Afterglow or Adjustment? Domestic Institutions and Responses to Overstretch

Mark R. Brawley

Columbia University Press

1998

1. Overextension and the Obstacles to Adjustment

 

Despite the fall of its principal political rival, the United States continues to shoulder heavy international obligations. Some would even argue that America’s international responsibilities will now expand due to instabilities wrought by the end of the Cold War. Historically, those countries such as the U.S. which have attempted to organize and lead global political and economic affairs eventually found themselves overextended. According to historians, such situations proved disastrous for those countries, and often for the international system. How should we assess American responses to its current situation? If the U.S. is currently overextended, how should it react? Most studies of overstretch begin, logically, by examining how states become overextended. That is not the only focus here, however, since scholars have provided a plausible explanation for such behavior: things change. Policymakers do not have perfect information; they fail to make perfect predictions. Instead of asking only why overstretch occurs, I go on to examine the responses to overstretch—which are much less well understood.

Since most previous studies of overstretch explored the sources of the phenomenon without delving into states’ responses to such situations, they neglected examples where a state successfully extricated itself from overextension. The failures have been all too obvious, and all too dramatic. For this reason, the general discussion about overstretch has provided little insight into policy matters, beyond highlighting how dangerous such episodes can be. In a review of the most well-known work on overstretch (Paul Kennedy’s best-seller The Rise and Fall of the Great Powers), Charles Kupchan raises similar doubts about the practical utility of the knowledge produced so far. ₁ In Kennedy’s book (and in the works of Charles Doran, Jack Snyder, and others), much of the blame for past examples of overstretch rests on policymakers’ failure to recognize the problem, because they lacked the analytical tools needed to assess the degree to which their state was overextended. Kupchan finds this an unsatisfying explanation, however, because in the cases he reviewed, decisionmakers often realized that a problem existed. ₂ I intend to show that decisionmakers were usually able to recognize the problem. Failure to adjust to overstretch, on the other hand, appears to have been common. Why have overextended states regularly failed to adjust their resources or obligations? As Kupchan points out, this question is more complex and intriguing than merely asking why overextension occurred.

This is not to say that the sources of overstretch do not matter, or that I will ignore them. The process in which a state finds itself overextended may very well shape later responses, for it may structure the range of policy choices decisionmakers face. Certainly the specific nature of the problem a particular state confronted will also determine what sort of historical parallels can logically be constructed, and thus what policy lessons one may draw from comparative analysis. In short, one cannot address the questions concerning responses to overstretch without a thorough examination of the phenomenon.

While the arguments I make will be linked to the process leading to overextension, the aim is to explain variations in the responses to overstretch. Instead of reducing obligations to a level congruent with existing resources, hegemonic powers in particular often respond to overextension with “afterglows”—they maintain the international obligations associated with leadership, even after such policies no longer appear to be rational from a national perspective. ₃ Political scientists, historians, and economists have offered a variety of potential explanations for why hegemonic states experience afterglows, but rarely based on a comparative theoretical framework or a systematic analysis of the evidence.

For the most part, we scholars have not even identified variation across cases. ₄ After World War I, Britain struggled to return to the gold standard and to retain sterling’s premier role in the international economy. In reasserting international leadership, British policymakers seemed to ignore changes in the underlying international economic structure which World War I had accelerated. Britain was no longer the premier financial power; yet the policies adopted were aimed at resisting structural constraints, not accepting them or adjusting policies to end leadership. Faced with a currency overhang—far too much sterling in circulation compared to the Bank of England’s reserves—authorities chose to restrict the money supply so sterling would again command its premier status. Rather than avoiding the costs associated with a return to the gold standard at the pound’s traditional exchange rate, policymakers chose to rebuild the international monetary regime with Britain at its head even if these actions damaged prospects for many sectors of the British economy.

These decisions stand in stark contrast to those taken by American authorities when they faced structural decline and a currency overhang half a century later. ₅ The problems were decidedly similar; in the words of C. Fred Bergsten, both countries had kept their currencies “overvalued far too long out of concern for maintaining the status of their currencies, at the cost of heavy domestic unemployment, and had failed to recognize the need to align their financial roles with the sharp declines in their overall economic and political power positions.” When American monetary authorities had to choose between domestic economic performance and the continuation of their leadership role in the Bretton Woods regime, the U.S. willingly sacrificed the regime to enhance domestic economic performance. Knowing that a restriction in the money supply would restore confidence in the dollar, but cause an economic slowdown within the U.S., authorities agreed to abandon the international regime instead. Given that the decisions in each case concerned the policy response to a currency overhang and the continuation of international leadership after international economic structures had shifted, why did decisionmakers react so differently?

Similar questions can be raised about policy responses to relative economic decline in other issue-areas, such as trade. As other countries began raising tariffs in the late 1800s, defecting from the informal regime Britain had inspired, Britain chose not to retaliate. Despite the rising barriers to trade and the erosion of the regime, Britain maintained free trade and did not attempt to exercise bilateral leverage against major powers. Since a similar pattern of erosion in the GATT regime began in the 1970s, the U.S. has established its willingness to use trade policy as a means to enforce a low-tariff regime. American policymakers view retaliation outside the GATT framework to be an important tool for maintaining free trade. At the same time, the American commitment to free trade remains strong, despite some domestic opposition and relative economic decline. ₆ Again, we must pose this question: why the different responses to roughly analogous problems?

In the issue-area of military responsibilities, during the periods of their respective hegemonic leaderships both Britain and the U.S. accepted obligations which the country could not have met simultaneously with their realized resources. This was true for Britain by the 1880s—before Germany emerged as a military rival. At first, Britain did not appear to react to this situation at all. Yet, as the evidence will show, military commanders understood quite well that Britain was militarily overstretched. Once Britain had to prepare for a military challenge by Germany, it reduced its non-European responsibilities by seeking out allies. Yet in making a commitment to France, Britain accepted even greater responsibilities which it was in no position to meet. In the U.S. case, military obligations have been immense since World War II. Adjustment was attempted in the early 1970s (paralleling the efforts in the monetary realm). In this issue-area, each country responded to overstretch through a variety of measures, ranging from retrenchment to afterglow.

As this brief description of past episodes illustrates, not only is there variation between British and American responses to overstretch which needs to be explained, there is also variation across issue-areas within each country’s period of leadership, or even over time within a single issue-area. In the British case we see some evidence of adjustment in at least one issue-area (military affairs), if not in the others (trade and money). In the American case, we see parallel adjustments attempted by the Nixon Administration in the military and monetary spheres, though their effect may very well have been limited. Yet with so few attempts to categorize and compare the responses to overstretch, and with the phenomenon typically described in broad and general terms, any examples of effective adjustment have largely been obscured. ₇ A greater understanding of past responses to overstretch—the successes as well as failures—is needed if we are to forecast accurately the difficulties the United States is likely to face in the future, or if we are to offer policy guidance. In the remainder of this chapter, I define overstretch more precisely, discuss a prominent hypothesis on why afterglows occur, and explore the various components of that conjecture. These components are dealt with in detail, so that each may then be examined within the cases in the later chapters. This chapter concludes with a discussion of the evidence which will confirm or disconfirm different aspects of the afterglow hypothesis.

 

Defining Overstretch

Kennedy’s widely read history of the great powers popularized the notion of overstretch. Kennedy showed that, time and time again, powerful states accepted obligations they could not meet once their economic power waned. Just as Britain had suffered “imperial overstretch” in the late 1800s and early 1900s, the U.S. has had greater commitments than it could reasonably afford. Kennedy based his views on trends in economic growth. Since economic power is the main source of political power, a cyclical pattern in the former creates a cyclical pattern in the latter, with a slight lag in time. Thanks to this lag, an economically growing power can easily take on international obligations; once relative economic decline sets in, however, those responsibilities became difficult to maintain—or, apparently, to cast off. ₈

This parallels the explanation for overcommitment developed by Charles Doran, who argued that countries go through cycles of rise and decline as the distribution of power changes, much as Kennedy described. In Doran’s analysis, decisionmakers reflect on their country’s recent past performance when predicting what their country will be capable of in the near future. Thus when a country’s trajectory changes—when it first begins to decline, for instance—decisionmakers’ projections miss the mark. Adjustment to overextension takes place, but this period is fraught with peril. Doran blames overextension on the inability of decisionmakers to anticipate changes, or to think in nonlinear patterns; as I hope to show in the cases, decisionmakers have recognized and even foreseen overstretch. Yet, recognition does not lead automatically to any sort of adjustment. ₉ The variation in responses to overstretch once it has been recognized is precisely what I seek to explain.

In another widely known study, Jack Snyder argued that overcommitment resulted from “myths.” In Snyder’s view, overstretch results from political failures due to log-rolling in the formulation of foreign policy. Groups with diverse, narrow interests (but which all stand to gain from expansion) unite in a log-roll to create political myths justifying their desires. Such myths, untrue by definition, are internalized by politicians and statesmen, and perhaps by the general population as well. ₁₀ The very ambition of Snyder’s work may be a source of weakness, however, since he cast a wide net. He compares cases of overstretch ranging from stable hegemonic powers (such as nineteenth-century Britain) to expansionary powers (such as Nazi Germany). The fascist states embarked on conflict with other major powers and lost; Britain and the U.S. won major wars, but then were overstretched because they could not assume the responsibilities of leadership indefinitely. By drawing such comparisons, Snyder raises doubts about whether hegemonic leadership is ever appropriate; his cases illustrate that overstretch can occur independent of relative economic decline. I would argue that hegemonic leadership in at least two cases appeared to be sustainable for more than a decade. Yet if such policies were appropriate at one point in time, when exactly did they become inappropriate? Was there a lag between the onset of overstretch (based on an objective assessment) and policymakers’ recognition of the problem? Between the recognition of the problem and a policy response? The lack of persuasive answers to such questions suggests that overstretch and its consequences are not as clearly understood as we might wish.

Given his review of The Rise and Fall of the Great Powers cited earlier, it is no surprise that Kupchan’s own book asks the questions most closely related to the ones I pose here. Kupchan is concerned with the variation in adjustment to security overstretch. While he asks why some countries were able to adjust well in some periods, rather than in others, he too considers a wide variety of cases. Just as Snyder had done, he compares expansionary powers as well as liberal hegemonic states. As the title The Vulnerability of Empire illustrates, he is concerned with overextension in terms of the security of the home country and its empire. Overstretch is posed as a choice between defending the metropole or the empire; the metropole is clearly the more valuable. It is less clear that the cases he examines are comparable in terms of the threats to both empire and metropole. In that sense, his historical cases focus more on how priorities are set (why would anyone choose to defend their imperial possessions to the point of placing their homeland at risk?), rather than examining how countries balance resources and commitments. ₁₁

While we consider very similar questions, several other points will illustrate the differences between our approaches. Some of our cases overlap—we both examine British and American military overcommitments, though I view longer time periods. I will also look at a different sort of overcommitment by including an economic issue-area, whereas Kupchan’s focus is exclusively on security affairs. By examining economic issues, I will be exploring cases where rival explanations are perhaps more numerous. For instance, Kupchan finds little evidence that domestic economic interests shape the responses to overstretch. While this might be consistent with our expectations about security policy, domestic economic interests are much more likely to play an active role in the formulation of policy responses to economic overcommitment.

