The Post-War Order: What is it and why is it controversial?

What is the oft-cited “postwar order” that ostensibly is being threatened by populism? Commentators, diplomats, economists, policymakers and the public use this term to describe different concepts, frequently confusing rather than informing their listeners and readers. Such misinterpretations may trigger emotional reactions that inhibit thoughtful dialogue. This article defines these terms to facilitate meaningful discussions.

We will begin with some history. There have been three major attempts to create an international architecture in hopes of discouraging war and encouraging peaceful commerce among world’s countries. The first occurred after the Napoleonic wars, the second occurred after World War I, and the third occurred after World War II.

First order

During the Congress of Vienna from November 1814 to June 1815, Austrian Foreign Minister Klemens Wenzel Nepomuk Lothar, Prince von Metternich-Winneburg zu Beilstein, met with ambassadors from the major European powers to settle issues arising from the French Revolution and the Napoleonic wars. Instead of punishing post-Napoleonic France, Metternich included France as an equal at the Congress.

To create a sustainable peace, Metternich advocated a balance of power among the European kingdoms and empires so that no single power would be strong enough on its own to be successful in a war of aggression against the others.

Metternich created a Concert of Europe, an informal organization of the major European powers. Under this system, the United Kingdom helped to maintain the balance often by supporting weaker continental powers when conflicts arose with stronger ones. Although minor wars continued to occur, the Concert successfully diffused major crises and prevented a general European war for a century (e.g., Congress of Berlin from June 13, 1878 to July 13, 1878) until the rise of Germany upset the balance of power and led to World War I.

Second order

The second attempt to create an international architecture occurred after World War I, and this second order merits significant analysis because its failure helps to explain how and why the current system was designed. In a speech on Jan. 8, 1918, U.S. President Woodrow Wilson proposed “peace without victory” between the Allied and Associated Powers and the Central Powers based on “Fourteen Points” including the evacuation of all occupied territories, freedom of the seas, free trade, and “self determination” for the Poles and the nationalities within the Austro-Hungarian Empire.

Although British Prime Minister David Lloyd-George grudgingly supported 13 of the Fourteen Points, French Prime Minister Georges Clemenceau sarcastically dismissed them, saying «Le bon Dieu n’en avait que dix!» (“The good Lord only had ten!”).

Assuming that Wilson had spoken for all of the Allied and Associated Powers, newly installed German Chancellor Prince Maximilian of Baden decided on Oct. 5, 1918 to seek peace based on the Fourteen Points. German policymakers thought that if Kaiser Wilhelm II abdicated and a new democratic government was established, Germany would be treated as generously after World War I as France had been after the Napoleonic wars.

However, Clemenceau and Lloyd-George wanted harsh reparations and severe limits on the German armed forces. Based on these misconceptions, German Finance Minister Matthias Erzberger signed an armistice in the private railroad car of French Marshal Ferdinand Foch at 5:00 a.m. on Nov. 11, 1918 that became effective later that day at 11:00 a.m.

The Paris Peace Conference met from January 1919 to June 1919. Unlike the Congress of Vienna, Clemenceau, Lloyd-George, and Wilson excluded the German delegates from conference deliberations. Knowing that Wilson valued a League of Nations above all else, Clemenceau and Lloyd-George threatened to block its creation unless Wilson dropped his support for free trade, blamed Germany for war, and imposed reparations on Germany.
Instead of “peace without victory,” the Treaty of Versailles became “victory without peace.”

German misunderstandings before the armistice and the Treaty’s punitive provisions bred the “stabbed in the back” mythology that Adolf Hitler exploited to gain power in Germany on Jan. 30, 1933.

Moreover, Wilson’s virulent racism led him to make other blunders during the conference that would cost the United States dearly in blood and treasure as the 20th century unfolded. To protect racial segregation in the American South, Wilson blocked Japan’s proposal to ban racial discrimination in the Treaty. Japan, which had been an Ally in World War I, took Wilson’s dismissal as proof that the white Americans and Europeans would not accept the Japanese as their equal. Japanese militarists used Wilson’s action to justify Japan’s aggression against China, Japan’s Axis military alliance with Germany and Italy, and Japan’s attack on Pearl Harbor, the Philippines and European colonies in Southeast Asia.

