe. As a
precondition for supporting the movement toward European economic unification,
the West Europeans agreed to treat American multinational corporations as if they
were European corporations and to avoid discriminating against them in their
policies. Or, in more technical language, the West Europeans extended the
principle of 'national treatment' to American firms, While the United States did
demand access to the Common Market for American corporations, it tolerated
what it assumed would be the temporary discrimination against American
agricultural and other exports in order to rebuild Western Europe and thwart Soviet
expansionist designs.
The other important American initiative was the 1949 creation of the North
Atlantic Treaty Organisation (NATO) to link the two sides of the Atlantic
militarily. In effect, the United States brought Western Europe under the American
nuclear umbrella through the strategy of extended deterrence and thereby
communicated to the Soviet Union that an attack on Western Europe would be
tantamount to an attack on the United States itself. The stationing of American
troops on European soil became a visible sign of this commitment. The NATO
Treaty identified and legitimated for Americans and West Europeans alike the
linking of their security. In short, economic and security ties have been closely
linked in defining the relationship of the United States and its West European allies
since shortly after the end of World War II
The American-Japanese Component
In Asia the United States also found itself facing a serious political, economic, and
strategic challenge. World War II and its aftermath had strengthened the position
of the Soviet Union in East Asia, while China and North Korea had become
communist countries and political allies of the Soviet Union. These important
traditional Japanese markets were now in hostile hands. Similarly to West
Germany, intense concern existed that the forces of economic gravity would pull
Japan toward the Soviet Union and its Chinese ally. Moreover, the Japanese
economy was a shambles; it had been much more devastated by the War than had
initially been appreciated. Although in retrospect, it is difficult to understand,
American officials truly despaired over the problem of ensuring Japanese
economic survival.
In addition to guaranteeing Japanese security through the formation of the
American-Japanese Mutual Security Treaty (MST), the United States wanted to
integrate Japan into a larger framework of economic relationships and thereby
remove the attractiveness of the communist-dominated Asian market. However,
unlike West Germany, there were no large neighbouring non-communist
economies to which the Japanese economy could be anchored. To overcome this
problem of an isolated and vulnerable Japan, the United States took several
initiatives. One was to expedite the decolonisation of southeast Asia (it should be
remembered that one cause of the Pacific War was that European colonizers had
largely closed these economies to Japanese exports). The United States also
sponsored Japanese membership in the 'Western Club'. Despite strong West
European resistance based on intense fear of Japanese economic competition, the
United States eventually secured Japanese participation in the IMF, the World
Bank, and other international organisations. In addition, the United States gave
Japan relatively free access to the American market and to American technology.
Furthermore, the United States used its vast financial resources to assist in the
rebuilding of the Japanese economy, but it did not demand access to the Japanese
economy for its multinational corporations. Instead, the quid pro quo for American
economic concessions to Japan was Japanese permission to use their air and naval
bases in order to deter the perceived threat of Chinese and Soviet expansion.
In order to guarantee Japanese security, the United States also spread its nuclear
umbrella over Japan. The MST, however, differs fundamentally from the NATO
alliance. Under the NATO treaty an external attack on any member obliges the
other members to consider measures of mutual defense. In the MST, the United
States agrees to defend Japan if Japan is attacked, but the Japanese are not
obligated to defend the United States. Also, whereas the NATO agreement applies
only to the territory of its members, the MST refers to the outbreak of hostilities in
the entire Pacific region. Through this agreement the United States obtained the
right to use air and naval bases in Japan to defend and secure its position in the
Western Pacific. The Japanese were given access to the American market in
exchange for the right to anchor on Japan the American strategic position in East
Asia.
In these ways, the United States became the fulcrum of the American system; the
American-West European and the American-Japanese components of the system
had little to do with one another. Lines of cooperation, however, did and do run
through Washington. Although Japan and Western Europe would become equal
participants in the annual 'Western' summits, Japanese-West European diplomatic
relations were primarily a function of their ties to the United States. In the
economic arena, Japanese-West European commerce was and still is relatively
minor compared to the commerce of each with the United States. With respect to
security, no military connections exist between Western Europe and Japan. In
economic, diplomatic, and security affairs, the American system has, for nearly
half a century, tested squarely on American leadership.
The American system of alliances across the Atlantic and the Pacific provided the
political framework within which American political and economic influence
expanded around the globe until the expansionism was brought to an end at least
temporarily in the jungles of Vietnam. Although both the United States and the
Soviet Union sought to expand their domain, the United States was the most
successful expansionist power in the postwar era. In response to its intense fear of
communism and in pursuit of its policy of containment of the Soviet Union, the
United States, like other great powers before it, became the most expansive power
in the international system. American influence expanded rapidly in Europe, Asia,
and the Middle East. Thus, in its effort to contain Soviet expansion, the United
States itself became a highly successful expansionist power.
The Liberal World Economy
The institutional framework of the postwar world economy was constructed at the
Bretton Woods conference in 1944. Eventually known as the Bretton Woods
System (BWS), this essentially American-British achievement reflected the
thinking of Harry Dexter White and John Maynard Keynes. (In retrospect, the
small number of principal players involved in formulating the agreement accounts
in large part for the extraordinary success of the conference and is in marked
contrast to subsequent efforts to agree on rules to govern the world economy.)
Although a number of disagreements divided the American and British negotiators,
the conference succeeded in reconciling its two major objectives. The first goal of
the conference was to formulate unifying principles that would be embodied in the
institutions to comprise the BWS: the International Monetary Fund (IMF), the
World Bank, and what would become the General Agreement on Tariffs and Trade
(GATT). These guidelines included (1) a commitment to trade liberalisation via
multilateral negotiations and the principle of nondiscrimination, (2) agreements
that current account transactions should be freed from controls, but that capital
controls were permissible, and (3) agreement that exchange rates should be fixed
or pegged and that their adjustment was of concern to all. The second goal of the
conference was to leave mom within the BWS for governments to pursue
Keynesian stabilisation and social welfare policies; individual nations would be
free (within prescribed limits) to pursue economic growth and full employment
policies. These fundamental principles and the international institutions embodying
them created the framework within which the postwar international economy has
flourished.