To maintain a narrow focus while exploring different policy areas, I intend to examine only those cases of overextended hegemonic leaders. In most such cases, the leadership policies were sustainable for long periods of time (i.e. a decade or more), and then became questionable, because of international economic and political shifts. Moreover, I wish to focus on these examples of past hegemonic leadership in order to find the most relevant insights into future problems the United States will probably confront. In terms of theories and concepts, I largely agree with and am building on the work of Kennedy, Doran, Snyder, Kupchan, and others. I extend their works by focusing more intently on what happens once overstretch occurs (and is recognized by decisionmakers). We have explanations for overextension; what we lack is an explanation for the seemingly irrational yet fairly common failure to respond appropriately to overstretch. As Kupchan has put it: “Why do states faced with a weakening economic base and a changing distribution of international power fail to adjust their foreign and defense policies to close the gap between resources and commitments, and thus avoid the dangers of overextension?” ₁₂

In answering this question, we should recognize differences in the definition of overstretch. Kennedy employs two slightly different meanings. On the one hand, he defines strategic overextension as a situation where the costs of expansion outweigh the benefits. Later, he defines overstretch as the inability to defend all global interests and obligations simultaneously. ₁₃ Snyder roughly follows a definition, first provided by Robert Gilpin, by describing overextension as “expansion beyond the point where material costs equal material benefits, measured where possible in quantifiable economic and security terms.” ₁₄ While it is certainly important to measure this concept as clearly as possible, this definition is in fact more slippery than it first appears. By placing it in terms of a cost-benefit analysis, one runs into problems. Tracing returns to specific foreign policy actions is notoriously difficult. Actions may be aimed at reputational or symbolic goals which generate no immediate material gain, but provide significant benefits in the long run. Moreover, scholars often try to examine the cost and benefits of leadership as if it were a single calculation. In works on security overstretch, the emphasis tends to be on territorial expansion; I am interested in the concept of commitments more generally. Thus I offer a slightly different definition of overextension or overstretch, which is consistent with that provided in the last part of Kennedy’s book, and emphasizes Kupchan’s own phrasing: overstretch is the extension of obligations or commitments beyond the point where resources may be expected to meet responsibilities. ₁₅

 

Defining the Context of Overextension

I hope to avoid some of the problems associated with the measurement of both obligations and resources by breaking down the problem of overextension into separate issue-areas, and then focusing on those where responsibilities and resources are especially well defined. In this way, the relationship between commitments and means should be clear. The two issue-areas I examine in detail are international monetary affairs (where overextension equals a currency overhang) and military overcommitment (overextending obligations of the armed forces). In each case, responsibilities are well defined, and the resources necessary to meet the commitments are easily measured. Each is an important issue-area in its own right. Yet each represents different sorts of problems, which allows for additional insight when executing comparisons. Examining more than one issue-area will also illustrate the generalizability of the argument I develop.

A currency overhang represents a situation where the hegemonic power has oversupplied leadership. The leader has supplied a collective good to the point where its actions are no longer stabilizing the international regime in question. It is an example of overstretch in international economic relations, where the leading state provides the supporting infrastructure to an international economic subsystem. Problems here typically occur when asset holders wish to switch to a different currency—usually the money of another country participating in the hegemon-led subsystem. The threat to the hegemonic power’s leadership comes from an economic rival, and most likely a political ally.

Military overcommitment, on the other hand, results when leadership is undersupplied. That is, the hegemonic power is not providing as much leadership as is demanded. It is representative of problems in security affairs and involves political relations. Problems here occur when a rival emerges outside the hegemon-led subsystem. Despite the different sources of overextension in each issue-area, I intend to show that the forces driving policy responses to currency overhangs and military overcommitments are largely the same. A graphic presentation of this definition (figure 1) suggests that at any given point in time, the relationship between commitments and resources can be categorized as one of three descriptions. Commitments (C) may be greater than, equal to (as represented by a 45 degree line), or less than Realized Resources (R).

Figure 1: Overstretch

This, however, is only partially true to the ideas expressed above. Kupchan placed his discussion of the gap between commitments and resources in the more general context of relative economic decline. Relative economic decline suggests doubts about the sustainability of commitments. (Too often, “relative economic decline” collapses together two factors better left separate: the rise of rivals and the ability to raise resources.) Thus another definition of overstretch can be proposed: when commitments are above the level of sustainability. I treat sustainability as a constant; this assumes that the ability of a society to devote more resources toward foreign affairs has a maximum, and that maximum is not manipulable by policy in the short or even medium term. This is a conservative way to think of sustainability, since I do not assume that this maximum level will fall dramatically, either. It is a simplifying assumption, because it means policy choices remain focused on balancing resources and commitments.

While at first this sounds as if I have simply introduced a concept (sustainability) and then eliminated its impact to return us to the earlier definition, the mere introduction of sustainability as a reference point alters the discussions significantly. There are in fact two different types of overstretch, which can (but do not necessarily) occur simultaneously. There may be a gap between commitments and resources (i.e. when C > R) or there could be a gap between commitments and the level of sustainability (i.e. when C > S), or there could be some combination of the two. Recognition of the differences in these problems suggests that two separate issues are at stake, which we should think of in sequence: setting the level of commitments, and then producing the resources to live up to them. ₁₆ While ideally one decision should be made in the light of the other, I would suggest that they often are not.

A gap between commitments and resources can exist because a state fails to live up to commitments (even though these commitments are affordable), or because it takes on commitments beyond its capacity to sustain them for any length of time. Clearly, those who write about relative economic decline have been more concerned with this latter definition, though relative economic decline does not automatically make commitments unsustainable. The differences in this definition can be viewed more clearly when it is portrayed graphically (figure 2), and compared to the earlier representation.

Figure 2: An Alternative View of Overstretch (Maximum level sustainable = S, Commitments = C, Realized Resources = R)

The distinction between the two types of overstretch is also critical for assessing the appropriateness of policy responses, for the range of enduring solutions is different in each case. When there is a gap between resources and commitments and the state has taken on unsustainable commitments (as at time t+3 in figure 2), the logical policy recommendation is to reduce commitments; closing the gap between resources and commitments by raising resources is by definition unsustainable, and therefore would only be a temporary solution. (This is exactly the criticism raised about Reagan’s military buildup in the 1980s—U.S. military forces might have more realistically met global obligations, but it was unlikely that the U.S. could have afforded to maintain such large, well-equipped forces for long.) What if commitments began above the level of sustainability were being reduced (but still lay above sustainability) and resources were being raised to meet them? Should we consider a country in such a situation overstretched? By most definitions, it is not. Now consider a situation when there is a gap between resources and commitments, but commitments lie within the level of sustainability (as at time t in figure 2). What is the proper policy response in this case? Would it be incorrect to raise both resources and commitments, yet leave a gap between the two (as between t and t+1)? More to the point, how should we predict policy responses in these different situations?

As suggested before, there are two interconnected decisions at hand, one concerning changes in commitments, the other concerning changes in realized resources. In situations where obligations are already above the level of sustainability (C > S), there are two choices in altering commitments: raising them versus maintaining or lowering them. After this first choice, there is then a second which concerns resources. Taken together, these two decisions produce five recognizable outcomes. (There are more than four simply because the level of R compared to S also comes into play.) If we assume that C > S and R > S, there are two possible variations if commitments are increased. If resources are also increased (despite being above sustainability), this equates to afterglow—irrationally pursuing an international role which is no longer appropriate. If resources are not increased or even fall, this is worsening afterglow, since both the gap between C and S and the gap between C and R are widening. One can easily see why afterglows would worsen, for R is already beyond S—a policy of increasing R cannot last long.

Still assuming C > S and R > S, commitments might first be lowered to approach sustainability. If resources are increased to meet commitments, this closes the gap between C and R, but the outcome will be above S. I label this unsustainable adjustment. If in this same situation resources are lowered, I call this partial adjustment, for C and R are both approaching S, though C may well remain above S and the gap between C and R may remain depending on the degree each is lowered. If we assume C > S, but R < S, then we merely replicate some of the outcomes already described. For instance, when C > S and commitments are increasing, and then R is also increased, this parallels afterglow. When C > S but decreasing, and R < S but also decreasing, the outcome looks like partial adjustment. Only when C > S but C is falling, and R < S but rising, do we have sustainable adjustment (i.e. both gaps are narrowing and the situation is stable), though by implication in the end C must fall below S before R equals C.

When we consider situations where C < S but an overstretch exists (C > R), we have only three distinct responses. These are interesting because the gap between resources and commitments represents a failure to live up to capabilities. In the first situation, commitments can be maintained or reduced while resources are raised—the gap between the two is reduced, so this is also adjustment. Commitments might be increased as resource levels are raised, in which case the commitments might still be affordable, but we could expect the gap between resources and commitments to continue. Hence I call this response continuing overstretch, though the outcome depends on the speed with which C and R change. Finally, there are outcomes where resources are lowered, regardless of any change in commitments. These outcomes represent underfulfillment, since overstretch continues or even worsens even though the country could sustain these obligations.

These descriptions provide the range of five responses to overstretch (i.e. C > R) when commitments are set too high (i.e. C > S), and the three responses to overstretch when commitments are in fact sustainable (i.e. C < S). In order to understand which of these various responses should be expected in a given situation, we need to turn to an examination of the decisionmakers involved in making commitments and in raising and allocating resources.

 

Responding to Overstretch: The Afterglow Hypothesis

As defined above, a currency overhang occurs when, in a system of fixed exchange rates, there is so much of a currency in circulation that the supply overwhelms the reserves set aside to back the currency. Oversupply erodes confidence in the currency and threatens exchange rate stability. Where the national money is serving as a key currency in the international economy, allowing the currency’s confidence to fall can have the advantage of making exports more competitive but clearly brings the currency’s role as an international medium of exchange into question. As noted earlier, decisionmakers in both the U.S. and Britain faced a currency overhang during their periods of relative decline, yet they reacted differently. Their choice determined whether the country’s money would continue to serve as the key international currency, and whether the existing monetary regime would survive.

