Two Hegemonies: Britain 1846-1914 and the United States 1941-2001

8/10/2019 Two Hegemonies: Britain 1846-1914 and the United States 1941-2001

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Robert Gilpin, "The Rise of American Hegemony," in Two H egemonies:Br itain 1846-1914 and the Uni ted States 1941-2001 edited by Patrick KarlO'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 IIhas been the subject of many scholarly and conflicting analyses. At the core of thedifferent views regarding America's central position in international affairs overthe past half century has been the relationship of American primacy and the worldeconomy. 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 tothis 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 notlogically connected to one another. In the opinion of Marxists and leftist writers,on the other band, politics and economics are intimately linked. The insatiabledesire 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 ModernWorld 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 profoundinfluence over the nature and functioning of the international economy. A principalexpression of the perspective is what has been called the theory of hegemonicstability.

The Theory of Hegemonic Stability

According to 'the theory of hegemonic stability', as I am using it in this article, thecreation and maintenance of an open and liberal world economy such as the onethat has characterised most of the world economy since the end of World War IIrequires a powerful leader. This leader uses its power and influence to promotetrade liberalisation and a stable international monetary system primarily in order toadvance its own political and economic interests. The leader, however, can seldomcoerce reluctant states to obey the rules of a liberal international economic orderand 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 managingthe world economy following World War H, it did so with the strong co-operationof 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 CharlesKindleberger in his book The World in Depression, 1929-1939 (1973). 1 The


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existence of a liberal international economy, Kindleberger argued, required a political leader that could and would use its influence to create the internationaleconomic system and subsequently to perform a number of necessary economicfunctions to keep the system working efficiently. In The World in Depression and

other writings, Kindleberger identified and discussed at length the tasks that theleader of the world economy must carry out. These tasks of the hegemon thatinclude the creation and maintenance of a liberal trade regime, the establishment ofthe 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 ofthe 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 liberalworld economy results in increasing trade protectionism and violations of the

regimes governing trade, monetary, and other forms of international commerce Inthe 1990s, an extremely important manifestation of the relative economic declineof American economic power has been the growing tendency for the worldeconomy 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 economycan be demonstrated by an examination of the British and American eras ofinternational leadership.

Kindleberger's basic ideas on the importance of a political leader for internationaleconomic 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 ofhegemonic 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 itsobjective; more specifically, a hegemon is the leader of an alliance such as the oneorganised by Sparta to defeat the Persians in the fifth century B.C. In addition,whereas Kindleberger argued that the leader created a liberal internationaleconomy 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 leaderwere primarily economic, political scientists argued that these interests were notonly economic but also political. Despite these differences between Kindleberger'sliberal version of the theory and the political scientist version, both versions statethat the provision of international collective (public) goods such as free trade andmonetary stability requires a dominant power with an interest in a liberal worldeconomy and a willingness to expend economic and political resources to achieveand 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


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Britain led the efforts for trade liberalisation and monetary stability. Similarly, theUnited 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 capitalmovements, and a stable monetary system based on the gold standard; theAmerican system comprised only the 'Free World' and has been characterised bytrade discrimination, capital controls until the mid-l970s, and monetary instabilityafter 1971. Whereas the British promoted and inspired free trade through a seriesof bilateral agreements, the United States championed trade liberalisation throughmultilateral negotiations in the GATT. International security considerations, that is,the forging of the Western alliance against the Soviet Union, played a crucial rolein America's promotion of free trade. Although the Bank of England played acentral 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 newdevelopments with a gradual retrenchment of its global position and initiation ofnumerous measures to strengthen its security. Although Great Britain modified anumber of its economic policies, its huge dependence on trade forestalled a retreatinto protectionism. British leadership in trade liberalisation slackened, and by the1930s Britain bad retreated to a system of imperial preferences. As early as themid-1970s, concerns over the relative decline of the American economy and thedamaging effects of international competition on American industry wereexpressed by American political leaders, business interests, and scholars. Thesechanges produced the New Protectionism; as formal tariffs were reduced throughtrade negotiations, the United States erected such non-tariff barriers as thoseembedded in the Multi-Fiber Agreement, in which many nations were assignedquotas, and imposed 'voluntary' export restraints on Japanese automobiles. Inresponse to the ballooning American trade deficit intensifying fears ofdeindustrialisation, and rising protectionist pressures, the Reagan Administration in

the mid-1980s significantly modified America's postwar commitment tomultilateralism. The Administration began to pursue a multitrack trade policy thathas not only de-emphasized multilateral negotiations, but also increasedunilateralism and bilateralism (especially 'managed trade' with Japan) andeconomic regionalism as well (in the North American Free Trade Agreement withCanada and Mexico). My concern in this article, however, is the rise of Americanhegemony 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 newinternational order that it wished to create. The so-called Rooseveltian vision,


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named after President Franklin Delano Roosevelt, had several elements. TheUnited Nations and particularly the Security Council (including the five permanentmembers) would be responsible for guaranteeing the peace. In addition, the BrettonWoods conference (1944) proposed that a constellation of novel economic

institutions, which were to include the International Monetary Fund (IMF), theInternational Bank for Reconstruction and Development (World Bank), and theInternational Trade Organisation, should be responsible for promotion andadministration of an open and multilateral world economy; with the eventual defeatof the International Trade Organisation by the United States Congress, the UnitedStates and its economic partners established the General Agreement on Tariff andTrade (GATT) as a negotiating forum although not as a full-fledged internationalorganisation. The postwar international order was to be based on the AtlanticCharter and its Four Freedoms (today's 'human rights') in whose name the UnitedStates and its allies had fought the war. Within this structure, the victors would

build the peaceful, prosperous, and humane world that had eluded mankind afterWorld War I. As we know at the turn of the century, not all of these worthyobjectives would be achieved.