In subsequent years the original Bretton Woods System has been significantly
modified in response to economic and political realities beginning immediately
after the end of World War II. The prostrate European and Japanese economies, the
problem of the 'dollar shortage', and especially the exigencies of the Cold War
brought about major changes in the original system. In the interest of forging an
alliance system against the Soviet Union, the United States reversed its prior
positions on a number of international economic issues and took a decisive
leadership role in the creation of the postwar world economy. The emergence of
the postwar international economic order cannot be understood without
recognising the need for allied co-operation against the Soviet Union.
The world's foremost creditor nation, the United States, used its financial reserves,
primarily through the Marshall Plan, to facilitate the rebuilding of the West
European economies as a buffer against Soviet expansionism. Despite its historic
aversion to trading blocs, the United States pressured the West Europeans to
pursue European integration. As a pre-condition for receiving American assistance,
West European governments were required to remove intra-European trade barriers
and to co-operate and co-ordinate their economic plans through the Organisation
for European Economic Cooperation (OEEC); the West Europeans were also
encouraged to carry out domestic economic ref orms, including the adoption of
America's more productive manufacturing and management
techniques. In order to promote European integration, the United States even
tolerated European discrimination against American agricultural and manufactured
exports. In a less dramatic but equally important way, the United States also used
its financial and other resources to help rebuild the Japanese economy and
integrate it into the Western system. Thus, during the Cold War, the postwar
international economic order and the international security order became intimately
joined to one another.
The core of the modified Bretton Woods System was composed of two
international regimes with important roles in the early success of the international
economy. The first regime was the international monetary system based on fixed
but adjustable exchange rates, rates for which the International Monetary Fund
(IMF) was given formal responsibility in reality, the United States used its
economic resources and political influence to assure the early success of that
monetary system. The second important regime was the international trading
system based on the GATT; responsibility the the trading regime was diffused
among a number of nations and, as this number increased during the postwar years,
the trading regime became more and more unwieldy. There were plans for a third
regime (based perhaps on the World Bank) to be responsible for promoting the
economic development of the less developed countries. This regime never
materialised, largely because of the strong opposition of the industrial economies;
even at the end of the twentieth century, no full-fledged development regime or
agreed-upon principles regarding economic development yet exists.
International Monetary System of Fixed Rates
Experts from many countries holding common views on the technical issues
needing resolution played significant roles in the creation of the international
monetary regime. The system had to provide monetary reserves and reserve credits
in sufficient amounts to enable member governments to keep their exchange rates
fixed or pegged to one another. (This is called the 'liquidity problem'.) The IMF
would solve this problem by offering reserve credits to deficit states using
contributions from member countries. Second, the system also bad to solve the so-
called Nth problem. (This is called the 'adjustnent problem'.) In a monetary system
based on fixed exchange rates covering N countries, if policy conflict is to be
avoided, only N-I countries can, at any particular time, pursue independent
exchange rate policies, i.e., the currency of at least one country must stay stable
while others are free to vary the value of their own currencies. The requirement
that countries had to obtain IMP approval to alter their exchange rate was designed
to solve the Nth country problem. Third, the monetary system had to anchor its
members' monetary policies to some objective standard in order to prevent global
inflation or devaluation. (This is the 'confidence problem'.) Stabilisation of a
monetary system can be achieved in one of three ways: by (1) tying every currency
to a 'non-monetary' asset, gold being the asset of choice; (2) adopting a policy rule
to co-ordinate national monetary policies, or (3) following a leader whose revealed
policy preferences promise to provide the desired degree of economic stability.
Although all three methods were in fact employed in the early postwar years, the
monetary policies of member states were 'anchored' by tying every currency to
gold and the major powers coordinated (informally at least) their national
economic policies.
The postwar international monetary system, which lasted until 1973, was
extraordinarily successful. The system was designed to provide both domestic
policy autonomy and international monetary stability; in effect, the system
provided a compromise between the rigid gold standard of the late nineteenth
century under which governments had very little ability to manage their own
economies and the monetary anarchy of the 1930s when governments had too
much license to engage in competitive devaluations and other destructive practices.
In order to achieve both autonomy and stability, the system was based on the
following principles: (1) fixed or pegged exchange rates, but with sufficient
flexibility to enable individual states to deal with extraordinary situations including
the pursuit of full employment; (2) the establishment of a reliable source of reserve
credit in the event of an international payments problem; (3) an agreement among
member countries to peg their currencies to gold at $ 35/oz. or to the dollar; (4)
IMF approval of exchange rates and of adjustments in the event of a 'fundamental
disequilibrium' in a nation's balance of payments; (5) monetary reserves provided
by an IMF endowment to create a pool of national currencies or county quotas
which could be made available to deficit countries. These principles would govern
the system until its breakdown in the early 1970s.
The ways in which the system actually functioned in practice did not fulfill the
intentions and expectations of its founders. Firstly, although the IMF was made
responsible for maintaining liquidity, in practice the primary solution was the
build-up of the dollar reserves of member governments due to continuing
American balance of payment deficits, especially after 1959. In this way the
American dollar became the foundation-stone of the international monetary
system. Secondly, although the adjustment or Nth country problem was to be
solved by requiring counties in 'fundamental disequilibrium' to obtain IMF
approval before changing exchange rates, in practice, the problem was solved
politically through co-operation among the United States and its allies and by the
passive US attitude toward the exchange rate of the dollar up to the 1971 Nixon
shock. The confidence problem was solved as the members followed US policy
preferences which, in the early postwar era, promised to provide stability to the
system. However, the essential requirement that the United States as the N-I
country, pursue a policy of price stability failed eventually with the escalation of
the Vietnam War in the late 1960s; the ensuing inflation leading to the
abandonment of the fixed rate system by the Nixon Administration in the early
1970s because the system no longer suited American interests. Nevertheless, the
United States and the dollar have continued to be the foundation of the system.
The key role of the dollar in the international monetary system held the American
alliance system and the world economy together, and the international role of the
dollar as both a reserve and transaction currency actually became a cornerstone of
America's global economic and political position. Because America's major allies
and economic partners were willing to hold dollars for political as well as for
economic reasons, the international role of the dollar conferred on the United
States the right of 'seigneurage'; this term refers to privileges associated with being
the provider of the currency for an economy, in this case the international
economy. As President Charles de Gaulle of France bitterly complained in the
1960s, the 'hegemony of the dollar' conferred 'extravagant privileges' on the United
States, because it alone could simply print dollars to fight foreign wars, buy up
French and other businesses, and go deeply into national debt with no fear for the
consequences.