Thinking that national self-determination was for whites only, Wilson dismissed a Vietnamese delegation led by H Chí Minh seeking Vietnam’s independence from France. After Wilson’s rejection, H turned toward communism to secure Viet Nam’s independence. From 1945 to 1973, H made France and the United States pay for Wilson’s racism.

The Treaty of Versailles established the League of Nations. However, the United States never joined. Arrogantly refusing to accept 14 minor reservations that (1) Senate Foreign Relations Committee Chairman Henry Cabot Lodge (R-MA) had proposed and (2) both France and the United Kingdom accepted, Wilson arrogantly directed Democratic Senators to vote with a handful of isolationist Republican Senators to defeat the Treaty on Nov. 19, 1919.

The absence of the United States and the League’s inability to require its member states to act against aggression left the League impotent. After Japan invaded Manchuria on Sept. 19, 1931, the League established the Lytton Commission to investigate. On Oct. 2, 1932, the commission reported that Japan was the aggressor in Manchuria. When a motion was made to condemn Japan, Japanese Ambassador Yosuke Matsuoka walked out of the League’s General Assembly. Japan formally withdrew from the League of Nations on March 27, 1933.

The League had failed and would continue to fail as the aggression of Germany, Italy and Japan became increasingly brazen during the remainder of the 1930s.

The Treaty did not address the urgent economic problems that World War I had created – the need for demobilization, the restoration of the gold standard, the resumption of international trade flows, and the reconstruction of war-ravaged areas. Reparations burdened Germany and contributed to hyperinflation. The Dawes plan, which reduced reparations payments, introduced a gold-backed Reichsmark, and encouraged American loans to Germany, stabilized the German economy in 1924.

However, Germany depended on American loans to make its reparations payments to France and the United Kingdom. In turn, France and the United Kingdom depended on German reparations to repay their wartime loans from the United States. This financial merry-go-round was inherently unstable.

Long-term sustainable global economic growth required that either (1) the United States substantially must lower its tariffs and other trade barriers and run large trade deficits so that Germany could earn enough U.S. dollars and/or gold from trade surpluses to pay its reparations and France and the United Kingdom could in turn service their wartime loans; or (2) if the United States wished to maintain high tariffs and run trade surpluses, the U.S. government must forgive its wartime loans to France and the United Kingdom so that they could afford to forgo reparations payments from Germany. The United States did neither.

Instead, President Warren Harding signed the Fordney-McCumber Tariff Act in September 1922 that raised the American ad valorem tariff rate to an average of about 38.5 percent for dutiable imports and 14 percent overall.

Unlike the prewar classical gold standard, the interwar gold standard was also an unstable hodgepodge. In 1924, British Chancellor of the Exchequer Winston Churchill announced that the United Kingdom would re-establish the pound’s convertibility into gold at its pre-war parity. In contrast, the Monetary Law of 1928, France re-established the franc’s convertibility into gold at the prevailing parity in December 1926. Resumption went smoothly in France, but not in the United Kingdom. The resulting rise in the market value of pound caused deflation, high unemployment, and a chronic balance of payments deficit in the United Kingdom.

During the 1920s, the United States had chronic balance of payments surpluses due to surpluses in its trade and primary income accounts. If the United States had revalued the dollar, and the United Kingdom had devalued the pound to reflect postwar economic reality, the worst of the Great Depression could have been avoided. Instead, the Federal Reserve lowered U.S. interest rates to address these imbalances, reduce gold inflows into the United States and outflows from the United Kingdom, and keep the United Kingdom on the gold standard at its prewar parity. The excess liquidity from the Fed’s easing while the U.S. economy was booming inflated an unsustainable bubble in the U.S. stock market, which burst in October 1929.

