The Neo-Capitalist Assault Essay Four of Part I (The ... Data/The Neo-Capitalist... · The...

©TJSGA/TLWNSI ESSAY/NEO-CAPITALIST ASSAULT (4)/APRIL03/Alvaro de Regil Castilla 1

Living Wages North and South

The Jus Semper Global Alliance

Keynesian Economicsand The Welfare State

By Alvaro J. de Regil a

From time to time TJSGA will issue essays ontopics relevant to The Living Wages North andSouth Initiative (TLWNSI). This paper is thefourth in the series “The Neo-Capitalist Assault”–a collection in development aboutNeoliberalism.

The author explains in detail the emergence of thenew Keynesian economic paradigm as aconsequence of the experience of the Great Warand the Great Depression and the resultsobtained through government intervention duringthe New Deal. The goal here is to show how thepost-war era, with the government in the driver’sseat of the economy, provided the greatest periodof progress in the welfare of both rich and poornations, in spite of the very powerful interests thatcontinuously moved in the opposite direction.The essay opens by stating that the war economypulled the capitalist world out of depression.

The immediate development of World War II onthe economies of the belligerent nations was theeffective end of the years of depression. Becauseof the need to maintain the supply of the militaryresources required to sustain their war fronts, allthe warring nations put their productioninfrastructure to use. They switched to aneconomy of war. All their idle productioncapacity went into full use, with labour going intofull employment. There were some differences,though, between the various nations, in thedegree in which the resources were devoted tothe war effort and were limited for regular non-war consumption.

War EconomicsIn the U.S., in contrast to the situation in Europe,production of goods and services almost doubledbetween 1939 and 1944. There were limitationsin the availability of products, such as textiles,tires and automobiles, made by companies bythen almost totally devoted to the production ofmilitary equipment, but, aside from that, civilianconsumption increased 16% during the period.As previously mentioned, in the U.S. there wasmuch slack capacity not used before the war,and, thus, the capacity devoted to civilianconsumption was not as affected as in othercountries, when production was geared to supplythe war’s implements. Inflation was kept at baythrough a strict price control policy. Monetarypolicy, by fixing the discount rate at a nominal1%, was used to expand production and keep theentire cost of the war low; in fact, much lower

The Neo-Capitalist Assault Essay Four of Part I (The Economics of Reference)

April 2001 GLOBAL ECONOMIC DEVELOPMENT – A TLWNSI ISSUE ESSAY SERIES

Summary

War Economics

Keynesian Economics. Thirty Years ofReconstruction and Development.The United States and its WorldHegemony

The Keynesian Paradigm

The Birth of the Bretton WoodsInstitutions

The Actual Agreement of the BrettonWoods Conference

The United Nations Umbrella

Keynesian Economics in Practice andthe Consolidation of the Welfare State

The Collapse of Bretton Woods asOriginally Chartered

2 ©TJSGA/TLWNSI ESSAY/NEO-CAPITALIST ASSAULT (4)/APRIL03/Alvaro de Regil Castilla

Living Wages North and South Keynesian Economics and The Welfare State

The Neo-Capitalist Assault

than during the Great War. Thus, the cost of thewar was primarily financed by taxation andgovernment bonds, which, in line with monetarypolicy, paid a low rate, reflecting the discountrate.1

Since the formerly unemployed were now atwork, the increase in aggregate demandconcentrated on that segment, but, since therewere price controls and there was no, or limitedavailability of many products –there was acomprehensive system of rationing– savingsincreased dramatically from 4.1% to 16.7%during 1939-1945. Such economic management,having learned from the experience of the GreatWar not to commit the same mistakes byeffectively intervening at both macro andmicroeconomic levels, put the country,sometimes unintentionally in a starkly differentsituation after the war, from the previous post-warperiod. This time no laissez faire vision wasconsidered. Government intervention wasneeded to sustain the nation during the period,with the sight put on its aftermath.2

In Great Britain, in contrast, things weresignificantly different. First, the scene of the war.Apart from the war in the Pacific, war was beingwaged, predominantly, in both continentalEurope and England. Thus, for the most part,consumption was severely rationed, taxes weresubstantially raised and price controls were put inplace. And, as in the U.S., the economy alsoentered into a state of full employment and fullproduction capacity. Britain had entered the warwith substantial slack capacity as well, anadvantage, which became decisive in theoutcome of the war.

Germany, instead, had ended its depressionperiod in 1936, when Hitler put all resources andinfrastructure to work in public works, publicindustry and armament. Thus, as noted earlier,Germany entered the war already at full capacity,with no production or manpower reserves toendure the conflict, should it prolong itself forseveral years, as it did.

In France, the story was different. Prior to thewar, the Leon Blum’s socialist coalitiongovernment (1936-1938) was very unstable dueto the attacks of the right and the constantinfighting of the factions that formed the coalition.

However, although the government implementeda wide range of social and economic reforms,providing substantial concessions to labour,sometimes more popular than effective, itcollapsed. As a result of such instability, Francewas ill prepared for the war and entered itdisorganized and in much confusion.3 Then, theNazi blitzkrieg occupied the country in 1940 andimposed the collaborationist Vichy government ofMarshall Petain, whilst the resistance governmenttried to maintain the former in check. Theeconomy, therefore, remained sequestered inpartial idleness until the defeat of Germany, withthe country spending almost the entire war underNazi command and La Resistance awaiting theopportunity for victory. Of all the European countries involved in theWar that belong today to the G7 group of mostadvanced nations, Italy was the least developed atthe brink of World War II. Part of this situationwas due to the scarcity of resources, such as coal,which, in Britain, France and Germany, fuelledthe Industrial Revolution, but the other factor wasthe very unstable political situation and theinfighting between the regions. Except for thenorthwestern region, much of Italy was still,predominantly, an agrarian society of biglandowners and peasants and a rising socialistmovement. Then, Mussolini’s disastrous career asa dictator forced him to retreat to the north underGerman protection. Subsequently, after Italysurrendered to the allied forces in 1943, it spentthe rest of the war resisting the Nazis andMussolini until their defeat. So, Italy, too, as inthe case of France, had no war economy tomanage; at least not the sort of wartimeeconomies of Britain and the U.S.

Since the end of the XIX century, Japan embarkedon a militaristic era. It came out victorious in theSino-Japanese war of 1894-1895, securing controlof Korea. It defeated Russia in the 1904-1905war, securing more territory. Then it participatedin the Great War on the side of the allies, takingsome of the German possessions in East Asia.During the world depression, Japan had alsosuffered greatly up to 1932. Then it embarked,again dominated by the military, on anotheraggression against China, effectively controllingManchuria in 1932. Another clash against Chinain 1937 led to the control of East China by 1940,up to the brink of World War II. In reality, ingreat part because of its militaristic spree, Japan


Living Wages North and SouthKeynesian Economics and The Welfare StateThe Neo-Capitalist Assault

had not suffered much since the Great War,except for the period of 1930-1932, as a result ofthe Great Depression. Throughout the century,extreme right military leaders had dominated it.Thus, with the invasion of Manchuria in 1932,which enhanced its continuous conflict withChina, Japan was able to end the recession by1936, but here, too, the government wasinstrumental in the recovery of the economy. Thegovernment intervened directly supporting theeconomy with unorthodox policies. It spentheavily on military production; devalued the Yen,making its exports very competitive; and, with thetraditional cosy association between governmentand the big business’ conglomerates, –theZaibatsu– it embarked on heavy industrialinvestment in a wide variety of areas. All thesemeasures, and the need to maintain the warapparatus after 1941, maintained a full-blowneconomy in full force until Japan’s defeat. Then,the reconstruction would take more time tocomplete. For, according to Galbraith, who wentofficially to inspect the aftermath, the damageinflicted by the air attacks –not including theatomic bombs– was crueller and moredevastating than anything suffered by Germany.4

Keynesian Economics. Thirty Years ofReconstruction and Development. The UnitedStates and its World HegemonyWith the end of the war, the United Statesemerged as the unrivalled leader of Capitalism. Ithad become the biggest economy, and it was inan enviable position to increase its economic andmilitary power. In contrast with its allies, and, ofcourse, with Germany and Japan, it suffered nodestruction in its territory, and, also in muchcontrast with the Great War, the state of theeconomy was poised for a powerful growth.Roosevelt had learned from the experience of theprevious war. Now, with the nation under fullemployment and full production, a swift shift ofresources to the normal use given duringpeacetime conditions would leave the economypoised to explode. During the war, the level ofsavings reached an all time high. Thus, now thatnormal domestic consumption could be resumed,the economy began to grow at a very fast pace.The country was living a time of prosperity wheretens of millions of people were joining in thewave of a new affluent middle class life style;they were joining into the so-called “Americanway of life.”