As Robert Triffin warned in the early 1960s, there was a fundamental contradiction
at the heart of this dollar-based system. While the huge outflow of American
dollars to finance the re-building of Western Europe and Japan and the American
military build-up during both the Korean and Vietnam Wars helped to solve the
liquidity problem, this outflow or overhang of dollars meant that the United States
would one day be unable to redeem in gold those dollars held by private investors
and foreign governments at the agreed price. Triffin predicted that confidence in
the dollar would be undermined as the American balance of payments shifted from
a surplus to a deficit. As this deficit grew in the late 1950s and the 1960s, the
conflict between the monetary system's mechanism of liquidity creation and the
solution of the confidence problem became increasingly severe. The problem
became even more acute in the 1960s when the escalation of the Vietnam War and
its inflationary consequences caused a deterioration of international confidence in
the value of the dollar. As confidence in the dollar declined, the foundations of the
Bretton Woods system of fixed rates began to erode.
Decreasing confidence in the dollar led to intensifying speculation in gold, and this
was followed by attempts to find solutions to the confidence problem; the most
important of these efforts was the creation in the late 1960s of Special Drawing
Rights (SDRs) as a new reserve asset to complement the dollar. However, the
'solution' reached was essentially political. America's Cold War allies, fearing that
a collapse of the dollar would force the United States to withdraw its forces from
overseas and to retreat into political isolation, agreed to hold over-valued dollars to
prevent the monetary system from breaking down. In essence, the confidence
problem was solved by the political necessity to maintain the anti-Sot alliance.
Another factor in the allied support of the overvalued dollar, however, was that the
American market was lucrative for such export-oriented economies as West
Germany and, later, Japan.
At any particular time during the postwar era, the United States has had one
primary partner in defending the dollar and hence its international position. In the
early postwar period, the American position in the world and support for the dollar
were based on co-operation with the British this 'special relationship', begun
between World Wars I and II, had been solidified by the wartime experience. The
Anglo-Saxon powers worked together to frame the Bretton Woods System and re-
establish the liberal international economy. By 1967, however, the relative decline
of the British economy forced Great Britain to devalue its currency and pull away
from its close partnership with the United States. West Germany then replaced
Great Britain as the US's foremost economic partner and supporter of the dollar,
Throughout the Vietnam War and into the 1970s, the Germans supported
American hegemony by holding dollars and buying American government
securities. The inflationary and other consequences of this new special relationship
weakened the American-West German relationship in the mid-1970s and
eventually led to its fracture in 1979; the Germans refused to support what they
considered to be President Carter's inflationary economic policies and, with their
joint sponsorship with the French of the European Monetary System in the late
1970s, began to isolate the mark from the wild fluctuations of the dollar. During
the Volcker Recession in the late 1970s and early 1980s, Germans were replaced
by the Japanese who 'provided the financial backing for President Reagan's
economic and military policies. In the 1990s, in the guise of the G-7, the
international role of the dollar has been maintained primarily through the informal
co-operation of the American, German, and Japanese central banks. This co-
operation continues largely out of fear of what would happen to the international
economic and political system if the monetary system were to break down.
The Trade Regime
The trade regime was born in conflict between the American and British
negotiators at Bretton Woods. Reflecting American industrial supremacy, the
American negotiators' goal was to achieve free trade and to open foreign markets.
Although the British were also committed to the principle of flee trade, they were
extremely concerned over the 'dollar shortage', the possible loss of domestic
economic autonomy to pursue full employment, and a number of related issues.
However, the eventual British-American compromise and agreement to create the
International Trade Organisation (ITO) to complement the IMF and the World
Bank, proved futile. The American Administration itself rejected the ITO because
it believed that the ITO would meddle in domestic economic affairs, resulting in
the American government failure to ratify the agreement.
As an interim measure until a replacement for the defunct ITO could be found, the
United States and its principal economic partners created the GATT in 1948. The
purpose of the GATT (like the moribund ITO) was to promote 'freer and fairer'
trade, primarily through the negotiated reduction of formal tariffs. Although the
GATT was remarkably successful in fostering trade liberalisation and providing a
framework for trade discussions, its authority and the scope of its responsibilities
were severely limited and applied primarily to manufactured goods. The GATT did
not have authority to deal with agriculture, services, intellectual property rights, or
foreign direct investment; nor did the GATT have authority with respect to
customs unions and other preferential trading arrangements. Successive American
administrations and other governments became increasingly cognizant of these
inherent limitations and, following the completion of the Uruguay Round in the
1980s, replaced the GATT with the World Trade Organisation (WTO) whose
responsibilities are much broader and which, unlike the GATT, is a full-fledged
international organisation rather than merely an international secretariat.
Despite the limitations of its mandate and organisational structure, however, the
GATT for many years played an important role in reducing barriers to international
trade. Embodying the neo-classical economic commitment to free trade, the GATT
provided a rule-based regime of trade liberalisation founded on the principles of
non-discrimination and Most-favoured-Nation treatment (MFN), unconditional
reciprocity, and transparency (for example, the use of formal tariffs and the
publication of trade regulations); in effect, the members of GATT agreed to
establish regulations lowering trade barriers and to let markets determine trade
patterns. Under GATT, markets were opened and new rules established by mutual
agreements and negotiations carried out under its auspices; agreement was based
on balanced compromise or unconditional reciprocity rather than on unilateral
actions by the strong and the type of 'specific reciprocity' that; in the final decades
of the twentieth century, became increasingly characteristic of international trade.
The goal of the GATT was an open multilateralism, that is, the agreement provided
for the extension of negotiated trade rules without discrimination to all members of
the international system; however, candidates for membership had to meet certain
criteria and agree to obey the rules. The founders of the GATT wanted a steady
progression toward an open world economy with no return to the cycle of
retaliation and counter-retaliation that had characterised the 1930s.