Within a brief period, the Rooseveltian concept of 'one world' was shattered. TheSoviet-American confrontation over the territorial settlement in Central andEastern Europe destroyed the wartime spirit of Allied collaboration. The ideal of areunited world economy collided with the realities of the economic devastationwrought by World War II and the ensuing Cold War; the world economy soon wasideologically driven into what Stalin called the two antagonistic 'systems' ofcapitalism and socialism. Responding to this situation, the United States and itsallies assumed the task of fashioning economic, political, and securityarrangements that would restore the shattered economies of Japan and WesternEurope and provide for their common security. The American System emergedfrom 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 interestof 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 ofcontaining Soviet power. The Soviet danger provided the political glue that helpedhold together the postwar international economy and facilitated compromisesolutions to a number of serious economic problems throughout the postwar

period. Although the economic and political structure created by the United Statesand its allies between 1946 and 1950 still stands, the tensions within the Systemhave become increasingly pronounced with the end of the Soviet military threat.

The American System has included both the American relationship with WesternEurope and the American relationship with Japan. Although these two principal

components of the American system have certain common features, theserelationships are fundamentally different regarding a number of economic,


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political, and security matters; these differences have become increasinglyimportant in determining the economic and political relations between the UnitedStates and its two major allies. My principal concern here, however, is with thedifferences 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 Statesrealised that there were urgent fundamental problems related to the security ofWestern Europe. The most pressing need was to assist in the revival of the WestEuropean economy while also finding a way to guarantee the military security ofthe West Europeans against the threat from the Soviet Union. To achieve anAmerican commitment to the pursuit of these goals, the American people had to belinked psychologically to Western Europe. It was vital to prevent a retreat into

isolationism like that which had followed World War I and contributed to theoutbreak of World War II. With the strong cooperation of its Western Europeanallies, the United States undertook several initiatives.

The first important initiative was the launching in 1947 of what became known asthe Marshall Plan. The Marshall Plan transferred huge capital resources from theUnited States to Western Europe, while basing American financial assistance onthe premise of intra-European cooperation. By one estimate, the cost of MarshallPlan to the United States was approximately $13 billion over four years orapproximately about 1.5 per cent of the American Gross National Product. In 1994dollars, this amount would be $100 billion. The United States was able to financethe 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 twentiethcentury, the United States used its accumulated wealth to help create a world thatAmerican leadership believed would serve both American economic and politicalinterests.

Another major initiative strongly supported by the United States was the formationof what would become the European Common Market or European EconomicCommunity (EEC). While the primary responsibility for this truly extraordinaryinitiative lay with the West Europeans themselves, the United States gave the

project its complete backing. Although the political goal of reconciling France andGermany was the principal purpose of the EEC, its proponents believed that thecreation of a huge market in Western Europe would give the West Europeans theeconomic strength to resist their domestic Communist Parties and the

blandishments of the Soviet Union. In addition, the European EconomicCommunity was conceived as a means to anchor West Germany firmly to the Westdespite the fact that historically the industrial Ruhr and other areas of WestGermany had looked eastward for their export markets. These markets were now in

Communist hands and alternative markets had to be found to decrease the fearedWest German temptation to strike an independent deal with the Soviets.


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Although the Common Market represented a violation of the American ideal of amultilateral world and entailed European discrimination against American exports,American policymakers accepted these economic costs as necessary for securityreasons. 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 itwould, over the longer term, become a stepping-stone to a multilateral system.American officials believed that, when Western Europe had regained its economicstrength and self-confidence, the West Europeans would lower their external

barriers and participate in the open world economy envisioned by the United Statesat 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 theywere 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 diddemand access to the Common Market for American corporations, it toleratedwhat it assumed would be the temporary discrimination against Americanagricultural and other exports in order to rebuild Western Europe and thwart Sovietexpansionist designs.

The other important American initiative was the 1949 creation of the NorthAtlantic Treaty Organisation (NATO) to link the two sides of the Atlanticmilitarily. In effect, the United States brought Western Europe under the Americannuclear umbrella through the strategy of extended deterrence and therebycommunicated to the Soviet Union that an attack on Western Europe would betantamount to an attack on the United States itself. The stationing of Americantroops on European soil became a visible sign of this commitment. The NATO

Treaty identified and legitimated for Americans and West Europeans alike thelinking of their security. In short, economic and security ties have been closelylinked in defining the relationship of the United States and its West European alliessince 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, andstrategic challenge. World War II and its aftermath had strengthened the positionof the Soviet Union in East Asia, while China and North Korea had become

communist countries and political allies of the Soviet Union. These importanttraditional Japanese markets were now in hostile hands. Similarly to West


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Germany, intense concern existed that the forces of economic gravity would pullJapan toward the Soviet Union and its Chinese ally. Moreover, the Japaneseeconomy was a shambles; it had been much more devastated by the War than hadinitially been appreciated. Although in retrospect, it is difficult to understand,

American officials truly despaired over the problem of ensuring Japaneseeconomic survival.

