The 1930s deserve their bad reputation. Unemployment, misery, for many people hunger and, for more, the lack of hope, went with all the other ills of the Great Depression. Then Hitler came to power and fascism around the world grew stronger. The invasions of China by Japan and Ethiopia by Italy, and the Franco rebellion in Spain that soon came to be seen as a kind of global civil war-all showed the way the world was going. Driven by economic pressures, the policies of democratic countries became more narrowly nationalistic; bilateral and preferential trade agreements increased and France, Britain and Holland did what they could to assert privileged positions in their colonies. Although the Soviet Union was hardly a worker's paradise, the very fact that it offered an alternative to collapsed capitalism stirred people's interest and the Kremlin had new cards to play with. The worried democracies, meanwhile, did little to check the rising strength of fascism and were led to make one concession after another. If the times had any redeeming feature, it was that they made people think.

In these unattractive surroundings, I graduated from high school in June 1933 and immediately offered my suggestions for improving matters. My graduation essay called for "comprehensive planning" as a remedy for "the failure of our outworn economic system." Sporting a fairly full-blown metaphor about children crossing a meadow who repeatedly fell into ditches because they did not heed the warnings of those who looked ahead, this paper said it was especially important for the government to keep businessmen from producing surpluses but, at the same time, to provide for "any and all emergencies." It argued that comprehensive planning was also called for in international relations and that this would have to be based on the people of each country having an understanding "as to the needs and desires of the rest of the world." Governmental alliances would not be enough because, as the Kaiser had shown, treaties could become "scraps of paper."

I have continued to be concerned with the place of the United States in the world economy and that is the principal topic of this retrospective reflection.

The subject is one that deeply divided Americans in the 1930s. Unprecedented prosperity had given way to deep depression, and many people believed that American capitalism was coming to an end. The debates about what to do were as bitter as the economic and political struggles for shares in what there was to be divided. While some harsh words were said about foreign debtors, competitors and imperialists, most Americans concentrated on what was wrong at home. That was nothing new. When in 1880 Winfield Scott Hancock said, "The tariff is a local issue," he was trying to fudge on his party's platform, but he caught the spirit of a country in which for a long time the domestic always won out over the foreign in economic policy.

The Hawley-Smoot Tariff of 1931 was only an extreme version of a trade policy that did not square with heavy American lending and investment abroad. It was more characteristic of the early New Deal to turn its back on the 1933 London Economic Conference than to put through the Trade Agreements Act, which gave the President the power to negotiate tariff reductions.

That measure-which makes 1934 a turning point in the history of American trade policy-owes its existence as much as anything to Franklin Roosevelt's wish to do something for conservative Democrats, one of whom was his own Secretary of State Cordell Hull, and to that Secretary's devotion to the lowering of tariffs, which he thought was also the road to peace. Henry Wallace, the Secretary of Agriculture, supported Hull because he saw tariff bargaining as the way to promote farm exports. Nevertheless, the trade agreements program endured and became the basis for the postwar multilateral arrangements for trade liberalization centering on the General Agreement on Tariffs and Trade (GATT) that have done so much to change the trading system of the world.

All that, however, lay in the future. In the 1930s one reason so many Americans were not greatly concerned with the economic problems of the rest of the world was that they did not think of their country as having any substantial power to affect what was done abroad. It followed that most Americans should look for ways of keeping the country out of war. When, in February 1937, the Council on Foreign Relations held a conference for university men, the participants were expected to support one of three positions: a modernized version of traditional neutrality; measures that would nearly isolate the United States from foreign conflicts; or joining in collective security measures to keep war from breaking out. However, my classmate from Swarthmore and I arrived at a fourth view. We thought that none of the proposed measures would either prevent war or keep the United States out of it. Therefore, the important thing to do was to figure out how to use those unavoidable developments to bring about the "decisive social changes" that we believed were essential and without which there could be no "effective collective action" in the future.

Just what that meant is none too clear at this distance. It certainly had to do with ending fascism, reforming capitalism, and providing a stronger means of international cooperation than the League of Nations. It was not an unreasonable view if you felt that sooner or later the Nazis would start a world war unless the democracies surrendered piecemeal.


Then war changed the way most Americans thought, how they acted collectively, and their ability to influence the rest of the world. It took several painful, costly years to make those changes, but thinking and planning started right away. Hardly had the Nazis invaded Poland when the Council on Foreign Relations, with the support of the Rockefeller Foundation, began to study problems that would arise at the end of the war (and what, if anything, could be done to deal with them currently). Later, the State Department and other parts of the government embarked on their own efforts. Private groups from all over the country joined in, some concentrating on specific issues, some grinding axes, others trying to see the big picture. Foreigners in the United States took part, and official and unofficial Americans went abroad to discuss ideas with friends and allies.

It was predictable that everyone should want to make the postwar world different from that of the 1920s and 1930s. It was not predictable that good ways could be found to do so and even less whether the United States-President, Congress, people-would accept such ideas, act on them, and stick with them. As Jacob Viner wrote in Foreign Affairs in July 1947, "The old schoolmen distinguished between the grace which inspires good resolutions and that other grace which provides the will to fulfill them. There is great danger that the American supply of the latter will fall far short of the State Department's supply of the former."

But it did not-at least not right away. Imperfectly, but to a remarkable degree, the American response met the immediate need. There was one more unpredictable element, the rest of the world. Without the cooperation of other governments, good ideas and a new resolve in the United States would not get very far.