Although the early postwar period witnessed a number of agreements to lower
tariff barriers, a significant shift in trade negotiations took place with the Kennedy
Round (1967), initiated by the United States in response to a growing concern over
the trade diversion effects of the European Economic Community. As a
consequence of American pressures, the Kennedy Round resulted in an
approximate 35 per cent reduction of trade barriers on nonagricultural imports and
led to a number of basic reforms such as the regulation of anti-dumping practices
and the substitution of across-the-board tariff cuts (or the principle of 'general'
reciprocity) on industrial products for the earlier emphasis on bilateral negotiations
and the 'multilateralising' of tariff reductions on individual products (or 'specific'
reciprocity). Subsequent rounds of GATT negotiations cut tariffs by more than 75
per cent. These tariff reductions have had a profound impact on international trade
in manufactured goods, but trade liberalisation in agricultural products has
developed much more slowly. With the reduction of trade bathers, international
trade grew at an annual rate of 7 per cent between 1948-1973.
In 1971 the industrial countries committed themselves in the Smithsonian
Agreement to reduce tariff and other trade barriers even more. The agenda of the
subsequent Tokyo Round, far more comprehensive than previous meetings,
included tariff cuts, liberalisation of agricultural trade, and elimination of non-tariff
bathers. In addition, the industrial countries pledged to pay greater attention to the
demands of the LDCs for special treatment of their exports. However, the most
important task of the Tokyo Round was fashioning codes of conduct dealing with
unfair trade practices. The results of the Round, completed in 1979 following
nearly a decade of bickering, were substantial. For example, tariffs on
manufactured goods were lowered by about an additional 34 per cent and the
negotiations resulted in a number of codes of conduct such as the prohibition of
export subsidies and the elimination of some discrimination in public procurement.
However, the Round failed to resolve the American-European dispute over
agriculture and neither satisfies the LDCs nor prevented the noxious proliferation
of non-tariff barriers that had been occurring throughout the 1970s.
With these trade-liberalising agreements, international trade throughout the
postwar era grew one or two percentage points more rapidly than did the Gross
World Product. This substantial expansion of trade meant that imports penetrated
deeply into domestic economies and exports became a much more important aspect
of national economies. In fact, for some EEC countries, exports have reached as
high as 50 per cent. Even the domestic markets of the United States and Japan
were internationalised. Between 1970 and 1989, American imports increased from
4,1 per cent to about 18.1 per cent of GNP. For Japan, the increase was from 10 per
cent to 13 per cent of GNP. It is particularly significant that Japanese imports have
included a growing percentage of manufactured goods. Meanwhile, GATT
membership greatly expanded over the years until it included 125 members in
1995, while growing trade flows created a highly interdependent international
economy despite the slowdown in the 1970s with the onset of global stagflation.
Limitations of the Bretton Woods System
The Bretton Woods System had several inherent limitations that would in time
weaken the foundations of the postwar economy. Many issues and topics of
potential importance were left vague or simply not covered by the rules of the
Bretton Woods system. On the trade issue, the fundamental purpose of the GATT
was to govern the exchanges of products and commodities, and at the insistence of
the United States, agriculture was excluded from GATT rules. Services, foreign
direct investment and intellectual property rights, issues which were quite
unimportant at the time of the founding of the Bretton Woods institutions and were
not included in GATT rules, would become major components of international
commerce only in the 1970s. Certain monetary issues were never satisfactorily
resolved, i.e. the problem of adjustments in payments imbalances and
determination of the responsibility of deficit and/or surplus countries to correct
imbalances. The role of international financial flows, which would transform the
global economy in the 1970s, was unanticipated and no rules were developed to
govern such matters. Finally, the increasing importance of the multinational
corporation (MNC) and foreign direct investment (FDI) in the postwar era
profoundly transformed the international economy, especially as trade and
investment became linked to one another. Initially, MNCs were mostly American
corporations that began a rapid overseas expansion in the 1950s as a response to
the creation of the European Common Market, but subsequently, the firms of all
the industrial and some industrialising countries would join the growing ranks of
the multinationals. Indeed, many of the economic activities and economic
problems that would become extremely important in the 1980s and 1990s were not
covered by the original GATI' framework. Despite these limitations, the Bretton
Woods system and the hegemony of the United States on which it rested provided
a solid foundation for the success of the world economy following World War II.
Note
1 Kindleberger, C., The World in Depression, 1929-1939 (London, 1973).




.

Andrew Gamble, "Hegemony and Decline: Britain and the United States,"
in Two Hegemonies: Britain 1846-1914 and the United States 1941-2001 edited
by Patrick Karl O'Brien and Armand Clesse (Aldershot: Ashgate Publishing,
Ltd., 2002), pp. 127-140

These two great organisations of the English-speaking democracies, the British
Empire and the United States, will have to be somewhat mixed up together in some
of their affairs for mutual and general advantage. For my own part, looking out
upon the future, I do not view the process with any misgivings. I could not stop it if
I wished; no one can stop it. Like the Mississippi, it just keeps rolling along. Let it
roll. Let it roll on full flood, inexorable, irresistible, benignant, to broader lands
and better days.
Winston Churchill, August 1940
Hegemony exercised by a single state is a rare and transient phenomenon in the
history of the world system. A unified world polity has been much slower to
emerge than a unified world economy. Some state functions have come to be
discharged at international level, but most remain rooted in national state
structures. When hegemony has been exercised it has been directed more at
promoting international monetary stability, improving global communications,
securing property rights and enforcing contracts, rather than at conferring wider
political rights, stabilising the global economy, redistributing income and wealth,
or promoting balanced development.
States find it difficult to retain hegemony for very long; once lost it cannot be
regained. But the few examples of hegemony that have existed raise interesting
questions about the nature of the world system and the conditions under which a
more permanent apparatus of central authority might emerge. Awareness of the
need for such central authority in the twentieth century has been keenest among the
elites of those states which have exercised hegemony. Such elites tend to think in
world-system terms, developing discourses which identify the requirements for
international political and economic stability.
Many of the most important geopolitical perspectives in the twentieth century have
as a result originated in Britain or the United States, 1 often displaying a set of
similar conceptions and concerns. Theorists like Alfred Mahan and Halford
Mackinder put forward the idea of a strategic partnership between the two states to
manage the world system and maintain world order. According to Mahan, 'the
United States has certainty of a very high other that the British Empire will stand
substantially on the same lines of world privileges as ourselves; that its strength
will be our strength, and its weakening an injury to us' . 2 As collaboration between
the two states developed, an influential strand of British political opinion came to
designate the United States not just as Britain's partner but as its natural successor
to the leading role in the world system.
