The Political Economy of the Special Relationship

Anglo-American Development from the Gold Standard to the Financial Crisis

Jeremy Green

• Publisher: Princeton University Press
• Year: 2020
• ISBN:
  9780691201610
• Topic: Économie
• Subtopic: Économie politique

How America's global financial power was created and shaped through its special relationship with Britain
The rise of global finance in the latter half of the twentieth century has long been understood as one chapter in a larger story about the postwar growth of the United States. The Political Economy of the Special Relationship challenges this popular narrative. Revealing the Anglo-American origins of financial globalization, Jeremy Green sheds new light on Britain's hugely significant, but often overlooked, role in remaking international capitalism alongside America.Drawing from new archival research, Green questions the conventional view of international economic history as a series of cyclical transitions among hegemonic powers. Instead, he explores the longstanding interactive role of private and public financial institutions in Britain and the United States—most notably the close links between their financial markets, central banks, and monetary and fiscal policies. He shows that America's unparalleled post-WWII financial power was facilitated, and in important ways constrained, by British capitalism, as the United States often had to work with and through British politicians, officials, and bankers to achieve its vision of a liberal economic order. Transatlantic integration and competition spurred the rise of the financial sector, an increased reliance on debt, a global easing of regulation, the ascendance of monetarism, and the transition to neoliberalism.From the gold standard to the recent global financial crisis and beyond, The Political Economy of the Special Relationship recasts the history of global finance through the prism of Anglo-American development.

1

Conceptualizing Anglo-American Development

THE THEORY of hegemonic stability (HST) was foundational to the emergence of IPE. It was with the “really big question” of systemic transformation that the discipline was preoccupied during the turbulent period of the 1970s (Kindleberger, 1973; Cohen, 2008). Our understanding of the history of the modern global political economy has been shaped, since those early enquiries, by the theory’s assumptions. Scholars have identified different reasons for the rise and decline of hegemonic powers, but the commitment to a cyclical view of the history of the global political economy—punctuated by periods of hegemonic order under the leadership of a dominant state—is widely shared (Gilpin, 1975, 1983; Krasner, 1976: Olson, 1982; Keohane, 1984; Cox, 1987; Arrighi, 1990). Indeed, in recent years the concept of hegemony has made a pronounced return to political economy debates. It has been applied (awkwardly) to Germany’s regional leadership role within the Eurozone, with the country being chided for the “reluctance” of its leadership and the failure to properly fulfill the functions of a hegemon (Blyth and Matthijs, 2011; Bulmer and Paterson, 2013; Crawford, 2014). At a more appropriately global level, and framed more clearly within the cyclical sense of historical leadership transitions, the concept has also been resuscitated to make sense of China’s intensified global influence (Arrighi, 2007; Campbell, 2008; Beeson, 2013). The impact of HST within IPE is not, then, merely a matter of historical curiosity; it is a live issue with substantial relevance to how we think about contemporary global transformations.

According to HST, the history of the modern global political economy can be divided into distinctive phases of hegemonic leadership—the Pax Britannica from 1815 to 1914, followed, after a disorderly and illiberal interregnum during the interwar years, by the Pax Americana from 1944 to 1971. Under both periods of leadership, a single, hegemonic state is said to have sponsored a largely consensual and liberal order of trade and finance by providing public goods. Militarily, the hegemon’s overwhelming power ensured security and stability. While realists and liberals stressed, respectively, the centrality of the state and the importance of international regimes in cementing hegemonic governance, Marxists highlighted the importance of social classes and ideological consensus in promoting and sustaining a liberal order (Gilpin, 1983; Keohane, 1984; Cox, 1987).

Numerous authors have challenged this narrative, arguing that the case for UK hegemony during the nineteenth century is flimsy, and that the HST framework is of limited use in understanding the continuities and distinctions of the two liberal orders (Latham, 1997; Lake, 2000; Hobson, 2002; Lacher and Germann, 2012). Despite these challenges, the theory continues to influence our understanding of both past and present manifestations of order within the global political economy. This enduring influence is a problem. HST has produced a deeply misleading reading of the history of the global political economy: it views history as a sequential cycle of neatly defined periods of rising and declining power, or hegemonic leads and lags (Krasner, 1976; Helleiner, 1994: 14), and has treated the demise of the United Kingdom and the ascendance of the United States as neatly distinguished and analytically discrete (Gilpin, 1975; Keohane, 1984; Gilpin, 1987; Arrighi, 1994; Lake, 2000).¹

This chapter establishes the book’s theoretical framework by interrogating the HST narrative and its impact upon our understanding of UK and US capitalism in the postwar period. It does so by arguing that the cyclical history of hegemonic leadership within the global political economy has led to a declinist preoccupation within scholarship on the UK and the US, focusing on the causes and consequences of their economic and political decline. This declinist focus has foreclosed alternative ways of thinking about the transformations of capitalism within each country and, more important, the transformative relationships between the Anglo-American political economies and their effect on the global economy. Declinism has also obscured the importance of processes of Anglo-American development within the global political economy.