Because the immediate postwar period is now seen as a time of American hegemony, there is a tendency for people to think the United States always got its way. Careful scholars know matters are more complicated than that. But when labels become commonplace, they often mislead, and that has happened to many people in this case. There is no doubt that the United States was the greatest power in the world. That did not mean it could impose a new economic system on the postwar world. There were at least four reasons for this.

First, for a long time Americans did not realize how strong they were. Plans for the postwar economy assumed that London would continue to be a primary financial center, the pound a key currency, and Britain a leading element in a multilateral trading system. Continental Europe was expected to return to a central position in the world economy-provided Germany could be kept from becoming a menace once again. Much of Asia and Africa was still ruled from European capitals. By the time Americans came to realize their own strength, the foundations of the postwar world had been laid and Washington wisely did not change course.

The second reason the United States could not always get its way was that not all American power could be used to shape the world economy. The planes may have stretched from one horizon to the other over Tokyo Bay when the Japanese surrendered on the Missouri, but that did nothing to rebuild factories or produce a set of rules for world trade.

Third-and most fundamental-the kind of international economic system the United States was advocating was based on cooperation among sovereign states; no country would engage in lasting cooperation unless its interests were served. Therefore, if the United States used its dominance to set up arrangements that served only American interests, they would be undone once other countries got strong enough-and if they did not get strong enough, American policy would have failed. That was clear to practical politicians as well as to postwar planners.

Finally, the Americans most concerned about the postwar world economy knew that a crucial problem was to restrain the United States. No one, in the 1940s, could feel sure that postwar American governments would be sufficiently different from their prewar counterparts to sustain the new lines of policy. An American commitment to international agreements known to be balanced bargains could be a potent argument for continuity and consistency.

Any careful study of the record will show that difficult and often unsatisfactory negotiation was the modality by which the postwar system was produced, not U.S. dictation. Of course, there was a bias. The Americans did the lion's share of the drafting (and most of the rest was British). Some things could not be done because Congress would not accept them; others had to be done because Congress insisted. American negotiators were known to invoke Congress as a bargaining weapon. When American performance fell short of what would have been desirable, other countries could only rarely force a change. Foreign governments had many irons in the fire and wanted to go along with American wishes as much as they conveniently could. The realistic recognition that countries with difficult balance-of-payments problems or large reconstruction needs had to be treated differently from the United States-whose economy had expanded during the war-meant that most foreign governments did not have to be in an uncomfortable hurry to live up to the principles they had agreed to.

This was not the only time that the United States accepted commonality in form that was not always matched in fact. Perhaps Americans simply recognized what the situation made reasonable, if not inevitable. To have been too stubborn or pushed too hard for full reciprocity and equality would have risked ruining the long-run prospects. Perhaps being a hegemon helped. By the 1960s and 1970s, when Americans began to find it annoying that other countries were not assuming more responsibility for international security and economic cooperation, Washington's power had declined.

Long before that point was reached, however, the new international economic order had been tested in a number of ways.


The testing started early, with unexpected events. For all the wartime planning, the United States was not adequately prepared for the part it was to play in European reconstruction. Nevertheless, through a number of channels, some ten billion dollars in aid was provided to Europe before the launching of the Marshall Plan. That famous effort was remarkable not only as an innovation in American policy but for the efforts, cooperative and national, it drew forth in Europe. Before the Marshall Plan was over, NATO was negotiated, rearmament began, the Korean War broke out and the United States was providing military aid in both Europe and Asia. Occupation policy in Germany was reversed and Japan was soon given its autonomy in economic policy-two major steps that further changed the world economy.

Not surprisingly, in these circumstances the dollar came to have a different place from that assumed at Bretton Woods. Most countries used exchange controls and, for some years, the International Monetary Fund could not play the central part it was supposed to have in liberalizing and stabilizing international payments. The International Bank for Reconstruction and Development moved slowly, was second to the United States in providing loans and could not do much in the short run to provide the underpinnings-material and psychological-for flourishing private investment. Trade liberalization, however, was not postponed, for two good reasons. The reduction of American tariffs while other countries continued to limit imports made an immediate contribution to righting imbalances. Had nothing been done until every country was ready to act, investment patterns would have been established that would have made later liberalization more difficult. Assistant Secretary of State Will Clayton, I was told, said it was important to act before the vested interests got their vests on.

It was not until the late 1950s that the world economy came close to matching the picture on which the new international system was based. But the contributions of improvisation and reasonably consistent adherence to the original ideas paid off. Great material progress which lasted into the 1970s seemed both to justify the new approach and to strengthen the ability of governments to cooperate.

The interplay of cause and effect is a matter for study and debate. The removal of trade barriers must have had something to do with the fact that international trade increased faster than production. But the great growth of international investment was also important and there was no general agreement covering that. Thus, the fact that the postwar depression that was widely expected did not materialize is not easily traceable to the commitments to international economic cooperation. Would cooperation have survived a serious contraction in the world economy? One way or another, the coexistence of the new order of international economic cooperation and a period of unprecedented growth and prosperity in most of the world augured well for both.

Remarkable economic changes took place in this period. Products never known before became commonplace; familiar products were produced by new processes. New firms and whole new industries appeared. All this changed the conditions of competition and helped some people while hurting others. Technological change was a big issue; there was a dispute about automation and the destruction of jobs in the 1950s and 1960s that foreshadowed today's concern about robotization and high technology. The technological revolution in agriculture-involving enormous investments made possible by public policy-began in the United States and spread to other countries. It played a constructive part in meeting the greatly increased world demand for food that resulted from the increase in population and income. But some of its other effects on international cooperation were damaging.