In the international arena, the U.S. emerged asone of the two super-powers that would dominatethe world’s affairs for the rest of the century, and,consistent with its manifest destiny, it emerged asthe new and now sole imperialist state of thecapitalist world. It would be a new kind ofcolonialism, where the U.S. would seek toimpose its polity, its culture and its economicethos in its ever-expanding sphere of influence. Itwould seek to impose a hegemonic view ofdemocracy and economics, which wouldselectively manipulate as it saw fit, in order tofulfil its geopolitical and economic interests.

Learning from the previous war as well, the U.S.sought this time to support and, actually, lead thereconstruction of the belligerent nations in amuch more proactive fashion than previouslyundertaken. It began to act, even before the endof the war, to create the conditions for aprosperous post-war world economy. In 1943, itcreated the United Nations Recovery andRehabilitation Administration to distribute food,clothing, seeds, cattle, machinery and medicinesin the most devastated areas.5 In spite of thedifficulties of reaching an agreement with theU.S.S.R. over the borders of its area of influencein Eastern Europe and Germany, it promotedsuccessfully the foundation of the U. N. in 1945;an organization in which the position of the U.S.,half a century later, has radically changed.Moreover, even before that, in 1944, the BrettonWoods Institutions were given form.

The Keynesian ParadigmWith the Great Depression and, then, World WarII, the classical paradigm was completelyabandoned. It was now the belief thatgovernments needed to play a role in regulatingtheir economies and that the laissez faireparadigm could not operate with only an“invisible hand”. A real hand needed to serve asa countervailing element to control its cycles andany speculative abuses.

However, not only the new nascent philosophyfocused on the need for each nation to regulate itseconomy individually. It also saw the need toimplement a structure that would establish aninternational financial regulatory framework anda bank that would support the reconstruction anddevelopment of the belligerent nations, as well asof the nations of the underdeveloped world. As a




result, one year before the end of the war, forty-four nations got together in the resort town ofBretton Woods to set the international financialinstitutions that gave form to the newinternational financial structure on which I willexpand later. The new paradigm known as theKeynesian Paradigm was taking form.

At this point in time, classical and neoclassicaleconomics were considered a dead theory, whenit became obvious, after thirty years of chaos, thatthe assumption that powerful market forces tendto ensure that the economy would stay close tofull employment of its labour and capitalresources, with none involuntarily idle, wascompletely unreal. The other directly relatedassumptions, Say’s law, that production –supply–generates its own demand and the assumptionthat the economy would have a market underconditions of perfect competition were completefallacies. They had never occurred and had beenalso rebuffed.

It was John Maynard Keynes who, through acritique of his mentor Alfred Marshall, whosework, a synthesis of classical and moderneconomic theory, was then dominant, putneoclassical economics under fire. After theGreat War and the Great Depression, increasingcriticism of neoclassical theory emerged fromeconomists like Veblen and Galbraith amongothers. However, Keynes was the economist thattook a complete theoretical and practicaldeparture from the classic paradigm andsucceeded in influencing the economic policiesof many nations. He challenged the assumptionof full employment of resources. He argued thatthe adequate level of wages and interests wouldnot produce an allocation of all workers intoemployment and all capital into investment. Heasserted that discretionary behaviours from theinvestors define their disposition to invest inproductive ventures; and that these behaviourscould be rooted in their perception of the marketopportunities or simply rooted on personalreasons that had nothing to do with the economy.Capitalists, for whatever reason, may prefer toleave their money idle for an indefinite period oftime, not in investment and not in consumption,but in savings, or, worse, they could use it forspeculative investment. Therefore, a newequilibrium may occur at low levels of use oflabour and capital: that is, at recessionary levels,

representing not a temporary situation but, rather,a normal state. This reality makes the economyinherently unstable. Thus, Keynes, as MarinerEccles had also expressed, the Chairman of theFederal Reserve under Roosevelt, proposed thatthe government must intervene through fiscalpolicy and public spending to generate theaggregate demand necessary to reverse therecessionary state, until private investment wouldresume and reach levels near full employmentand production capacity. This way the economywould maintain a fair amount of stability. Thegovernment would act in compensation, asnecessary, including direct support of theunemployed in order to maintain stability at ahigh level of supply and demand equilibrium.

To present his economic paradigm, Keynes hadpublished in 1936 his most famous work: “TheGeneral Theory of Employment, Interest andMoney”. This paradigm encompassed botheconomic theory and policy, and, for more thanthirty years, it would dominate the economicpolicies of most capitalist nations. In the UnitedStates, Keynesian economics was dominant evenbefore the war, and continued with Rooseveltuntil the end of the Carter administration. Then,Milton Friedman, with his monetarist ethos,brought back neoclassical economics, whichbecame the preferred view of the Reaganadministration and thereafter.

Keynes break with the classical paradigmencompassed a rebuff of all previousassumptions. Summarizing his theoretical logic,it goes like this:

Supply cannot generate its own demand6 becauseprices and wages are inflexible movingdownward; this is because monopolies andunions tend to protect their positions. Moreover,workers are in illusion with money wages–nominal pay– instead of thinking in terms of realwages –purchasing power–; thus, since the wage-price function is inflexible, the economy couldnot self-adjust to the right price and cost oflabour, and, therefore, full employment and fullcapacity could not be reinstated.7 For this reason,an equilibrium level of income as a function ofsupply and demand may be reached at less thanfull employment, even much less, such as in theGreat Depression. Then, relative to monetarypolicy, interest rates are not a reliable tool to



manage flows of investment since many factors–some capricious psychological issues– affect thedecision to invest, where to invest or leave thefunds to idle in money balances. In here, there isthe income-motive, the business-motive, theprecautionary-motive and, the most important:the speculative-motive liquidity-preferencefunction,8 which considers that rather than spendin consumption or save as opposed to invest,there is the other possibility of the speculativedemand of money to speculate in the bondmarket. Thus, monetary policy working throughthe interest rate cannot alone solve a state ofunemployment or depression. Fiscal policy mustthen take a central role.

It is under this rationale that Keynes proposed thatpublic investing, through taxation or public debtin the form of bonds, would need to be used asthe central element in an entire program ofdiscretionary policy. In fact Keynes proposed thatgovernments must act as compensatory agents atall times to insure full employment by way of abroad program of discretionary fiscal policy,which checks and balances every aspect of thecapitalist economy.

As to what to do in good times, Keynes proposedthat, as tax revenues increased, public deficitshould be reduced. In practice, this was moredifficult to do and tended to generate inflation, aspublic spending, many times because of politicalinterests, would increase the money stock, as Ishall later discuss. In any case, in a democracy,governments are obliged, in principle, to provideconditions for full employment, and in Keyneseconomic philosophy, to this endeavour, directsupport of the unemployed is necessary tomaintain aggregate demand and establish aminimal platform for a Welfare State. This, ofcourse, was something dreaded by theconservative forces because the government mustintervene through taxation and other forms tocontrol and regulate the excesses andcontradictions of Capitalism.

The Birth of the Bretton Woods InstitutionsBy 1945, the vision that aggregate demandthrough public spending must be used tomaintain full employment was well entrenched.According to Galbraith, it was in the UnitedStates where the staunchest supporters of Keynesparadigm were concentrated, in both academic

circles and government. However, with the riseof U.S. supremacy, the path towards internationalfinancial cooperation would have to be, alas, thepath that would secure U.S. imperial interests.

