I. Main Argument/Summary:
a. Helleiner argues that the liberalization of financial markets worldwide has been driven largely by government choices, not by technological change or economic pressures. American and British government decisions not to intervene when financial actors were developing the Eurodollar market underwrote the first step. Governments could have reversed the growing capital mobility of the late 1960s and 1970s had they so wished. While unilateral capital controls might not have worked, Cooperative capital controls' might have. Governmental decisions not to pursue these measures - 'non-decisions' - allowed the internationalization of financial markets. Finally, when crises appeared which could have destroyed the new global financial system, governments acted to prevent or minimize them.
i. Based on hegemonic stability theory
ii. US was hegemon in financial world and acted to support liberalization
a. A synthetic political history account of globalization
b. Answer the question: Why has such an open international financial order emerged in an era when states have retained numerous restrictive trade practices?
c. Since trade and finance have taken such different paths, maybe finance is separate from politics – since politics rules trade.
d. 4 explanations for widespread use of capital controls and the wariness of states to accept a liberal international financial order in the early post-war period (ie restrictive Bretton Woods regime)
i. The use of capital controls was prompted by prominence of an embedded liberal framework of thought in this period
1. Capital controls were necessary to prevent policy autonomy of new interventionist welfare state from being undermined by speculative and disequilibrating international capital flows.
2. To make finance the servant rather than the mater in economic and political matters
ii. Widespread belief that a liberal international financial order would not be compatible with a stable system of exchange rates and liberal international trading order
1. Stemmed from experience with destabilizing monetary flows in postwar era and belief that different aspects of liberal international economic order are not necessarily compatible
iii. Sympathetic attitude adopted by the US towards the use of capital controls in W.Europe and Japan – stemmed from American strategic goals after 1947; US was reluctant to alienate W.European allies during cold war, but also supported financial intervention as part of larger effort to promote growth.
iv. US wanted to receive European capital, which went from Europe to US after war, because US was the primary lender, and wanted the money.
e. Six market developments helped global financial markets reemerge
i. Restoration of market confidence in the safety of international financial transactions in the late 1950s
ii. Rapid increase in the demand for international financial services that accompanied the growth of international trade and MNC activity in 1960s
iii. Private banks responded quickly to the global financial imbalances caused by the 1973 oil price rise, encouraging deposits from oil-producing states and the borrowing of those funds by deficit countries
iv. The adoption of floating exchange rates in early 1970s encouraged market operators to diversify their assets internationally
v. The disintegration of domestically focuses postwar financial cartels in the later 1970s and early 1980s forced financial institutions to enter the international financial arena to supplement their decline domestic profits; and evade domestic regulations.
vi. The market options created in the competitive atmosphere – options, swaps, currency and interest rate futures – reduced the risks and costs of international financial operations.
f. According to 6 reasons above –states have played a minor role in international finance – and have been unable to stop the trend because they cannot control international capital movements b/c money is mobile and fungible
g. But you must answer how were the actions and decisions of states important to the globalization process and why did the states increasingly embrace an open liberal international financial order after having opposed its creation in the early post-war years.
i. States made three types of policy decisions in late 1950s that were important to globalization
1. Grant more freedom to market operators through liberalization initiatives
a. First evidenced in 1960 when US and Europe supported growth of Euromarket
b. 1974 – US initiated liberalization trend by removing the various capital control it had
c. 1979 – Britain followed Americans
d. Copied by other advanced industrialized nations in 1980s
2. Refrain from imposing more effective controls on capital movements
a. Bretton Woods had 2 specific mechanisms
i. Capital controls could be made to work through cooperative initiatives at both ends
ii. Evasion of capital controls could be prevented through the use of comprehensive exchange controls where all transactions were monitored for illegal capital flows
b. These made it into Bretton Woods, but states decided not to use them later
c. Ealry 1970s – speculative capital flows threatened Bretton Woods stable exchange system – Everyone except US wanted cooperative controls, but US said no, and asked other countries to agree with it. Without US support, the desire for control faded.
d. Late 1970s and early 1980s: British and French governments debated, and discarded, the notion of having tight exchange controls. US, during dollar crisis in 78-79 considered and rejected capital controls (showed US commitment to emerging financial order) Fed also tried to get Euromarket countries to intervene in 1980, and was turned down.