Naturally enough, recovery in Western Europe and Japan gave those areas greater economic weight in the world. As time passed, that was to have an effect on American policy. There were, however, other changes in the political and economic organization of the world that had a bearing on whether the international economic system set up at the end of the Second World War would work or not. That system, it should be recalled, was based on multilateral cooperation among governments that were responsible for their own national economies. With regard to international behavior, they made firm commitments on some matters and looser agreements for objectives on others. Each country was autonomous as to the character of its domestic economy (socialist, capitalist or whatever) and its performance (efficiency vs. stability, work vs. leisure, etc.), so long as it lived up to its international commitments. Reciprocity and equal treatment were basic elements in principle but imperfectly achieved in practice. Taken together, the numerous international agreements and the way governments behaved under them made up what can properly be called a new international economic system.

In principle this system was global. Most countries belonged to the United Nations, whose Economic and Social Council was expected to be more effective in guiding the world economy than it has proved to be. The major agreements on trade and finance involved only those countries willing to undertake certain obligations. In practice it was the continuing participation of several of the economically most important countries that was crucial to the system. Even among them, not everything could be reduced to rigid formulas, and occasional departures from the rules proved compatible with continuing cooperation. In practice the system has been very resilient. Nevertheless, its adaptation to some big changes in how the world is organized has left some unresolved problems.

Although the Russians were at the Bretton Woods conference, it was never clear whether they really wanted to take part in the building of a new international economic order-or how serious it would be if they did not. The cold war put that issue aside for the time being but raised new questions about the long-run economic relations of the First and Second Worlds, especially after the latter was enlarged to include Eastern Europe, China and several other countries. It proved not to be a serious disadvantage for the development of the new international economic order that the U.S.S.R. and its allies were outside and had to be dealt with by special arrangements. The biggest economic effect of the emergence of the U.S.S.R. as a superpower has come through the burdens of arms expenditures and the way strategic considerations have shaped policy on both sides, particularly for the United States. The impact of the Soviet economic system has been enormous on those who live under it but secondary for the rest of the world. East-West tensions strengthened the West's will to cooperate at certain times, but are now serious sources of divisiveness.

Far more important to the operation of the system than the omission of the Soviet bloc was the partial integration of Western Europe, something not seriously contemplated in wartime thinking about the postwar world (except by a handful of people). Though a nod was given to the possibility of customs unions and monetary groupings, the arrangements for multilateral cooperation among nation-states were not well equipped to deal with the appearance of major agglomerations. Once the path toward European integration was opened-starting with the cooperative arrangements that were part of the European end of the Marshall Plan and then, much more dramatically, with the creation of the European Coal and Steel Community in 1952-people came to expect much greater results than ever appeared. For a limited number of purposes, the European Community became a unit vis-à-vis the rest of the world; in other matters, its member-states continued to act separately; and sometimes they were in between, with preferential arrangements among themselves that were not always well regarded by the rest of the world. Without doubt, the strengthening of the European economy and the removal of historic barriers within Western Europe were major achievements of the postwar period. But the future remains unclear as to how this massive change will ultimately affect the international system, and also as to how cohesive the European Community will prove to be.

In the United States and Canada-and much less in Europe-Japan was not given much thought when plans were laid for the postwar international economic system. But by the time the peace treaty was negotiated, its economic counterpart was clear: a place would have to be found in the world economy to permit a resource-poor country with a talented, energetic people to live on economically satisfactory terms. Then came the unexpectedly rapid development of Japan into a major modern industrial power; it caught up to and often outdistanced North America and Western Europe as the premier producer of a number of key manufactures.

The liberal multilateral economic arrangements gave Japan great opportunities and the system's ability to accommodate this unexpected growth may be one of its major achievements. But neither Japan nor the other countries have done all they should. Perhaps time will permit the working out of arrangements for a fuller application of the system's rules and principles by all countries. There is, however, also a question whether Japan's economic success suggests that national and international policy principles based on the Atlantic industrial experience may be inadequate for the modern world.

No one seriously doubted that the changes in Europe and Japan, and the American reactions to them, had to be coped with if the system of international economic cooperation was to continue. But the dominant attitude toward the participation of the developing countries in the system has been that it was a secondary problem that could be temporized with. This is no longer true and was unwise from the first.

When the postwar planners thought about economic development, they looked mostly toward China but sometimes toward Latin America and Eastern Europe. They expected India to become independent but could not imagine that so many other countries would follow so quickly. Independence reversed the priorities of colonial times: growth took first place ahead of balancing the accounts. I remember an English economist who said, "I always told them there would be trouble with the balance of payments when the Indians began eating as they would like." That is not exactly what happened, but the new governments, democratic and not-so-democratic, were expected to produce results that it had taken decades-perhaps centuries-to achieve elsewhere. It was not independence alone that changed things-most Latin American countries had, after all, been governing themselves for over a century. People had new visions of what was possible; governments were judged by the standards of the mid-twentieth century welfare state, not the more rugged nineteenth century attitudes that had accompanied growth in Europe and North America. Maybe some of the most dangerous false expectations were those of economists who thought they had mastered development policy, endorsing first one formula and then another, counting too heavily on foreign aid, and using generalizations where particularization was needed.