Nevertheless, because of the prevalence of hiseconomical thought, Keynes played the mostprominent role in the Bretton Woods, NewHampshire, conference in the summer of 1944.For that conference, he prepared an entire plan toestablish an international financial framework thatwould protect the economies from falling againinto the major imbalances of the twenty years ofrecession and great depression between the twowars. To this endeavour, Keynes prepared a planin conjunction with William Henry Beveridge,another British economist who had developed amodel of a Welfare State for capitalist economies.Unfortunately, as it could be expected, theoutcome of the conference was substantiallydifferent from that envisioned by Keynes. TheUnited States presided over the conference, andthe original concept met substantial oppositionfrom the U.S. representatives led by SamuelMorgenthau, Secretary of the Treasury at the time.Keynes was heading the British delegation andwas in a difficult position to negotiate. On theone hand, he had his vision, which aimed toprovide a stable international economic andfinancial system and a fair trade framework.However, Keynes had instructions to secure anagreement to cover British war expenses underthe Lend-Lease scheme instead of the actualacquisition of war materials through debt, ashappened during the Great War. Thus, he wasforced to be acquiescent to the demands of theU.S. delegation. Notwithstanding these events,the outcome of the conference still contained agood portion of Keynes’ plan, which manyattribute to Keynes superb negotiating skills.

It is important to mention that, at the time of theconference in 1944, the creation of the UnitedNations system was in progress; and the financialinstitutions, now known as the Bretton WoodsInstitutions, where supposed to be under theumbrella of the UN system, functioning, ofcourse, as specialized agencies.

As part of the growing world’s social movement,which is trying to modify the present internationalfinancial architecture, a conference called“Rethinking Bretton Woods” was held in 1994 in




Washington, D.C., to explore proposals to revisethe scope of the BW institutions –fifty years later–and achieve a more equitable, sustainable anddemocratic development. Twenty-sevencountries and the BWIs attended the conference;and position papers from academicians and non-governmental organizations (NGOs) werediscussed. In these documents, it is exposed thatthere were three scenarios of the BWIs: thescenario envisioned by Keynes, the actualoutcome of the conference and the real praxis ofthe BWIs, away from the formal agreements of the1944 conference.9

The first scenario was obviously the mostambitious and radical in scope, largely preparedby Keynes and Beveridge, but also withcontributions from U.S. economists. The goal ofthis plan was to protect the capitalist world fromthe depressive conditions of the 1920s and 1930s,characterized by:10

• Mass unemployment• The collapse of commodity prices• Large competitive currency devaluations with

protectionist beggar-thy-neighbour policies11

• Deflation• Stock exchange crises due to abusive and

unlawful speculation

The radical vision to avoid the above conditionswas:12

• An economic paradigm for full employment,as previously explained

• A commodity price stabilization agreement• A fixed but adjustable exchange rate system• A world trade agreement• A world currency based on thirty primary

commodities including gold and oil, whichwould automatically stabilize itself

• A World Central Bank with the power toprovide liquidity to balance-of-paymentdeficit countries and to tax 1% a month onbalance-of-payment surpluses. The objectivebeing to promote full employment,internationally, by seeking to approachforeign trade balanced accounts. Namely,that countries with surplus balances are nothelping in promoting full employmentabroad, while those that have trade balancedeficits are. Thus, the tax revenue would

stabilize the balance of payments of thedeficit countries by providing automaticliquidity, while the surplus countries wouldpay a tax, as a deterrent to maintainsurpluses, or an incentive to import more.The tax revenue, of course, would be thesource for liquidity stabilization.

The agreement was pre-eminently an Anglo-Saxon vision. It was the synthesis of two years ofbilateral negotiations between Britain and theU.S. However, as earlier noted, it came out to besignificantly different from that envisioned byKeynes. There were significant improvementsfrom the existing conditions, but, still, the UnitedStates rejected key elements of Keynes’ plan. Atthe root of all was U.S. supremacy. There was aclear vested interest in the U.S., as could beexpected, to come out with a dominant positionwhich would bring significant economic andcommercial advantages and would establish the“Pax Americana”. There are, also, arguments thatthe position of the U.S. was also influenced bythe fact that they had not physically suffered theravages of war. They were not in the shoes of theEuropeans and, thus, they did not feel the sameurgency to reconstruct and recover. As to thespecifics of the agreement, there is somespeculation of why Morgenthau, the U.S.Treasury Secretary, and Harry Dexter White, theTreasury Under-Secretary, who had worked withKeynes in the preparation of the plan for theConference, rejected the Keynes Plan. For theconference, the U.S. agenda was the White Plan;for which, one week after Pearl Harbor,Morgenthau had put White to work on an inter-allied currency stabilization fund. Nonetheless,the truth of the matter is that U.S. supremacy wasat the centre of the disagreement. There was aclear struggle between the U.S. interest incontrolling the international financial system andthe interest of Keynes in having a world centralbank that would serve as an independentcountervailing vehicle to U.S. economic power.As James Boughton, the IMF’s historian, reports,Keynes and Dexter White agreed in most issues,except as to the degree of power and ofindependence that the IMF would have. ToKeynes the capitalist system required a centralbank regulating the flow of aggregate credit andits distribution. To White the goal was to have anadjunct to U.S. economic power, throughinstitutions that could promote a balanced growth



of trade with the U.S. dollar used as the standardcurrency of use in the financial system.13

On top of the hegemonic interest of the U.S.,there was its reluctance to carry the bulk of theweight in the quotas to capitalize the BWIs.Being the least hurt by the War and with thelargest and healthiest economy, growing andcompletely recovered from depression, the U.S.was supposed to bear the largest quota for thefunding of the Bretton Woods. At least this wasthe allies’ view. The European allies were in direstraits, with their economies and their productioninfrastructure in shambles. By 1948, WesternEuropean reserves were depleted, with only $6.7billion and a balance of payments deficit of $7.6billion in 1947, whilst, by 1948, U.S. reserveswere of $25.8 billion and growing, and a balancesurplus of $10.1 billion in 1947.14

It is argued that the U.S. Congress and the publicwould not approve the portion of the U.S.proposed quota to finance the Bretton WoodsInstitutions.15 In support of this argument, thereis clear evidence of the limitations imposed byU.S. domestic politics in the case of a tradeorganization, as part of the UN system, as I willsoon discuss. What is certain, however, is that,notwithstanding its reluctance to agree to thepropose quotas, the Executive Branch wanted toconsolidate its “Pax Americana” by establishing acomplete framework of financial, commercial andpolitical international structures, under U.S.hegemony, which, indeed, it accomplished. Inconsequence, the historical events show that,because of much wrangling about the conditionsfor the constitution and capitalization of theBWIs, between the U.S. and its allies, during theconference and thereafter, it took over a decadeto make them completely operational. Indeed,the Bretton Woods institutions remained largelydormant and undercapitalized until Europe andJapan recovered and were in a position to have asubstantial participation in their capitalization.This came about between 1956 and 1959 whenthe IMF was re-capitalized through increases inthe fund quotas. In fact, by 1959 European andJapanese reserves equalled those of the UnitedStates.16

The Actual Agreement of the Bretton WoodsConferenceThe agreement reached during the conferencewas to establish an international political,economic and commercial framework sustainedon four main pillars: The United Nations, as theumbrella organization, the World Bank, theInternational Monetary Fund (IMF), and theInternational Trade Organization (ITO). The UNsystem would encompass, through its specializedagencies, both international economic andfinancial management as well as developmentand emergency assistance of Third Worldcountries. The Bretton Woods institutions, asspecialized UN agencies, would support thedevelopment and monetary needs of membercountries.

I will examine first the BWIs’ pillars. The WorldBank, officially, the International Bank forReconstruction and Development (IBRD), wasoriginally in charge of the assistance required forthe recovery of the war-ravaged countries.However, the Marshall Plan was soonimplemented for that purpose, and the WorldBank, relieved of that task could concentrate ondevelopment, since it was in no position to fundEurope’s recovery. Thus, its official missionstatement is the pompous: To fight poverty withpassion and professionalism for lasting results.17

At the time of its foundation, the Bank’soperations were restricted to specific projects–many times as intermediaries– to source privatecapital and not to lend from its own funds, which,at the time, were very limited. There was only$570 million available that came from the U.S.allotment.18 Limited funds remained the situationuntil Robert McNamara, former U.S. Secretary ofDefence, became President of the Bank, in 1968,and redefined its scope and goals andsubstantially increased its resources for lending.