3. Prevent major international financial crises
a. If financial crises were uncontained, they would bring down the liberal financial order and cause people to retreat to domestic arenas.
b. Three major crises: 1974 (international banking crisis), 1982 (national debt crisis, 1987 (stock market crash) – states acted to contain them through lender of last resort action; extension of emergency assistance to institutions, countries and markets experiencing the problems.
h. Why did states support globalization?
i. Attempt to preserve Bretton Woods order met with several political difficulties
1. Creation of Euromarket showed ease of subverting Bretton Woods system
2. By deregulating, US and Britain encouraged competitive deregulation from others in order to gain access to deregulated capital and $$
3. Bretton Woods mechanisms for capital controls were un-implementable
ii. Strong interest of US and Britain, after late 1950s, in promoting a more open international financial order
1. Us became a hegemon and didn’t want to give up power, even when it was a decreasing hegemon, so they opened markets to become important to global economic order and keep power.
2. As Britain and Japan grew in financial importance, they wanted a more open financial order
iii. Increasing rejection of the embedded liberal framework in favor of neoliberal framework
1. Neoliberals advocated for liberal international financial order because it would enhance personal freedom and promote a more efficient allocation of capital (int’l and domestic)
2. Neoliberals also rejected Bretton Wood’s two capital controls because: didn’t think that speculative capital would disrupt exchange rate because they believed in a floating exchange rate and didn’t want to preserve autonomy of interventionist welfare state – they wanted freer domestic markets and more orthodox fiscal and monetary policies.
3. Took place in 1970s-1980s; Helped by Friedman and Hayek – supported by social groups
iv. The important cooperation of central bank officials from G-10 countries in preventing major international financial crises was aided by the existence of an increasingly sophisticated regime based around Bank for International Settlements (BIS)
1. Feared instability and crises in the new global financial markets – by central bankers
2. To prevent such crises they cooperated closely
3. And used BIS to help reduce international financial instability
4. Norms rules and procedures established with central banks through BIS meetings diminished problems of collective action involving global financial stability and wasn’t associated with Bretton Woods
i. Why have states acted so differently in trade and finance?
i. The unique mobility and fungibility of money ensured that policy makers were not faced with the same collective action problems in creating and maintaining an open financial system as exist with an open trading system
1. An open financial system could be created, unilaterally, by a state who provided its financial market operators an extra degree of freedom – like Britain and US did.
2. The competitive deregulation process allowed other states to deregulate as well
3. Maintain an open financial system doesn’t have collective action problems because you don’t need an organization to police it, like you do with a trade regime.
4. When there are collective action problems: international lender of last resort actions and international prudential supervision and regulation – the problems can be centered around the BIS which people were already working with.
ii. The hegemonic interests of US, Britain, and Japan have allowed them to assume a lead and they displayed enthusiasm for an open, liberal financial system – they had a hegemonic interest in finance that they didn’t have in trade.
iii. Neoliberal advocates had more influence in the international financial sector than the trade sector because of the relatively low domestic political visibility of financial liberalization – because of the seemingly complex and highly technical nature of international finance issues
iv. There is a relationship between finance and trade; a liberal financial order isn’t necessarily compatible with a liberal trading order.
1. Bretton Woods organizers thought that speculative capital movement would disrupt trade patterns and encourage protectionism. Recent experience has born out these fears – a little.
v. There are three broad theoretical issues that result from these differences in state behavior
1. States may be more likely to embrace an open, liberal order in some sectors of the international economy than others because of inherent sector-specific characteristics.
a. Such an order was easier for money than for trade because of the unique mobility of money, the fungibility of money, the relatively cooperative attitude of central bankers and the low domestic political visibility of the issues in financial liberalization
2. The leadership of the Us, Britain, and recently Japan, promoting globalization suggest that hegemonic states do play an important role in the creation of a liberal international financial order.
a. Three qualifications of traditional hegemonic stability theory:
i. US hegemonic behavior in finance was driven by less benevolent objectives than predicted by some versions of the theory
ii. The Japanese and British roles can be understood only by allowing for leads and lags in hegemonic behavior
iii. The concept of a hegemony must be differentiated by sector because each state’s hegemonic interest in financial openness did not correspond with its interests in trade.