In the case of Britain’s monetary policies after World War I, Stephen Krasner suggested that leadership was reasserted because such policies were supported by institutions and interests which themselves had been created during hegemonic ascendance—as he put it, “the British state was unable to free itself from the domestic structures that its earlier policy decisions had created.” ₁₇ In her study of British international monetary policy, Susan Strange made essentially the same point: “... it has been the misfortune of British policy since the Second World War to have inherited from this distant imperial hey-day, associated ideas which no longer apply to Britain’s changed situation, but have nevertheless proved remarkably hard to shed or modify.” ₁₈ Peter Katzenstein put forth a slightly different argument based on similar underlying factors, when he argued that “the British definition of policy objectives reflects a “banker’s” rather than a “business” view of the world. The former view has found its most ardent proponents in London’s City, whose economic survival, it was thought until the mid 1960s, depended on defending the position of sterling as a reserve currency.” ₁₉

Each of these scholars noted that Britain’s international monetary policy after World War I (and even much later) was not rational from the perspective of the nation as a whole. Despite the overhang, commitments were raised as the authorities tried to reestablish the pound at its prewar value. Attempts to honor such commitments in the 1920s inflicted hardships on industry in particular. Instead of this afterglow, adjustment out of the leadership role could have been undertaken: lowering commitments to the level of resources (i.e devaluation). The authors cited above link the afterglow to an institution created much earlier—Katzenstein put it most clearly: “The single most important source of the banker’s view has been the Bank of England.” ₂₀ Krasner’s “afterglow hypothesis,” that the forces driving states to assume international leadership would lock them into domestic institutions which would later resist adjustment out of the leadership role, poses several unexplored questions. What sorts of domestic institutions are necessary for effective international leadership? How are domestic interests filtered through these institutions? Why don’t the institutions respond to changes in the international structure? ₂₁

As a systemic-level argument, the traditional versions of hegemonic stability theory have been ill-equipped to answer these questions. In suggesting the afterglow hypothesis, Krasner intended to explain the time lags he observed between the onset of hegemonic decline (in structural terms) and the end of leadership (in terms of policy). By bringing domestic factors into the equation, the explanation offered was an ad hoc addendum to an otherwise structural theory rather than an integrated step in a comprehensive model. While some may have found Krasner’s afterglow hypothesis interesting, afterglows were largely ignored because of the inability of Realist-based hegemonic stability theory to tackle these issues, despite fears concerning the possible end of American leadership and the relevance which answers to these questions might have for policy. By choosing to address such topics, I am proposing that some of the most practical and policy-relevant conclusions from analyses of hegemonic leadership may be found in this largely unexplored area. ₂₂

At the same time, any explanation will have to incorporate causal forces beyond the scope of conventional hegemonic stability theory. The questions posed emphasize that structural systemic explanations have already been found wanting; the analyses of Britain’s reassertion of leadership in the 1920s cited above offer an array of potential explanations to which we can turn. By referring to “domestic structures,” Krasner suggests not only the dominating role of a specific public institution in policymaking (the Bank of England), but also the importance of narrow sectoral interests which developed over the preceding decades (London’s financial community), and ties between the two. ₂₃ Both Strange and Katzenstein refer to the power of ideas to shape policies, though both also pinpoint the Bank of England as the purveyor and protector of those ideas. The most logical step to take, then, is to blend the most important of these factors into a multilevel analysis.

For much of the late 1970s and early 1980s, the field of international relations struggled through the levels of analysis debate, which ostensibly concerned the locus of explanations for outcomes observed at the international level, but largely centered on which sorts of actors were the most important. The resulting consensus concluded that the best explanations draw on several different levels. ₂₄ Yet the manner in which theorists now execute analyses is rarely a synthesis of arguments from different levels. ₂₅ Too often the multilevel approach translates into the mere application of independent arguments employed in sequence. ₂₆ The approach I take blends causal factors from several different levels in a single model. In other words, rather than present, say, a structural argument, outline its shortcomings, then afterward apply some other theory from a different level, I will set up the relationships between arguments from different levels, draw on a variety of actors pursuing different sorts of goals, and then explain how they interact in the face of both systemic and domestic politics.

 

A Multilevel Approach

Since the outcome to be explained is state policy, the key focal point will be decisionmakers within state institutions—including the very ones central to the afterglow hypothesis, but others as well; I shall treat them primarily as bureaucratic actors. ₂₇ Bureaucratic interests are derived from the bureaucracies’ tasks and jurisdictions. Unlike traditional bureaucratic politics models, I assume that they must not only defend their interests from rival bureaucracies, but also serve the interests of some constituency (to enhance their base of power). They must be aware of and anticipate the need to muster domestic support for their policy choices. If bureaucracies are to serve domestic constituencies in the particular issue-areas we are interested in, they must defend and promote the interests of domestic constituencies in the face of international threats. How the bureaucracies choose one policy over another depends on their specific responsibilities, international forces affecting their interests directly or those of their constituents, the expression of domestic interests, the interaction between bureaucracies, and the policy instruments at their disposal.

To provide an overall framework to the argument, and to organize the different elements in the afterglow hypothesis, I turn to path-dependency. ₂₈ Arguments relying on path-dependency stress how judgments in one time period shape later decisions by eliminating or promoting future options. In this case, the initial decisions concern the creation of explicit institutions with specific instruments and responsibilities. The path which is then followed is of interest in its own right (since it is related to the success or failure of hegemonic leadership, as well as responses to overstretch which occurs when commitments are still at a sustainable level), but it also lays out reasons why commitments might be made beyond the level the state could possibly sustain. Overstretch depends, of course, not only on decisions about how a state takes on and manages its international obligations, but also on changes in the international environment—most notably the rise of potential rivals (which could induce the state in question to raise commitments) and relative economic decline (which could introduce questions about the wisdom of carrying heavy commitments). The final stage then involves responding to overstretch, in light of the earlier decisions.

To clarify the overall argument, I break down the afterglow hypothesis into three distinct phases. ₂₉ There is a separate set of variables applied in each part, though the answer to the first portion of the hypothesis frames the second, and so on. First, I posit that hegemonic ascendance will include the creation or empowerment of specific domestic institutions geared to international leadership. ₃₀ This conjecture can be tested on its own; it requires a discussion of the domestic sources of hegemonic aspirations, which informs an argument about institutional innovation. Second, when such institutions are created or empowered hegemonic leadership is more effective, but the successful pursuit of hegemonic leadership produces overstretch. I spend comparatively less time on this component of the afterglow hypothesis, for it goes over ground well covered by others. I will, however, apply the definition of overstretch portrayed in figure 2, to point out the different types of overstretch that occur. The development of overstretch sets up the last part of the afterglow hypothesis, which concerns the responses to overextension once commitments are already above the level of sustainability. Afterglows occur when the institution created to pursue hegemonic leadership feels intense pressure to continue its core mission and also has enough power to make its desires felt. If it can maintain or even raise commitments, afterglow results. Some sort of adjustment occurs when the chief bureaucracy charged with marshaling and doling out resources—the Treasury or Ministry of Finance—is under intense pressure to act and is more powerful than the institution created to pursue international leadership, for it then lowers commitments and resources. (This could then lead to sustained adjustment once commitments fall to a sustainable level.) If the institution associated with leadership is able to set commitments, but the Treasury reduces resources, we get a worsening afterglow. If there is a compromise between the two institutions so that commitments are reduced and resources increased, unsustainable adjustment results. Whether or not the afterglow is extreme, or the adjustment more than temporary, depends on the degree of independence the institution of international leadership has from the Treasury.

The multilevel aspect of the afterglow hypothesis which Krasner suggested, and which Strange and Katzenstein also hinted at, shows up in the ways in which the components fit together, as well as in the several themes that run throughout all three. Domestic interests interact with bureaucratic actors in each. In the ascendant period, we assume that domestic interests within the hegemonic power share a consensus supporting policies of leadership; bureaucratic institutions may then be created or empowered to execute those policies. Policy networks (the bonding of bureaucracies and domestic interests) can develop—a path has been chosen and locked in. ₃₁ As in path-dependency arguments, it will then be hard to redirect policy, even when the international environment changes and/or the domestic consensus behind leadership erodes. Yet as I have already suggested, policy adjustment occurs, but only in a few instances, thus the outcome is not predetermined as in so many applications of path-dependency. Instead, we have the ingredients for a clash between differing alliances of bureaucratic and sectoral interests, without the necessary information on which side will prevail. We are left with our key question—why adjustment occurs in some instances, but not others—though the way the first two parts of the hypothesis are modeled will identify each side in the dispute. What we then need is some way of understanding the intensity of each side’s interests, as well as each side’s ability to dominate decisionmaking.

There is also, of course, a systemic aspect to each component, which is interwoven with the domestic politics facet of the afterglow hypothesis. In the first stage, the country is powerful enough to consider undertaking hegemonic leadership. Hegemonic leadership entails taking on commitments, as would be covered in the second part. Then in the third, when the gap between international commitments and resources must be dealt with, I will argue that the presence of systemic rivals produces direct pressures on bureaucratic actors, as well as heightening pressures on those actors arising from constituents. Systemic rivals account for the intensity with which institutions of hegemonic leadership feel they must defend their core missions. This brief description also suggests why it is necessary to view causal forces from different levels together, since they have numerous interactions.

A closer inspection of bureaucratic responsibilities and their overlap is necessary to explain the final unfolding of the story. Intensity of desire to pursue particular policies cannot account for outcomes by itself, especially when interests clash. Therefore it is necessary to identify overlap or independence in policymaking and in the instruments used to execute policy. Does the Treasury have a say in setting international commitments, or merely in the generation and distribution of resources? When the Treasury must restrain the use of resources but other institutions want to honor international commitments, the conflict between them will only be settled by the relative power each can bring to bear. Afterglows will occur when the other institution can override the Treasury’s objections and make its policy effective despite the Treasury’s resistance. Only when the Treasury is dominant and can prevent the other institution from running an independent policy will adjustment (bringing commitments and resources down to a sustainable level) occur.

Of course, information on the bureaucracies’ characteristics is relevant in the first and second stages of the afterglow hypothesis. In the first stage, these characteristics are evidence for evaluating whether the conjecture put forth is correct or not. Moreover, we can see the links between domestic interests and the definition of bureaucratic responsibilities. Beyond simply asking whether or not such institutions are created or empowered, I examine whether those that indeed were constructed have characteristics consistent with traits deduced to be essential to hegemonic leadership. In the second stage, we examine the role of these institutions in the process of overextension. Does their presence make overextension more likely? How does the institution’s actions lead to bonds with domestic actors? Such information then feeds into the third component, as noted above. Once again, it is important to recognize the interplay between the different levels of analysis, as well as the interaction between the different stages of the afterglow hypothesis.