At this time, the Bank moved from project lendingto program lending, and, a feature that the Bankhad since inception, the “Conditionality Clause,”moved from project conditionality to programconditionality.19 This meant direct interventionin the sovereignty of the borrowing nation-states.For, whilst the project conditions were limited tothe efficient and rational use of the funds and tothe operational components of the project,usually, for an infrastructure project, the program




conditionality clause meant the directinterference of national policy in many areas ofgovernment. Therefore, the World Bank’scondition of lending upon compliance witheconomic and social policy prescriptions of itsown making, effectively meant a direct violationof the principle of sovereignty. It is true that,during the McNamara years, there was aredirection of funding into programs focused onthe reduction of poverty and there was lessemphasis on the funding of infrastructure.However, the “Conditionality Clause” in programlending would have a direct responsibility on theimposition of economic policy on borrowingcountries and, obviously, on the subjection ofthese countries to U.S. imperialist interests. Thisis done through the Structural AdjustmentPrograms (SAPs) introduced in the 1980s. Icannot emphasize enough the importance of thiselement at this point. It has represented, alongwith the IMF, –to be a bank member, countriesmust also be IMF members– the main instrumentof U.S. imperialist hegemonic control ofborrowing countries. This has become aconscious redirection of development andeconomic growth policies into neoliberaleconomic policy dogmas, that have onlybenefited the U.S. and the local oligarchies bymoving the world into what is known as the“Washington Consensus”; today’s new globaleconomic order, anchored on the neoclassicalparadigm, as its pundits wish to interpret it.Therefore, there is a clear contradiction betweenthe World Bank’s mission statement: –“to fightpoverty with passion and professionalism”– andits neoliberal prescriptions that, in conjunctionwith the IMF’s, widen the gap between rich andpoor, and especially devastate the poorest of all.There is much more to say on this later.

The other BWIs’ pillar, as noted earlier, is theInternational Monetary Fund. The main purposeof the IMF, as set forth in the conference, was toattain the stability of currencies among membercountries, avoiding competitive currencydevaluations, as had been occurring since the1920s; and to promote world trade and tomaintain equilibrium in the countries’ balance ofpayments. When countries fell into balance-of-payment deficits, they could borrow from the IMFin order to stabilize their currency under thecondition that they would not fluctuate theirexchange rates beyond 1% without prior IMF

approval. In order to maintain currencyexchange stability, the IMF has the surveillance ofmonetary policy in member nations as a keyresponsibility.

All of this makes perfect sense from a world tradepromotion perspective. Currency stability andbalance of payment equilibrium are desirableconditions for a healthy trade growth. Thus,apparently, the ultimate goal, therefore, is tosecure the optimum conditions for an expansiveworld trade. Without currency stability, worldtrade is trammelled. If a country falls intobalance of payment deficits, its capacity to importwhat its market demands is also trammelled.Thus, the above conditions are elements sine quanon world trade cannot grow.

It is quite interesting, however, to note how wellintentioned the stated goals appear to be and, aswe shall see later, how divergent they are fromthe IMF’s actual praxis. The first article ofagreement, as adopted at the United NationsMonetary and Financial Conference, BrettonWoods, New Hampshire, on July 22, 1944,contains the purpose for which the IMF wascreated. The objectives previously mentionedappear in this first article. Nonetheless, also inthis article, there are key stated goals that,concurrent with the previously stated goals, mustalso be achieved. These are the goals of attainingfull employment and real income and of avoidingmeasures, which would negatively affect thedomestic prosperity of member countries, in linewith the Keynesian paradigm. The specific statedgoals are:

(ii) To facilitate the expansion and balancedgrowth of international trade, and to contribute,thereby, to the promotion and maintenance ofhigh levels of employment and real income andto the development of the productive resources ofall members as primary objectives of economicpolicy.

(v) To give confidence to members by making thegeneral resources of the Fund temporarilyavailable to them under adequate safeguards, thusproviding them with the opportunity to correctmaladjustments in their balance of paymentswithout resorting to measures destructive ofnational or international prosperity.20



It is evident in the above goals that the ultimateaim is not world trade. Observing carefully,world trade is the vehicle to the intended result:High levels of employment and real income, andthe development of productive resources of allmembers. This is, therefore, the ultimate goal;and, consistent with it, there is the goal ofrequiring, in any adjustments to be made, theprotection of the domestic economy. However,the IMF’s interaction with its borrowing membersdoes not comply at all with its intended goals. Aswe all know, the malady at the threshold of thethird millennia, of the IMF’s borrowing members,is, precisely, the IMF’s prescriptions that requirethe reduction of the employment base and thedestruction of the domestic economies in favourof the global economy in line with the neo-capitalist neoclassical paradigm, from now onreferred to as the “Washington Consensus”. One element of major importance that Keyneswanted in the articles of agreement of the IMFwas the mechanism for member countries to drawfunds when in need of additional liquidity.Keynes wanted to have an international currencyissued by the world’s central bank. Keynes alsowanted to use this mechanism as leverage tobalance the power exerted by the U.S., aspreviously noted. However, the U.S. rejected theidea for several reasons: the original funding ofthe IMF was envisaged to be sufficiently large sothat the IMF would have no need for a specialdrawing mechanism; the U.S. considered that itwould remain a creditor in the system for a longtime, as it did; and, of course, the U.S. wanted tocontrol the system by having the dollar as theinternational currency. In practice, the formula todetermine the amount of funds provided bymember countries to the IMF was much less thanwhat Keynes had envisaged. He proposed 50%of the member’s total imports but, during theconference, it was reduced to 18%. Then, theproportion became even smaller when theamounts were not increased as world tradeincreased. It stands now at about 2% of theworld’s imports.21 In any case, in 1969, after fiveyears of much wrangling, the IMF Articles ofAgreement were amended to include the SpecialDrawing Rights (SDR), but these merely serve as aunit of account to settle international tradebalances and debts. They were pegged to theprice of gold, to which the dollar was previouslypegged –the dollar was pegged back to the priceof gold in 1947 at the rate of 1/35. Currently, the

value of the SDR is defined by using a basket ofthe currencies of the five largest exportingnations, but it is far from the original idea of beingan international currency unit. For having theSDR as a real international currency unit wouldeliminate the asymmetry that arises from thedollar’s permanent position as the currency ofinternational finance.

Let’s now briefly discuss the issue of surveillancefrom its origins. At the time of the conference,inflation was not a problem, and Third Worldindebtedness was non-existent. On the contrary,because of the war ravages, the danger laid inEurope’s deflationary prices. As for theDeveloping World, in the immediate years afterthe conference, the prices of commoditiesremained high and, thus, it was in no danger ofbalance-of-payment deficits. In fact, manynations remained as creditors of First Worldcountries for many years. Thus, at the time of theconference, inflation and indebtedness were notprevalent problems, a situation that later radicallychanged.

Indeed, since the late 1950s, the price ofcommodities has consistently declined, negativelyaffecting the Third World’s terms-of-trade.Because of this deterioration, and because ofmacroeconomic mismanagement and otherexogenous and endogenous reasons, which I willlater discuss, the Third World has becomeentangled in an unending spiral of borrowing andindebtedness to stabilize its monetary systems.These monetary stabilization measures requiredsurveillance, which has been performed, ofcourse, by the IMF. However, while there havebeen numerous imbalances in developingcountries, this, by no means, implied that they aretheir only generators. Many imbalances aregenerated by the exogenous influence of themuch larger developed economies. There arealso many monetary imbalances inherentlydomestic to these economies. The responsibilitiesof monetary surveillance by the IMF weresupposed to include, from its inception, allmembers. Unfortunately, in practice, the IMF hasleverage to influence only the borrower, despitethe fact that the most damaging imbalancesusually come from the First World, normally alender. Thus, since the First World does notregularly borrow from the IMF, it has shown noregard for its recommendations to coordinate




economic policy to prevent a crisis. It seems thatit has a tendency to cooperate only in times ofcrises while it refuses to include, in its domesticeconomic policies, international monetaryprevention considerations. For instance, between1977 and 1978, the U.S. was asked to act tostabilize the declining dollar, in the face of risinginflation, by resorting to anti-inflationarymeasures or exchange rate intervention. Instead,the U.S. pressured Germany and Japan todepreciate their currencies by inflating theireconomies. Obviously, Germany and Japanrefused to follow. The result was a stalemate.22

The unwillingness to play by the same rulesimposed on borrowing countries provides clearevidence that the IMF has been used as aninstrument of control of the Third World from itscreation. Thus, at the Bretton Woods conference,Keynes’ proposal for a 1% tax on surplusbalances, in order to cooperate with currencies’stabilization measures, was obviously sent intooblivion. In fact, this measure was in directopposition to untrammelled world trade, which atthe time was providing the U.S. enormousbalance surpluses, so much for the surveillance ofthe First World.