In addition to guaranteeing Japanese security through the formation of theAmerican-Japanese Mutual Security Treaty (MST), the United States wanted tointegrate Japan into a larger framework of economic relationships and therebyremove the attractiveness of the communist-dominated Asian market. However,unlike West Germany, there were no large neighbouring non-communisteconomies 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 beremembered that one cause of the Pacific War was that European colonizers hadlargely closed these economies to Japanese exports). The United States alsosponsored Japanese membership in the 'Western Club'. Despite strong WestEuropean resistance based on intense fear of Japanese economic competition, theUnited States eventually secured Japanese participation in the IMF, the WorldBank, and other international organisations. In addition, the United States gaveJapan relatively free access to the American market and to American technology.Furthermore, the United States used its vast financial resources to assist in therebuilding of the Japanese economy, but it did not demand access to the Japaneseeconomy for its multinational corporations. Instead, the quid pro quo for Americaneconomic 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 nuclearumbrella over Japan. The MST, however, differs fundamentally from the NATOalliance. Under the NATO treaty an external attack on any member obliges theother members to consider measures of mutual defense. In the MST, the UnitedStates agrees to defend Japan if Japan is attacked, but the Japanese are not

obligated to defend the United States. Also, whereas the NATO agreement appliesonly to the territory of its members, the MST refers to the outbreak of hostilities inthe entire Pacific region. Through this agreement the United States obtained theright to use air and naval bases in Japan to defend and secure its position in theWestern Pacific. The Japanese were given access to the American market inexchange for the right to anchor on Japan the American strategic position in EastAsia.

In these ways, the United States became the fulcrum of the American system; theAmerican-West European and the American-Japanese components of the system

had little to do with one another. Lines of cooperation, however, did and do runthrough Washington. Although Japan and Western Europe would become equal


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participants in the annual 'Western' summits, Japanese-West European diplomaticrelations were primarily a function of their ties to the United States. In theeconomic arena, Japanese-West European commerce was and still is relativelyminor compared to the commerce of each with the United States. With respect to

security, no military connections exist between Western Europe and Japan. Ineconomic, diplomatic, and security affairs, the American system has, for nearlyhalf 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 influenceexpanded around the globe until the expansionism was brought to an end at leasttemporarily in the jungles of Vietnam. Although both the United States and theSoviet Union sought to expand their domain, the United States was the mostsuccessful 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, theUnited States, like other great powers before it, became the most expansive powerin the international system. American influence expanded rapidly in Europe, Asia,and the Middle East. Thus, in its effort to contain Soviet expansion, the UnitedStates itself became a highly successful expansionist power.

The Liberal World Economy

The institutional framework of the postwar world economy was constructed at theBretton Woods conference in 1944. Eventually known as the Bretton WoodsSystem (BWS), this essentially American-British achievement reflected thethinking of Harry Dexter White and John Maynard Keynes. (In retrospect, thesmall number of principal players involved in formulating the agreement accountsin large part for the extraordinary success of the conference and is in markedcontrast 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 ofthe conference was to formulate unifying principles that would be embodied in theinstitutions 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 viamultilateral negotiations and the principle of nondiscrimination, (2) agreementsthat current account transactions should be freed from controls, but that capitalcontrols were permissible, and (3) agreement that exchange rates should be fixedor pegged and that their adjustment was of concern to all. The second goal of theconference was to leave mom within the BWS for governments to pursueKeynesian stabilisation and social welfare policies; individual nations would befree (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 hasflourished.


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In subsequent years the original Bretton Woods System has been significantlymodified in response to economic and political realities beginning immediatelyafter 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 analliance system against the Soviet Union, the United States reversed its prior positions on a number of international economic issues and took a decisiveleadership role in the creation of the postwar world economy. The emergence ofthe postwar international economic order cannot be understood withoutrecognising 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 WestEuropean 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 barriersand to co-operate and co-ordinate their economic plans through the Organisationfor European Economic Cooperation (OEEC); the West Europeans were alsoencouraged to carry out domestic economic ref orms, including the adoption ofAmerica's more productive manufacturing and managementtechniques. In order to promote European integration, the United States eventolerated European discrimination against American agricultural and manufacturedexports. In a less dramatic but equally important way, the United States also usedits financial and other resources to help rebuild the Japanese economy andintegrate it into the Western system. Thus, during the Cold War, the postwarinternational economic order and the international security order became intimately

joined to one another.

The core of the modified Bretton Woods System was composed of twointernational regimes with important roles in the early success of the internationaleconomy. 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 itseconomic resources and political influence to assure the early success of thatmonetary system. The second important regime was the international tradingsystem based on the GATT; responsibility the the trading regime was diffusedamong 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 thirdregime (based perhaps on the World Bank) to be responsible for promoting theeconomic development of the less developed countries. This regime nevermaterialised, largely because of the strong opposition of the industrial economies;even at the end of the twentieth century, no full-fledged development regime oragreed-upon principles regarding economic development yet exists.


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International Monetary System of Fixed Rates

Experts from many countries holding common views on the technical issuesneeding resolution played significant roles in the creation of the internationalmonetary regime. The system had to provide monetary reserves and reserve creditsin sufficient amounts to enable member governments to keep their exchange ratesfixed or pegged to one another. (This is called the 'liquidity problem'.) The IMFwould solve this problem by offering reserve credits to deficit states usingcontributions 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 beavoided, only N-I countries can, at any particular time, pursue independentexchange rate policies, i.e., the currency of at least one country must stay stablewhile 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 designedto solve the Nth country problem. Third, the monetary system had to anchor itsmembers' monetary policies to some objective standard in order to prevent globalinflation or devaluation. (This is the 'confidence problem'.) Stabilisation of amonetary system can be achieved in one of three ways: by (1) tying every currencyto a 'non-monetary' asset, gold being the asset of choice; (2) adopting a policy ruleto 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, themonetary policies of member states were 'anchored' by tying every currency togold and the major powers coordinated (informally at least) their nationaleconomic policies.