 

A Starting Point: The Microfoundations of Liberal Leadership

Specifying the initial stages of the afterglow hypothesis requires coming to grips with the domestic sources of hegemonic leadership—the microfoundations of hegemony, to use David Lake’s words. ₃₂ Those microfoundations must then be linked to policies of international leadership. Since I intend to discuss specific issue-areas, we must identify the sorts of policies required for the exercise of hegemonic leadership in each. We can then go on to ask about the domestic institutions which might be designed to support these policies. Such a model is needed for several reasons: to tell us whether there is a broad enough consensus to succeed in the construction of new institutions (or the empowerment of existing ones), as well as to tell us more about what those institutions’ responsibilities will be. Armed with that information, we can then examine how well the institutions served their domestic constituencies, to understand what sort of policy networks developed, as well as draw a picture of the relationship between different bureaucracies. If the microfoundations are dynamic, then they will also specify when the consensus behind leadership comes apart, as the international environment changes—thus altering the balance of power behind the options of afterglow and adjustment.

An examination of the microfoundations of hegemonic leadership underscores the interaction of an array of explanatory factors, thus separating this argument from conventional versions of hegemonic stability theory. By linking the arguments about the microfoundations of liberal leadership with those about the domestic institutions a liberal hegemon would desire so that it could provide more effective leadership, I am able to formulate very specific expectations about institutional innovation which are elaborated in the section after this one. The current section is devoted to an explanation of the domestic sources of aspirations to provide hegemonic leadership, and how those are likely to evolve.

Elsewhere, I have argued that the dynamics of the leadership of economically open international subsystems can best be explained through a combination of domestic political and economic factors, alongside the traditional structural factors. More specifically, I have argued that a republic, relatively rich in capital, and possessing enough international power to contemplate assumption of the leading role in management of an international economic subsystem, will pursue liberal hegemonic foreign policies (e.g. leadership in the liberalization of trade, the opening up of capital flows, the stabilization of exchange rates, etc.) in the absence of another such leader. These attributes by no means ensure that the state will successfully provide leadership. ₃₃ Liberal hegemony (or liberal leadership as I prefer to call it, given that my arguments aim to explain examples of leadership and the provision of international collective goods, not overt dominance of even a subsystem, let alone the international system as a whole) is explained through a combination of interests and capabilities; unlike in Structural Realism, interests and capabilities are not coterminous. In purely structural accounts, the distribution of international capabilities also defines interests. Here, interests are explained through economic analysis—and those interests are shaped by the characteristics of the domestic political regime.

Producers can seek profits through production in competitive markets (including an open international market), or through rents based on market interference (which usually require restrictions on both foreign and domestic competition). In cases where the good or service being produced has no extraordinary characteristics, producers prefer to capture rents rather than compete in an open market. Since most rent-seeking arrangements involve limiting entry into the sector, such arrangements provide existing producers the opportunity to shift their production to whichever level maximizes their profit.

Political settings determine whether such preferences translate into outcomes. In countries ruled by representative regimes, producers are involved in rent-seeking (perhaps even more so than in autocratic regimes, since more groups participate actively in politics), but the rents which are allowed in republics are less disruptive, less distorting, and not likely to persist when compared to those allowed under autocratic regimes. Wider political competition in representative systems prevents the state from playing favorites for as long as is possible under autocratic regimes. When trying to increase its own revenues, the representative state must take into account the costs of losing political support—a much weaker constraint on autocratic regimes’ decisionmaking. ₃₄ Widespread interference in domestic markets due to pervasive and persistent rents will distort producers’ interests in foreign economic policy. In autocratic states, where rents are more likely to exist, and more likely to distort preferences, interests in exploiting foreign markets will be retarded. Since producers wish to capture rents in the domestic market, their highest preference will be for the state to use its international power to protect and expand these domestic rents, rather than expend power to establish an open international economic zone. It is therefore unlikely that a powerful autocratic state would ever lead international liberalization.

By default, powerful republics are more likely to lead the liberalization of international economic relations, but certainly we cannot infer that all republics share similarly substantial interests in undertaking such activities. We still need to uncover which constellations of domestic interests support policies of liberal leadership, so that we can understand when they would drive policy. Following interpretations of the Stolper-Samuelson theorem, sectors intensely employing the abundant factor of production would benefit from greater levels of trade, while sectors intensely utilizing the relatively scarce factor of production would benefit from limitations to trade. ₃₅ But another important element must be added to the basic, two-factor Stolper-Samuelson model: the role of capital in the expansion of international trade. The Stolper-Samuelson argument compares the uses of two factors of production (capital and labor) within the domestic economy. It does not take into account how the expansion of second and third markets might stimulate further employment for the capital-intensive sectors of the economy.

Highly capital-intensive service sectors (such as banking, transportation, insurance, etc.) would gain higher returns from increased international traffic of any goods. The capital-intensive sectors of a country where capital was abundant relative to labor would gain from an expansion of international trade in ways which the Stolper-Samuelson theorem and its derivatives tend to overlook. This would explain why a capital abundant, powerful country ruled via a representative regime would be more willing to initiate trade and organize the international economy around liberal principles than would a country with labor relatively abundant, even though theory would tell us both can gain from specialization and exchange—the capital-intensive sectors would gain from the act of exchange itself, so the capital abundant country would have greater incentives to lead in liberalization. Indeed, this capital-rich country would even gain from the expansion of trade between third parties with which it has no direct trade in goods, since some of its citizens would profit by providing the most competitively priced capital-intensive services.

In situations where a powerful country with a representative regime surges ahead of others in terms of capital-abundance, the sectors that prefer opening to the international economy can appeal to the state to exercise its power in support of their attempts to expand the competitive international market. ₃₆ This would entail an expansion of the state’s traditional services (in ensuring property rights, providing a medium of exchange, maintaining a legal system, and other such services) beyond its national boundaries. The establishment of such infrastructural support for an international economic subsystem is the essence of liberal leadership. As such, the liberal hegemonic power is providing collective goods which others may benefit from, but doing so to serve the economic interests of its constituents. Thus this model of hegemony suggests that leadership is based on both positive and negative forms of power, and that there may well be states choosing to support this leadership, as well as some who will choose to free ride upon it. ₃₇

Another way this model varies from the standard Realist version of hegemony is that it is dynamic; it not only explains why and when we would expect to see domestic interests shift, pressuring a particular state to adopt leadership policies (and therefore also pressuring it to create specific domestic institutions necessary to achieve international objectives), but it also offers reasons for such leadership to be cyclical. Success in expanding the international market and thus employing more capital in the international arena has significant predictable effects on sectoral interests over the long run. Relative economic decline occurs when other states’ factor endowments become similar to those of the liberal leader; the accumulation of capital relative to labor elsewhere reduces the competitiveness of the liberal leader’s capital-intensive sectors, thereby undercutting domestic support for continued pursuit of the policies of hegemonic leadership.

Capital abundance is a relative concept, influenced by rates of capital accumulation domestically and abroad. If a hegemonic leader successfully establishes an international subsystem regulated by liberal principles and open to international capital flows, relative rates of capital accumulation among the members will likely be altered. The leading state’s incentives to continue to provide the political economic infrastructure to the open subsystem may be eroded as the relative gains from doing so drop as competitors close the gap in terms of relative capital-abundance. The incentives for trade change as the countries within the trading system come to resemble each other in terms of their endowments of capital and labor, as well. ₃₈

From this economic analysis, we can outline the domestic support for and opposition to policies of liberalizing leadership over time. A liberal leader which successfully pumps its capital into other countries in pursuit of profits will initially face domestic opposition from the most labor-intensive sectors only; these will always be the first to object to the policies of trade specialization, since they are clearly hurt in the process. ₃₉ But over time, if capital is accumulated at relatively higher rates in other countries, and the distribution of factors of production come to be more equalized throughout the open subsystem, firms which are producing goods embodying a combination of capital and labor closer to the world ratio come under foreign competition—driving them from the coalition supporting liberal leadership. Finally, as some other countries accumulate capital and catch up to the liberal leader in terms of its capital-labor ratio, even domestically oriented capital-intensive sectors lose their interest in supporting policies of leadership. Only the most capital-intensive sectors (such as internationally oriented capital services) will be among the last supporting the continuation of leadership. ₄₀

The afterglow hypothesis suggests, however, that even as domestic support for liberal leadership erodes certain domestic institutions are difficult to alter or dismantle, thus making it difficult to redirect policy. The microfoundations of hegemony provide us with the material to construct an explanation for each step in the sequence of events. It suggests that in powerful republics which find themselves suddenly relatively abundant in capital compared to other states, domestic interests will pressure the state to undertake policies to lead international economic liberalization. This will include the creation of domestic institutions with the specific characteristics necessary for executing hegemonic leadership. Over time, domestic interests shift, as does the international environment; the state may find its commitments outstrip its capabilities. How will the state (or even more specifically, the institutions created to execute leadership) respond to the changing situation and the shifting domestic support for its past policies? First we need to step back, and examine the exact nature of the institutions we would expect to be created in the pursuit of leadership.

 

The First Phase of the Afterglow Hypothesis: Ascendance and Institutional Innovation

Do the institutions of leadership get created? To explain why they would be created in some instances but not others, we need to look at the interaction of domestic interests, their perceptions of the need to create an institution for the pursuit of the policies they support, and the obstacles that might prevent such institutions from coming into existence. To understand what the obstacles might be, we must consider what sort of institutions would be desired in the abstract. As will be developed in more detail below, the institution we abstractly associate with management of security commitments is a general staff; in international monetary affairs it is a central bank, as mentioned in the case of Britain’s monetary affairs in the 1920s. Thus in this discussion of the opening stage of the afterglow hypothesis, I first deductively identify the characteristics of institutions that might be demanded to support hegemonic leadership in the two issue-areas under examination. I then lay out the set of factors that determine whether such institutions will be created.

The microfoundations of leadership are important not only for understanding why a state would choose to carry the burdens of leadership, but also for telling us when it is likely to do so and how the domestic processes associated with the assumption of leadership will likely unfold. Since we can logically identify the sorts of tasks a liberal hegemonic power will have to undertake if it is to provide leadership successfully, we can tie this to the interest-based arguments above. When a powerful country ruled by a republican government suddenly pulls ahead of other countries in terms of relative capital abundance, we should expect the sectors that use capital intensively to lobby the state to help them enter new international markets. Yet to do so, the state may have to develop new institutions to formulate and execute the policies associated with leadership.