The third pillar referred to trade. The U.S. wasadvocating free trade since the early Rooseveltyears. It was considered an important vehicle ofgeneral prosperity and a deterrent of war conflict.Originally, the design of an organization,empowered to regulate world trade on anequitable basis, was supposed to be discussed atthe BW conference. However, participantsdecided that it was too important a part of theworld’s post-war economic structure and, thus,they agreed that it deserved a specific conference.The conference, however, was not held untilthree years later in Havana, from November 1947to March 1948, to create the International TradeOrganization (ITO), also under the umbrella ofthe UN. Keynes certainly considered the issue oftrade to be of utmost importance, and he agreedto some postponement believing that the ITOwould be created. However, Keynes died in1946, and the ITO was never created.

The answer of why the ITO did not come tofruition lies at the core of U.S. capitalism. It sohappens that the ITO charter, already signed byfifty countries, contained a proposal for theestablishment of anti-trust laws. This proposal

included regulations against restrictive businesspractices and employee and labour rights. Ascould be expected, the ITO charter was attackedby big business in the U.S. and, thus, the U.S.Congress, already immersed in a new isolationistmood, refused to ratify it.23 Trade policy in theU.S. is intimately linked to domestic politics andrequires the Executive Branch to attain priorcongressional approval for any trade agreement.Thus, the ITO was never ratified and, by the late1950s, it was considered a dead issue. There isspeculation as to whether or not Keynes wouldhave accepted the agreements of the conferencehad he known that the ITO would not beestablished. In my opinion, the other pillars wereas critical on his vision of a World governmentand would have not changed his acceptance.However, he would have certainly been veryupset by the U.S. non-compliance and wouldhave manoeuvred to try to implement the ITO.

Because it took more than three years for theBretton Woods participants to reconvene andnegotiate the ITO in Havana, twenty threecountries met in Geneva in 1947 and adopted asingle agreement on trade, which was supposedto serve as an interim accord until theimplementation of the ITO. This was the GeneralAgreement on Tariffs and Trade (GATT). Duringthe war, all recipients of Lend-Lease contracts hadbeen required to commit themselves to lowertariffs. These commitments were internationallyformalized in 1947 with the GATT. Theagreement was a very limited treaty, since it wasoriginally considered to be temporary. It lackedauthority and only included provisions formanufactured goods. It did not cover any tradeprovisions for price stabilization of commodities,an issue of critical importance to developingcountries. The absence of these provisions hasgenerated dire consequences for world trade forall trading parties. However, at the time, the U.S.and other industrial nations were satisfied withthe GATT’s limited charter and chose not tocomplete a treaty that would encompass all issuesand the interest of both developed anddeveloping countries alike. The key principle ofthe GATT was reciprocity. The commitment wasto establish reciprocal and mutually beneficialaccords aimed at drastically cutting trade barriersand ending trade discrimination,24 but, obviously,this reciprocity was valid only for manufacturedproducts where the U.S. and the recovering



warring parties of Europe had the overwhelmingadvantage.

There was a later attempt to provide protectionfor commodity prices through the United NationsConference on Trade and Tariffs (UNCTAD) in1964, but the First World chose to reject itbecause it provided more benefits to thedeveloping nations –actually it provided a morebalanced concept– and because, under the UN,each country had equal voting rights. I will coverlater in more detail this last issue, due to itsNorth-South transcendence.

Fifty years later, the world is enjoying, at last, theWorld Trade Organization (WTO). Nonetheless,alas, it lacks again any provisions for thestabilization of commodity prices. It is clear thatno act of contrition has been experienced by theFirst World, and the lack of fair game arenasremains evident.

The United Nations UmbrellaThe United Nations was supposed to be thegoverning body of the relations between theworld’s nations, encompassing in its realm all theareas of interaction between its members. It isnot a world government in the sense that it doesnot issue laws, but its purpose is to secure peaceand harmonize the entire realm of nation-staterelations and of the interaction of their societies.The United Nations was established in 1945,committed to preserving peace throughinternational cooperation and collective security.According to its charter, the UN has fourpurposes:25

• To maintain international peace and security• To develop friendly relations among nations• To cooperate in solving international problems

and in promoting respect for human rights• To be a centre for harmonizing the actions of

nations

The United Nations is composed, in the first level,of six main organs: the General Assembly, theSecurity Council, the Economic and SocialCouncil, the Trusteeship Council, the Secretariatand the International Court of Justice. In theeconomic realm, the United Nation’s Economicand Social Council (ECOSOC) is the principleorgan to promote higher standards of living, fullemployment, and conditions of economic and

social progress and development.26 Then, thereare the specialized agencies in the charter. Hereis where the World Bank and the InternationalMonetary Fund are inserted as part of the UNsystem, just like the World Health Organization(WHO), the Food and Agriculture Organization(FAO) or the United Nations IndustrialDevelopment Organizat ion (UNIDO).Consistent with the first level, the United Nations’charter outlines the objectives, structure andresponsibilities of ECOSOC in chapters nine andten. There it outlines, in a generic form, invarious articles of these chapters, the relationshipof ECOSOC with the specialized agencies.Nonetheless, it does not go beyond makingobservations, providing recommendations,requesting information and reporting to the UNSecurity Council.27 Nowhere in the charter is amandate nor the authority to manage or controlthe functions of any of the specialized agencies.

According to the “Rethinking Bretton Woods”Conference, the consensus at the originalconference was that the Bank and the Fundshould have been directly linked to the UN underone system as the centre of global economicmanagement. But the conference’s documentspoint out that, whilst this is true legally, inpractice there are two distinct systems: The UNSystem and the BWI System. The BWIs are ineffect specialized autonomous institutions thathave no obligation to consider, if they so decide,the opinion or positions of the UN System’sorgans and agencies. Moreover, it points out thatboth have two clearly distinctive ideologies,degrees of political support and resources.However, above these differences that existbetween the two systems, lies the most divergentand the most important: the decision-makingmethod.28

Here is the central root of most conflicts and ofthe dissatisfaction with the BWIs amongdeveloping nations. As noted earlier in essay I,whilst in the UN System the decision-makingprocess is through a democratic one-country one-vote system, with the BWIs the procedure isbased on one-dollar one-vote system. In thelatter, the voting concept is the same as that of theboard of a corporation. Those partners with thegreatest investments have the greatest share ofvoice. The others have an extremely limited




voice, which in practice, is no voice at all sincetheir monetary contributions are nominal. Thismay sound reasonable from a businessperspective, but companies are not democratic bynature and, thus, applying it to organizations thatmingle with the livelihood of many civil societiescontradicts the spirit of the stated objectives of theBWIs. For there is no possible way to implementfull employment and income strategies and theprotection of the domestic economies of eachnation, when the BWIs are subject to the needsand will of the industrial powers regardless ofeverything else. This dramatic divergence makesclearly evident the type of conflicts thatconstantly arise between developed anddeveloping nations; not only with respect to thetotally undemocratic system used in the BWIs, butalso with the reasonably democratic system of theUnited Nations. In the latter case, with the U.S.having only one-vote, its conflicts and itsboycotts, including falling on purpose in arrearson its dues, are famous.

In retrospect, the reason why the Bretton Woodsinstitutions have never become integrated in theUN system and are completely autonomous isobviously because the United States and otherFirst World nations want to have completecontrol of the world’s financial and economicarchitecture. There is ample evidence that atteststo this assertion. A scratch on the surface makesevident that the only reason why the capitalistworld’s economy is today immersed in theglobalization of the neo-capitalist paradigm isbecause of this design of First World control.Through this voting system, the conditionsnecessary to impose, by the throats of the ThirdWorld, this barbarian brand of Capitalismbecomes possible. Through this scheme, theBWIs have been used, by systematicallyconditioning their assistance, to imposecompliance with the demands for the opening ofmarkets and the adoption of supply-sideeconomics (monetarist theory) and thedismantling of demand-side economics(Keynesian theory of full employment and of theWelfare State). To be sure, the credit of thisimposition goes fully to the U.S.’ vision of its PaxAmericana.