The postwar international monetary system, which lasted until 1973, wasextraordinarily 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 nineteenthcentury under which governments had very little ability to manage their owneconomies 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 thefollowing principles: (1) fixed or pegged exchange rates, but with sufficientflexibility to enable individual states to deal with extraordinary situations includingthe pursuit of full employment; (2) the establishment of a reliable source of reservecredit in the event of an international payments problem; (3) an agreement amongmember 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 'fundamentaldisequilibrium' in a nation's balance of payments; (5) monetary reserves provided

by an IMF endowment to create a pool of national currencies or county quotaswhich could be made available to deficit countries. These principles would governthe system until its breakdown in the early 1970s.


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The ways in which the system actually functioned in practice did not fulfill theintentions and expectations of its founders. Firstly, although the IMF was maderesponsible 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 theAmerican dollar became the foundation-stone of the international monetarysystem. Secondly, although the adjustment or Nth country problem was to besolved by requiring counties in 'fundamental disequilibrium' to obtain IMFapproval 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 Nixonshock. The confidence problem was solved as the members followed US policy

preferences which, in the early postwar era, promised to provide stability to thesystem. However, the essential requirement that the United States as the N-I

country, pursue a policy of price stability failed eventually with the escalation ofthe Vietnam War in the late 1960s; the ensuing inflation leading to theabandonment of the fixed rate system by the Nixon Administration in the early1970s because the system no longer suited American interests. Nevertheless, theUnited 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 Americanalliance system and the world economy together, and the international role of thedollar as both a reserve and transaction currency actually became a cornerstone ofAmerica's global economic and political position. Because America's major alliesand economic partners were willing to hold dollars for political as well as foreconomic reasons, the international role of the dollar conferred on the UnitedStates the right of 'seigneurage'; this term refers to privileges associated with beingthe provider of the currency for an economy, in this case the internationaleconomy. As President Charles de Gaulle of France bitterly complained in the1960s, the 'hegemony of the dollar' conferred 'extravagant privileges' on the UnitedStates, because it alone could simply print dollars to fight foreign wars, buy upFrench and other businesses, and go deeply into national debt with no fear for theconsequences.

As Robert Triffin warned in the early 1960s, there was a fundamental contradictionat the heart of this dollar-based system. While the huge outflow of Americandollars to finance the re-building of Western Europe and Japan and the Americanmilitary build-up during both the Korean and Vietnam Wars helped to solve theliquidity problem, this outflow or overhang of dollars meant that the United Stateswould one day be unable to redeem in gold those dollars held by private investorsand foreign governments at the agreed price. Triffin predicted that confidence inthe dollar would be undermined as the American balance of payments shifted froma surplus to a deficit. As this deficit grew in the late 1950s and the 1960s, theconflict between the monetary system's mechanism of liquidity creation and thesolution of the confidence problem became increasingly severe. The problem


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The trade regime was born in conflict between the American and Britishnegotiators at Bretton Woods. Reflecting American industrial supremacy, theAmerican 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 domesticeconomic autonomy to pursue full employment, and a number of related issues.However, the eventual British-American compromise and agreement to create theInternational Trade Organisation (ITO) to complement the IMF and the WorldBank, proved futile. The American Administration itself rejected the ITO becauseit believed that the ITO would meddle in domestic economic affairs, resulting inthe American government failure to ratify the agreement.

As an interim measure until a replacement for the defunct ITO could be found, theUnited 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 theGATT was remarkably successful in fostering trade liberalisation and providing aframework for trade discussions, its authority and the scope of its responsibilitieswere severely limited and applied primarily to manufactured goods. The GATT didnot have authority to deal with agriculture, services, intellectual property rights, orforeign direct investment; nor did the GATT have authority with respect tocustoms unions and other preferential trading arrangements. Successive Americanadministrations and other governments became increasingly cognizant of theseinherent limitations and, following the completion of the Uruguay Round in the1980s, replaced the GATT with the World Trade Organisation (WTO) whoseresponsibilities are much broader and which, unlike the GATT, is a full-fledgedinternational organisation rather than merely an international secretariat.

Despite the limitations of its mandate and organisational structure, however, theGATT for many years played an important role in reducing barriers to internationaltrade. Embodying the neo-classical economic commitment to free trade, the GATT

provided a rule-based regime of trade liberalisation founded on the principles ofnon-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 toestablish regulations lowering trade barriers and to let markets determine trade

patterns. Under GATT, markets were opened and new rules established by mutualagreements and negotiations carried out under its auspices; agreement was basedon balanced compromise or unconditional reciprocity rather than on unilateralactions by the strong and the type of 'specific reciprocity' that; in the final decadesof the twentieth century, became increasingly characteristic of international trade.The goal of the GATT was an open multilateralism, that is, the agreement providedfor the extension of negotiated trade rules without discrimination to all members ofthe international system; however, candidates for membership had to meet certaincriteria and agree to obey the rules. The founders of the GATT wanted a steady


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progression toward an open world economy with no return to the cycle ofretaliation and counter-retaliation that had characterised the 1930s.

Although the early postwar period witnessed a number of agreements to lowertariff barriers, a significant shift in trade negotiations took place with the KennedyRound (1967), initiated by the United States in response to a growing concern overthe trade diversion effects of the European Economic Community. As aconsequence of American pressures, the Kennedy Round resulted in anapproximate 35 per cent reduction of trade barriers on nonagricultural imports andled to a number of basic reforms such as the regulation of anti-dumping practicesand the substitution of across-the-board tariff cuts (or the principle of 'general'reciprocity) on industrial products for the earlier emphasis on bilateral negotiationsand 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 tradein manufactured goods, but trade liberalisation in agricultural products hasdeveloped much more slowly. With the reduction of trade bathers, internationaltrade grew at an annual rate of 7 per cent between 1948-1973.