In the 1930s, many countries tried economic nationalism to escape from the Great Depression. Abandonment of the interwar gold standard, high tariffs to discourage imports, and competitive devaluations to boost exports became widespread. However, these “beggar-thy-neighbor” failed economically, caused the collapse of international trade, and contributed to rising international tensions.

Third order

During World War II, both Prime Minister Winston Churchill and President Franklin D. Roosevelt sought to avoid the economic and political mistakes made in the Treaty of Versailles and during the interwar years. On Jan. 1, 1942, Churchill and Roosevelt signed the “Declaration by the United Nations” that established the war and postwar aims of the Allies. Subsequently, China, the Soviet Union, and 43 other countries signed the declaration. Instead of an armistice, this group of nations sought a complete victory over the Axis. Each country pledged to use its resources to support the war and not to make a separate peace agreement with any Axis country.

Thus, the “United Nations” became the official term for the Allies during World War II. The decision in 1945 to use the same term for the successor to the League of Nations may breed confusion. The wartime United Nations conferences that shaped the current international architecture were really conferences among Allies, not conferences sponsored by the not-yet-created United Nations (UN) organization or any of its organs.

While both Churchill and Roosevelt were determined to purge the leaders of Nazism from Germany, Fascism from Italy, and militarism from Japan, neither Churchill nor Roosevelt wanted to punish ordinary Germans, Italians or Japanese. Instead of the postwar harshness of Clemenceau, Churchill and Roosevelt favored the postwar magnanimity of Metternich, in which Germany, Italy, and Japan would be reconstructed as democratic capitalist countries.

Both Churchill and Roosevelt wanted to replace the League of Nations with a stronger international organization. Both Churchill and Roosevelt envisioned that China, France, the Soviet Union, the United Kingdom and the United States would become a second Concert of Europe within this new organization and that, acting together, the “Big Five” could require other member states to act against aggression.

Moreover, both Churchill and Roosevelt thought that other new international organizations would be needed to help finance postwar reconstruction, provide stable exchange rates, and promote the progressive liberalization of international trade.

The evolution of the modern post-war order

At the risk of oversimplifying, there are four major pieces of what is now loosely though of as the postwar order.

1. The United Nations and other multilateral bodies
2. The International Monetary Fund and World Bank
3. The World Trade Organization and affiliated trade pacts
4. NATO and other military/security alliances

United Nations

On Oct. 30, 1943 during the Moscow Conference, China, the Soviet Union, the United Kingdom and the United States issued the Four Power Declaration that a new international organization should replace the League of Nations. To advance this goal, representatives of these four powers met at the Washington Conversations on International Peace and Security Organization, which is also known as the Dumbarton Oaks Conference after its meeting site, the Dumbarton Oaks house in Washington, D.C., from Aug. 21, 1944, to Oct. 7, 1944. On the final day, the delegates reached the Dumbarton Oaks Agreement, which resolved many of the issues surrounding the establishment of what would become the United Nations.

Delegates from 50 Allied countries met at the United Nations Conference on International Organization, which is also known as the San Francisco Conference after its meeting site, from April 25, 1945 to June 26, 1945. At the Yalta Conference, Churchill, Roosevelt and Soviet dictator Joseph Stalin had agreed this new international organization would have a Security Council, in which China, France, the Soviet Union, the United Kingdom and the United States would be permanent members and have a veto over Security Council actions.

The delegates at the San Francisco Conference reviewed and sometimes modified the provisions of the Dumbarton Oaks Agreement. On June 26, 1945, representatives of 50 Allied countries signed the Charter of the United Nations. Poland, which had signed the Declaration of the United Nations was absent from the San Francisco, was allowed to sign the Charter on October 15, 1945, giving the United Nations organization 51 founding member states. The Charter became effective on Oct. 24, 1945 after China, France, the Soviet Union, the United Kingdom, the United States, and a majority of the other signatory countries had ratified the Charter.