These elites were motivated partly by cultural and ideological affinities, but also by
the perception that both states shared an interest in promoting the conditions for a
liberal international order. There were important differences between them, but
nonetheless, sufficient common ground to make collaboration possible and to
encourage the idea, particularly on the British side, of a project to transfer the role
and responsibilities which Britain had once exercised as a hegemonic power to the
United States. In this way a transfer of hegemony was engineered between the two
powers, which rested on collaboration rather than conflict. In the period of Britain's
decline as a hegemonic power, British elites became divided on whether British
security was best protected by an open world economy--which required acceptance
of United States leadership--or by maintenance of an exclusive sphere of influence
through its empire. The decisive historical choice, which Britain made in 1940 and
was confirmed by all governments since 1945, was in favour of the former. Its
most tangible symbol was the alliance with the United States. The importance of
being at the heart of an expanding world economy was in the end judged molt
important than the preservation of a regional sphere of interest.
It is in this context that the problem of British decline should be viewed. Some
historians have come to regard the explanation of British industrial decline as the
central problem of twentieth century British historiography. 3 But industrial
decline is only one aspect of a much bigger problem, the decline of Britain as a
world power. This decline is intimately connected to the question of hegemony. In
the course of the twentieth century Britain was displaced as a world power, losing
its empire and its commercial, financial, technological and ideological hegemony.
The industrial decline creates a particular puzzle--why having paid the penalty of
being the leader and having fallen behind, did it take Britain so long to catch up? 4
But this issue is inextricably related to the bigger question of how Britain gradually
relinquished the last vestiges of its own hegemony and accepted the hegemony of
the United States, emerging in the l940s as the principal ally of the United States, a
role which it has never since lost. There was nothing pre-ordained about this
outcome. Earlier in the century some observers, including Leon Trotsky, expected
there to be military conflict between Britain and the United States in order to settle
the question of world leadership, 5 Trotsky arguing that this was the way in which
hegemony passed from a declining power to a rising power. But no such conflict
took place. On the contrary so smooth was the transfer of hegemony between the
two powers that the last one hundred and fifty years can sometimes appear as a
single unbroken hegemony exercised by the Anglo-Saxons over the rest of the
world.
Hegemony
Hegemony has been defined in several different ways, but two are of particular
importance. The first is associated with world-systems theory, which challenged
the notion of discrete and autonomous national economic development associated
with modernisation theory. Instead, national economic development was
considered part of the development of capitalism, which from its very beginnings
was not a national but a world system. Capitalism according to world-systems
theory is based on two fundamental forces; firstly, an expanding division of labour
and a network of trade and finance which steadily draws more and more territories
and populations into relationships of exchange and interdependence; and secondly,
a competition between territorially based states, This competition developed
between the states with the greatest economic, military, technological,
administrative and cultural capacities at the centre of the world system, aimed at
the control and exploitation of less developed regions and populations in the
periphery. The complex interaction and competition between states, households,
ethnic groups, and business enterprises for comparative advantage makes the
capitalist world system highly dynamic. As Immanuel Wallerstein puts it: 'its life is
made up of conflicting forces which hold it together by tension, and tear it apart as
each group seeks eternally to remould it to its advantage'.6
The key feature of the world system is that as an economy it displays ever-greater
tendency to cohesion and interconnectedness, but as a polity it remains fragmented.
It has never been transformed into a universal empire, although one or two
adventurers in the last two hundred years have made the attempt. It has been united
more by economics than by politics, but the political disunity arising as it does in a
context of a dynamic and rapidly expanding cosmopolitan system of commerce
and finance, has also often been the spur to expansion, as well as resulting in a
highly unequal distribution of income and resources. Strong states arose to protect
and promote the national advantage of their citizens within the expanding global
economy.
This imbalance between the economic and the political in the world system
predated industrialisation, but industrialisation intensified it. In the international
state-system, nation-states have remained the focus of decision-making and
legitimacy; international institutions have been slow to develop and have not kept
pace with economic integration. Problems arise because international institutions
are needed to create and sustain the conditions for a global economic order. The
type of governance that is necessary to sustain national markets is also necessary
for global markets. States can enforce rates within the territories they control-the
problem is the exchanges, which spill over state frontiers.
A global economy requires the supply of certain functions if it is to function
satisfactorily. A global polity would be one means of providing these but it is not
the only one. Another alternative is that one of the states in the international state
system is so dominant that it exercises hegemony over the other leading states and
can either impose or get agreement to a system of international rights and norms.
Such a condition of hegemony develops when one state has such economic
supremacy that no other state or combination of states is able to challenge it
effectively. The main dimensions of economic supremacy lie in production
(technological lead), commerce (share of world trade), and finance (international
credit and currency). If a state enjoys supremacy in all three areas it possesses the
ability to exercise hegemony, and to some extent to assume state functions for the
whole of the world system as though it were the central authority.
The second perspective draws on the understanding of hegemony associated with
Gramsci. 7 The exercise of power entails the use of both coercion and consent, and
the most stable polities are those where consent is prominent. The focus is less on
the structural factors, which establish the possibility of hegemony as on the way in
which power is accepted as legitimate through ideological and cultural persuasion.
The emphasis is on how a particular conception of world order is created and
sustained through a myriad of agencies and organisations, and the incorporation of
many different interests into an overarching political project. The ideological
aspect of hegemony is what is most significant about it.
The hegemony that is based on the economic supremacy of individual states tends
to be short-lived, in part because of the existence of hegemony itself, If one state
has economic supremacy and uses it to promote an era of prosperity and advance
in the global economy, rivals will soon develop as other leading states organise to
close the gap in productivity, technology, mid investment. Such rivalry if it is not
held in check may produce increasing friction and eventually war. A second
problem is what happens to the hegemonic state itself. A tension develops between
maintaining a global role and preserving a strong economic capability through new
technology and investment. Paul Kennedy has pointed to a conflict, which arises
for such states between security, consumption, and investment, 8 leading to a
condition of imperial overstretch. The pressures for spending to boost public and
private consumption and military security tend to crowd out the pressures for
industrial investment. The elites in the hegemonic state become more interested in
attending to the problems of world order and managing the global polity than to
concentrating on the long-term needs of their domestic economy. In this way rivals
are assisted. They can free-ride on the back of the hegemonic power.