There is more evidence to this situation. The U.S.has consistently blocked all efforts to move someof the economic assistance and support programs

to the UN and has maintained its will to keep allkey economic and financial responsibilities withthe BWIs where its power reigns. According tothe Rethinking Bretton Woods conference, theWorld Bank was originally limited to projectlending, primarily bridging loans from the privatesector, and it was not supposed to get involved inaid activities. After long negotiations and strongresistance from developed nations, the UnitedNations Fund for Economic Development(UNFED), the UN economic developmentagency, was approved in the 1950s, but, alas, itcontinued to meet strong resistance and itreceived minimal financial support. It was notuntil it was moved to the World Bank as theAgency of International Development (AID) that itwas sufficiently funded to provide soft aid to theThird World. Except during the KennedyAdministration –when there was a partial swingback to economic development in the UN withthe creation of the UN Development Program andthe Food Program, (UNDP and UNWFP)– thepattern has been consistent in showing that theFirst World wants the hard part of development:Finance, economic strategy, currencymanagement, balance of payments and trade,with the BWIs and the WTO. The so-called softpart of development: Emergency aid,environment, health and education, are left to theUN with much less funding. However, this goesagainst the original vision at the 1944 conferenceand against current development theories whereboth development areas must be managedtogether and not with two divergent entities.Thus, the hard part is managed with anundemocratic decision-making method at theBWIs, where the U.S. and the other G7s cancondition financial assistance to the imposition oftheir interests; and the soft part is managed at theUN, under a reasonable democratic process, butusually under funded by the economic powersand sometimes boycotted by the U.S. 29

Keynesian Economics in Practice and theConsolidation of the Welfare StateAfter the war, there were thirty years of asubstantial degree of true economic progress inmany of the nations with a capitalist system.Europe, Iberian America, Eastern Asia and thenation-members of the British Commonwealthexperienced true economic expansion and realsocial progress.



The recovery plan for Europe was initially goingto be carried out by the World Bank, but, when itbecame clear that it was a matter of U.S. nationalsecurity to enable Europe to recover, and thefunds required were much greater than originallycommitted, a new plan was needed. In 1947,Europe was still in a dire situation, and the winterhad been particularly harsh, with a great scarcityof many things. Concurrently, the frictionsbetween the U.S. and the U.S.S.R over Germanyhad already escalated into the beginning of theCold War period. Thus, the U.S. approved a planwith the purpose of enabling Europe to recovereconomically in order to secure its hegemony inWestern Europe as part of its detente strategy. Incountries such as France, Italy and Greece,communist philosophy had a strong force, and,thus, a quick economic recovery would reduce itsstrength and keep it at bay. Thus, over the nextfive years, the Marshall Plan funnelled aid forover $13 billion to sixteen European nationsincluding Germany, aid which was funnelledback to the U.S. economy, since Europe hadnothing to sell, and the U.S. had almosteverything to supply for Europe’s recovery.Subsequently, when China became a threat toU.S. interests in Asia, the U.S. established amutual defence treaty with Japan and providedthe necessary financial aid to fasten its economicrecovery. This was the beginning of theconsolidation of the U.S. as the imperialsuperpower of the West.

As a result of the Marshall Plan, Europerecovered, and its economy strongly expanded.The infusion of capital provided the energy torecover and Western Europe was able to achievegreat economic expansion for the next thirtyyears. Its tremendous growth was surpassed onlyby the even more impressive growth of Japan. InEurope, many new MNCs joined those alreadyestablished. Liberal democracy contributed muchto the consolidation of the Welfare State and tothe appeasement of the memories of war and theeconomic depressions of the inter-war years. Inline with the Keynesian paradigm, economicpolicy did have a very visible hand, and fullemployment was maintained, albeit economicgrowth was so strong that the economies ofWestern Europe seldom required thegovernment’s intervention. In 1957, theEuropean Economic Community was created bythe leading states of western continental Europe,

in order to increase the probability of maintainingeconomic expansion by sharing their newfoundwealth, created as a result of collective co-operation. In 1963, France and West Germanysigned a “special relation treaty” of cooperationthat buried for good any concerns of furtherconflict and provided the joint leadership behindtoday’s European Union. France blocked Britainduring the De Gaulle era, due to its “special”relationship with the U.S., but later it wasadmitted. By 1983, there were twelve prosperousEuropean nations in the union. All this prosperitywas fuelled by sustained increases in real wages,which gave way in Europe to a new culture ofmass consumption and materialistic values.

During the initial years of the post-war era, theold European colonial empires that had risenduring the previous century were rapidlydismantled, and a strong sentiment of nationalpride and optimism emerged in the old and newnations of the developing world. Britain gaveIndia its independence in 1947. The followingyear the Netherlands abandoned Indonesia.France lost Indochina soon after, and resisted,unsuccessfully, Algeria’s independence for eightyears until 1962; Portugal, too, eventually lostAngola and Mozambique. In 1956, Moroccofreed itself from its period of being a Spanish andFrench protectorate. The former Europeancolonies of the XIX and XX centuries, with theirnewly gained independence, initiated theirprocess of economic decolonisation, which hadstarted between the two world wars, bynationalizing key strategic industries, especiallythe oil industry, or unique enterprises such asEgypt’s Suez Canal. Land reform was, too, takenas a priority among several developing nations.Many of the developing countries, in line with thenew Keynesian paradigm, began to develop theirown welfare systems. Real wages and standardsof living improved substantially –given theextremely low benchmarks of reference– and arespectable degree of progress was attained,especially among some Asian and IberianAmerican nations. There was a genuine desire forprogress. Nationalism was high, and a renewedoptimism for complete independence and adesire for the re-vindication of their aspirations ofsocial justice, after long colonial oppression,became a top priority.




As for Japan, after the treaty with the U.S., itexperienced an explosive economic growth,equal to none. From 1954 to 1972, Japan'seconomy expanded rapidly. Building on its pre-war industrial base, Japan became the mostefficient manufacturer of a wide variety ofproducts, from the steel industry, chemicals andautomotive products, to consumer electronics.Rather than develop new technology, it based itsprogress on the adaptation and improvement offoreign production technology and madeeconomic development the chief nationalpriority. By 1977 Japan’s GDP became thesecond biggest in the world, and there had beendramatic gains in the standards of living in allranks of the Japanese society. During this period,Japan's’ Welfare State was consolidated. A goodpart of the success story of Japan was based on itsinsertion as part of the economic system of thepost-war Pax Americana, importing raw materialsand exporting manufactured products.30 Theother part was no magic formula. The traditionalways of industrial relations between businessowners and workers, indigenous to Japaneseculture, were maintained. This culture is verymuch in line with the Keynesian ethos, and itplayed a very preponderant role in the harmonybetween business and labour and in theimpressive increase in the standard of living of theaverage Japanese household.

From 1945 through the early 1970s, the UnitedStates experienced, up to then, its greatesteconomic expansion. By 1955, the U.S. wasgenerating 50% of the world’s production withonly six percent of the population. In twenty-twoyears, the GDP had increased 3.7 times to $775billion in 1967. Great investments were made inresearch and development by both governmentand the private sector, and the development ofthe modern U.S. multinational corporationsgreatly expanded overseas, buying localcompanies or opening entirely new operations.This period generated great real social progress inthe U.S. Between 1945 and 1960, twenty-twomillion people joined the work force. Realincome of the labour force grew 50%, and thenumber of people under the line of poverty wasreduced to half. The most important event was aconsiderable shrinking of the gap between richand poor. There were some losses for labour withthe Taft-Hartley Act of 1948, which limited thebargaining power of unions. Nonetheless, since

the middle of the social pyramid was widened tothe detriment of its deep bottom and some of itscusped, union activity appeased considerably.The middle class expanded tremendously withgreat strides forward in its quality of life. This wasalso the time when one of the lowest proportionsof immigrants arrived and when social differencesbetween the foreign born and those born in thecountry, and between Catholics, Protestant andJews, greatly diminished.31 However, this wasnot true by any means, in the case of Blacks andHispanics, they were still poor. Thus,concurrently with this new prosperity, there was amassive migration to the suburbs while newproblems and new ethnic minority ghettos sprangin the cities.