The United Nations has five main organs—the General Assembly; the Security Council; the Economic and Social Council; the International Court of Justice; and the Secretariat. The General Assembly admits new member states, approves the annual budget, elects the secretary general, the 10 non-permanent members of the Security Council, and the 53 members of the Economic and Social Council, and may adopt non-binding resolutions. The Security Council may adopt binding resolutions on member states to redress aggression and maintain peace. The Economic and Social Council may gather information and make recommendations to member states. The International Court of Justice adjudicates disputes among member states. The Secretariat is the UN’s administrative arm.

Affiliated international organizations

Another source of confusion are the 15 United Nations Specialized Agencies and two related international organizations. Article 57 and 63 of the Charter allows the Economic and Social Council to enter into agreements with independent international organizations to facilitate cooperation. There are 15 such international organizations, known as United Nations Specialized Agencies, including:

(1) the Food and Agricultural Organization (FAO);
(2) the International Civil Aviation Organization (ICAO);
(3) the International Fund for Agricultural Development (IFAD);
(4) the International Labor Organization (ILO);
(5) the International Maritime Organization (IMO);
(6) the International Monetary Fund (IMF);
(7) the International Telecommunications Union (ITU);
(8) the United Nations Educational, Scientific and Cultural Organization (UNESCO);
(9) the United Nations Industrial Development Organization (UNIDO);
(10) the Universal Postal Union (UPU);
(11) the World Bank Group;
(12) the World Health Organization (WHO);
(13) the World Intellectual Property Organization (WIPO);
(14) the World Meteorological Organization (WMO); and
(15) the World Tourism Association (UNWTO).

Two other international organizations, (1) the International Atomic Energy Agency (IAEA) and (2) the World Trade Organization (WTO), do not have agreements with the Economic and Social Council, but are described as related agencies because the IAEA and the WTO informally cooperate with the Economic and Social Council and the United National Specialized Agencies.

Although these United Nations specialized agencies are loosely part of the United Nations system, each of them is independent with its own charter, membership, governance, personnel, functions, and policy objectives. Some United Nations specialized agencies were created in the 19th century, some were created through the Treaty of Versailles along with the League of Nations, and still others were created at the end of World War II.

Some United Nations Specialized Agencies have narrow functions that support technical cooperation on a specific subject among their member-states, while others have broad economic functions. Their independence is real, and they often have policy disagreements with United Nations organs. The main channel for cooperation among United Nations organs, United Nations Specialized Agencies, and related agencies is the Chief Executive Board (CEB), which the UN Secretary General chairs. The CEB meets twice a year focusing on personnel matters.

Unaffiliated international organizations

Established in 1961, the Organization for Economic Cooperation and Development (OECD) is multilateral organization whose members are 36 mostly developed counties. The OCED supports economic research and provides comparable economic statistics on its member states and major developing countries such as China. The OCED provides a forum to coordinate economic policies among its member states. This function may be controversial. For example, OCED has advocated the reduction in tax competition.

The IMF and World Bank

While technically affiliated with the U.N., the IMF and World Bank merit separate discussion because of their significant role in the current postwar order. These organizations were created when delegates from 44 Allied countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, from July 1, 1944, to July 22, 1994, for the Bretton Woods Conference (formally the United Nations Monetary and Financial Conference).

The conference agreed to (1) establish a system of fixed, but adjustable exchange rates; (2) create an International Monetary Fund to promote stable exchange rates by providing short-term financial assistance to any member state that faced a balance of payments crisis to allow such member-state time to adjust its internal economic policies; and (3) create an International Bank for Reconstruction and Development (IBRD) to finance the reconstruction of necessary infrastructure destroyed during World War II. The public soon referred to the IBRD as the World Bank.

When other divisions were created, a holding company, known as the World Bank Group, was organized, and the IBRD became a division of the World Bank Group. The other divisions of the World Bank Group are the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID). The IBRD lends at market rates and terms to newly industrializing and developing countries. The IDA lends on a non-market basis to least developed countries. In reality, IDA loans more like grants than loans. The IFC offers investment, advisory, and asset-management services to encourage private-sector development in developing countries. The MIGA offers political risk insurance and credit enhancement guarantees that protect foreign direct investments against political and non-commercial risks in developing countries.