By shifting focus from decline to development, and from national power to transnational interdependence, the chapter builds an alternative theoretical framework of Anglo-American development. Drawing upon a heterodox tradition of political economy—which stresses the importance of the relationship between private banking, treasury control, and central banking—the chapter outlines the primary historical-institutional bases of Anglo-American capitalism and their transnational linkages. This framework has two major advantages. Firstly, it recovers the important and underappreciated role of combined Anglo-American leadership within the politics of postwar financial globalization. And, secondly, it presents a novel way of understanding both the emergence (and the limits) of US power within global finance, by revealing how America’s financial ascendancy was articulated in and through transformations within UK capitalism.

The chapter begins by examining the impact of declinist narratives linked to HST upon the study of Anglo-American capitalism. In the second section, the chapter critically engages the concept of structural power and outlines a developmental approach to global political-economic order. The third section establishes the theoretical basis for understanding the general relationship between banking and the state within contemporary capitalism. The specific historical-institutional foundations of Anglo-American financial development—and their role within the politics of financial globalization—are then outlined in the fourth section. Finally, a framework for understanding the linked transformations of domestic financial regimes within the US and the UK and the wider international monetary order is established.

A Tale of Two Declines

The onset of decline in the UK and the US was, according to conventional periodization, separated by almost one hundred years. The UK’s descent from the peak of its imperial power began in the 1870s, as German, Japanese, and US late industrialization eroded the privileges of pioneering industrial status (Gamble, 1990: 54; Pollard, 2002: 116). In the postwar period, with the UK crippled by debts, the preoccupation with UK decline was revived. For the US, the recognition of decline arrived in earnest during the early 1970s, as US trade performance deteriorated and the dollar was cut loose from the fixed gold convertibility enshrined at Bretton Woods. Yet, despite the substantial gap in the timing of the onset of the symptoms of decline, the scholarly recognition of the phenomenon in both states has been peculiarly parallel. This disjuncture between the distinctive historical periodization of decline in each country on the one hand, and the synchronized recognition of its effects on the other, is puzzling. It is explicable, in part, by the sheer endurance and intransigence of the UK’s condition of decline, which, having first been recognized by commentators in the 1880s, was still the prevailing framework for thinking about UK capitalism during the 1990s (Gamble, 1990). But, in another sense, the synchronicity of declinist narratives is a product of the specific historical interpretation of the international economy proposed by HST. Either explicitly or implicitly, assessment of the fortunes of both states was, from the 1970s, increasingly interpreted through this shared cyclical reading of international economic history.²

Scholars of UK capitalism confirmed its relative decline through an assessment of the UK’s postwar standing in comparison to US hegemony—more specifically, through an examination of the early postwar relationship between the two states that affirmed the UK’s newly junior status and shaped the UK’s prospects for prosperity. For the US, acknowledgment of the earlier rise and decline of the UK was both a way of making sense of US power in historical terms and, simultaneously, an early warning system for detecting signs of decline and learning the required lessons from the UK case to prevent it (Gilpin, 1975; 2002; Krasner, 1976; Calleo, 2005).

The shared international history within which thinkers on both sides of the Atlantic assessed their national capitalisms created a peculiar symmetry of declinist preoccupation. Scholars of the UK made sense of the UK experience, retrospectively, through the recognition of US predominance and the broader historical analytic of rise and decline enabled by this comparative framing. US academics viewed the crisis of the 1970s through the comparative historical lens of an earlier period of UK hegemonic decline and asked whether the weakening of US predominance and the breakdown of Bretton Woods might presage a return to the fractious, protectionist, and unstable tendencies of the 1930s (Kindleberger, 1973).

Although the historical roots of the UK decline debate are deep, there remains no consensus over its principal causes (Gamble, 1990: 32; English and Kenny, 2000: 279–300). But the very fact of decline itself is accepted. The same cannot be said for the parallel debate regarding the US. This decline is far more disputed. This dispute is due in part to the way the use of the UK case as a reference point for the US led to a premature diagnosis of decline. There is still no consensus over the question of whether US power has been in retreat; while various scholars suggested that it had experienced a pronounced decline from its postwar zenith (Gilpin, 1975; Keohane, 1982; Krasner, 1982), a contending group proposed that it had been redefined rather than suffering terminal retreat (Strange, 1987; Gill, 1991; Gowan, 1999; Konings, 2011; Panitch and Gindin, 2012). The declinists, similarly to their UK comparators, pointed to numerous different causes of decline (Gilpin, 1975: 46–47; Keohane, 1982: 66–68; Krasner, 1982: 33–42).

What matters for the focus of this book is the effect of these declinist narratives on understanding Anglo-American capitalism. One of the most important consequences of the debate over US decline is the ambiguity it has produced regarding the form and extent of US power and its projection upon subordinate forms of national capitalism. As with the UK, the focus on delineating decline has relegated other questions and concerns to the wayside. IPE scholarship became too concerned with the what, why, and how of the decline of the US and to the neglect of the underlying developmental processes that defined its role within the postwar international political economy.