Periods of true economic supremacy have been short-lived, but once a state has
exercised hegemony it is usually reluctant to relinquish it. In the twentieth century
Britain sought to maintain its global role long after the conditions for the automatic
exercise of its hegemony had passed. Reflection on its failure prompted one of the
most influential arguments in favour of hegemony. Charles Kindleberger argued
that once the hegemon is no longer able to exercise its power, the result is conflict
and a breakdown of world economic order. He explained the 1930s depression in
this way. Britain was no longer able to enforce the rules of a liberal world order
and the United States was not ready to. 9
Britain's period of economic supremacy on which its hegemony was founded
developed after 1815. It established a clear lead in finance, commerce and industry,
and London was recognised as the undisputed centre of the worlds financial and
commercial system. By 1870 the London market was twice as large as the capital
markets of its rivals combined, and sterling had become the leading international
currency By 1914 British foreign investments had reached 4,000 million,
providing a render income of 200 million per annum. This economic supremacy
was not so dependent on a manufacturing export surplus, as once thought. Its real
basis was the surplus earned from financial and commercial services. Britain was a
commercial and financial power before industry developed, and the new wealth
and opportunities which industry brought were exploited within the framework of
the global relationships which had already been created. The wealth from industry
changed the balance of the British economy by making the preservation of
agricultural self-sufficiency unnecessary. The number of Britons fed on foreign
wheat rose six times between 1820 and 1850. 10
The commitment to free trade became the symbol of British policy in the middle of
the nineteenth century. It followed a commercial rather than an industrial logic.
British prosperity and the feeding of its growing population came to depend on the
maintenance of the network of trading relationships which now covered the whole
world and whose centre was London. Britain had a strong interest in preserving the
free movement of goods, capital and labour in this world economy when British
manufacturing industries enjoyed a technological lead over those in other
countries. What was more surprising was that Britain's attachment to this policy
took so long to diminish even when this lead began to be eroded.
British hegemony was different from American in several key respects. Britain was
dependent on trade to a much greater extent than the United Stales. It needed a
visible trade deficit rather than a visible trade surplus in order to stimulate
economic development in other parts of the world economy which boosted demand
for British banking, shipping, and insurance services. A policy of autarchy and
protection never made sense for Britain. The British national interest became
maintaining the openness of the world economy. For a long while the United States
had no such interest. It acquired one only later when it needed to find a way to
absorb the huge American visible export surplus. A second difference was that in
addition to its informal commercial empire, Britain had also acquired an extensive
formal empire, with direct administrative responsibilities, and this formal empire
continued to increase in size up to 1918. Britain's commitment to universalism and
the open world economy was qualified by its interest in protecting its sphere of
interest within the world economy. While the United Stales developed its own
sphere of interest it did not rule directly. The military commitment underpinning
the two hegemonies was also very different. The Pax Britannica required a naval
budget of only 8 million, 11 while the Pax Americana has seen the construction of
the most extensive system of military bases in the history of the world. US
hegemony has been exercised through a series of military alliances, whereas
Britain generally acted alone.
Britain's period of undisputed hegemony lasted through the middle decades of the
nineteenth century. In this period the ideal of a liberal world order, founded on
principles of global free trade, security of contract, and private property first took
practical shape. In the final decades of that century Britain faced a growing
military and industrial challenge from new rivals, particularly Germany and the
United States. Both moved to protect their new industrial sectors from British
competition and both contested the inclusion of so much of the world in Britain's
sphere of influence through formal colonial links and through the informal links of
investment and trade. At the same time both increasingly exploited the open access
to the British market which adherence to the policy of free trade allowed. The
impact of this on British politics was dramatic. It created the first great bout of
introspection about economic decline amidst fears that British industry could no
longer compete with the energy and technological sophistication of the Americans
and the Germans. 12
The challenge to Britain's position was both military and economic, and faced the
British state with a serious strategic dilemma. Either it had to come to terms with
its new rivals or it had to fight them. In the end it did both. The commitment to an
open world economy came under severe pressure. Britain defended itself by
seeking to enlarge its own sphere of influence. As Halford Mackinder explained:
'Under a condition of universal free trade, the dream of the sixties of the last
century, industrial life and empire might be dissociated, but when competing
countries seek to monopolise markets by means of customs tariffs, even
democracies are compelled to annex empires. In the last two generations ... the
object of vast British annexations has been to support a trade open to all the world'.
13
In the first decade of the twentieth century there was a major debate in Britain on
the merits of the formal as against the informal empire. At the height of Britain's
hegemony in the middle decades of the century, the claims of the formal empire
were much diminished. At its crudest, the case for free trade imperialism was that
foreign nations could be made valuable colonies without the expense or
responsibility of governing them; 14 but there was also an argument of principle.
In a memorandum written in 1907 Eyre Crowe argued: 15
Second only to the ideal of independence, nations have always cherished the right
of free intercourse and trade in the world's markets, and in proportion as England
champions the principle of the largest measure of general freedom of commerce,
she undoubtedly strengthens her hold on the interested friendship of other nations,
at least to the extent of making them less apprehensive of naval supremacy in the
hands of a free trade England than they would in the face of a predominant
protectionist power
The alternative view was put by those like Milner who thought that Britain's
priority should be the development of its Empire, whatever the consequences for
the open world economy. They argued that the best way for Britain to retain its
naval supremacy was through a protectionist economy, which safeguarded the
British manufacturing base. Joseph Chamberlain and Alfred Milner spearheaded
the attack on free trade: 16
Let us free ourselves from the insane delusion that a nation grows richer by buying
outside its borders what it can produce within them. It is not a blessing when, in
the blind worship of cheapness, we undermine our own industries. Now is the time
to strike a blow to free ourselves from the shackles of an antique creed, to open the
door, which has been banged and barred against our fellow-countrymen in the
Dominions.
Anglo-American Collaboration
The transfer of hegemony between Britain and the United States went through
three stages. In the first stage, from the early years of the century until 1940,
Britain acquiesced in the United States establishing its own sphere of interest in the
Americas; British and American interests came to be treated as complementary
rather than as antagonistic. Britain continued to rule its Empire but ceded priority
to the United States in South America and parts of the Caribbean. Each power
might thus enjoy its own sphere of interest and co-operate in the task of
maintaining international order.