Yet there was much success. Growth in the developing world as a whole has been high; hundreds of millions of people are better off in health, life expectancy and standards of living than their parents; most countries can earn their way in the world at much higher levels of production and consumption than ever before. The idea of new Japans entering the world scene may cause some trepidation, but surely the appearance of the NICs-the newly industrializing countries-is a mark of progress. The NICs also make another basic point. Not only are they quite different from most other developing countries but they vary greatly from one another-compare South Korea and Brazil. Differentiation is a better approach to the problems of the developing countries than treating the Third World as a whole. OPEC-the oil-producers' cartel-showed that, too.

There is, however, more evidence coming-China. How is it to be regarded? As the biggest developing country, but with a late start? As a late-starting communist country that is also less developed? As a near-NIC on the coast but with a huge hinterland? As falling into the category of countries whose absolute size makes their economy different from others, including India, the U.S.S.R., Australia, Brazil, Canada and maybe the United States? Or simply as a country different from all others, as almost any Chinese would say?

Unfortunately, the way the new international economic system dealt with these sweeping developments was all too often by giving the developing countries a special status exempt from most obligations and entitled to some kind of specially favorable treatment. For reasons that cannot be set out in detail here, this formula has not been very helpful to either set of countries. External pressure improves the performance of rich, industrialized countries; are poor countries likely to do better when fewer demands are made on them? Can the rich countries be expected to expose one domestic industry after another to competition if their access to the markets of developing countries does not improve in return?

Whenever lines are drawn on a generalized North-South basis, difficulties multiply and often lead to an impasse. To the extent that differentiation is acceptable, new possibilities arise, provided the stronger countries do not try too hard to take advantage of their positions. What is called for, I think, is not simply some improved method of bringing the developing countries into fuller participation in the international economic system that has been shaped by the older industrial countries, but a reshaping of that system itself.

Unfortunately, reshaping the international economic system to permit it to work better in a greatly changed world has not been regarded by the powers that be as a vital need-and when efforts have been made in the last decade and a half, they have not produced great success. It seems quite clear that the world is no longer as creative or farsighted in dealing with new challenges as it was in the 1940s, 1950s, and early 1960s.

This is not just nostalgia. Consider the record. By the late 1960s there was no serious doubt that the international monetary system needed reform. It proved hard to achieve. The unilateral American decision to stop exchanging dollars for gold in 1971 forced the issue and set everyone on a new course-but it hardly passes for cooperation. When a new system of floating rates was worked out, governments proved unwilling to let them swing beyond certain points and unable to agree what those points should be. The energy crisis of the 1970s ought to have seen a drawing together of the main consumer countries. But mostly their responses were divisive, and have continued that way as each country has tried to attain more security in its oil supplies. Who can be confident that the easier situation of oil supply and prices (resulting to an important degree from the depression of the early 1980s) will set these issues aside forever? In trade, the Tokyo Round took longer than the Kennedy Round and left important gaps in its achievements. At the end of a near fiasco last November, the GATT ministerial meeting called for a strengthening of the trading system, an eloquent plea from the very people who were undermining it. The record on the coordination of national economic policies is very unsatisfactory even though the effort was moved from what is usually called the working level up to the summit.

Many people see this deterioration of cooperation as primarily a product of the 1970s. Certainly that was a time of troubles. Some were new, notably the oil shocks and the souring of U.S.-Soviet relations before the most serious effort to improve them had a reasonable trial. But other developments-new heights of inflation and new lows in productivity growth, and the spread of macroeconomic failure to most major countries-were at least in part an extension of past troubles. That was also true of the difficulties with the international monetary system and with the American economy. It seems to me preferable to stress the links between the 1970s and the earlier decades than to look for what it is now fashionable to call a discontinuity.

The depression of the early 1980s is another villain in the piece. It increased all economic difficulties and pushed governments even further to let domestic pressures take priority over international considerations. Recovery will ease matters, but will not restore the status quo ante-much less create a more satisfactory state of affairs.

The unique troublesome features of the 1970s and the early 1980s should not be stressed to the point of making the period from the late 1940s to the early 1960s sound like a golden age of international cooperation and economic growth. Growth there was, but it was not uniform, not guaranteed, and not as smooth as it looks in hindsight. Cooperation was more the result of tough bargaining than of a harmonious atmosphere and widespread altruism. Exaggeration suppresses the failures and difficulties: much was not done that should have been done and even the second best was often unattainable. The real reason for looking back is to discern the main sources of deterioration; only then can one see what the chances are of doing better in the future.


Some of the reasons for the deterioration of cooperation are to be found within the system itself. Never in world history has there been so much reliance on multilateral agreements and international organization. Although the major institutions have shown themselves to be flexible and durable, time has reduced the resilience of some.

From the very beginning there have been gaps and weaknesses. The U.N. Economic and Social Council never did the coordinating and guiding that was once expected of it. Although a few U.N. agencies have dealt effectively with economic problems, the general record is not encouraging. Part of the explanation lies in the large number of countries involved in most efforts, the emphasis on national sovereignty, the frequency with which issues fall into a North-South or East-West pattern, and the unwillingness of the economically stronger countries to let themselves be outvoted on matters of substance by a majority of poorer, weaker nations. The creation in 1964 of the United Nations Conference on Trade and Development (UNCTAD) as a place where the richer and more industrialized countries have had to respond to the wishes of the developing countries has had its uses, although the material results have been fairly modest.