By already accepting the legitimacy of the hegemonic-cycles approach to understanding IPE, these accounts fixated on exploring the transition from hegemony to decline rather than tracing how the development of US capitalism continued to shape the global political economy. Methodologically, the analyses focused on US power as a predominantly national question, which overlooked the extent to which the US state had already been internationalized through the reconstruction of global capitalism after World War II; the formation of Bretton Woods; the promotion of the international role of the dollar; and the extension of New Deal institutional patterns into Western Europe with the Marshall Plan (Maier, 1977; Gill, 1991; Gowan, 1999; Konings, 2011; Panitch and Gindin, 2012).

The Development of Structural Power

In response to declinist arguments within US academic circles, scholars developed alternative theorizations. Non-American scholars based in the UK or Canada, to whom overwhelming US power still felt very real, provided dissenting points of view.³ Susan Strange’s work was foundational here: her notion of “structural power” was the fundamental conceptual innovation underpinning the argument that US power had not diminished but had in fact undergone a transformation of form and function. Strange’s work served as an important corrective to the preoccupation with US decline; by shifting attention to structural dimensions of US power, she elucidated the continuing influence of the US in shaping the parameters of action within the global economy and promoting US interests.

Strange (1987: 565) defined structural power as “the power to choose and to shape the structures of the global political economy within which other states, their political institutions, their economic enterprises, and their professional people have to operate.”⁴ This refers to a state’s capacity to articulate the boundaries of political-economic action, order the pivotal institutions of the global political economy, and thus delimit the agency of other actors. It was less about directly exercising agency and consensual leadership in relation to other states, and more about structuring the options and choices of others through the weight of US power resources. As the nature of relationships between states changed, from the mid-1960s onward, structural power became more important (553). The US benefited from this transformation, with its structural power increasing. Continued US financial and military dominance were evidence of this enduring power (Strange, 1988b: 7–8); the notion of its “lost hegemony” was a pernicious myth.

The argument that follows in this book shifts our focus from cyclical notions of hegemonic rise and decline and moves it beyond structural power arguments. It also deepens our understanding of the developmental processes that underpin forms of global order. These processes are not adequately addressed within HST; neither are they captured by the concept of structural power. This is because Strange’s work contained no overarching or clearly specified theory of change (May, 1996: 185; Tooze, 2000: 286). The concept of structural power is based upon circular reasoning—the US has structural power because it can shape the choices and preferences of other actors, but it can do so only because it has already acquired structural power. Thus, while Strange captures a very important aspect of how structural power can be utilized once attained, she does not account for how such potential emerges over time. This failure creates a theoretical bias toward continuity and obscures the microdynamism of capitalist developmental processes and institutional change; Strange’s conceptualization offers no sense of how the institutional infrastructure underpinning US structural power arose. Attentiveness to these dynamics matters, because it is precisely these microprocesses that feed, cumulatively, into larger macroshifts in the prevailing orientation of the global political economy. The continuity bias of structural power provides no means to understand how existing orders came to be, or how new forms of order might emerge, and what characteristics they will likely exhibit. These neglected dynamics are integral to understanding patterns of transformation within IPE.

American structural power resources were, in fact, amassed through interactive developmental processes. Particularly in matters of finance, where Strange (1994: 104) identified US structural power as crucial evidence against decline, the historical development of structural power was tightly linked to the decisions and actions of UK policy makers and financiers. US bankers and policy makers, therefore, were not always able to steer these developmental processes toward intentional policy design and strategy—to “choose and shape,” as Strange puts it (1987: 565). US power did not only structure the options of other states; it was also structured by the actions of foreign states and social forces in critical ways that were hugely consequential for the type of global political economy that took shape. These dynamics do not only apply to the case of the UK, but also to other important national capitalisms too, as well as in issue areas outside of finance.⁵ In this book, the argument is that in the crucial area of financial globalization, Anglo-American development was paramount.

A further limitation of structural power, already alluded to above, is that it posits a one-directional outward projection of US power onto the broader global political economy. Contrary to the notion of structural power, US policies and practices also often ended up constraining and delimiting the possibilities for US development, and US choices and options were themselves structured in important ways by other powerful state and financial actors. In relation to other advanced capitalist states, this was a case of mutual dependence, something that structural power theories have failed to capture (Culpepper, 2015). The stress placed on the capacity of the US to “choose and shape” the structural foundations of the global political economy is excessively voluntaristic, overlooking the unintended and unexpected outcomes of codevelopment between capitalist states across time and space. As formulated by Strange, structural power never came to terms with the spatially and institutionally complex processes of transnational capitalist development that generated, often quite accidentally, the institutional capacities and infrastructure that both underpinned and, crucially, constrained America’s postwa...