The key episodes, which marked the beginning of this stage, which was so crucial
for later developments, began in the 1890s. In 1895/6 Washington intervened in a
boundary dispute between Venezuela and British Guyana, and after reflection
Britain conceded the right of the United States to do so. It was followed by
Britain's decision to give up its half share in the planned isthmian canal and to
withdraw its navy from the western hemisphere. No formal treaty was ever signed
but Britain through its actions recognised the United States declaration that the
Americas lay within its sphere of influence. There were strategic, economic, and
ideological reasons for this decision. The option of opposing the rising power of
the United States was considered but quickly rejected. In 1901 the Admiralty,
asked to advise on the feasibility of a war against the United States, replied that
command of the American seas would only be possible if the neutrality of the
European powers could be assured. 17 Since this was impossible it underlined that
Britain needed the friendship and co-operation of the United States and needed to
ensure that the United States was at least neutral in any European conflict in which
Britain became involved.
The strategic argument was reinforced by economic and ideological factors. The
two economies were closely linked. There were substantial British investments in
the United States and a large volume of trade, Neither side needed territory, which
the other controlled. There were many more advantages in co-operating than in
fighting. The common cultural and ideological heritage of the English-speaking
peoples was also beginning to be deployed, with the propagation of ideas of an
Anglo-Saxon race and the need for Anglo-Saxon unity.
The entry of the United States on the side of Britain and France in the First World
War was taken as a sign of the growing understanding between Britain and the
United States and evidence that their interests were compatible rather than in
conflict. But the war also demonstrated that the United States was potentially a
world power, not just a regional power, and this changed the relative position of
Britain and the United States irrevocably. After the war the United States insisted
that it should henceforward enjoy naval parity with Britain. One of the results of
the war was that the United States emerged as both the leading creditor nation, and
the leading industrial power in the world economy.
But despite the signs of the growing power and importance of the United States,
and the ambitions of some of its political class, symbolised by Woodrow Wilson's
commitment to build a new international political and economic order, the United
States was not ready to take a hegemonic role in the world system and moved back
to its traditional isolationist stance. The dislocation of the global economy by
World War I created a series of intractable problems in the way of recreating the
conditions for prewar prosperity, and these came to seem insoluble when the
international financial system collapsed in 1931, signaling the start of a long and
damaging slump. The growth of economic nationalism and the splitting up of the
world into protectionist currency blocs in the 1930s demonstrated sharply both the
desirability of an international economic order and also the difficulty of achieving
one without the co-operation of the United States. Alter the collapse of the gold
standard the world economy fragmented into currency blocs and protected spheres
of interest, which reduced trade and output and contributed to the rise of regimes
committed to the redistribution of territory by force.
The second stage in the partnership between Britain and the United States was
initiated by the alliance between Britain and the United States to fight Germany
and Japan in the Second World War, which was preceded by the Lend-Lease
agreement. The formation of a Coalition Government in Britain and the decision to
abandon appeasement and to wage all-cut war necessitated a sharp break with both
the domestic and the foreign policies of British governments in the 1930s. The
dependence of Britain upon the United States, which began with the Lend-Lease
agreement, was much more marked than in 1914-18. The United States demanded
a high price for its support. The Atlantic Charter, agreed in 1941, set out plans for a
reconstruction of the international economic order on universal principles, which
implied the dismantling of all protected spheres of interest, including the British
Empire. Much of the drive behind United States thinking came from the State
Department under Cordell Hull. He described the 1932 Ottawa agreements, which
had established imperial preference within the British Empire. as 'the greatest
injury, in a commercial way, that has been inflicted on this country since I have
been in public life'. 18
The Atlantic Charter was a key statement of United States policy, marking a turn
away from the sphere-of-interest politics which had dominated the 1930s. At that
time the United States accepted the political division of the world market and had
even floated the idea of a super bloc--the Grand Area--which would have included
the Americas, Britain and the British Empire, and much of East Asia, including
China and Japan. This bloc was intended to counterbalance Germany and the
Soviet Union. 19 With the entry of the United States into the war, more ambitious
ideas were floated. The Grand Area was now envisaged as the basis for a
reconstructed world order under United States leadership. Germany and the Soviet
Union were both included within it on condition that they along with Britain and
Japan agreed to give up their protected spheres of interest. In the case of the
European powers, a particular concern of the United States was that they should be
forced to give up their colonies.
The United States Government was divided between those who favoured a special
relationship with Britain in order to build a stable international economic order,
and those who were against making any concessions to Britain that were not made
to all other countries. This difference of view made negotiations over the shape of
the postwar order protracted, and many of the more ambitious plans were never
realised. The hopes for an early resumption of multilateral trade and convertible
currencies had to be postponed. The British and US delegations at Bretton Woods
put forward different plans, and the final compromise was shaped more by the
latter than the former. It was still attacked in both countries. In the US there was a
strong lobby, which opposed any departure from the principles of sound finance,
and supported the re-establishment of the gold standard, because this would rule
out any discretionary rules aimed at providing credit for countries which were
constantly in deficit.
The British view was different. The collapse of the international financial system
between the wars had left deep scars. There was strong attachment to the policy of
maintaining a protected sphere of interest as the foundation for international
economic order, and scepticism that order could be restored on the basis of the old
universal principles. Support for protectionism was especially solid among the
supporters of tariff reform in the Conservative party, but it had become the
dominant view in the Labour party as well. The decline of the Liberal party meant
that support for the old principles was much weaker. But certain fundamentals had
not changed, and the liberal tradition was still powerful. Many Liberals like
Keynes himself had become advocates of bilateralism in the 1930s because of the
severity of the slump, but once the opportunity presented itself for a reconstruction
of international economic order along liberal lines even if under American
leadership, Keynes had no hesitation in recommending what the choice should be
for Britain. As he told the House of Lords:
To suppose that a system of bilateral and barter arrangements is the best way of
encouraging the Dominions to centre their trade on London, seems to me pretty
near frenzy. As a technique of little Englandism, adopted as a last resort when all
else has failed us, with this small country driven to autarchy, keeping to itself in a
harsh and unfriendly world, it might make more sense. But those who talk this
way, in the expectation that the rest of the Commonwealth will throw in their lot
on these lines and cut their free commercial relations with the rest of the world, can
have very little idea of how this Empire has grown or by what means it can be
sustained. 20
After 1945 there was a close collaboration between Britain and the United States in
rebuilding an international economic and political order, but there were important
differences between the two powers. As the emergent hegemon, the United States
pressed for as full and complete a liberalisation of international economic relations
as possible. As the former hegemon, Britain favoured a period of transition in
which it would only gradually relinquish its sphere of influence and would still be
able to retain control over large parts of its colonial empire. But Britain supported
the United States' aim of recreating an open multilateral trading economy, seeing
the advantages of re-establishing sterling as an international currency and
rebuilding the financial and insurance services of the City, as well as Britain's
overseas investment portfolio.