The industrial countries have also not been willing to push ahead with the process of cooperation and building institutions. An International Trade Organization (ITO), repeatedly said to be essential to the success of the International Monetary Fund and the World Bank, was both proposed and abandoned by the United States at a very early stage. The breaking point was an investment code unwisely asked for and then opposed by American business. (That was neither the first nor the last time that organized American business did not distinguish itself by its foresightedness.) Massive investments have done much to change the world economy, but there are still no broad multilateral agreements about them. There have also been no adequate replacements for other chapters in the ITO Charter, on commodity agreements, restrictive business practices and the relation of national economic problems to trade. We have the General Agreement on Tariffs and Trade-but significant parts of world trade escape it, and its provisions and organization are inadequate to deal with disputes stemming from the clash of national industrial policies and structural changes in the world economy. The Articles of Agreement of the IMF were drafted on the assumption that capital movements would be controlled by national action, but this does not much happen any more. So far as I know, no one ever tried to work out the kinds of agreements Eugene Staley, an American economist, proposed in 1944 (in a report to the International Labor Organization) for matching the rise of industries in developing countries with the changing structure of production in the older economic centers. It should not have required a debt crisis to make people realize that the connections between trade and finance were not being well handled by the international agencies-or anyone else.

A second major source of the deterioration of cooperation lies in the problems of managing national economies. It was hardly a new thought in 1945 that governments were responsible for their economies, but the idea took on a new meaning once it was believed that governments not only should but could prevent depressions, guarantee something like full employment, and keep the unemployed, the old, the weak, and even just the feckless from the depths of poverty and its ills. This new social contract brought benefits that were not only humanitarian but economic. It is not always easy to tell them apart, as human capital is every country's major resource, and people sense that there are links between economic security and political cohesion. At the same time it is clear that welfare and security for individuals can have social costs if they reduce the flexibility of economies, put budgets out of control, blunt incentives and initiative, and foster too much consumption at the expense of investment. There are complex interrelations among entitlements, the veto power of certain groups, the political process, and both macroeconomic and structural policies.

A period of considerable success in economic management in most industrial countries has been followed by doubts about the ability of governments to govern. The backlash against government programs has underestimated their durability-perhaps because there are so many beneficiaries. Imperative as it may be to reduce the burden of some social costs, governments cannot escape responsibility for what happens to the poor, the old and the unemployed. Health as an objective of public policy is growing, not diminishing, in the importance most people attach to it. Deregulation is often highly beneficial-perhaps especially when it is opposed by those who are regulated-but there is no evidence that laissez faire is around the corner. People support most measures to improve the environment. What is increasingly being sought is clarification of objectives, costs and how to get results efficiently. Who should choose the necessary tradeoffs is a fundamental political problem.

All this makes it very hard to balance the demands of a democracy's public-which is often many publics-with a responsible overall management of the economy through traditional macroeconomic policies dealing with fiscal and monetary matters-and now with the simultaneous pursuit of a number of specific economic objectives with regard to productivity, trade, industrial structure, regional balance and other matters. Unemployment and inflation make everything more difficult and create specific pressures of their own. Naturally, these domestic pressures are the ones that every government feels the most acutely. Legislators and executives do what they think has to be done and hope that the international effects will take care of themselves or can be lived with. And if some of the burdens and costs of dealing with a domestic problem can be dumped on other countries, so much the better-if one can get away with it.

Increasingly, though, one cannot. Very few countries can cope with their so-called domestic economic problems without taking account of the international economy. They cannot safely assume that other countries will absorb whatever dislocation comes their way without reacting. Ironically, past success in cooperation has contributed to the present deterioration and that deterioration seems likely to continue. Barriers to trade and investment have come down, money moves freely around the world, the ability to insulate is limited and, regardless of a government's intentions, the effects of its actions may be felt abroad. Consequently, the gaps in the system of economic cooperation are more serious than they used to be.

At the same time, the troubles every country has with its domestic economy are harder to deal with because all economies are so exposed to one another. This is the paradox of interdependence. It is so well recognized, and so much written about these days, that there is no need to expand on the subject. It is necessary, though, to underline the basic challenge that interdependence poses. It was put clearly and forcefully by Ramsay Muir, a British Liberal, in The Interdependent World and its Problems, published in 1933:

We have entered a new era, the era of world-interdependence; and this interdependent world is threatened with chaos because it has not learnt how to adjust its institutions and its traditions of government to the new conditions.

The situation has been familiar for many years: national politics and international economics. There are parallels in security. We are not about to see the end of the nation-state, so the tension will continue. There could be some pulling back from interdependence: some lines can be cut, some flows dammed, in the interests of gaining a freer hand to shape the national economy and meet domestic pressures. But for most countries, the area of maneuver is very limited; reducing interdependence is likely to mean reducing resources; the cost of extensive disturbances of established patterns of production, consumption and trade is likely to seem rather high. Some of these prices may have to be paid, if only because other countries will not cooperate to reduce them. Before asking what it might be reasonable to look for in new cooperative measures, it is worth asking whether there may not be other forces at play, pushing the world economy toward greater internationalization and further limiting the ability of governments to manage domestic affairs on a purely national basis.

Business is one possibility. Its internationalization is a complex process that has been gaining ground throughout the postwar period. This is not just a matter of the spread of multinational enterprises. The late Judd Polk argued long ago that we should focus on the characteristics of international production and its financing rather than on organizational forms. In many different ways, and through various kinds of financial links, the internationalization of business changes (and may conceal) who controls what and whose assets have to cover what obligations. It alters the meaning of national policies and the reach of national measures. Private business has to negotiate with governments but also has a certain freedom of action. Is it possible that, as entrepreneurs pursue their interests in flexible and ingenious ways, they will bring about a creative adaptation of the world economy to the new interdependence? It is, but that cannot be the whole answer. There has to be some means of asserting the public interest, and neither theory nor practice says that the invisible hand of the market will do so.