3. The apparent incompatibility of liberal orders in trade and finance suggests that IPE scholars should be careful when describing the structure of the international economy as a whole during any given period.
j. Three broad arguments in the book:
i. Globalization cannot be seen as a direct product of the early postwar international economic order. Rather the states were – in the 1940s and 1950s – committed to a restrictive financial order outlined at Bretton Woods because of the strength of an embedded liberal framework of thought, US strategic goals in the cold war, and the need to sacrificie financial liberalism in order to promote free trade and exchange rate stability.
ii. Advanced industrial states have played an important role in the globalization process since the late 1950s by:
1. Granting freedom to market operators – both through encouraging growth of the Euromarket in the 1960s and through liberalizing capital controls after the mid 1970s
2. Choosing not to implement more effective controls on capital movements in the early 1970s and four instances in late 1970s/early 1980s
3. Preventing three major international crises in 1974, 1982, and 1987.
4. The support of industrial states can be explained by the political difficulties involved in implementing more effective controls and in preventing unilateral liberalization moves, the hegemonic interests of the US/Britain/Japan in creating and maintaining a stable/open international financial order, the growing influence of the neoliberal advocates in international financial policy making and the existence of an increasingly sophisticated regime centered around the BIS designed to prevent and contain international financial crises.
iii. States embraced more open liberal international finance order at a time when they retained numerous restrictions on trade because:
1. The mobility and fungibility of money ensured that the collective actions necessary to create and maintain an open trade order were less relevant in finance
2. The BIS-centered regime drew strength from the fact that central bankers, unlike trade officials, exhibited many of the characteristics of a transnational epistemic community
3. The US, Britain, Japan supported the globalization trend in finance particularly strongly because their power and interests in trade and in finance differed
4. Neoliberal advocates were able to exert strong influence in finance in part because of the low domestic political visibility of the issues
5. State behavior in trade and finance may be related, but not the same.
III. The Restrictive Bretton Woods Financial Order: 1944 Bretton Woods Conference, US built an embedded liberal order in which restrictive economic practices were strongly endorsed.
a. The break with liberal tradition in international finance after 1931
i. Conferences at Brussels in 1920 and Genoa in 1922 – bankers called for a return to balanced budgets, independent central banks, free capital movements, and the international gold standard – led by bankers in London and NY who offered large loans to governments willing to adopt these policy changes.
ii. After 1929 the confidence in private bankers was deteriorated because of the stock market crash, worldwide depression, reparations and war debt problems, and large payment imbalances
iii. 1930 – created the Bank for International Settlements – a body that was supposed to facilitate central bank cooperation as well as to depoliticize the debt and reparations issue
iv. 1931 brought about an end of international capital markets and a break with liberal tradition in financial affairs; states began using capital controls as a permanent aspect of new interventionist economic strategies (Japan and Germany were first)
1. Britain came off gold standard
v. 1933 – FDR took the US off gold standard; shifted control of monetary policy from Fed to Treasury Dept
vi. The big thinkers in US (Morgenthau and White) and Britain (Keynes) wanted a more interventionist policy that would remove power from bankers.
b. Early proposals of Keynes and White
i. Both supported capital controls
1. International movements of capital could not be allowed to disrupt the policy autonomy of the new interventionist welfare state; wanted to protect domestic economic planning measures
2. A liberal financial order was not compatible with a stable exchange rate system and a more liberal international trading system – both of which they wanted to establish.
a. Capital movements cause fluxes in exchange rates
b. If capital could be moved, largely and suddenly, it would set of domestic economic concerns that would call for protectionism.
ii. Only opposed disequilibriating capital flows – equilibriating ones were okay. Equilibriating flows: from countries with a surplus to those with a deficit; also productive capital flows should be allowed. Productive flows: those that satisfy practical needs in international commerce and provide new interest for developing the world’s resources.
iii. Both thought the open financial markets should be sacrificed for open trading system.
iv. ways they proposed to control capital:
1. To prevent capital flows from being disguised as account transfers, each state was allowed to institute exchange controls to scree anll account transactions for illegal capital movements.