Policies of leadership in the liberalization of international economic relations support an expansion of competitive trade and capital flows, and then maintain and defend the resulting international subsystem. A stable open international monetary system is critical for international trade and investment to be liberalized and increase. Most theorists of hegemonic leadership included the creation of a stable international medium of exchange (with adequate liquidity to facilitate the expansion of trade) as a characteristic of leadership. Several scholars also emphasize the ability to project military power as a key characteristic; George Modelski goes so far as to identify the development of a global military strategy as a key component in successful leadership. ₄₁ To achieve these goals, specific domestic institutions may be needed.

As part of an open international economic subsystem, the leading state desires a particular sort of international monetary regime, which underscores the three basic functions of money in any market-based exchange system. Money serves as a unit of value (i.e. a measure), as a medium of exchange (i.e. an intermediating device), and as a standard for deferred payments (or store of value, i.e. credit). Money underpins the efficient operation of any market, for it eases transactions. Without money, trade could occur only via barter, leading to the complicated process of matching buyers and sellers who each hold what the other desires—what economists call finding the “double coincidence of wants.” ₄₂

Exchange based on comparative advantage drives international markets. As with any market-based system, the international economy functions more smoothly with an acceptable medium of exchange. In this sense, the supply of money shares some of the features of a collective good—while exclusion may be possible (but would always be difficult), nonrival consumption is clearly an important characteristic of money; the more widespread the use of a money, the more effective it usually is. ₄₃ As with so many other collective goods, presently we find that governments typically provide money in the domestic political economy. ₄₄ Since the international system lacks an overarching political authority, however, it also lacks a true international money.

Hegemonic stability theory argues that in the absence of such an international political authority, these sorts of collective goods which support liberal international economic relations will exist only when a state with the requisite capabilities decides to provide them. The establishment of an international money therefore is one of the classic issues hegemonic stability theory (or the model of liberal leadership I have posed as a modification or alternative to it) is meant to analyze. If the liberal leader is trying to create and maintain an open economic subsystem, it is necessary to establish a stable international money accepted throughout that subsystem. The more widely this money is accepted, the more widely markets are integrated, and the greater the range of outlets for the capital and capital-intensive exports of the leading country. In the absence of a single widely accepted currency, transaction costs rise and can become a formidable barrier to economic intercourse. ₄₅ By applying the liberal leadership model, we can identify deductively the period when a state would try to establish an international money and create a monetary regime supporting a liberal economic subsystem: once a powerful republican state has surged ahead of other states in terms of relative capital-abundance, its citizens will pressure the government to assume leadership in international monetary affairs.

The state providing leadership to the open subsystem will seek to construct a regime with particular characteristics. In describing and comparing international monetary regimes, we focus on three characteristics: exchange rates, the nature of reserves, and the convertibility of capital (the nature of the links between capital markets). ₄₆ The first characteristic concerns how national currencies are traded; are exchange rates fixed, freely floating, or somewhere in between? On one end of the spectrum, exchange rates are determined by authorities and on the other, they are determined by markets. Reserves can vary in nature yet still serve their primary purpose. Two types have been utilized in the past. The first is a commodity, most often a metal such as gold or silver. These are accepted as a monetary reserve because they have some high intrinsic value recognized across international boundaries, which makes them desirable in their own right. The second common form of reserve asset is a national currency, which may become internationally attractive because the currency is believed to have value. This typically entails that holders of this currency be able to spend the currency in the domestic market of the issuing country (i.e., the issuer practices relatively free trade). A possible third form would be a money created by an international agency, though currencies issued by international organizations have as yet played only minor roles in international monetary affairs. The third monetary regime characteristic involves the nature of controls on financial connections and/or capital flows. Here analysts measure how open or closed the international financial system is—how well are national financial markets integrated? This has significant ramifications not only for the amount of international investment that can take place, but also for financing trade and other activities.

If the hegemonic leader’s aim is to liberalize trade within a subsystem, and to support the expansion of its own capital-intensive sectors (as presented above), monetary regimes with particular characteristics will be more appealing than others. Clearly an aspiring liberal leader would prefer to have capital convertible as widely and as freely as possible, for this would allow its own capital-intensive sectors to penetrate foreign markets and capture higher profits. Fixed exchange rates allow for switching currencies at a regular rate, which not only reduces transaction costs and the risks associated with doing business internationally, but also is a distinct advantage when using money to serve as a standard for deferred payment. Perhaps the most important goal of a liberal leader, however, is establishing a single international money. This is related to the issues over the form of reserves used, but the particulars are less important than if there is merely some form of asset which is widely believed to have value, and is therefore accepted throughout the open subsystem—in this way, money can improve the functioning of markets by serving as a common unit of value and medium of exchange, as well as a common store of value.

Others have undertaken analyses of the monetary requirements of an open economic subsystem, and reached similar conclusions. According to W. M. Scammell, such a system must have four integrated parts. These parallel the discussion above, in that a well functioning monetary system needs a medium of international exchange, adequate ties between nations’ financial institutions in order to employ that medium of exchange, and some method (or methods) of managing balance of payments adjustments. He added another requirement, which captures the more qualitative aspect of the liberal leader’s role: there must be management of the international monetary system. ₄₇ Scammell realized the need for management in any monetary system (even within a single country), but considers the problems confronting an international monetary system to be rather acute. Leadership must address several tasks: managing the nature and supply of international money, managing the forces and policies that drive changes in nations’ balance of payments, and coordinating national policies within the monetary system (though this task might better be thought of as “damage control” rather than true coordination). ₄₈ Domestically, management of the nature and supply of money is easier because governments can exercise authority over other actors. A state can make a currency legal tender within its borders, and force the use of a single currency upon others (though making a currency attractive is a much more effective way to foster its use, especially when substitutes exist).

Managing the nature and supply of international money is difficult because the authority to force acceptance of a currency or asset is typically missing, even for a liberal hegemonic power. ₄₉ Some management of the international money is necessary in order to maintain the balance between its acceptability (confidence in its value) and its availability (for there to be enough in circulation to provide liquidity supporting international economic activity). In the absence of effective supranational institutions, the liberal hegemonic power manages the international medium of exchange through its own political leadership. ₅₀

While this explanation does not rest on the liberal leader’s ability to coerce other states into joining the monetary regime it creates, it is based on the notion that the liberal leader receives distinct benefits by leading an international monetary order. I have already mentioned some of the benefits for the enhancement of trade and broader economic interests, but it is important to note that the specific manner chosen to create and execute monetary leadership may also confer benefits to the state itself as well as its constituents. For instance, the easiest and most obvious route for the liberal leader to provide an international money is to foster the use of its own domestic currency in such a role. The liberal hegemonic power can exercise authority in the domestic sphere to control the characteristics of its own currency, and thereby give it the traits it needs to attain the status of an international medium of exchange. Establishing a domestic currency as an international money provides a service to other participants in the open economic subsystem, while allowing the leading state to garner specific advantages. ₅₁ Because of the currency’s dominance in finance, the state’s control over the currency becomes a potential lever vis-à-vis other states. Invisible earnings may be increased because others utilize the nation’s services more than they would otherwise; financial actors with a base in the leading country have an edge against competitors in that they have greater access to the largest supply of the international money. Finally, practice has shown that the state whose currency is accepted as an international money has the option of allowing a deficit in its balance of payments, since working balances of its currency may accumulate abroad without any negative ramifications in the short-run. ₅₂

Disadvantages to this specific form of leadership may emerge as well, though, among them the emergence of an overhang. ₅₃ If your currency is the numeraire of the system (i.e. if it is the standard of value for other currencies), devaluation is not a viable policy for rectifying a balance of payments deficit. Other monetary policies may be constrained, in that they may be slanted toward external concerns rather than domestic goals. ₅₄ Management of the international regime may conflict with domestic policies, particularly when one institution is given responsibilities in both areas and must act with a single set of policy instruments—a good description of the ingredients for afterglow.

In the issue-area of military affairs, the liberal hegemon’s responsibilities can also be logically identified. The security aspect of leadership can be divided into two separate functions. First, the hegemonic power is supposed to provide internal security to the subsystem; second, it is to provide security from external threats. Internal dangers threaten the rule of law and order, endangering property rights and peaceful trade. Perhaps the most obvious internal peril in earlier centuries was maritime piracy, but the general problem of maintaining free passage on the high seas remains an issue today (witness concerns over sea traffic in the Persian Gulf).

The second task, providing security from external threats, involves protecting the hegemon-led subsystem from dangers originating outside the subsystem. The most obvious example of such a threat came from the fascist countries in the 1930s. These dangers arise when one or more major powers wish to expand their domestic political economies at the expense of the open economic subsystem. External threats exist as long as powerful non-democratic states remain outside the hegemon-led subsystem. Even when they are participating in the open subsystem, such states may still harbor desires to expand by incorporating parts of the international economy into their domestic economies.

The key point in either task is that the hegemonic leader expands its definition of security beyond defense of the national borders. Because of its citizens’ interests in international trade and/or international investments, the state redefines national interests. Now the hegemonic state considers it necessary to defend other states because of their economic importance; trading routes may even become vitally important. In defending the subsystem, the hegemonic leader takes on the responsibilities of defending other states and their interests.

National interests may be redefined in terms of the subsystem’s functioning. This fusion of national and subsystemic interests often occurs through action (during international conflicts) as much as through conscious deliberation. Since hegemonic transitions tend to be associated with major war, ascending hegemonic states often take on enormous military responsibilities without any conscious intention of doing so. The new hegemonic leader emerges from the war victorious, but as part of the strategy for winning the war, finds its military forces widely deployed, holding strategic points and operating from far-flung bases. At the same time, the hegemonic power’s victory suggests that it has the military assets to meet extensive obligations.

The benefits to the hegemonic leader depend upon the particular manner in which the leading state chooses to provide security. Security arrangements involving serious contributions from allies are obviously easier burdens to bear; this however weakens the leverage the leader has over its allies. It would be quite rational, therefore, for the hegemonic leader to carry significant burdens of leadership in the security area in order to have added leverage over allies. The disadvantage is clearly in the area of costs. When the returns to leadership are high, it would be easier to build a domestic consensus favoring such expenditures. As the returns to liberalized interactions fall, the willingness to bear the burdens of leadership will also decline. Again, we see reasons overstretch might occur.

 

Relating Hegemonic Leadership to Institutional Characteristics

From the discussion above, we can elaborate descriptions of the two institutions we would expect to see created or empowered during hegemonic ascendance to further policy in monetary and security affairs. As already mentioned, the two institutions relevant for the issue-areas I have chosen to examine are a central bank and a joint-service military staff. Many nation-states have created central banks and combined service military staffs, though, not just those which have led international liberalizations. More specifically, then, I argue in this first stage of the afterglow hypothesis that the timing of the creation and/or the empowerment of central banks and military staffs may be explained in specific cases by the same factors that drive these states to assume international leadership (i.e., a key element of the explanation for the institutional development was the desire to adopt policies of international leadership). This explanation is offered for several specific cases, and is not intended as an explanation for the creation or empowerment of all central banks or all military staffs. To be credible, the perspective offered here should provide additional insight to the sources of institutional change; in particular, it should shed light on the timing of such change and account for more of the specific design of the institution in question.

