The Development of American Finance by Martijn Konings (review)

Professor Martijn Konings’ new synthesis of the financial evolution of the United States from the colonial period to the present examines the institutional linkages that draw together the state, financial organizations, and the nation’s citizenry. In addition to this analysis, the survey of the social boundaries of finance enables Konings to challenge alternative explanations about the US global experience in the contemporary era. He particularly questions the modern transition in world finance embraced by scholars of International Political Economy (IPE).

What concerns Konings is the rigidity and narrowness of many of IPE’s leading practitioners about the status of the dollar and US global financial institutions since World War II. In Konings’ view, the IPE interpretation relies too heavily on the insights of Michael Polanyi, especially concerning the “embedding” and subsequent “disembedding” of social institutions. This school separates the postwar experience into two periods based on the rigidity of rules imposed to order finance. The persistence of the negative prognostications about the future of US financial capitalism expressed by many Polanyi followers is what disturbs Konings.

The first period was that of “embedded liberalism,” the principles of which had been laid down under Bretton Woods Agreement of 1944 in an attempt to restore world economy after a devastating war. This liberal ideal necessitated an international regime to facilitate the free flow or goods and labor, while simultaneously extending social welfare. In order to achieve such objectives in the straitened circumstances of the late 1940s in Europe and Asia, it was believed that “embedding,” i.e., imposition of rules for governing international finance such as fixed exchange rates, restrictions on capital flows, and the acceptance on the US dollar as a gold-equivalent currency for settling external balances, was necessary. This system prevailed until 1971 when the Nixon administration, faced with chronic balance of payments deficits, slow economic growth, and a costly war, ended dollar–gold convertibility. Reversion to a regime of freely floating exchange rates was cited as a national weakness instead of the abandonment of emergency measures to restore a revived global economy.

The second period, the “neoliberalism,” of the 1980s, decreed “disembedding,” i.e., the liberation of economics and finance from strong regulations increasingly seen as impediments to global growth. In the United States, this caused the steady abandonment during the Reagan administration of legacy regulatory structures dating back to the Progressive and New Deal eras. Some argue that the process had actually begun in 1978 during Carter’s term with the deregulation of interstate rail, truck, and barge transportation in 1978. From an IPE perspective, however, such initiatives failed to restore international equilibrium, and the continued imbalances presaged a future breakdown of US financial leadership.

Konings’ believes that the dire prognostications of many IPE scholars were based on too narrow a view, which emphasized the direct exercise of government power. This Polanyian perspective was insufficient to analyze global financial dynamics. Konings rejects “… reified conceptualizations that hold us captive to hegemonic ways of thinking” and favors new analysis “… not preoccupied by stylized concepts of state and markets but instead is centrally concerned with the operation of power and its contradictions.”

Konings model is more complex and involves a deeper consideration of the effects of social interdependency than contemplated by Polanyi. Konings argues that, over time, innovation bolsters connectivity at all levels of the social hierarchy, thus broadening boundaries for public involvement in financial markets. While such change may create problems of power alignment and distribution—or “contradictions,” to use Konings’ term—expansion of the channels for mediation makes the system’s more flexible, i.e., more open to negotiation and compromise. Moreover, the ability to tap “infrastructural capacities,” i.e., resources drawn from the broader social sphere, magnifies the power of the “integral state.” This coordinates both domestic and international affairs by enlisting the indirect support of innovative financial organizations as well as a citizenry deeply involved with finance. In Konings’ view, the trajectory...