2. Counties should be able to increase the effectiveness of their capital controls by cooperating in the enforcement of each others regulations.
c. Bankers opposed these proposals because they saw them as removing business (capital flight from Europe to US was great for NY bankers) and capital controls would prevent NY bankers from benefiting from an open, liberal international financial market
d. Modifications of Early proposals:
i. Bankers succeeded in toning down obligatory cooperative controls
ii. The wording was changed to say that countries can use exchange rates to impede capital transfers, but not to restrict payments for current debts
iii. Governments were permitted to cooperate in controlling capital movements
iv. Only required to provide IMF on request with information on capital movements and holdings, except to the extent that such information would disclose the affairs of individuals or companies
e. Bretton Woods and the Endorsement of Capital Controls
i. Bretton Woods contained the capital flow restrictions from Keynes and White – although the NY bankers made cooperative enforcement optional.
ii. States were given the explicit right to control all capital movements
iii. States were permitted to use exchange controls to search for and prevent illicit capital movements.
iv. Embedded liberal thought in BW – priority to the defense of the policy autonomy of the new interventionist welfare state from international financial pressures
f. Continuing Caution: The Slow and Limited Move to Convertibility
i. The traditional argument is that after WWII the US used its power to create an open liberal international economic order – except for 1945-1947 this isn’t true.
1. In fact, US supported restrictive capital movements and didn’t encourage convertibility of currency
ii. Capital Flight and the Failure of the Key Currency Plan
1. When Truman took office, the bankers found themselves in favor again
2. Objective: pressure Britain to restore convertibility between the pound and the dollar – hoping that a stable relationship between these 2 key currencies would revive international trade and reestablish traditional patters of private international finance
3. In 1945 the US cut funding to Britain under Lend-Lease Act but promised sizable loan if Britain would make pound convertible w/in 18 months – Britain was facing serious financial crisis and accepted the loan.
a. By mid-1947 – a short six weeks after moving to convertibility, Britain had to put on tight exchange controls because there was massive speculation and caused another crisis
4. Bankers tried to transform Bretton Woods institutions (IMF/World Bank) into conservative to speed convertibility of other currencies.
a. Failed by mid-1947
5. Bankers also pushed to keep the BIS and not dissolve it
6. 1947 – fiscal crisis in Europe; balance of payment problems caused it and massive inflation
a. Capital fled Europe to US b/c of economic and political instability (estimates guess approx $4.3 billion)
7. Europe tried to control capital flight but couldn’t differentiate between a capital transfer and normal account activity – so had to resort to tightening exchange controls
a. US could’ve helped by enforcing capital controls in US against foreigners, but bankers didn’t want this and thought Europe could do it itself if it placed deflationary internal policies to attract the capital back.
iii. Marshall Plan Aide as Offsetting Financing
1. Marshall plan served to cover the funds that were lost to European countries by capital flight to the US.
2. Offsetting financing -> where the European countries kept their currencies non-convertible to dollars, but borrowed in dollars to cover expenses; kept current and capital accounts in their currency -> so kept the money separate.