Moreover, there are many public interests and they have to be blended, compromised and offset. Present (and past) practice calls for all these interests to be balanced, fused or organized in the process of arriving at something called the national interest. This is not a very sensible procedure and becomes increasingly less so as economies are internationalized and their boundaries blurred. (Does anyone doubt that what happens to American companies abroad affects American as well as foreign interests? In what sense are foreign-owned companies in the United States "American"?) Quite often, businessmen try to avoid bringing their "own" governments into disputes with other governments for fear that their own interests will be lost in the pursuit of other national aims. Surely we ought to make better use of the fact that most international economic issues involve clashes of interests within each country. Why have better ways not been invented to let private people make their cases to international bodies and foreign governments? Is it simply cultural lag? Or is it the inevitable consequence of the fact that the "consent of the governed" is asked and given entirely on a national level?

Along with business, technology has been a major force creating interdependence. The 50 years covered in this essay may have set a record in shrinking the globe. Perhaps the most dramatic economic effect has come from the almost instantaneous movement of money around the world. This technological marvel may not be all to the good. Years ago when my brother wrote one of the earliest papers on electronic banking, my wife said, "but I don't want the money taken out of my bank account as soon as I hand over my charge card." Governments may feel the same way, as they try to control their money supply.

What can you do, though, in the face of technological change? "Speed up the reaction time" is a common answer. But people are increasingly uncomfortable with the idea that they will be pushed around by machines or some disembodied force called Technology. What is the cost of resistance-to become Luddites, or laggards in a technological race all countries are forced to run? So far as one can see, most governments have opted for speeding up the race, but often get poor results. Can the race be run to the advantage of all-perhaps by increased internationalization of the effort, through private and public channels? Or do we ineluctably make it a zero-sum game if we all want the same thing-the lead?

As in the case of interdependence, we are back at a basic choice that wise men recognized long ago. In 1939, Eugene Staley wrote, in World Economy in Transition:

Fundamental technological changes are pushing mankind in the direction of world-wide economic integration and interdependence, but . . . political tendencies . . . have strongly resisted that trend . . . . It would be unfortunate if inability to solve the political problems connected with a world-wide economy should snatch away the productive advantages . . . offered by our technicians.

Many people, then and since, have accepted this proposition-but how much international action has been based on it?


With the international economic system in a troubled state, the United States faces hard choices. In the 1930s it tried to stand aside. In the 1940s it took the lead, and by the 1950s it had, for the first time in history, played a key part in leading the world into highly developed arrangements for international cooperation. In the 1980s, it is again in a new position.

The internationalization of the American economy has outrun people's understanding of its implications. More than ever before, we cannot put our own house in order except by relating the American economy to the rest of the world. In trying to do that we have trouble because our pluralistic methods greatly complicate our dealings with other countries. It is not just a matter of government and business, Congress and the President: the courts play a key part in economic matters; it is hard to know when a ruling on the environment or something else is final; the actions of independent regulatory agencies affect foreign countries; states and cities deal with foreign investors and Canadian provinces (it makes sense for New York to buy subway cars in Canada but Michigan and Washington do not agree). In my recent work I have been repeatedly struck with how many current issues I first encountered as an undergraduate in a seminar on government and business. They were hard problems then, when we rarely looked beyond the American scene; they are harder now when the international dimensions cannot be ignored, whether we are talking about coal, steel, antitrust, banking reform, or the Securities and Exchange Commission.

Macroeconomic policies that worked fairly well in the past have broken down and have not been replaced by anything worth having. America's adaptation to changes in the world economy and in technology is very incomplete. This is reflected in selective protection, high general unemployment, extraordinarily high unemployment among some groups, the related deterioration of human capital and the educational system, the slump in productivity growth, reduced international competitiveness, low investment in times of high consumption, a variety of business practices and labor attitudes, and some aspects of inflation. The recent depression has made things worse, but recovery will not eliminate the basic problems.

On top of everything else, the United States has to cope with frustration. The world economy is not what many Americans expected it to be, or what they thought they were promised in the bargains that created the postwar institutions. The frustration that fueled the American outburst of disruptive economic nationalism in August 1971 can still be felt strongly today.

There are good grounds for some of these reactions but not for others. Americans are not free to conclude that the international economic system is tilted against them unless they also recognize that the United States has not been laggard in looking for special treatment for its own problems. It led the way in putting most agriculture outside the arrangements for trade liberalization (and now wants to push some back); it did the same for cotton textiles in 1961 and then, ten years later, for man-made fibers; since the 1950s the United States has pressed Japan to restrict exports of one product or another and then formalized such arrangements in Orderly Marketing Agreements extended to other countries. The list goes on: export subsidies that violated GATT rules; delays in conforming on other matters (American Selling Price and the injury test for countervailing duties); bilateral arrangements made without much regard to the multilateral rules (steel and autos). Foreigners have a right to ask how much weight their interests have been given in the shaping of American fiscal and monetary measures.

It is quite true that most other countries behave at least as badly as the United States in these matters and frequently worse. There is no doubt that some foreign governments and their negotiators believe they can get away with some things because the United States will not always retaliate in kind-or will not be effective if it tries, because its government is cumbersome and has its hands tied by legal limits and procedural requirements unknown in most other democracies. This only exacerbates matters and can lead to a good deal of trouble because the United States is not immune to economic nationalism. Support grows for the view that the United States should hit back, "give them a dose of their own medicine" and so on. If that approach is embodied in law, any American administration will have only limited freedom of action; if the approach gains strong political support, the forces that made for cooperation will be reversed. If that happens, they are likely to stay that way for some time to come.

