Five key factors behind the emergence of MDBs
The growth of international cooperation
Nascent international cooperation was a key factor in the emergence of the MDBs. One of the first attempts at a mechanism for promoting international peace and stability was the Concert of Europe, established in 1815. It failed but set the precedent for cooperation and international organisations dedicated to pragmatic economic and technical cooperation did ultimately prove successful. Interestingly,
in earlier international organizations, voting power was determined purely by financial contributions, ensuring that the most economically powerful merit' bers would prevail. This was the case in the International Telegraphic Union established in 1865 and, subsequently, in the Universal Postal Union, the International Wine Office, and the International Institute of Agriculture, all of which were created by 1914-
(Woods 1999, 42)
The voting proposed for, and adopted by, the IMF and World Bank and most subsequent MDBs seems to derive from this precedent. The distribution of power in the IBRD initially reflected the economic hierarchy at the end of the Second World War and this legacy has been hard to overcome with the US determined to maintain its control. As Pieterse (2011, 26) said, ‘even if hegemonic capacity isn’t what it used to be, the habits of hegemony and of following hegemony linger.’
Still, the key point, as Mazower (2012) argued, is that between the late 1700s and the 1830s Europeans started to conceive not just of inter-state politics but also of an international political system acknowledging diverse peoples and forms of government. Systems of international organisation took a leap forward after the First World War, though most proposals and organisations were not able to overcome state rivalries and the forces of isolationism - especially in the US, the emerging hegemon.
The First World War, inter-war chaos, and changing international hegemony
The First World War was a nodal point in the decline of British hegemony and the rise of the US. War debts were one significant factor in this shift. The inter-war period (1918-39) saw a range of proposals for international cooperation, including in the financial terrain, though few successes. Still these provided the inspiration for later efforts. The ideas, and failures, of earlier cooperation attempts and the Great Depression were key motivators driving renewed cooperation efforts during and after the Second World War.
During the First World War, there were large government-to-government war and relief loans in particular from the US, Britain, and France to their allies
Debt, development, and the emergence 25 and, subsequently, to support reconstruction (Mikesell 1966). However, there was no formal cooperation to assist countries recover from the war individually or collectively. Interestingly, Imperial China’s leader Sun Yat-sen unsuccessfully proposed ‘to the Paris Peace Conference of 1919 the creation of an “International Development Organization” that could mobilize international long-term lending to support China’s development’ (Helleiner 2017, 29). After the war, many countries faced political and economic chaos and for some this was exacerbated by the terms of the Treaty of Versailles, which concluded the war. The Great Powers established the League of Nations, though it was largely a failure. They attempted to organise financial cooperation through the League, starting with a conference in Brussels in 1920. Discussions on the monetary system and exchange rates at the conference were not successful but those for lending did continue. The proposals at these conferences provide a lineage for the Bretton Woods twins.
One proposal for the Brussels conference sent to delegates by Léon Delacroix, Prime Minister and Finance Minister of Belgium, was to set up an International Bank of Issue, which has a range of similarities to the IBRD (Oliver 1975). Its purpose was to issue interest-bearing gold bonds in exchange for securities like rights over customs duties, minerals, harvests, and so on. The bonds were to be issued to importers to pay for countries’ imports of productive goods. Shares in the Bank were to be purchased in gold and voting power determined by the number of shares held, as in the IBRD. But the proposal lacked a guarantee that the bonds would be redeemed and sufficient incentive for nations that would not borrow to join (Oliver 1975).
M.C.E ter Meulen, the Dutch delegate, working off Delacroix’s ideas, developed a plan for a Central Commission, which would allow individual states to issue interest-bearing bonds. It proposed using government revenues as securities and to give those securities to importers to use as collateral with exporters. The Central Commission was to be appointed by the League of Nations, which suggested that creditors’ interests would be protected, and the bonds were to be 5-10 years, longer than Delacroix’s, aiming to give borrowers more chance of recovering. The ter Meulen Plan was accepted and a Commission was established but, in 1922, the scheme was abandoned without making any loans. One of the reasons for this was the development of alternative sources of finance, in particular the 1919 US Edge Act provided long-term credits to support exports and, in the same year, the UK established an Exports-Credit Scheme (Oliver 1975). Export-import banks are, in fact, a key predecessor to the MDBs and they remain as siblings in the contemporary MDF system.
