Understanding International Relations, Third Edition

Global economic institutions: Bretton Woods and after
In terms of global governance and the undermining of sovereignty, the EU is
the most ambitious of contemporary international institutions, but on the
world scene, an almost equally impressive set of institutions exists. Some
historical background is necessary here. Before 1914 the world economy
was nominally ‘self-regulating’; in practice British economic power provided
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a degree of actual regulation but most countries were on the gold standard,
which meant no elaborate international monetary institutions were neces-
sary and trade was relatively free, in accordance with the dictates of eco-
nomic liberalism (to be discussed further in the next chapter). This economy
collapsed under the strain of war – with most of the participants imposing
physical controls on exports and imports and going off the gold standard,
ending the direct link between their currencies and the price of gold – but
the intention was that this would be temporary and that the old liberal
international economy would be re-established after the war was over. This
proved impossible and after a brief interlude of prosperity in the 1920s, the
Wall Street Crash of 1929 and bank failures in Europe in 1930 and 1931,
virtually all countries introduced high levels of protection for their trade,
and extensive monetary controls.
The leader of the old system, Britain, left the gold standard for good in
1931 and in 1932 established a system of Imperial Preferences, at last aban-
doning free trade and following the lead of the highly protectionist
Hawley–Smoot Tariff which the United States Congress had passed in 1929.
Between 1929 and 1933 trade crashed world-wide, declining by the latter
year to less than one-quarter by value of its 1929 figure. The Great
Depression of the 1930s was trade-led – unlike, for example, the recessions
of the 1980s when trade actually increased year on year, even when overall
output fell. When recovery began in the 1930s it was on the basis of trade
blocs – the Dollar Area, the Sterling Area, the Gold Franc Area and so on –
and with much resort to bartering, usually on a basis which reflected polit-
ical power rather than economic advantage, as with some of the barters
arranged by the Nazis in the late 1930s whereby, say, Romania would be
obliged to exchange its oil for cuckoo clocks and other inessentials. In the
collective memory of the world capitalist system this whole period was a
disaster, and it remains the case that the memory of the Great Depression is
one of the factors that promotes cooperation in the world economy today.
On some accounts, it was a lack of leadership that produced the
depression – Britain no longer had the ability to lead, the United States had not
the will. In any event, by the mid-1930s the United States was already taking
the initiative at international trade conferences, and with the coming of the
war and the establishment of the United States as the arsenal of democracy
and the world’s leading financial power, America was in a position to
determine the future shape of the world economy, along with its now junior