Americans are in danger of misunderstanding their place in the world. Oversimplified statements about the decline of American power have confused people. How would we like it if Europe and Japan were still economic weaklings and no one in the Third World had reached the level of the NICs? The end of hegemony need not be traumatic but it requires adjustments that have not been handled very well. The United States and other countries share responsibility for this.

It is wrong to say that the United States is a country like any other. Our dollar and our missiles prove that. It is also wrong to suppose that American interests will be well served by old-fashioned narrow nationalism modified by contemporary neomercantilism. The final fallacy in this series is to believe that the loss of power means the United States has no responsibilities for the repair of the international economic system. True, the United States cannot do the job alone, but neither can anyone else. The United States has a veto but so do some others, and no one can be counted on to use it very constructively. Nothing major can be done without strong American participation and from that fact stem responsibilities.

Before they can act on these responsibilities, however, Americans have to do some serious rethinking about what they want in the world. They have to get used to defining their interests in terms of both the domestic economy and the world economy. Unless they are prepared to make some changes in both spheres, it is hard to see either why the international deterioration should come to an end, or how the American economy will overcome the obstacles to satisfactory performance at home and the ability to compete internationally.

Using the historical perspective of this paper, one could say that Americans need a sense of concern about their own economy comparable to what they had in the Great Depression-and about the world economy of the sort that they developed in the 1940s. Naturally, the measures taken in those earlier times are not right for today. It would mean little to say we need a New Deal, but let us recall that the New Deal was neither an ideology nor a full-blown program; it was highly pragmatic and comprised experimental approaches to many problems. We need some of that spirit now.

When I say we need to look at our relation to the international economy as we did in the 1940s, I do not mean that we should simply refurbish and patch up the structure of international agreements set in place then. For years my studies have shown that these arrangements are not adequate for the kind of world we live in now. It is vital to improve them, but that is only part of what needs to be done, as Miriam Camps and I have recently argued with regard to trade in The New Multilateralism.1 Action will be needed in a number of fields-trade, money, energy, the debt issue and development finance, the relation of national economic policies to those of other countries, investment, industrial policy, raw materials and the movement of people. We should have long-run objectives even if they remain unattainable for some time, and also practical programs for immediate action. But we should not proclaim our adherence to such commonly heard objectives as a new Bretton Woods, or free trade, or getting the government out of the economy.

It is not "Bretton Woods" that has broken down, only the provisions for more-or-less fixed exchange rates. The replacement part-floating rates-has not performed as we hoped and itself needs repair. We also need a clearer understanding of the obligations of debtors and creditors to cope with troublesome debts. Our best chance to meet these needs is to build on the rest of the Bretton Woods system itself: the IMF, the processes that have grown up around it, and the basic principle that a common interest in money and finance requires continuous cooperation centered in an institution that both helps countries and puts pressure on them. "Free trade" has never been an American objective, is not mentioned in GATT and would not be accepted by many governments without massive and disillusioning exceptions. Freer trade is another matter. Getting the government out of the economy cannot be a realistic objective-for the United States or anyone else-no matter how desirable it may be to end various kinds of intervention and regulation. But there are questions about how the international impact of interventions should be handled when different governments have different practices.

It is hard to escape some use of oversimplified tags as shorthand, but to let them become the clichés of journalism, and then of speeches and policy pronouncements, is dangerous. By obscuring complexity they inhibit thought; by preaching perfection they invite accusations of hypocrisy and lay the foundations for frustration. If we want a single label, let us adopt Miriam Camps' coinage, "The Management of Interdependence."2 This is not achieved by some single act but calls for continuing, complex activities, domestic and international, which require more imagination, ingenuity and stamina than have been evident for some time.


It is not the United States alone that has to show these qualities-or, for that matter, do the thinking that is called for about the international system. If other countries too do not exercise their responsibilities, then any efforts the United States may make will not arrest the deterioration of the international economic system (though they may improve the position of the United States). Not every country has to cooperate and not all have to play an equal part in every activity.

Indeed, one of the most difficult questions to be faced is which countries are crucial for which activities. The formula cannot be the same as in the 1940s; and this raises a delicate, even dangerous, issue. In a world in which some degree of equal treatment and some sense of reciprocity are essential to get sovereigns to cooperate, should one wait for a broad consensus or encourage a few major countries to push ahead of the rest? And can that be done without undermining the basic character of the system?

As countries go through these processes, they should be doing more than preparing negotiating positions. They should be talking with one another about directions, objectives and constraints. They should make proposals, however tentative. If other countries do not do this, they will encourage one of the worst habits of the U.S. government, which is to work out fairly ambitious programs on its own which take realistic account of the domestic play of forces needed to get support for them-and then to present to the rest of the world programs so tailored to American needs as to incite suspicion, and so linked to political bargains in the United States as to impede negotiation.

There is no need to think in terms of major new international conferences-within or outside the U.N. framework-to discuss all these matters. The time for that is in the future and will not ever arrive if the recent deterioration of cooperation is not stemmed. There is also no need to wait for new ideas. The failures of recent years have not come from lack of imagination or of practical proposals, but from the unwillingness of governments to adopt them. Naturally, new ideas are always welcome, and sometimes they provide just the twist needed to make something acceptable and manageable. More often than not, though, new ideas can only very slowly be built into bases for practical action. (One reason the American proposals to extend the principles of trade liberalization to services led to nothing more than a two-year study in GATT was that so few people in foreign countries had done any thinking about the subject.)