Over the years, the missions of both the IMF and the World Bank Group have evolved. The decision of President Richard Nixon to “close the gold window” on Aug. 15, 1971 terminated the Bretton Woods system of fixed, but flexible exchange rates. By 1974, all of the major market economies let their currencies float.

Over the next decade, the IMF refocused on providing conditional assistance to newly industrializing and developing countries that face financial crises. Such IMF assistance has been controversial. IMF assistance creates a moral hazard problem, encouraging creditors in developed countries to lend more money on more generous terms to governments, banks and other financial institutions, non-financial corporations, and households in newly industrializing and developing countries. The conditions that the IMF has typically imposed involve higher taxes along with some positive structural reforms – deregulation, trade liberalization, and privatization of state-owned firms.

Once the post-World War II reconstruction had been recompleted (at least in non-communist countries) the World Bank Group, particularly the IBRD and the IDA, turned to funding large-scale infrastructure projects in developing and least developed countries from the 1960s to 1980s.

In 1990s, the World Bank Group refocused again on helping former Soviet bloc countries convert to market economies and eliminating extreme poverty in developing and least developed countries. In recent years, the World Bank has helped a number of countries to establish saving-based retirement systems, provide clean water supplies, and fund microfinance so that the poor can establish small businesses to support themselves.

The WTO and trade liberalization

The Bretton Woods conference also endorsed the progressive reduction of tariffs and the creation of an International Trade Organization (ITO) to establish the rules governing international trade. In July 1945, Congress authorized President Harry S Truman to negotiate a multilateral agreement for the reduction of tariffs. At the request of the United States, the United Nations Economic and Social Committee agreed in February 1946 to convene a United Nations Conference on Trade and Employment to draft a charter for ITO. On Oct. 30, 1947, in Geneva, Switzerland, negotiators for eight of the 23 countries (including the United States) signed a General Agreement on Tariffs and Trade (GATT).

Negotiators had intended the GATT to be an interim agreement until the ITO was established. The conference met during 1947 and reached agreement in 1948. On March 24, 1948, 56 countries signed the Havana Charter, which would have established the ITO and basic rules for international trade. Because of congressional opposition, the Senate never ratified the Havana Charter, and President Truman announced on Dec. 6, 1950, that he would no longer seek its approval. Without the United States, the ITO was stillborn. GATT signatories reluctantly agreed that they would have to transform the GATT from an interim agreement into de facto international organization. The GATT signatories held seven rounds of multilateral negotiations before the signatories agreed to create the World Trade Organization (WTO) in the Uruguay Round Agreements. The WTO came into being on Jan. 1, 1995.

Regional trade liberalization

One of the two non-discrimination principals, on which the GATT is based, is Most Favored Nation (MFN). MFN means the lowest tariff and other trade barriers on any line of trade that any WTO member agrees to with any other WTO member must be granted to all WTO members.

There are two exceptions to the MFN principal. One is the Generalized System of Preferences (GSP) that began in 1979. GSP allows developed and advanced developing countries to offer unilateral tariff and trade barrier reductions to goods from least developed countries without offering the same reductions to all WTO members. The other is the exception is for bilateral or regional free trade agreements (FTAs) and customs unions. WTO members may create FTAs and customs unions that cover “substantially all” trade in goods and services without violating their MFN commitments.

Until the mid-1980s, the only significant regional trade bloc was the European Union (EU) and its predecessors. The United States and Japan favored progressive trade liberalization through the GATT negotiating rounds and discouraged the emergence of other regional FTAs or custom unions. President Ronald Reagan changed U.S. trade policy to favor both approaches. In 1986, Reagan launched the Uruguay Round of GATT negotiations and bilateral negotiations with Canada to create the U.S.-Canada Free Trade Agreement. This U.S. policy change opened the floodgates to negotiations for FTAs worldwide.