In 1971 the industrial countries committed themselves in the SmithsonianAgreement to reduce tariff and other trade barriers even more. The agenda of thesubsequent 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 thedemands of the LDCs for special treatment of their exports. However, the mostimportant task of the Tokyo Round was fashioning codes of conduct dealing withunfair trade practices. The results of the Round, completed in 1979 followingnearly a decade of bickering, were substantial. For example, tariffs onmanufactured goods were lowered by about an additional 34 per cent and thenegotiations resulted in a number of codes of conduct such as the prohibition ofexport subsidies and the elimination of some discrimination in public procurement.However, the Round failed to resolve the American-European dispute overagriculture 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 GrossWorld Product. This substantial expansion of trade meant that imports penetrateddeeply into domestic economies and exports became a much more important aspectof national economies. In fact, for some EEC countries, exports have reached ashigh as 50 per cent. Even the domestic markets of the United States and Japanwere internationalised. Between 1970 and 1989, American imports increased from4,1 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 haveincluded a growing percentage of manufactured goods. Meanwhile, GATT


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membership greatly expanded over the years until it included 125 members in1995, while growing trade flows created a highly interdependent internationaleconomy 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 timeweaken the foundations of the postwar economy. Many issues and topics of

potential importance were left vague or simply not covered by the rules of theBretton Woods system. On the trade issue, the fundamental purpose of the GATTwas to govern the exchanges of products and commodities, and at the insistence ofthe United States, agriculture was excluded from GATT rules. Services, foreigndirect investment and intellectual property rights, issues which were quiteunimportant at the time of the founding of the Bretton Woods institutions and were

not included in GATT rules, would become major components of internationalcommerce only in the 1970s. Certain monetary issues were never satisfactorilyresolved, i.e. the problem of adjustments in payments imbalances anddetermination of the responsibility of deficit and/or surplus countries to correctimbalances. The role of international financial flows, which would transform theglobal economy in the 1970s, was unanticipated and no rules were developed togovern such matters. Finally, the increasing importance of the multinationalcorporation (MNC) and foreign direct investment (FDI) in the postwar era

profoundly transformed the international economy, especially as trade andinvestment became linked to one another. Initially, MNCs were mostly Americancorporations that began a rapid overseas expansion in the 1950s as a response tothe creation of the European Common Market, but subsequently, the firms of allthe industrial and some industrialising countries would join the growing ranks ofthe multinationals. Indeed, many of the economic activities and economic

problems that would become extremely important in the 1980s and 1990s were notcovered by the original GATI' framework. Despite these limitations, the BrettonWoods system and the hegemony of the United States on which it rested provideda solid foundation for the success of the world economy following World War II.

Note1 Kindleberger, C., The World in Depression, 1929-1939 (London, 1973).


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.

Andrew Gamble, "Hegemony and Decline: Britain and the United States,"in Two H egemonies: Br itain 1846-1914 and the Uni ted States 1941-2001 editedby 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 someof their affairs for mutual and general advantage. For my own part, looking outupon 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 itroll. Let it roll on full flood, inexorable, irresistible, benignant, to broader landsand better days.

Winston Churchill, August 1940

Hegemony exercised by a single state is a rare and transient phenomenon in thehistory of the world system. A unified world polity has been much slower toemerge than a unified world economy. Some state functions have come to be

discharged at international level, but most remain rooted in national statestructures. 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 beregained. But the few examples of hegemony that have existed raise interestingquestions about the nature of the world system and the conditions under which amore permanent apparatus of central authority might emerge. Awareness of theneed for such central authority in the twentieth century has been keenest among theelites of those states which have exercised hegemony. Such elites tend to think inworld-system terms, developing discourses which identify the requirements forinternational political and economic stability.

Many of the most important geopolitical perspectives in the twentieth century haveas a result originated in Britain or the United States, 1 often displaying a set ofsimilar conceptions and concerns. Theorists like Alfred Mahan and HalfordMackinder put forward the idea of a strategic partnership between the two states tomanage the world system and maintain world order. According to Mahan, 'the


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United States has certainty of a very high other that the British Empire will standsubstantially on the same lines of world privileges as ourselves; that its strengthwill be our strength, and its weakening an injury to us' . 2 As collaboration betweenthe 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 successorto the leading role in the world system.

These elites were motivated partly by cultural and ideological affinities, but also bythe perception that both states shared an interest in promoting the conditions for aliberal international order. There were important differences between them, butnonetheless, sufficient common ground to make collaboration possible and toencourage the idea, particularly on the British side, of a project to transfer the roleand responsibilities which Britain had once exercised as a hegemonic power to theUnited 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'sdecline as a hegemonic power, British elites became divided on whether Britishsecurity was best protected by an open world economy--which required acceptanceof United States leadership--or by maintenance of an exclusive sphere of influencethrough its empire. The decisive historical choice, which Britain made in 1940 andwas confirmed by all governments since 1945, was in favour of the former. Itsmost 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 moltimportant than the preservation of a regional sphere of interest.

It is in this context that the problem of British decline should be viewed. Somehistorians have come to regard the explanation of British industrial decline as thecentral problem of twentieth century British historiography. 3 But industrialdecline is only one aspect of a much bigger problem, the decline of Britain as aworld power. This decline is intimately connected to the question of hegemony. Inthe course of the twentieth century Britain was displaced as a world power, losingits 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 graduallyrelinquished the last vestiges of its own hegemony and accepted the hegemony ofthe United States, emerging in the l940s as the principal ally of the United States, arole which it has never since lost. There was nothing pre-ordained about thisoutcome. Earlier in the century some observers, including Leon Trotsky, expectedthere to be military conflict between Britain and the United States in order to settlethe question of world leadership, 5 Trotsky arguing that this was the way in whichhegemony passed from a declining power to a rising power. But no such conflicttook place. On the contrary so smooth was the transfer of hegemony between thetwo powers that the last one hundred and fifty years can sometimes appear as asingle unbroken hegemony exercised by the Anglo-Saxons over the rest of theworld.