Meanwhile, for the “mainstream,” for the firsttime ever, education increased substantially, withevery new generation acquiring more of it thantheir predecessors. In general, the daily workschedule was reduced to eight hours and theworking week to five days. As a whole, theSocial Security System became well established,and there were addendums to its coverage. Still,it lagged far behind, in several aspects, to that ofthe advanced nations of Western Europe. But, atleast, many companies voluntarily offered paidvacations, retirement funds, health care coveragefor the entire household and other benefits whichthey were not obliged by law to provide.

In consequence, the standard of living, in terms ofeveryday comforts, greatly increased. Televisionbecame a staple in every house in the 1960s and,with it, the great society of massive consumptionwas born. With the improvement in the materialstandard of living, the service industry flourished,and the proportion of the white-collar work forceincreased strongly, while the blue-collar workforce’s share began to drop. The leisure industry,particularly, expanded and became one of themain propellers behind the expansion of theservice industry sector.

Much of this came about as the result of whatJohn Kenneth Galbraith denominated the “NewClass”: a class who pursues economic and socialachievement through education, seekingsatisfaction instead of toil out of work. Itultimately pursues leisure, hedonism and instantself-gratification through massive consumption.Unfortunately, although in the fifties and sixties,



Keynesian economics were in full swing, theincrease in affluence also produced a comfortzone from which to neglect the still visiblepoverty of a good portion of the population.This, as Galbraith asserts, is a result of theconstant belief that government is inefficient andits cost is a threat to liberty; this is the basis of thedominant view that the government should nothelp the poor. To be sure, the roots of thisphilosophy lie deep in the particular influence ofSocial Darwinism on U.S. culture.32

In consequence, because of this philosophicalethos, the great wealth of the nation, in spite ofthe great progress attained in this period, stilldraws the greatest social contrasts between richand poor of the developed world. Paradoxically,the “Land of Opportunity” showed manysimilarities with the countries of the periphery, inthe great social disparities of its classes. AsMexican intellectual Pablo González Casanovaobserved about the U.S. in the early 1980s, theimmense U.S. is surprising as an empire thatincludes at its core contradictions that are properof the former colonies. The classes and cultures,races and technologies, masses and minorities ofthe U.S. resemble those of the periphery, foralthough the U.S. is certainly different for itswealth and dominant modern energy, itresembles the colonies for its discrimination.33

It should be recognized, however, that, duringthis period, there were clear advances againstdiscrimination. Supreme Court Justice EarlWarren swept away the legal basis for racialdiscrimination during his long sixteen-year tenure(1953-1969), and, with this, the socialmovements themselves, especially of the blackpopulation, achieved important gains in socialjustice.

Overall, for almost thirty years, the welfare of allranks of society substantially improved in muchof the capitalist world. Both developed anddeveloping nations applied Keynesian economics.The First World consolidated its welfare system,and the Third World began its own. The mostimportant event: that the responsibility ofgovernment, by using a very visible hand andintervening in the economy whenever necessary,was to provide for the general welfare of all ranksof society, became the general assumption. Thatis, that the first responsibility of democratic

governments is to provide and maintain theconditions necessary for the common good.Since the economy is the human activity thatencompasses the use of all material andnonmaterial resources available for human life, itsdemocratic, rational and efficient managementmust exist. Therefore, democratic governments,which are the sole representatives of theirdomestic society, are responsible for managingthe economy in order to ensure that the wealthgenerated benefits all ranks of society in anequitable manner. The individual self-interest, aswell as the individual corporate-interest, bydefinition, and by enormous unquestionablehistorical evidence, cannot bring benefit toanyone but to themselves. Thus, the need forgovernment to directly intervene at all times inthe economy and manage it, acting as an agent tocompensate for the negative effect of the freeforces of the market, became clearly established.This intervention became accepted at the macro-level as well as at the sectorial or micro-level.Thus, through the Keynesian ethos, the welfare ofcapitalist societies prospered for almost thirtyyears.

The Collapse of Bretton Woods as OriginallyCharteredDid the welfare of capitalist societies reallyprosper? It did, indeed, in spite of the powerfulnegative forces that continuously moved in theopposite direction. Nonetheless, it could not lastfor too long when the views of the key centers ofpower did not agree with some gains in equality.There is ample evidence that some wanted asystem that could benefit none but themselves.Concurrent with the increased presence of themultinational corporation in the capitalist world,the management of the Bretton Woods institutionsconsolidated its grip on the periphery on behalf ofthe interests of the U.S. and the other members ofthe G7. As the “Rethinking Bretton Woods”conference asserts, the G7, with 12% of thepopulation, has “dictated” monetary policy,34

since inception, for all members; leaving, ofcourse, the rest completely unprotected against itswhims and interests. Thus, as time passed, theIMF became a real police instrument of the G7 onthe developing nations while no progress wasachieved on improving the terms-of-trade ofclient states.




There is ample support to this claim. The reportof the conference discusses a number of keyfindings that show the disruption of the originalmission of the BWIs in favour of the interests ofthe G7 nations, with the BWIs acting now as itsinstruments of control. The report relates anumber of the BWIs’ key activities that deviatefrom the original mandate:35

• The imposition of an economic agenda dictatedby the U.S. and the other G7 nations as aprecondition to borrowing. This is donethrough ready-made economic plans, whichlack knowledge of the real economy ofborrowing members.

• The securing of the capacity of borrowers toservice debt as a main priority, in spite of thefact that this is not included in the Articles ofAgreement.

• The high degree of overlap in the programs fordifferent countries, which look strikingly similarand concentrate on financial management withlittle regard to the real economy. Moreover,work is done on a country-by-country basiswith no coordination to avoid conflicts withother countries’ programs, especially in thecase of commodity price stabilization.

• A shift in emphasis at the World Bank fromproject lending to program lending.

• The imposition by the G7 of privileged creditorstatus for the BWIs, in spite of the fact that thetwo assumptions for this policy: that multilaterallending represents a small part of total debt andthat programs are successful and benefitborrowers have been shown not to be true orhave come into question by internal reports.36

This one-sided status in favour of theG7eventually contributed to the collapse of theBW system under the Keynesian paradigm. Thelack of a democratic system for the decision-making process had blocked any attempts fromthe part of developing nations to put in place astructure that would regulate trade in such a waythat all countries would get even handed terms-of-trade. As earlier noted, the terms-of-trade forthe suppliers of commodities remained largelyerratic with a clear trend towards the reduction intheir prices. The refusal of the G7 to implementthe ITO to regulate the trade of commodities leftdeveloping countries completely unprotected,while the developed countries felt very satisfied

with the protection provided by the GATT, whichwas limited to manufactured goods. This complete bias in the management ofinternational monetary and trade policy in favourof the G7 nations generated two major events,which brought major disruptions to the BWIsystem. In the early 1970s, the BWI system wasgreatly disrupted by the unilateral suspension ofthe convertibility of the U.S. dollar into gold andby the oil crises as a result of the abrupt surge inoil prices prompted by the OPEC oil cartel.

The first event was the result of the increasingmonetary interdependence of the G7’s currenciesand an unwillingness to cooperate, from the partof the U.S., to manage the growing monetaryinstability. This instability was mainly the resultof two factors: the increasing over-valuation ofthe dollar due to a surge in inflation, primarilygenerated by military expenditures devoted to thewar in Vietnam; and the adjustment of their owncurrencies by the U.S.’ major trading partners inorder to manage their own inflation. As a result,the Europeans and Japanese wanted the U.S. todevalue the dollar, in line with monetary logic,but, as earlier noted, the U.S. refused tocooperate. Instead, the U.S. wanted Europe andJapan to inflate the price of their currencies sothat the U.S. could maintain the dollar at fixedrate. Nixon’s political interests in the 1972 re-election were largely the motivation for the U.S.refusal. In order to assure his re-election, Nixonwanted to maintain the dollar as the pivotalcurrency of the system, fixed at the same rate; asituation which had been very beneficial for theU.S. for more than twenty years and which wouldavoid raising any domestic political problems.Thus, Nixon’s political interests prevailed overfinancial common sense –and internationalcommitments to manage monetary policy incoordination– and the U.S. refused to adjust thedollar. As a result, on August 15, 1971, the U.S.suspended the convertibility of the dollar withoutconsulting any of the other members. Then itattempted to push the dollar as the new systemstandard; but after two years of disagreements anda new environment of chaotic floating exchangerates, the G7 left the fate of monetary policy tothe whims of market forces. This event isregarded by many as the collapse of the BrettonWoods system and the start of a long inflationaryperiod.37



The other major event, which occurred with theoil crisis of 1973, completed the collapse of theoriginal Bretton Woods system. This came aboutwhen the OPEC (Organization of PetroleumExporting Countries) nations decided to retaliateagainst the collapse of oil prices and thesubsequent unilateral reduction in payments bythe world’s major oil companies, also known asthe “seven sisters.” Since the insistence ofdeveloping nations to introduce a commoditystabilization system had been systematicallyignored by the G7 nations, the oil producingcountries, through OPEC, quadrupled the price ofoil within a year. It should be noted, however,that, unlike the sudden increase in oil prices, theprevious collapse of oil prices came about over aperiod of twenty years. Thus, there had beenplenty of lead-time to avoid the problem; but theindustrialized nations refused to deal with thedeveloping countries’ demand to reach a pricestabilization agreement.

