The term “hegemonic stability” refers to the ability of a State which has great military and economic power (a hegemon) to structure the international system to benefit the most from it (Chatagnier, 2017, p. 139; Poletti, 2017, p. 156). In this article, hegemonic stability will be first defined in its causes and characteristics, and then it will be applied to the hegemony of the United States of America in the first decades of the Cold War, to better understand how it restored and fostered the international economic system.
The concept was first theorised by Realist theorists Robert Gilpin, Stephen Krasner, and Charles Kindleberger. Hegemonic stability is caused by the anarchic nature of international relations: international rules and cooperation are easier to be achieved in a situation of strong unbalance between actors, where States either abide by the hegemon’ will or end up at the periphery of the global order.
The hegemon creates systemic equilibrium in its sphere of influence, meaning that no State inside it wants to override it since they all benefit from its existence through the provision of public goods from the hegemon (Chatagnier, 2017, p. 140). Moreover, weaker states are maintained within the system through side payments and the threat of retaliation in case of defection from the system (Eichengreen, 1987, p. 12; Gilpin, 2001, p. 95).
Only the hegemon has the economic and political power to provide public goods, but it has good motivation because it obtains significant gains in return. For instance, by promoting liberalization, the dominant state can increase its income, political power, military capabilities, and its own prestige which can be used to maintain the system. (Webb & Krasner, 1989, p. 184).
Given its status, the hegemon enjoys structural power to set the agenda and influence its subjects. The public goods provided by the hegemon, mentioned above, are namely the organisation of trade liberalization, the management of the international monetary system, the provision of liquidity for the system, and the managing the structure of exchange rates (Webb & Krasner, 1989, p. 185; Gilpin, 2001, p. 100) along with systemic peace. Let’s now analyse how the US set up them to create the international economic system in the aftermath of the Second World War.
By 1945, the US was the global hegemon and, parallel with the hegemonic stability theory, Washington exploited its economic and military power to build an American-centred global economic order (Chatagnier, 2017, p. 146). In 1944, the Allies reunited in Bretton Woods, Massachusetts, to discuss the international economic system in the coming new world order. The US aimed to avoid the causes that led to the crisis of the 1930s, namely protective tariffs, autarkic policies, unfair competition, and restricted access to vital raw materials. The new global economic order had to benefit Western capitalist States, and more specifically the US (Kennedy, 1988, p. 359). The system developed in Bretton Woods was based on fixed exchange rates, and setup a new monetary system, an open commercial system, and a focal point for economic policies.
The new monetary system envisaged the dollar fixed at the value of 35 golden ounces, while the other currencies had to define their value in gold to set the exchange rates among them. Since the US owned 60% of the world’s golden stock, the price of gold in terms of dollars was believed to be very stable. This made dollar reserves the most important source of international liquidity, the dollar became the designed currency for international exchanges, which significantly benefitted global economic growth by facilitating trade (De Simone, 2018, p. 242). However, this excessive demand for dollars would cause inflation and economic consequences in the US in the following decades (Eichengreen, 1987, p. 41).
In addition, the International Monetary Fund (IMF) was created to facilitate commercial exchanges, by guaranteeing the stability of exchange rates between worldwide currencies. The IMF had a reserve of all its members’ currencies so that it could help central banks to maintain their currency’s exchange rate fixed (De Simone, 2018, p. 230). The IMF was also crucial in the stabilization of currencies in the States most affected by WW2, by defending their fixed parity with gold.
The new commercial system was designed to be free and open, and this was achieved in 1947 with the General Agreement on Tariffs and Trade (GATT), a multilateral treaty which progressively removed tariffs and other obstacles to free international trade.
Thanks to the openness of the commercial system and the international monetary system, the world industrial output grew dramatically (6% per year, between 1953 and 1975), and so did the volume of world trade (going from 103 in 1948 to 520 in 1971) (Kennedy, 1988, p. 413-414). In this way, the hyper-productive American industries could rely on free trade and open markets worldwide.
Moreover, the International Bank for Reconstruction and Development (IBRD, later called the World Bank) was founded to manage the reconstruction of key production assets through long-term loans. However, these had political strings attached, and the States that wanted to use the IBRD’s resources had to comply with the American system’s requirement of free convertibility of their currencies and open competition (Kennedy, 1988, p. 360).
Finally, the US represented a focal point for economic policies due to the fact the US did not force any State into their economic system but proved to be a focal point for policy harmonization. For instance, the provisions agreed upon in Bretton Woods reflected not only American market power and American economic hegemony but also the existence of an international consensus on the objectives and formulation of monetary policy, which permitted central bank policies to be harmonized (Eichengreen, 1987, p. 36).
In conclusion, under American hegemony the international economic system was structured to foster free trade worldwide through an American-sponsored multilateral forum which enabled to gradually lower tariffs, favoring US exports in the years after the war but also quick economic reconstruction in Western Europe and Japan. For instance, the process of economic integration in Europe was fostered by Washington (Kennedy, 1988, p. 403). In addition, stability to the system was brought by the pivotal role of the dollar, which enabled exchanges across the globe.
A last remark to show how meaningful was American hegemony in the development of the international economy is that, even though the Bretton Woods System formally collapsed in the 1970s, the institutions created and the amount of freedom of trade and exchanges achieved were maintained until today, although undergoing some changes. The globalized world economy of the 1990s-2010s is the heir of the Bretton Woods System, and thus to American hegemonic stability’s influence.
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Gilpin, R. (1981). War and Change in World Politics. Cambridge: Cambridge University Press.
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Kennedy, P. (1988). The Rise and Fall of Great Powers. London: Unwin Hyman Limited.
Poletti, A. (2017). Robert Keohane: The Promises of Cooperation. In F. Andreatta, Classic Works in International Relations (pp. 154-167). Il Mulino.
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