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Hegemony

Hegemony has been defined in several different ways, but two are of particularimportance. The first is associated with world-systems theory, which challengedthe notion of discrete and autonomous national economic development associatedwith modernisation theory. Instead, national economic development wasconsidered part of the development of capitalism, which from its very beginningswas not a national but a world system. Capitalism according to world-systemstheory is based on two fundamental forces; firstly, an expanding division of labourand a network of trade and finance which steadily draws more and more territoriesand 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 thecapitalist world system highly dynamic. As Immanuel Wallerstein puts it: 'its life ismade up of conflicting forces which hold it together by tension, and tear it apart aseach 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-greatertendency to cohesion and interconnectedness, but as a polity it remains fragmented.It has never been transformed into a universal empire, although one or twoadventurers in the last two hundred years have made the attempt. It has been unitedmore by economics than by politics, but the political disunity arising as it does in acontext of a dynamic and rapidly expanding cosmopolitan system of commerceand finance, has also often been the spur to expansion, as well as resulting in ahighly unequal distribution of income and resources. Strong states arose to protectand promote the national advantage of their citizens within the expanding globaleconomy.

This imbalance between the economic and the political in the world system

predated industrialisation, but industrialisation intensified it. In the internationalstate-system, nation-states have remained the focus of decision-making andlegitimacy; international institutions have been slow to develop and have not kept

pace with economic integration. Problems arise because international institutionsare needed to create and sustain the conditions for a global economic order. Thetype of governance that is necessary to sustain national markets is also necessaryfor 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 notthe only one. Another alternative is that one of the states in the international state


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system is so dominant that it exercises hegemony over the other leading states andcan either impose or get agreement to a system of international rights and norms.Such a condition of hegemony develops when one state has such economicsupremacy 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 (internationalcredit and currency). If a state enjoys supremacy in all three areas it possesses theability to exercise hegemony, and to some extent to assume state functions for thewhole of the world system as though it were the central authority.

The second perspective draws on the understanding of hegemony associated withGramsci. 7 The exercise of power entails the use of both coercion and consent, andthe most stable polities are those where consent is prominent. The focus is less onthe 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 andsustained through a myriad of agencies and organisations, and the incorporation ofmany different interests into an overarching political project. The ideologicalaspect of hegemony is what is most significant about it.

The hegemony that is based on the economic supremacy of individual states tendsto be short-lived, in part because of the existence of hegemony itself, If one statehas economic supremacy and uses it to promote an era of prosperity and advancein the global economy, rivals will soon develop as other leading states organise toclose the gap in productivity, technology, mid investment. Such rivalry if it is notheld in check may produce increasing friction and eventually war. A second

problem is what happens to the hegemonic state itself. A tension develops betweenmaintaining a global role and preserving a strong economic capability through newtechnology and investment. Paul Kennedy has pointed to a conflict, which arisesfor such states between security, consumption, and investment, 8 leading to acondition of imperial overstretch. The pressures for spending to boost public and

private consumption and military security tend to crowd out the pressures forindustrial investment. The elites in the hegemonic state become more interested in

attending to the problems of world order and managing the global polity than toconcentrating on the long-term needs of their domestic economy. In this way rivalsare 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 hasexercised hegemony it is usually reluctant to relinquish it. In the twentieth centuryBritain sought to maintain its global role long after the conditions for the automaticexercise of its hegemony had passed. Reflection on its failure prompted one of themost influential arguments in favour of hegemony. Charles Kindleberger arguedthat 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


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this way. Britain was no longer able to enforce the rules of a liberal world orderand the United States was not ready to. 9

Britain's period of economic supremacy on which its hegemony was foundeddeveloped after 1815. It established a clear lead in finance, commerce and industry,and London was recognised as the undisputed centre of the worlds financial andcommercial system. By 1870 the London market was twice as large as the capitalmarkets of its rivals combined, and sterling had become the leading internationalcurrency By 1914 British foreign investments had reached 4,000 million,

providing a render income of 200 million per annum. This economic supremacywas 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 acommercial and financial power before industry developed, and the new wealthand opportunities which industry brought were exploited within the framework of

the global relationships which had already been created. The wealth from industrychanged the balance of the British economy by making the preservation ofagricultural self-sufficiency unnecessary. The number of Britons fed on foreignwheat rose six times between 1820 and 1850. 10

The commitment to free trade became the symbol of British policy in the middle ofthe nineteenth century. It followed a commercial rather than an industrial logic.British prosperity and the feeding of its growing population came to depend on themaintenance of the network of trading relationships which now covered the wholeworld and whose centre was London. Britain had a strong interest in preserving thefree movement of goods, capital and labour in this world economy when Britishmanufacturing industries enjoyed a technological lead over those in othercountries. What was more surprising was that Britain's attachment to this policytook so long to diminish even when this lead began to be eroded.

British hegemony was different from American in several key respects. Britain wasdependent on trade to a much greater extent than the United Stales. It needed avisible trade deficit rather than a visible trade surplus in order to stimulateeconomic 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 becamemaintaining the openness of the world economy. For a long while the United Stateshad no such interest. It acquired one only later when it needed to find a way toabsorb the huge American visible export surplus. A second difference was that inaddition to its informal commercial empire, Britain had also acquired an extensiveformal empire, with direct administrative responsibilities, and this formal empirecontinued to increase in size up to 1918. Britain's commitment to universalism andthe open world economy was qualified by its interest in protecting its sphere ofinterest within the world economy. While the United Stales developed its own

sphere of interest it did not rule directly. The military commitment underpinningthe two hegemonies was also very different. The Pax Britannica required a naval


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budget of only 8 million, 11 while the Pax Americana has seen the construction ofthe most extensive system of military bases in the history of the world. UShegemony has been exercised through a series of military alliances, whereasBritain generally acted alone.