While there are many possible reasons for the creation or empowerment of central banks, the argument I make here stresses forces that have only recently come under closer scrutiny. ₅₅ A country wishing to manage an open international economic subsystem and provide an international money will most likely choose to adapt a national currency for international use. To change the currency’s attributes to make it attractive for international use, the state must first bring its own domestic financial system under control. The institutional mechanism for managing one’s own currency and monetary system, and thereby achieving similar goals internationally, has been a central bank. If a country embarks on the role of liberal leader without a central bank, it must create or empower one. This is not to contest traditional arguments for the creation of central banks—quite to the contrary, we should find much overlap between recent explanations focusing on developing the national currency as an international medium of exchange, and the more traditional explanations for central bank formation which focus on currency stability or domestic regulation, for the former encompasses the latter.

Economic historians rely on a combination of factors to explain the creation of central banks, among them economic efficiency, collective action problems among banks in terms of regulation and insurance, political motives, and historical accident. ₅₆ One of these institutions’ common prior responsibilities was assisting state finance ₅₇ ; in more modern times, functions such as the issue of legal tender and lender of last resort developed, and only then even later did the central bank’s role as regulator of the financial system emerge. As Charles Goodhart has pointed out, these discretionary functions of modern central banks were only recently grafted onto existing institutions. ₅₈ Such observations are especially relevant when analyzing the period of the gold standard, when almost all central banks concentrated their efforts on currency stabilization and international balance of payments targets. It was only after the Keynesian revolution that regulation developed as a technique for implementing broader economic policies. In light of these observations, I wish to distinguish between two events: the formation of the institution as a bank, and the institution’s empowerment as a central bank.

A central bank stands above other financial institutions within the domestic system by virtue of its special powers and responsibilities. There is, however, some disagreement over which specific abilities or responsibilities make central banks unique. Although there seems to be a general sense of the duties of a modern central bank, a glance at the literature leaves one with a bewilderingly wide array of views. ₅₉ Some see the central bank’s key role to be the lender of last resort function, some bank clearing, others the controller of note issues or control over the creation of credit, still others stress the maintenance of stability of the monetary standard; the Bank of International Settlements defines a central bank as an institution “entrusted with the duty of regulating the volume of currency and credit” in a country. I find this last definition the most attractive—central banks have control over the issue of legal tender, which gives them control or leverage over the volume of currency and credit. This provides the link to the earlier discussion on a hegemonic power’s desire to create an international medium of exchange.

The argument I am making about central bank creation or empowerment can be contrasted with traditional explanations, to the extent that it provides additional insight into the design of the institution itself. If the argument here is correct, the central bank’s design will reflect the specific problems of adapting the national currency for international use. As pointed out earlier, an international medium of exchange must command high confidence, but also be in abundant supply to meet the needs of the international economic subsystem. Currency adaptation for international use will require raising both confidence in the currency and liquidity. Since confidence and liquidity are typically seen as tradeoffs, this explains why institutional changes would be necessary. New policy instruments might be required if both confidence and liquidity are to be adjusted. ₆₀ The exact mixture of the changes will depend on the domestic currency’s starting characteristics—a weak currency in abundant supply will need more measures to restore its confidence (without reducing liquidity), whereas a domestic currency that already commands great confidence will need some way to expand its liquidity (without undercutting confidence). ₆₁ The route of adaptation is therefore contingent on the currency’s original characteristics.

Just as provision of an international money requires a balancing of liquidity versus confidence, the provision of security also requires management. ₆₂ The institution charged with formulating defense strategies is a military staff. In order to allocate resources to cover a wide variety of military objectives, and to manage the development of capabilities to execute policies in this sphere, countries have developed military staffs. More importantly, this must be a combined staff, one that allows the different branches of the military to make decisions together. Again, as in the case of central banks, the benefits from having such an institution are not uniquely tied to hegemonic leadership, though hegemonic powers may feel the need for such an institution more strongly than other states. By comparison, there is a much smaller and less coherent literature on the development of military staffs than there is on the formation of central banks.

The standard story about the creation of the modern general staff system begins with Prussia’s Great General Staff (Grossgeneralstab) and the string of military successes it delivered in the later 1800s. Previously, staffs had little to do with military strategy, which was left in the hands of the generals in the field. Instead, staffs concentrated their efforts on questions of administration and supply. ₆₃ Prussia’s staff offered a different way of developing military strategy. Other countries took note of Prussia’s victories and emulated the Prussian example. Some states, however, were reluctant to copy the Grossgeneralstab for the obvious reasons: they saw how the military acted in Prussia, and thus viewed a military staff as a potential threat to civilian control over the armed forces.

The Prussians had created a general staff designed to control the various elements of the army, not all the country’s armed forces. The Prussian navy was not very large, nor an important component of the country’s defense. A staff which combined decisionmaking among the different armed services (i.e. army, navy, and then later air force as well) could only be constructed after each service had achieved centralized decisionmaking on its own, so as one might guess, these took some time to create. A combined staff is much better suited to the tasks of assessing overall threats to security, designing the appropriate military forces to counter such threats, developing the correct mix of military forces to cover international obligations, and allocating resources through deployment to meet the country’s needs. Clearly, any time international security obligations are extensive, the need to conduct such planning would be immense.

The need for a liberal hegemonic leader to develop a combined military staff would be particularly acute. Not only is such a country likely to have far-reaching commitments, but those commitments are also likely to be geographically dispersed and involve defense of allies, overseas possessions, and even sea lanes. Extensive roles for all the armed services are likely, if the country wishes to defend an international trading system. A liberal hegemon would feel especially strongly the need to allocate resources among the services in a sensible way, and to integrate the different services’ strategies and doctrines.

 

From Interests to Action: The Ingredients for Successful Institutional Innovation

Beyond simply discussing domestic interests, we have to understand whether these interests will succeed in creating a new institution, or empowering an existing one. Several factors apply, though there is overlap between them. Does policy have to be shifted to the degree that a new institution is required, or at least an old institution needs to be given a new mandate? Is there a wide base of support for these changes (given that institutional change is more difficult to effect than mere policy change)? Finally, does the creation of a central bank or a military staff sit well with existing institutions and traditions? If the answer to any one of these questions is no, institutional change should not be expected.

The variation in the answers to the first question will be a bit surprising, though it reflects the connection between major war and hegemonic transitions. Since new hegemonic powers are said to emerge most often from victory in major wars, the need to create or empower military command institutions will most likely not be recognized. That is, the victory is proof that changes are not needed regardless of the extent of security obligations. Thus it may be quite common that there will not be a consensus on the need to have a military staff, simply because it may seem that military policy is already being executed effectively.

In monetary affairs, I have already noted that the degree of policy change required is determined by the characteristics of the national currency. We have good reason to suspect that one of the very forces driving domestic groups to support hegemonic aspirations—relative capital abundance—might also be destabilizing the national currency. Rising relative capital abundance would be associated with falling returns to capital and greater economic competition between holders of capital. Such competition will encourage risk-taking and reckless behavior on the part of financial actors. Since an international medium of exchange requires high confidence and high liquidity, the need for an institution to effect such changes in the currency may well overlap with the desires of some groups for greater domestic financial stability. Thus it is much more likely to find a broad consensus behind institutional change in this issue-area than in the other.

The obstacles to the creation of each type of institution also vary, stacking the odds more in favor of the creation or empowerment of central banks. Such obstacles depend on the nature of the institution requested, and its ability to mesh with existing institutions. In states with decentralized governments, institutions with centralized decisionmaking may well be resisted. There are other reasons for resistance. I have already identified the likely liberal hegemonic powers as republics. Republics have been slow to embrace centralized military commands, for instance, since these represent a potential threat to civilian control of the military. Support for policies of hegemonic leadership may include calls for the creation or empowerment of military staffs, but these calls will not necessarily be heeded.

 

The Second Stage: Domestic Institutions, Liberal Leadership and Overstretch

When such institutions are created, we would naturally expect hegemonic leadership to be carried out more effectively than otherwise. In the cases where the institutions do not get created as expected, I expect leadership to be less effective. I also expect, however, that even when the institution is created other sorts of problems will eventually arise, including of course overextension. In some cases for instance, overstretch occurs prior to relative economic decline (that is when commitments are still below the level of sustainability, as at time t + 1 in figure 2).

With a central bank created to foster hegemonic leadership, we should expect the institution to alter the characteristics of the currency and facilitate its use as an international medium of exchange. In the absence of a central bank to manage the currency’s characteristics, I would expect a failure to alter the national currency. With the national currency unaltered, and therefore no international medium of exchange in the hegemon-led subsystem, I would expect significant barriers to international transactions to remain. Of course, we would not expect a currency overhang to develop in this case.

Since an overhang represents a situation where liquidity has grown at the expense of confidence, ₆₄ how does such a problem develop, if the central bank has been given the powers to manage the currency? Hegemonic stability theorists have suggested that overhangs actually become attractive for the state once relative economic decline has set in and budgetary problems develop. ₆₅ Sparked by the combination of increasing international obligations and an economy unable or unwilling to bear heavier taxes, the state finds it easier in the short-run to finance its activities through currency overissue. As noted above, when the liberal leader’s own currency is used internationally, it is possible to allow balance of payments deficits to accumulate overseas without short-run ramifications. As these build up, they produce an overhang. While this is a standard argument, another can be added which draws on the actions of private individuals and firms rather than state policy. Private financial actors can multiply the currency supply through their extension of loans. An institution with policy instruments active in only one economy in the subsystem such as a central bank (albeit perhaps the most significant financial institution in the most significant economy), may simply not have the precise policy tools needed to manage the expansion of the use of its currency beyond its borders. Given both the public and private sources, it is easy to see why overhangs develop. Yet monetary authorities still have freedom of action in selecting a particular response to the overhang.

The policies of the liberal leader’s central bank can become harmful for the country’s domestic economy when the bank places priority on its management of the international monetary system. If the central bank develops the use of its own currency as the international medium of exchange as is likely, and an overhang develops as is also likely, the central bank may support and defend the international role of the currency—which means the bank supports the value of the currency at a level which is less beneficial for the overall economic interests of the nation. This echoes precisely the afterglow hypothesis.