Following the success of the Uruguay Round, progress in the WTO toward trade liberalization has stalled. Several factors account for this failure. First, the WTO operates on the basis of consensus. Any member can effective cast a veto. The veto did not matter so much when GATT negotiating rounds involved few, generally developed and newly industrializing countries. Consequently when U.S. and EU negotiators reached agreement on major issues, the United States and the European Union could count on the acquiescence of other members. The accession of China to the WTO and the growing interest of India in trade policy have created alternative power centers in the WTO with different trade agenda. Consensus has become almost impossible. Second, as tariffs have fallen, discriminatory domestic regulatory policies have become more important as trade barriers. Negotiations over discriminatory domestic regulations are inherently more difficult than negotiations over tariffs at the border.

As the trade liberalization through the WTO has stalled, regional FTAs and customs unions have multiplied. For example, the United States has 14 FTAs with 20 countries. The EU has FTAs with 34 countries. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership has 11 member-countries.

Military alliances and security cooperation

Cold War tensions prevented the United Nations from being an effective security organization. Both the Soviet Union and the United States used their vetoes in the Security Council to block any actions that threatened them or their blocs. The Security Council acted only in conflicts where none of permanent five powers thought their interests were at stake. One notable exception occurred during a Soviet boycott of the Security Council. On June 25, 1950, the Security Council adopted Resolution 82 that ordered North Korea to halt its aggression and authorized U.N. member states to use force to expel North Korean forces from South Korea. At the end of the Cold War, there was a brief period of international cooperation when it was hoped that the Security Council might function as envisioned. However, the growing rivalry among China, Russia and the United States is again enfeebling the Security Council.

Regional security organizations

Given the disappointment with the United Nations and growing threat from the Soviet bloc, the United States and its allies turned to regional security pacts, of which the most notable is the North Atlantic Treaty Organization (NATO). NATO is an intergovernmental military alliance among the United States, Canada, and 27 European countries. NATO implements the North Atlantic Treaty, which was on April 4, 1949. NATO is a system of collective security through which each of its member-states pledged to respond to an attack on any other member state by any external party. NATO provided the pattern for other bilateral or regional mutual defense treaties that the United States signed during the Cold War.

Controversy

All four components of the current international architecture have critics, but they should be examined separately.

  1. The United Nations is routinely condemned for being ineffective, wasteful and anti-Western. However, the UN part of the post-war order is not under serious threat. However, the OECD is subject to considerable attacks because of its statist policy agenda.
  2. The IMF and World Bank are routinely condemned for being wasteful and anti-market. The IMF also is singled out for bailout policies that are said to encourage profligacy in developing nation and to reward sloppy lending practices by big western banks. Notwithstanding the instability than many say is caused by the IMF, this part of the postwar order is not under serious threat.
  3. The WTO and regional FTAs are under threat from a populist backlash in the United States and Europe, driven in large part by angst over financial prospects for lower-skilled workers. This part of the postwar order is under serious threat, especially because U.S. laws give the president significant unilateral powers over trade policy.
  4. NATO and other security arrangements are being questioned for both cost and changing geopolitical factors (e.g., the rise of China, Islamic terrorism). While unlikely at this point, dramatic policy changes from the United States could substantially alter the structure and/or operation of these military alliances.

Conclusion

The so-called postwar order is not a monolithic entity. There are separate components that serve separate purposes. All were started with good intentions. Some have been very successful. Consider, for instance, the sweeping reduction in trade barriers and the concomitant rise in cross-border commerce. While populists grouse, there is deep support in most nations to protect and preserve world trade.

But other parts of the post-war order do not have very strong track records. Bureaucracies such as the IMF and OECD arguably deserve some hostile attention because of their support for anti-market policies.

Policymakers who want to preserve the best parts of the post-war order may want to consider whether it is time to jettison or reform the harmful parts.

The author of this article, who goes by the name “Hamilton” is a senior U.S. economist who frequently writes under a nom de plume.