3. Most direct stipulation of conditionality in Marshall Plan -> the 6 members of the European Coal and Steel Community/EU had to work together to promote their community.
iv. Foreign Aid as leverage? Programs of late 1940s
1. April 1947 – First meeting of Mont Pelerin Society – neoliberal thinkers and political figures
2. US had chance to force convertibility in its economic aid programs – but didn’t really stress it all that much
v. European Dollar Convertibility in 1950s
1. The US laid foundation for the move to European convertibility through its stabilization programs (kind of, but not really)
2. More important was the British move, by financial figures, to multilateralism.
3. 1949 devaluation of currency in Europe helped balance of payments issue, permitting liberalization to occur in 1950s
4. US and IMF favored devaluation – but didn’t force it for fear of alienating people
5. Establishment of EPU in 1950 - restored limited convertibility in Europe and helped W.Europe achieve a more open system of trade and exchange payments.
a. 1953 - EPU pushed for dollar convertibility of member currencies
6. Although restoration of dollar convertibility was something that was wanted, the fear was still that capital would be at risk of massive capital flight, so American and Europe backed the restrictive Bretton Woods order to prevent the fear of capital flight
vi. Japanese Convertibility
1. American occupation control established a very restrictive system of exchange controls
a. Dodge plan: lets Japanese have a regulated economy and independent from US
b. Major US lending program to Japan in 1950s -> Korean War…the US needed a base to set everything up, and used Japan and paid for the privilege
2. 1954 – US recognized it needed to stress continued economic aid without pressure to liberalize Japan – and so the move to convertibility was finally left to Japanese authorities.
3. Rigid exchange controls were needed to prevent capital flight from undermining artificially low interest rates – which were promoting growth in Japan
4. Japanese companies and individuals had to be prevented from evading government’s credit restraints and borrowing abroad.
5. 1964 – Japan began to liberalize external financial relations; resorted convertibility and joined OECD – and accepted the code of liberalization
a. OECD Code of Liberalization – forced liberalization of capital movements
vii. Early post war years are commonly depicted as period in which the US used its overwhelming power to build a liberal international economic order – it didn’t do so in the financial sector
viii. 4 reasons:
1. NY bankers wanted more open financial system but they sabotaged their attempts by refusing to support attempts to curtail European capital flight.
2. Like Bretton Woods – US policy makers considered it necessary to sacrifice financial liberalism to prevent disequilibriating speculative capital movements from threatening the construction of an open trading order and maintenance of stable exchange rates
a. 1947 crisis confirmed this for policy makers
3. Policy makers continued to be influenced by embedded liberal thought
4. New Dealers found strong support for their approach to foreign economic policy among those concerned with US strategic goals in the cold war – sympathetic to embedded liberal ideas because of goal of promoting growth and political stability in Europe and Japan
ix. Developments confirmed the restrictive Bretton Woods in early postwar years
x. Several developments foreshadowed its unraveling:
1. Rise of neoliberal movement in Europe (1940s)
2. Decision to preserve BIS
3. 1947 crisis revealed the fundamental political difficulties of using Bretton Woods mechanisms to control disequilibriating speculative capital movements
4. Reorientation of British financial authorities in favor of multilateralism as an alternative to the protected sterling bloc (late 1940s)
IV. The Reemergence of Global Finance
a. Support for the Euromarket in the 1960s
i. Eurodollar market was created by private operators and actively encouraged by British financial authorities
ii. British restricted how much you could take out of the country for individual citizens (seen as a form of capital control)
iii. Represented goal of restoring London’s international position with the Keynsian welfare state and Britain’s deteriorating economic position
iv. Bank of England – 1962 – allowed the issue of foreign securities denominated in foreign currencies in London, promoting growth of Eurobond market.
v. Timed to replace NY as main capital trading when US instituted capital controls in 1963
vi. Basis of American Support for Euromarket
1. External deficit was rising, confidence in dollar was slipping, solution would’ve been to raise long-term interest rates but the domestic policymakers didn’t want to do that…..