On the military side of things, I have already suggested why there will probably not be a staff created during hegemonic ascendance. Yet for many of the same reasons, a liberal hegemonic leader’s military situation in the years following victory in a major war is highly unstable. According to the microfoundations of hegemony described earlier, I expect hegemonic states to be republican; republics are typically suspicious of the professional military establishment. Not only do they resist centralized military command, republican states usually refuse to support an extensive standing military establishment during peacetime. Thus after winning major wars, liberal hegemonic powers can be expected to disband their military forces. They may, however, maintain important bases abroad, as well as some of their military infrastructure. Extensive military obligations may remain, too. The urge to reduce the size of the military to a peacetime stature may clash with an unwillingness to reduce military commitments concurrently. This conflict in goals provides the possibility of overextension even before relative economic decline sets in.

We may consider whether or not a military staff is needed to lay the groundwork for successful hegemonic leadership. The military success that prevents a domestic groundswell for institutional change from forming may also deter likely military challengers. The reputation gained by victory in major war may take some time to be forfeited. The natural tendency to reduce military forces may soon undercut that reputation, however. We therefore have many of the ingredients for overstretch with or without the institution. Successful economic leadership of the subsystem ensures that obligations are likely only to increase, regardless of what happens to force levels. Success in trade and in international investment means the hegemonic power develops wider interests. Defending those interests means expanding explicit military obligations, whether or not its resources and capabilities expand.

 

The Third Stage: Responding to Overstretch

Earlier, I defined overstretch in two different ways: when commitments are greater than realized resources (but commitments are at or below a sustainable level), or when commitments are greater than or equal to realized resources (but commitments are above the level which the country can sustain). In other words, overstretch may occur independent of relative economic decline. I drew out how there were really two decisions involved in the response to overstretch: setting commitments and also setting resources relative to commitments.

The arguments relevant to the third component of the afterglow hypothesis deal with the interactions of the different bureaucracies as they react to various international and domestic pressures accompanying overstretch. The key institution largely missing from the discussions so far is the Treasury (or Ministry of Finance). ₆₆ The institution whose mission is wrapped up in hegemonic leadership will confront pressures from the Treasury, depending on the relationship between existing resources, the level of sustainability, and the pressures on the Treasury. To understand this confrontation, we need more details on the intensity of the institutions’ desire to pursue their core missions, plus some way of predicting which is likely to win out. The intensity of their interest in particular policies will be determined by numerous factors, among them the way in which overcommitment threatens their responsibilities, and the degree to which domestic constitutencies apply pressure. Each of these in turn rests on several more specific factors. As for which side wins in a bureaucratic dispute (an element notoriously missing from many versions of bureaucratic politics), we can use information on the relative power of domestic constituencies, the intensity of the bureacracies concerns, and the various interaction of the bureaucracies’ policy instruments to project which is likely to win in a given situation.

In order to get the full confrontation, each institution must have intense interests at stake. Without intense interests on both sides, one is much more likely to back down. For instance, if there is a gap between resources and commitments, and the institution with the core mission associated with hegemonic leadership argues in favor of raising resources to honor those commitments, and the budget continually generates a large surplus, there is no reason to expect the Treasury to put up strong resistance. Both sides in the dispute must feel intensely about the decision.

On the part of the central bank or military staff, intensity of interest depends on a set of three factors. The size of the gap between commitments and realized resources matters, for it reflects a threat to the institution’s core mission. If the institution is judged to have failed to execute its central task, it may be unable to justify its existence. The existence of an international rival is critical. The presence of an international rival increases the need to respond to any overstretch measurably. For a central bank supporting the confidence of a currency, the emergence of a rival currency alters the need to defend the national currency. Asset holders now have a serious substitute to consider; competition forces the central bank to act. The same can be said for military staffs when a rival appears. This incorporates some notions of changing distributions of capabilities. It also accounts for some reasons why there is variation in responses across issue-areas, for rivalry varies from one issue-area to another (i.e. the hegemonic leader’s chief economic rival is often not a military rival). Last but not least, there is pressure from domestic constituencies. The institution’s chief constituencies are likely to be sensitive to emerging international rivals. Thus the rise of a rival currency, for instance, will not only alter the central bank’s need to act in one of its core missions (defending the international value of the currency), but it will also be encouraged to do so by its key domestic constituencies (such as internationally oriented financial actors). Since the core constituencies for the institutions are likely to be internationally oriented (being the same ones which gave the institution its internationally oriented mission in the first place), presence of an international rival sparks both direct and indirect pressures; we can collapse them together into a single causal factor. Again, we should see variation across issue-areas here, since the domestic constituencies for different policies of leadership will vary. This could also account for Kupchan’s findings that domestic interests do not appear to cause overstretch in security policy, while we would expect them to play a role in afterglows in economic issue-areas. The sources of intensity of interest can therefore be plotted on a two-by-two matrix (figure 3).

Figure 3: Intensity of the Institution’s Interests

The Treasury on the other hand, has a wider variety of factors influencing the intensity of its interests. First would be the size of any outstanding debt. The size of the debt burden matters not only because it sets down some notion of maximum current expenditures, but also because it establishes the amount of interest the Treasury must pay. The more interest the Treasury pays, the more intensely it will feel about policies setting the interest rate. Along the same lines, the location of this debt would affect the intensity of the Treasury’s interests in other aspects of monetary policy. If the debt is primarily owed to domestic actors, the Treasury’s interest in exchange rate policy will surely be less than if the debt is owed to foreigners. The presence of a rival financial center may therefore alter the Treasury’s bureaucratic interests in international monetary policy, since exchange rate shifts would make it relatively easier or hardier to pay down international debts. Another factor would be whether the annual budget was balanced or not, since this would affect the Treasury’s forecasts of its own tasks. This projection of the fiscal status of the state would certainly tell us about the intensity of the Treasury’s resistance to raising resources to honor existing commitments. The need for expenditures in other areas would be a fifth factor. A sixth factor would be pressures emanating from domestic constituencies. This may well rise and fall with the presence of international rivals, or be a function of tax levels, but could even be thought of more broadly: the Treasury is responsible to the rest of the cabinet or chief executive, which in turn means the cabinet must be more sensitive to the overall economic welfare of the state than is the central bank or the military staff. The Treasury feels electoral pressures much more directly. A seventh factor would be the calculations on the part of the Treasury concerning the ability to raise new taxes. In some situations, the Treasury may well offer to increase the government’s expenditures to honor international commitments because such increases can be made up for by raising taxes. When tax levels cannot be increased, the Treasury is more likely to resist devoting more resources to foreign commitments.

There is no simple way to portray the interaction of these different forces. We would need to collapse several of them into composite variables, which might be called “fiscal status of the state,” “fiscal projection,” and domestic pressures. Realistically, any combination of these might make the issue of policy responses to overstretch intensely important to the Treasury. More difficult in this task would be the unraveling of the impact of each of these factors, since each can compound the effect of others. For instance, a change in tax rates might make the budget balanced, reduce the debt burden, allow for greater expenditures, but make the government less popular. Also, we can easily see how relative economic decline would generate intensity of the Treasury’s interests through a number of these factors at once. It would alter fiscal projections, make domestic actors more sensitive to international competition and tax burdens, make it more likely that the Treasury would be borrowing from abroad, and perhaps increase the need for expenditures in a number of areas. Rather than attempt to make some meaningful aggregation of these forces into a few separate factors to simplify this picture, I shall instead try to highlight how these factors come together in specific instances in the cases.

Having clarified when both institutions will feel intensely about the decision to be made and will therefore be likely to stand their ground, we still need some way to understand which side will dominate policy. I offer two critical variables. The first is the power of constituencies supporting the policy choice. The institution which can marshal the most domestic support will be able to put the most pressure on the other institution to back down. While this suggests that the Treasury should dominate, that is not always the case. Often the other institution may be able to gather significant domestic support. But to have the possibility of afterglow (which by definition, is the pursuit of leadership after it is no longer rational for the country as a whole), it surely must be possible for the institution associated with hegmeonic leadership to exert more power over at least part of the decision—perhaps power to set commitments. The second factor at work, then, concerns the relative independence of the two institutions. ₆₇ Can the institution associated with hegemonic leadership set commitments by itself? Can it raise resources independent of the Treasury? This degree of independence will be gauged by formal institutional hierarchies (if they exist) and the independence or overlap of policy instruments. When the Treasury’s policy tools are independent from the other institution’s, and both feel intensely about this policy, there is an excellent chance that each will employ their policy instruments in the way they wish, rather than together (a result consistent with bureaucratic politics).

The interplay of these two variables can then be portrayed to illustrate likely results for policy in situations where both institutions have an intense interest in the policy. (When neither institution feels intensely about overextension, there will be no response in terms of altering resources or commitments, although “doing nothing” may entail reorganizations or redeployment of existing resources). The first deals with the response to overextension while commitments are above a sustainable level. The second deals with responses to overextension when commitments are below the level of sustainability (figure 4 and figure 5).

Figure 4: The Response to Overstretch When Commitments are Above a Sustainable Level

 

Figure 5
The Response to Overstretch When Commitments are Sustainable
Image not available

It is worth noting that in none of the outcomes in figure 4 is there a guarantee that both commitments and resources will change at the same pace. In other words, even in the outcome described as adjustment, the gaps (between C and R on the one hand and C and S on the other) may remain, but at least both will be narrowing. Along the same lines, it is also worth noting that the Treasury’s partial dominance over policy can actually lead to a worsening of the situation (when resources fall but commitments remain or even grow).

 

Deciphering the Evidence

In the following chapters, the fully articulated version of the afterglow hypothesis will be tested in the development of six institutions. These consist of a chapter each on the Federal Reserve and Joint Chiefs of Staff in the hegemonic leadership of the U.S., and the Bank of England and Committee of Imperial Defence in the case of Britain. In addition, a chapter is devoted to the development of monetary and military institutions in the Dutch Republic during its attempt to provide hegemonic leadership in the late seventeenth and early eighteenth centuries. In terms of cases, this material encompasses each of the three steps in the afterglow hypothesis (from institutional innovation to attempts to lead, and from there to overstretch, and then to afterglow or adjustment), but also with variations inside each of these particular periods. In other words, some variables will shift, thereby altering expectations—even within the discussion of one country’s responses to overstretch in one issue-area. ₆₈

By exploring different issue-areas in separate attempts to provide hegemonic leadership, I cover a variety of outcomes in each stage of the afterglow hypothesis. First, the factors highlighted as the microfoundations of hegemony will account for pressures for the creation of an international medium of exchange and for the expansion of military commitments, but these pressures will not automatically lead to the creation or empowerment of domestic institutions. Did desires to adapt and internationalize a domestic currency lead to the creation or empowerment of a central bank? Did the demands for increased military commitments lead to the development of an institution to formulate military strategy? The answer here will depend on the particular case—the route of adaptation varied from case to case, because the situation of each country as it assumed leadership in each issue-area differed significantly. The argument here not only offers new insight into the timing of institutional innovation or empowerment, but also tells us much more about why these particular institutions were given the specific mandates and policy instruments each held. The evidence will also illustrate that successful international leadership required domestic institutional changes. Without such changes, policies of leadership achieved only limited success, regardless of the systemic/structural position of the state attempting to provide leadership. This will become clear when we examine instances of overstretch during hegemonic ascendance—underfulfillment of leadership—which has consequences for evaluating the relationship between hegemony and regime performance. In other words, the arguments here add a new wrinkle to debates about the applicability of hegemonic stability theory.