Britain's period of undisputed hegemony lasted through the middle decades of thenineteenth 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 growingmilitary and industrial challenge from new rivals, particularly Germany and theUnited States. Both moved to protect their new industrial sectors from Britishcompetition and both contested the inclusion of so much of the world in Britain'ssphere of influence through formal colonial links and through the informal links ofinvestment 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. Theimpact of this on British politics was dramatic. It created the first great bout ofintrospection about economic decline amidst fears that British industry could nolonger compete with the energy and technological sophistication of the Americansand the Germans. 12

The challenge to Britain's position was both military and economic, and faced theBritish state with a serious strategic dilemma. Either it had to come to terms withits new rivals or it had to fight them. In the end it did both. The commitment to anopen world economy came under severe pressure. Britain defended itself byseeking 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 lastcentury, industrial life and empire might be dissociated, but when competingcountries seek to monopolise markets by means of customs tariffs, evendemocracies are compelled to annex empires. In the last two generations ... theobject 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'shegemony in the middle decades of the century, the claims of the formal empirewere much diminished. At its crudest, the case for free trade imperialism was thatforeign nations could be made valuable colonies without the expense orresponsibility 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 rightof free intercourse and trade in the world's markets, and in proportion as Englandchampions 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


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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 forthe open world economy. They argued that the best way for Britain to retain itsnaval supremacy was through a protectionist economy, which safeguarded theBritish manufacturing base. Joseph Chamberlain and Alfred Milner spearheadedthe attack on free trade: 16

Let us free ourselves from the insane delusion that a nation grows richer by buyingoutside its borders what it can produce within them. It is not a blessing when, inthe blind worship of cheapness, we undermine our own industries. Now is the timeto 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 theDominions.

Anglo-American Collaboration

The transfer of hegemony between Britain and the United States went throughthree 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 theAmericas; British and American interests came to be treated as complementaryrather 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 powermight thus enjoy its own sphere of interest and co-operate in the task ofmaintaining international order.

The key episodes, which marked the beginning of this stage, which was so crucialfor later developments, began in the 1890s. In 1895/6 Washington intervened in a

boundary dispute between Venezuela and British Guyana, and after reflectionBritain conceded the right of the United States to do so. It was followed byBritain's decision to give up its half share in the planned isthmian canal and towithdraw its navy from the western hemisphere. No formal treaty was ever signed

but Britain through its actions recognised the United States declaration that theAmericas lay within its sphere of influence. There were strategic, economic, andideological reasons for this decision. The option of opposing the rising power ofthe 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 thatcommand of the American seas would only be possible if the neutrality of theEuropean powers could be assured. 17 Since this was impossible it underlined thatBritain needed the friendship and co-operation of the United States and needed toensure that the United States was at least neutral in any European conflict in which

Britain became involved.


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The strategic argument was reinforced by economic and ideological factors. Thetwo economies were closely linked. There were substantial British investments inthe United States and a large volume of trade, Neither side needed territory, whichthe 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 anAnglo-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 WorldWar was taken as a sign of the growing understanding between Britain and theUnited States and evidence that their interests were compatible rather than inconflict. But the war also demonstrated that the United States was potentially aworld power, not just a regional power, and this changed the relative position ofBritain 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 ofthe war was that the United States emerged as both the leading creditor nation, andthe 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'scommitment to build a new international political and economic order, the UnitedStates was not ready to take a hegemonic role in the world system and moved backto its traditional isolationist stance. The dislocation of the global economy byWorld War I created a series of intractable problems in the way of recreating theconditions for prewar prosperity, and these came to seem insoluble when theinternational financial system collapsed in 1931, signaling the start of a long anddamaging slump. The growth of economic nationalism and the splitting up of theworld into protectionist currency blocs in the 1930s demonstrated sharply both thedesirability of an international economic order and also the difficulty of achievingone without the co-operation of the United States. Alter the collapse of the goldstandard the world economy fragmented into currency blocs and protected spheresof interest, which reduced trade and output and contributed to the rise of regimescommitted to the redistribution of territory by force.

The second stage in the partnership between Britain and the United States wasinitiated by the alliance between Britain and the United States to fight Germanyand Japan in the Second World War, which was preceded by the Lend-Leaseagreement. The formation of a Coalition Government in Britain and the decision toabandon appeasement and to wage all-cut war necessitated a sharp break with boththe domestic and the foreign policies of British governments in the 1930s. Thedependence of Britain upon the United States, which began with the Lend-Leaseagreement, was much more marked than in 1914-18. The United States demandeda 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, whichimplied the dismantling of all protected spheres of interest, including the British


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Empire. Much of the drive behind United States thinking came from the StateDepartment under Cordell Hull. He described the 1932 Ottawa agreements, whichhad established imperial preference within the British Empire. as 'the greatestinjury, in a commercial way, that has been inflicted on this country since I have

been in public life'. 18The Atlantic Charter was a key statement of United States policy, marking a turnaway from the sphere-of-interest politics which had dominated the 1930s. At thattime the United States accepted the political division of the world market and hadeven floated the idea of a super bloc--the Grand Area--which would have includedthe Americas, Britain and the British Empire, and much of East Asia, includingChina and Japan. This bloc was intended to counterbalance Germany and theSoviet Union. 19 With the entry of the United States into the war, more ambitiousideas were floated. The Grand Area was now envisaged as the basis for a

reconstructed world order under United States leadership. Germany and the SovietUnion were both included within it on condition that they along with Britain andJapan agreed to give up their protected spheres of interest. In the case of theEuropean powers, a particular concern of the United States was that they should beforced to give up their colonies.