Prescriptions abound, and there is no space to lay out a detailed agenda or offer the author's favorite programs in some or all fields. The agenda lies to hand. Where better to start than with the issues on which governments have failed to agree for the last decade and more?

-The unfinished business of the Tokyo Round-such as tightening the conditions under which countries can temporarily restrict disruptive imports, breathing life into the codes on subsidies and other matters already agreed upon, and moving ahead in the directions proposed at the GATT ministerial meeting of November 1982;

-Serious negotiations about fitting the NICs more fully into the world economic system, plus a realistic appraisal of the long-run trade requirements of developing countries-this last could be linked to the handling of the debt issue, the newest big question and one which governments seem more disposed to cooperate on than other matters, perhaps because their fear is greater;

-A reassessment of the energy situation before too many countries go too far on the assumption that there will never again be an oil problem;

-Finding ways to deal with clashes among national industrial policies;

-Finally coming to grips with the better management of exchange rates, which may well require going behind them and asking if it might be possible to do something about the world's money supply and the cumulative effect of national fiscal policies.

The list goes on, but this is enough to show that what is missing is not an agenda but action on it.

Many people hold very strong views on these matters. But the larger need-of repairing the damage to the international system-will not be best served if each country insists on every jot and tittle of a particular way of handling a problem. Details are immensely important in international economic relations, but imperfect arrangements often work. Logic has its limits in human affairs and the world has done quite well with arrangements that could be shown on paper to be fatally flawed. Internationally as well as nationally-and perhaps even more so-we live with a constantly changing interplay of forces which cannot always be either prevented from hurting others or channeled toward constructive results. As law is an incomplete remedy nationally, so are fixed commitments internationally-even if governments have agreed to them. James Madison laid out the fundamentals in Number 10 of The Federalist:

The latent causes of faction are . . . . sown in the nature of man . . . . The regulation of these various and interfering interests forms the principal task of modern legislation . . . .

It is in vain to say that enlightened statesmen will be able to adjust these clashing interests, and render them all subservient to the public good. Enlightened statesmen will not always be at the helm. Nor, in many cases, can such an adjustment be made at all without taking into view indirect and remote considerations, which will rarely prevail over the immediate interest which one party may find in disregarding the rights of another or the good of the whole.

The inference to which we are brought is, that the causes of faction cannot be removed, and that relief is only to be sought in the means of controlling its effects.

Negotiation can itself be a process of education, showing what is possible and what people will tolerate in others even if they do not accept it in principle (or for themselves). Thanks to the situation described earlier in this article-the combination of interdependence with the problems of managing national economies-there may well be a need for innovations in the way international economic negotiations are carried on. The importance of international economic organizations in the process suggests that they should be strengthened. It should not be forgotten, though, that these are intergovernmental organizations and what they do depends on what governments will have them do. The primary need is for governments to realize anew the strength of their national interests in an effective system of international economic cooperation.

Some governments might come to a different conclusion, believing themselves better off pursuing "national interests" on their own. Then everything depends on their strength, their skill in using it and what other governments do. It is hard to believe that more than one or two important countries can choose the non-cooperative course without almost all following (though they may group together in bilateral or broader combinations). It is conceivable that the interplay of many such national policies will produce more benign results than those one generally associates with a world of rivals who think of their national interests rather narrowly, that is, in terms of conventional neomercantilism.

It is conceivable-but to me it is not credible. It can be argued that in the end these policies will cause so much trouble that countries will be forced to work out compromises and to move toward a new system of economic cooperation better attuned to the end of the twentieth century than what we have now. One has to ask how long that will take and what it will cost. Nor can one really be certain that better cooperation will be the ultimate course. It is exceptional to have the kind of arrangements that have marked the last 40 years. There is no reason to suppose that it will become the normal state of affairs. At best one can take comfort from Francis Bacon's remark, "Prosperity doth best discover vice, but adversity doth best discover virtue." He was, however, also the man who said, "Hope is a good breakfast, but it is a bad supper."

As my analysis has tried to show, there are reasons for the deterioration of international cooperation. I believe we are quite far along in that undesirable process; others take a less pessimistic view. Very likely the positive arguments of these last few pages fall into the category of "giving good advice to people who don't want it." Perhaps not enough people are sufficiently alarmed; perhaps they take it too much for granted that cooperation is the natural state of things because they did not live through the process of painstaking construction of what has been good but is still inadequate.

Certainly it is easier to see why international economic cooperation should continue to deteriorate than to see where the strength for its restoration will come from. There is only fragmentary evidence of a will to deal adequately with the basic structural problems of the American economy-and that will worsen our relations with the rest of the world. So we may well be on the verge of a new era in international relations-and a very unattractive one.

That ageless baseball pitcher, Satchel Paige, used to say, "Never look back, something may be gaining on you." But if you do look back, you may see that you are losing something.

1 Miriam Camps and William Diebold, Jr., The New Multilateralism, New York: Council on Foreign Relations, 1983.

2 Miriam Camps, The Management of Interdependence, New York: Council on Foreign Relations, 1974.


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  • William Diebold, Jr. retires this year as a Senior Fellow at the Council on Foreign Relations. During his more than 40 years with the Council, he has written dozens of articles and five books, including New Directions in Our Trade Policy (1941), and, most recently, Industrial Policy as an International Issue (1981).
  • More By William Diebold, Jr.