The early move to achieve convertibility and multilateralism had failed by 1947,
and the United States instead launched Marshall Aid to help rebuild the shattered
European economies and prevent any more being absorbed into the Soviet sphere
of influence. The objectives of Bretton Woods were eventually achieved, but much
later, in the 1960s. Britain sought close partnership with the United States in both
the military and the economic sphere. But the partnership was always an unequal
one and became more unequal as time went on, partly because Britain seemed to
retain many of the disadvantages of being a hegemon without any longer enjoying
the advantages. The burden of overseas military spending and an overvalued
currency contributed to the neglect of long-term investment in domestic industry.
British economy and society were not reorganised successfully to allow Britain to
compete effectively within the new expanding world economy. Hegemony was
transferred, international economic order was rebuilt, but in the first four decades
after the end of the war, Britain was one of the casualties rather than one of the
beneficiaries.
Conclusion
Reading the voluminous literature on British industrial decline, a visitor to Britain
in the 1970s or 1980s might have expected to find a country in economic collapse,
with large absolute falls in living standards. But although particular groups and
sectors have experienced absolute declines, the general experience is not one of
absolute decline at all. On the contrary the economy has made steady progress
throughout the century, and will produce three to four times as much wealth in
2000 as it did in 1900.
If there has been any economic decline at all, it has been a relative decline, a
decline that can only be observed when the performance of the British economy is
compared with the performance of similar economies. Whether it makes sense to
compare the performance of national economies as though they were single
organisations with a directing will has often been questioned. But it has become a
staple part of political debate. The relative decline of the British economy has been
a constant theme in political debate in Britain since the 1880s, and at certain times,
particularly in the early 1960s and 1970s, has been a central and obsessive theme.
Even if it were concluded that decline was an illusion lacking any objective basis
in reality it would still be necessary to explain why such a large part of Britain's
political elite interpreted British experience in the twentieth century as one of
decline.
The argument of this chapter is that this question can be answered once it is
understood that the question of decline only makes sense by considering the
interrelationship of the relative economic decline and the absolute decline in world
power. It was always the absolute decline that mattered most to the British political
elite, and measures to stave that off and preserve Britain's traditional global role
always took preference over the task of modernising the British economy and
British society. The way which the British found to preserve their global role long
after the economic and military conditions for their hegemony had been eroded
was the preservation of the empire. But ultimately Britain was obliged to choose
between its empire and the reconstruction of an international economic order,
which Britain could no longer hope to dominate. Britain chose the latter, but was
always divided by it, and remained encumbered by its traditional aspirations. Until
the 1980s the British political elite failed to draw the radical implications of the
choice it made in the 1940s.
In terms of its importance and capacities as a great power, Britain's position in
2000 will be much reduced compared to 1900. The historical puzzle is not so much
why it happened, but why it was relatively so smooth, and to what extent the
smoothness of the process contributed to the difficulties Britain found in
maintaining economic competitiveness. There is a rich vein of academic writing on
decline, which has explored this idea. Stephen Blank argued that Britain's post-war
decline was due to the choice of an inappropriate foreign economic policy, which
gave priority to the protection of Britain's traditional global role--foreign
investment, overseas military bases, and a high exchange rate for sterling-at the
expense of industrial investment and economic modernisation. 21 What such
approaches suggest is that the phenomenon of decline in a state which is or has
been hegemonic has its own special character. An imperial state whose elite has
become accustomed to thinking in global terms views poor domestic economic
performance, its causes and its remedies, in a particular way. The political debate
on British decline lasted from the 1880s to the 1980s, but the context of hegemony
and empire, which gave it significance, is now no more. Decline is unlikely to
haunt the British political imagination in the twenty-first century as it did in the
twentieth.
Notes
1. Parker, G. (1985), Western Geopolitical Thought in the Twentieth Century.
London.
2. Van der Pijl, K. (1984), The Making of an Atlantic Ruling Class, London, p. 53.
3. See for example Wiener, M. (1981). English Culture and the Decline of the
Industrial Spirit, 1850-1980.
4. There is a long literature stemming from Alexander Gorschenkron's analysis
(1962) of the politics of economic development; Economic Backwardness in
Historical Perspective. Cambridge.
5. Trotsky, L (1974), Collected Writings and Speeches on Britain, London, New
Park
6. Wallerstein, I. (1974), The Modern World System. New York, p. 347.
7. See especially the work of Cox, R. Production, Power, and World Order,
and Approaches to World Order. Cambridge.
8. Kennedy, P. (1988). The Rise and Fail of the Great Powers. London.
9. Kindleberger, C. (1973), The World in Depression, 1929-1939. Berkeley; see
also Gilpin R. (1987), The Political Economy of International Relations. Princeton,
New Jersey.
10. Semmel, B. (1970), The Rise of Free Trade Imperialism. Cambridge.
11. Kennedy. P. (1983), Strategy and Diplomacy 1870-1945, London.
12. Gamble, A. (1994), Britain in Decline: Economic Policy, Political Strategy,
and the British State, London, pp. 12, 26.
13. Mackinder, H. (1902), Britain and the British Seas, London, p. 343.
14. Semmnel, The Rise of Free-Trade Imperialism, p. 8.
15. Gardner, R.N. (1956), Sterling-Dollar Diplomacy, Oxford, p. 27.
16 Lord Milner, speech at Huddersfield, February 17th, 1910.
17. Watt, D.C. (1975), Personalities and Policies, London, p. 27.
18. Gardner, R. N., Sterling-Dollar Diplomacy, p. 19.
19. Van der Pijl, The Making of an Atlantic Ruling Class.
20. Gardner, R.N., Sterling-Dollar Diplomacy, p. 125.
21. Blank, S. (1977), 'The Politics of Foreign Economic Policy', International
Organisation, 31 (4), pp. 673-722.