The United States Government was divided between those who favoured a specialrelationship with Britain in order to build a stable international economic order,and those who were against making any concessions to Britain that were not madeto all other countries. This difference of view made negotiations over the shape ofthe postwar order protracted, and many of the more ambitious plans were neverrealised. The hopes for an early resumption of multilateral trade and convertiblecurrencies had to be postponed. The British and US delegations at Bretton Woods

put forward different plans, and the final compromise was shaped more by thelatter than the former. It was still attacked in both countries. In the US there was astrong lobby, which opposed any departure from the principles of sound finance,and supported the re-establishment of the gold standard, because this would ruleout any discretionary rules aimed at providing credit for countries which wereconstantly 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 ofmaintaining a protected sphere of interest as the foundation for internationaleconomic order, and scepticism that order could be restored on the basis of the olduniversal principles. Support for protectionism was especially solid among thesupporters of tariff reform in the Conservative party, but it had become thedominant view in the Labour party as well. The decline of the Liberal party meantthat support for the old principles was much weaker. But certain fundamentals hadnot changed, and the liberal tradition was still powerful. Many Liberals like

Keynes himself had become advocates of bilateralism in the 1930s because of theseverity of the slump, but once the opportunity presented itself for a reconstruction


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of international economic order along liberal lines even if under Americanleadership, Keynes had no hesitation in recommending what the choice should befor Britain. As he told the House of Lords:

To suppose that a system of bilateral and barter arrangements is the best way ofencouraging the Dominions to centre their trade on London, seems to me prettynear frenzy. As a technique of little Englandism, adopted as a last resort when allelse has failed us, with this small country driven to autarchy, keeping to itself in aharsh and unfriendly world, it might make more sense. But those who talk thisway, in the expectation that the rest of the Commonwealth will throw in their loton these lines and cut their free commercial relations with the rest of the world, canhave very little idea of how this Empire has grown or by what means it can besustained. 20

After 1945 there was a close collaboration between Britain and the United States inrebuilding an international economic and political order, but there were importantdifferences between the two powers. As the emergent hegemon, the United States

pressed for as full and complete a liberalisation of international economic relationsas possible. As the former hegemon, Britain favoured a period of transition inwhich it would only gradually relinquish its sphere of influence and would still beable to retain control over large parts of its colonial empire. But Britain supportedthe United States' aim of recreating an open multilateral trading economy, seeingthe advantages of re-establishing sterling as an international currency andrebuilding the financial and insurance services of the City, as well as Britain'soverseas 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 shatteredEuropean economies and prevent any more being absorbed into the Soviet sphereof influence. The objectives of Bretton Woods were eventually achieved, but muchlater, in the 1960s. Britain sought close partnership with the United States in boththe military and the economic sphere. But the partnership was always an unequalone 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 enjoyingthe advantages. The burden of overseas military spending and an overvaluedcurrency contributed to the neglect of long-term investment in domestic industry.British economy and society were not reorganised successfully to allow Britain tocompete effectively within the new expanding world economy. Hegemony wastransferred, international economic order was rebuilt, but in the first four decadesafter the end of the war, Britain was one of the casualties rather than one of the

beneficiaries.

Conclusion


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Reading the voluminous literature on British industrial decline, a visitor to Britainin 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 andsectors have experienced absolute declines, the general experience is not one of

absolute decline at all. On the contrary the economy has made steady progressthroughout the century, and will produce three to four times as much wealth in2000 as it did in 1900.

If there has been any economic decline at all, it has been a relative decline, adecline that can only be observed when the performance of the British economy iscompared with the performance of similar economies. Whether it makes sense tocompare the performance of national economies as though they were singleorganisations with a directing will has often been questioned. But it has become astaple 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 basisin 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 ofdecline.

The argument of this chapter is that this question can be answered once it isunderstood that the question of decline only makes sense by considering theinterrelationship of the relative economic decline and the absolute decline in world

power. It was always the absolute decline that mattered most to the British politicalelite, and measures to stave that off and preserve Britain's traditional global rolealways took preference over the task of modernising the British economy andBritish society. The way which the British found to preserve their global role longafter the economic and military conditions for their hegemony had been erodedwas 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 wasalways divided by it, and remained encumbered by its traditional aspirations. Until

the 1980s the British political elite failed to draw the radical implications of thechoice it made in the 1940s.

In terms of its importance and capacities as a great power, Britain's position in2000 will be much reduced compared to 1900. The historical puzzle is not so muchwhy it happened, but why it was relatively so smooth, and to what extent thesmoothness of the process contributed to the difficulties Britain found inmaintaining economic competitiveness. There is a rich vein of academic writing ondecline, which has explored this idea. Stephen Blank argued that Britain's post-wardecline was due to the choice of an inappropriate foreign economic policy, which

gave priority to the protection of Britain's traditional global role--foreigninvestment, overseas military bases, and a high exchange rate for sterling-at the


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expense of industrial investment and economic modernisation. 21 What suchapproaches 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 debateon British decline lasted from the 1880s to the 1980s, but the context of hegemonyand empire, which gave it significance, is now no more. Decline is unlikely tohaunt the British political imagination in the twenty-first century as it did in thetwentieth.

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, NewPark6. 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; seealso 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', InternationalOrganisation , 31 (4), pp. 673-722.


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Documents

Two Hegemonies: Britain 1846-1914 and the United States 1941-2001