2. July 1962: IET (interest equalization tax
3. 1964 – IET was extended to cover bank loans with a duration of one year or more as well as nonbank credits of one to three years
4. 1965 – Volentary export control to prohibit capital export by American banks and corporations
5. Reasons American support:
a. Provided a way for dollar to increase attractiveness to foreign holders
b. US banks were participating in Euromarket to a high degree b/c they didn’t like the controls placed by federal government on US transactions
c. US didn’t want to undertake adjustment measures with the deficit, so they turned to Euromarket to finance the deficits
vii. 1960s was transition decade for international finance
viii. Widespread use of capital controls and offsetting financing networks demonstrated that states continued to fear disequilibriating capital movements
ix. Britain and US promoted financial liberalization through unilateral action – which was more effective than anything else
b. Failed Cooperation in the Early 1970s
i. W.Europe and Japan tried to move towards a more closed financial order in early 1970s and failed
ii. The decision of everyone not to initiate cooperative capital controls signaled end of Bretton Woods
iii. States abandoned principle that liberal financial system should be sacrificed for stable exchange rates
iv. The floating exchange system stimulated international financial activity
v. The 2 mechanisms for capital control in Bretton Woods proved politically impossible to insist on
vi. Neoliberalism emerged as new school of dominant economics
vii. US support for new neoliberal policies was because
1. Wanted to keep hegemonic power in finance
2. Wanted to keep autonomy – which meant keeping power
3. Economic troubles of era made embedded liberalism of Bretton Woods less attractive
4. Leadership and coalitions of neoliberal and financial institutions emerged
c. Four Turning Points in the Late 1970s and Early 1980s
i. There were four financial crises
ii. If Britain, US, or France had reinstituted capital controls in any of these cases, then liberalization of finance would have been set back – but they didn’t
iii. Reasons that Bretton Woods was abandoned and no one reinstituted capital controls
1. Serious political difficulties in putting capital controls into place
2. People didn’t like the embedded liberal thought anymore, and were shifting to neoliberalism
3. Recognition by US policy makers that US would benefit from emerging open international financial order because of their position in the order
a. Dollar crisis of 1978-79 undermined US autonomy
b. But hadn’t lost power compared to the position of other states
c. Volcker’s stabilization plan (no capital controls, austerity policy, disinflationary tactics) and Reagan’s economic policy show how US was still dominant in international finance
d. The Liberalization Trend in the 1980s
i. Extensive liberalization initiatives throughout OECD
ii. OECD countries extended Code of Liberalization of Capital Movements to cover all international capital movements – May 1989
1. No enforcement capability
2. It produces report of preferred policy to influence governments
3. They come up with the multilateral agreements on investments which was supposed to put neoliberal policies in WTO and it derailed because it was leaked to NGOs
iii. Three explanations:
1. Hegemonic interests of US (existing), Britain (fallen), Japan (rising)(world financial hegemons)
a. Open international financial system would help US gain foreign support to finance internal and external debts
b. Britain – still committed to London as a center of financial power – lagging hegemon
c. Japan – financial liberalization reflected their rising hegemonic status and was a “leader” on its way up and knew financial liberalization would help it on its way up
2. Competitive deregulation dynamic
3. Policy shifts from embedded liberal to neoliberal trains of thought
e. Weathering International Financial Crises
i. Central banks really played a role, as did US dominated institutions
ii. States can really shape financial world – if they wanted to.
a. Explaining Differing state Behavior in Trade and Finance
a. While the political side of the story is well told, the technological and competitive sides are underplayed. The Carter administration rejected capital controls in 1979, not so much because of the growing importance of neoliberal ideas, as the author suggests, but because of the practical infeasibility of using them without a full panoply of exchange controls, which have been politically unacceptable (as well as undesirable for trade) except in wartime.
b. Policymakers also recognized that technology makes the locus of financial transactions geographically footloose: Switzerland, Luxembourg, Singapore, and Bermuda thrive by offering alternatives to the financial regulations of other countries. The demands on international cooperation to carry out a system of capital controls would be formidable; the issue would have to be elevated to a top priority in U.S. foreign policy, and even then might not succeed.
c. The author explains and interprets what he sees as the divergence between international capital movements (virtually free) and foreign trade (still restricted). But this view is myopic. It is true that foreign trade is not free of restrictions, for reasons that are well explained. But the book ignores the tremendous liberalization of trade that has occurred over the past 40 years, and is likely to continue with the European single market, NAFTA, and the Uruguay Round. In truth, there has been much more parallelism than divergence.