There were several other plans for economic cooperation in the 1920s and 1930s of lesser and greater ambition, the most important being John Maynard Keynes’ 1930 plan for a Supranational Bank. This was the predecessor to his International Clearing Union Plan that was the alternative to US Treasury official’s, Harry Dexter White’s, plan for the post-war economic and financial order. Keynes’ proposal was focussed on short-term adjustment finance, but other plans had long-term development aspects. What is notable is that there was significant debate on the topic in the inter-war years.
By the mid-1920s, the post-war chaos seemed to settle, and private international finance began to flow again. In contrast to the 19th century when flows to emerging regions mostly financed wars, these flows financed many productive investments (Mikesell 1966). Equally, however, many loans were reckless and excessive and there were mass defaults in the 1930s, resulting in private long-term lending slowing to almost a stand-still; it was even slower to recover after the Second World War. The defaults were caused, or aggravated, by the Great Depression, which started in 1929 with a financial crisis in the US. It spread internationally initially because Germany relied on US loans to pay its war reparations to Great Britain and France, and they, in turn, relied on these funds to pay their war debts to the US and other countries. Global lending collapsed and countries resorted to trade protectionism and currency devaluations which only exacerbated the crisis by contributing to a collapse in global trade. Mikesell (1966, 3-4) argued that the collapse of private lending in the inter-war years was in large part responsible for the establishment of the ‘complex of national and international public lending agencies’ that grew in the post-war era as there was clear evidence that free markets were not providing the necessary credit. The defaults of the 1930s produced the idea that loans for reconstruction and productive investments should be based on the recipients’ ability to repay. In other words, creditors should set conditions that were conducive to repayment and growth (Mikesell 1966, 19-20). Here is a key logic for MDF - coordination of creditors and debtors needs. The focus on fair terms between creditors and debtors is no longer as prominent in many MDBs but the broader idea of the need for economic cooperation between nations has remained.
In 1931, US President Herbert Hoover put in place a one-year moratorium on war debt repayments from all nations and this became permanent (Mikesell 1966, Rohrer 2006). The chaos of the inter-war years and unregulated debt informed the US approach in the Second World War - from March 1941, under the Lend-Lease programme, the US supplied whatever goods were declared by President Roosevelt as ‘in the interest of national defense’ to more than 38 nations and repayment was as ‘the President deems satisfactory’ (Kimball 2003). Between $42 and $50 billion of aid was given and repayment frequently came in the form of post-war agreements rather than cash or bullion. Before and during Lend-Lease, many nations had taken on debt, and Britain only paid back the last of this debt in 2006 (Rohrer 2006).
Despite the failure of the League of Nations’ attempts at economic cooperation, international monetary cooperation expanded during the inter-war period (Mikesell 1966). Cooperation between the emerging system of Federal Reserve Banks began in the 1920s (Ahamed 2009) and the Bank for International Settlements (BIS) was established in 1930 to manage the flow of German reparations and to formalise cooperation between central banks. German reparations were suspended shortly after the BIS was established but it continued to operate as a clearing house. It was set up as a corporation with shares owned by central banks, except for the US where private banks purchased the shares (Mikesell 1966, 14-15). This is like the IMF and IBRD, which are structured as state-owned
Debt, development, and the emergence 27 shareholder-based institutions. The US Exchange Stabilization Fund was established in 1934 to promote exchange rate cooperation, which means it is a direct predecessor of the IMF. However, before the Second World War, the US was not willing to underpin an international system and the UK no longer had the capacity to do so (Arrighi 1994, 271, Ikenberry 1992, 306), thus cooperation was still largely piecemeal.