The sudden increase in oil prices generated asudden transfer of liquidity from oil-deficit-nations to oil-surplus-nations. Nevertheless, if theincrease in oil prices fuelled inflation, the lack ofcooperation for monetary management and theneed to recycle the excess liquidity in oil-surplus-nations exacerbated inflationary and recessionarytrends. This was the most direct effect of the oilshock and of the lack of cooperative managementof monetary policy and of commoditystabilization. However, these events –the oilshock and the lack of cooperation– also hadanother major indirect effect: the origin of thedebt crises of developing nations. With the oilshock, oil deficient developing nations, such asBrazil and Pakistan, suffered a new deteriorationof their terms-of-trade when the cost of theirimports increased drastically. Thus, they fell inneed of financing. However, the liquidity surplusgenerated by the oil-producing nations wasrecycled primarily through private banks, whichmade the cost of loans very high, placingborrowers into a debt trap. To find a solution,they required assistance from the IMF, which, ofcourse, placed them in a structural adjustmentprogram. Moreover, as it is known, the structuraladjustment programs have only exacerbated thedebt trap and directly deteriorated the socialindicators of borrowing nations.

In the case of oil-surplus developing nations, suchas Mexico and Venezuela, their new foundwealth drove them into large investment projectsfinanced through private loans supported by theguarantee of their huge oil reserves. However,when the price of oil collapsed, they fell into thesame situation as the oil-deficient borrowers. Inthe case of Mexico, the situation becamedramatic when it defaulted on its loan servicingpayments in 1982. This was the beginning of thestill-unsolved debt crisis of the Third World,which gave way to additional levels of inflationand recession everywhere, and to a reversal offortune in their path towards development.

We shall discuss the world crises from 1980 inmore detail further ahead. However, the keypoint to emphasize at this stage is that thedeviation from the original agreement at BrettonWoods, as a result of the systematic lack ofcooperation within the G7 nations and betweenthese and the developing world, gave way to thecollapse of the Bretton Woods system under theKeynesian paradigm. The more troubling result ofthis collapse, however, is not the immediate effecton the developing nations and the capitalist worldeconomy at large; but the conscious effort fromthe centres of power, primarily from the U.S., toimpose a new paradigm that is premeditatedlydesigned to further benefit the powerful few indetriment of the impoverished many.

It should be evident that there has been, from theearly stages of colonialism up to this day, asystematic effort from the centres of power toexploit other nations. Of most concern is theabsence of any evidence of a change of ethos dueto the supposedly advancement of cooperation.Indeed, up to this date, it is clear, that the will ofthe centres of power is still the same as inclassical colonial times: to maintain lessdeveloped nations as weak as possible in order tocontrol them and exploit their resources with noregard for human solidarity. To be sure, thedeveloping nations have not progressed becauseof their lack of will, skill or ambition, but becauseof the concerted effort of the powerful, both at thecore and the periphery, to obstruct their quest forsocial and economic freedom. As it will becomeevident further ahead, there is a clear partnershipbetween the local oligarchies and the centres ofeconomic power to maintain a very inequitableethos.




It is a sad but unavoidable conclusion, that thebarbarian code of conduct still prevails in thecapitalist world and that it is the origin of thepermanent inequalities between rich and poorindividuals everywhere and between developedand developing nations. The worst aspect of thisis the clear evidence that, as long as the lack ofwill for the advancement of social justice at thecentres of power prevails, things will be gettingmuch worse, and there will be no hope until thatwill is forced to change.

a Alvaro J. de Regil is Executive Director of The Jus Semper

Global Alliance

1 John Kenneth Galbraith, A Journey Through Economic Time

(New York: Houghton Mifflin, 1994) 115-119.

2 Ibid, 119.

3 George Duby and Robert Mandrou, Historia de la

Civilización Francesa, Spanish-language edition of Histoire de

la Civilisation Française, ed. (1966; México, D.F.: Fondo de

Cultura Económica, Armand Colin, 1958) 531.

4 John Kenneth Galbraith, A Journey Through Economic Time

(New York: Houghton Mifflin, 1994) 133.

5 Samuel Eliot Morison, Henry Steele Commager andWilliam E. Leuchtenburg, Breve Historia de los EstadosUnidos, Spanish-language edition of The Concise History of

the American Republic, ed. (1980 México, D.F.: Fondo de

Cultura Económica, The Oxford University Press, 1977)785.

6 John Maynard Keynes, The General Theory of Employment,

Interest and Money (New York: Prometheus Books, 1997) 26-

34.

7 Ibid, 257-271.

8 Ibid, 194-209

9 Jo Marie Griesgraber & Bernhard G. Gunter, “Promoting

Development,” Rethinking Bretton Woods, vol. I (London:

Pluto Press, 1995) 1.

10 Ibid, 2.

11 Economic policies to improve a domestic economy that

have adverse effects on other economies.




13 James M. Boughton, “Harry Dexter White and the

International Monetary Fund,” Finance and Development

September 1998: Vol. 35, number 3.

14 Joan Edelman Spero, The Politics of International Economic

Relations, Second ed. (New York: St. Martin Press, 1981) 36.

15Georg Schild, Bretton Woods and Dumbarton Oaks:

American Economic and Political Postwar Planning in the

Summer of 1944. (New York: St. Martin Press, 1995) 131.

16 Joan Edelman Spero, The Politics of International

Economic Relations, Second ed. (New York: St. Martin Press,

1981) 41-42.

17 World Bank’s Webpage: What is the World Bank’s

mission? As of 6/12/99





Pluto Press, 1995) 4-5.

20 IMF’s Webpage: First Article of Agreement, (i ) & (v). As of

6/12/99





Relations, Second ed. (New York: St. Martin Press, 1981) 64-

65.

23 Jo Marie Griesgraber & Bernhard G. Gunter, “World

Trade,” Rethinking Bretton Woods, vol. V (London: Pluto

Press, 1995) 94.





25 UN’s Webpage: UN in Brief. As of 6/15/99

26 UN’s Webpage: Overview/Organs/ecosoc. As of 6/15/99

27 UN’s Webpage: about UN/charter/chapters 10 & 11 As of

6/15/99




29 Ibid, 10-13.

30 Yamamoto Mitsuru, Japón después del Milagro (Japan after

the Miracle) (México, D.F.: El Colegio de México, 1982) 19.

31 Samuel Eliot Morison, Henry Steele Commager andWilliam E. Leuchtenburg, Breve Historia de los EstadosUnidos, Spanish-language edition of The Concise History of

the American Republic, ed. (1980 México, D.F.: Fondo de

Cultura Económica, The Oxford University Press, 1977)833.

32 John Kenneth Galbraith, The Affluent Society (New York:

Mariner Books, 1958) 248-262.

33 Pablo González Casanova (editor), Estados Unidos Hoy

(The United States, today) (México, D.F.: Siglo XXI

Editores/UNAM, 1984) 9.




35 Ibid, 13-18.

36 The World Bank’s Portfolio Management Task Force,

Effective Implementation: Key to Development Impact, also

known as the Wapenhans Report, has suggested that some

projects have not benefited their recipients and questions the

benefits of its structural adjustment programs.



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