After describing how currency overhangs and military overcommitments developed (and here the Dutch story will be quite different, since its lack of success with institutional innovation limited its leadership, and also reduced the implications of overstretch later on), the explanations for afterglows are tested. As I hope to show, the bureaucratic, sectoral, and systemic factors must be taken together for a full explanation; to provide the strongest analysis, all three sets of factors must be combined in a multilevel argument. I will discuss cases of overstretch occurring while commitments are still at or below a level which the country could conceivably sustain them (when a gap between resources and commitments represents a failure to honor reasonable obligations), as well as cases where commitments are at unsustainable levels (when a gap between resources and commitments represents the inappropriateness of the obligations). In the latter situation, adjustment out of the leadership role still occurs only rarely—for policy guidance we need to know why. The evidence will allow for fine-tuning our understanding of the variety of forces that must be at play to get the Treasury intensely interested in the issue-area, and also to give it victory over both making commitments and setting resource levels.

Having described the role of domestic institutions in liberal hegemony and, more specifically, having examined their role in the choice between afterglow and adjustment, I turn to some broader questions at stake in the concluding chapter. The arguments that emerge from the analysis have relevance for issue-areas other than those directly addressed in the cases. This is true both for reinterpreting some past historical episodes of overextension, and for anticipating the possibility of future afterglows on the part of the United States. Before suggesting any policy recommendations, however, I must first establish the persuasiveness of the arguments upon which any recommendations would be based, so we now turn to an examination of the cases.

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Endnotes

Note 1: Obviously, Kennedy’s book is an excellent description of the problems associated with overstretch. The points raised by Kupchan have to do with the utility of Kennedy’s ideas for current policymaking.  Back.

Note 2: Charles Kupchan, “Empire, Military Power, and Economic Decline,” International Security 13 (Spring 1989): 48&-;49. In the cases discussed in his book, The Vulnerability of Empire (Ithaca: Cornell University Press, 1994), as well as the cases under discussion here, leaders clearly recognized the problem within a reasonable amount of time. That does not mean they reacted well, however.  Back.

Note 3: I borrow the term afterglow from David Lake and Richard Rosecrance. See David Lake, “Leadership, Hegemony, and the International Economy: Naked Emperor or Tattered Monarch with Potential?,” International Studies Quarterly 37(4) (December 1993): 474, 481.  Back.

Note 4: An exception is David Lake’s “British and American Hegemony Compared: Lessons for the Current Era of Decline,” in History, the White House and the Kremlin: Statesmen as Historians (London: Pinter Publishers, 1991). Lake suggests that the differences between the two declines may outweigh their similarities (pp. 110–117).  Back.

Note 5: There are examples of work examining the two episodes for similarities—most notably Susan Strange’s piece “The Politics of International Currencies,” World Politics 23 (2) (January 1971): 215–231, and C. Fred Bergsten’s book The Dilemmas of the Dollar (New York: New York University Press, 1975), especially p. 93. But these primarily stress the similarities of the problems faced, not the variation in policy responses. This is due largely to the timing of these works—the authors correctly anticipated the problems that arose. In the preface (p. xiii), Bergsten explains that one of his primary reasons for writing Dilemmas of the Dollar was to expose that “potentially tragic parallels existed between the historical evolution of the roles of sterling and the economic and political development of the United Kingdom, on the one hand, and the likely evolution of the dollar and the economic and political development of the United States on the other.”  Back.

Note 6: The search for an explanation of the continuance of this commitment is the driving force behind Judith Goldstein’s Ideas, Interests, and American Trade Policy (Ithaca: Cornell University Press, 1993); see pp. xi–xii.  Back.

Note 7: One of the few efforts to do so is The Vulnerability of Empire. Kupchan, however, looks at a different mix of evidence. He investigates the problem of security overstretch more broadly, whereas I limit my concerns to hegemonic leaders. Moreover Kupchan only examines security issues, whereas I look at examples of overextension in both economic and security issue-areas.  Back.

Note 8: Paul M. Kennedy, The Rise and Fall of the Great Powers (New York: Vintage/Random House, 1987), pp. xvi, xxiii, 515.  Back.

Note 9: For a good summary of his work, see Charles Doran, Systems in Crisis (Cambridge: Cambridge University Press, 1991).  Back.

Note 10: Jack Snyder, Myths of Empire: Domestic Politics and International Ambition (Ithaca: Cornell University Press, 1991), pp. 1–2.  Back.

Note 11: For example, Kupchan describes Britain’s military policies 1904–1912 to be an example of successful adjustment; I too consider the initial steps taken in this period as adjustment, but our evaluations diverge when it comes to Britain’s commitment to France. He considers this an example of placing priority on the defense of the metropole, and therefore a positive step in adjustment; I treat this as taking on a new obligation Britain does not have the resources to meet.

Also, the nature of the situation Britain faced in the 1930s was quite different than that preceding World War I. A better comparison would have been the 1890s and the 1930s, for in both periods Britain had to deal with separate threats in Europe and in Asia. By 1905, threats to Britain’s Empire were declining; the decision to place priority on Europe was, in essence, made for the British by the Japanese when they defeated Russia.  Back.

Note 12: Kupchan, “Empire, Military Power, and Economic Decline,” p. 47.  Back.

Note 13: Paul M. Kennedy, The Rise and Fall of the Great Powers, p. xvi and p. 515.  Back.

Note 14: Snyder, Myths of Empire, p. 60.  Back.

Note 15: This also fits with notions developed by Arthur Stein to explain how situations of overextension and underextension occur in the first place. See “Domestic Constraints, Extended Deterrence and the Incoherence of Grand Strategy: The United States, 1938–1950,” in The Domestic Bases of Grand Strategy, eds. Arthur Stein and Richard Rosecrance (Ithaca: Cornell University Press, 1993).  Back.

Note 16: This echoes a point made by Stein on failures to react to changes in the distribution of power. See “Domestic Constraints, Extended Deterrence, and the Incoherence of Grand Strategy,” p. 98.  Back.

Note 17: “State Power and the Structure of International Trade,” World Politics 28 (3) (April 1976): 342. This argument is also consistent with that put forward by Goldstein in Ideas, Interests, and American Trade Policy. As she puts it (p.xii), “the creation of rules and procedures to enforce a particular economic strategy at one point acts as a constraint not only on current behavior but also on the range of options available to future entrepreneurs.” This also fits in with broader theories about institutions and path-dependency. As Geoffrey Garrett and Peter Lange point out in their assessment of historical structural arguments on the role of institutions in “Internationalization, Institutions and Political Change,” International Organization 49 (4) (Autumn 1995): 628, “institutions invariably outlive the constellations of interests that created them, and hence provide barriers to market-driven policy change.” James G. March and Johan P. Olsen said much the same after describing institutions as solutions to an optimization problem: “Not all rules are necessarily good ones, least of all indefinitely.” See Rediscovering Institutions: The Organizational Basis of Politics (New York: Free Press, 1989), p. 54.  Back.

Note 18: Sterling and British Policy: A Political Study of an International Currency in Decline (New York: Oxford University Press, 1971), p. 47.  Back.

Note 19: “Conclusion: Domestic Structures and Strategies of Foreign Economic Policy,” in Between Power and Plenty, ed. Peter Katzenstein (Madison: University of Wisconsin Press, 1978), p. 309.  Back.

Note 20: Ibid.  Back.

Note 21: We might also ask: Why would institutional change be easier in the period the state assumes leadership, but be difficult during relative economic decline? Why have past cases differed? Has the U.S., by ending its obligations under Bretton Woods avoided an afterglow in the monetary realm altogether? What does that say about the possibility of future afterglows in other issue-areas where the U.S. exercises leadership?  Back.

Note 22: This of course does not mean that the answers one finds to questions about afterglows will always be manipulable via policy.  Back.

Note 23: I should thank Hudson Meadwell for pushing me to address this aspect of Krasner’s comment more fully.  Back.

Note 24: See, for instance, Deborah Larson, The Origins of Containment (Princeton: Princeton University Press, 1984), pp. 324–342 in particular.  Back.

Note 25: The classic version is to present the levels as a “funnel” with each level exerting its own influence on the outcome independent of the others.  Back.

Note 26: There are, of course, those who create similar models. The most notable attempts are two-level games; see George Tsebelis, Nested Games (Berkeley: University of California Press, 1990). Such an approach appreciates that state actors must act in both the domestic and international arenas.  Back.

Note 27: In other words, I will not be viewing them as individuals with idiosyncratic traits.  Back.

Note 28: For a discussion of path-dependency and its application in the study of policymaking institutions, see G. John Ikenberry, “Conclusion: an institutional approach to American foreign economic policy,” in The State and American Foreign Economic Policy, eds. G. John Ikenberry, David Lake, and Michael Mastanduno (Ithaca: Cornell University Press, 1988), pp. 223–226.  Back.

Note 29: Each corresponds to a stage in the cycle of ascendance, hegemony, and decline.  Back.

Note 30: Many have noted that arguments focusing on the role of institutions do not often explain where the institution came from in the first place, or relate the institution to the emergence of problems. Instead problems are treated as an exogenous shock. I try to incorporate these various aspects in a single framework. See Sven Steinmo and Kathleen Thelen, “Historical Institutionalism in Comparative Politics,” in Structuring Politics, eds. Sven Steinmo, Kathleen Thelen, and Frank Longstreth (New York: Cambridge University Press, 1992), pp. 14–15.  Back.

Note 31: One could ostensibly add in ideas or ideology as a causal factor at this stage as well, for domestic interests are clothed in particular concepts and claims, which in turn provide the content for the institutions. I have chosen not to treat ideas as a separate variable, however, and instead focus on the groups that promote one idea over another, and the institutions that then serve as carriers of ideas. For an example where ideas are given a separate causal role, see Goldstein, Ideas, Interests, and American Trade Policy.  Back.

Note 32: Lake, “Leadership, Hegemony, and the International Economy,” p. 477.  Back.

Note 33: In Liberal Leadership: Great Powers and Their Challengers in Peace and War (Ithaca: Cornell University Press, 1993), I argued that success depends on the ratio of hegemonic capabilities to the requirements of leadership. In a situation with many followers, leadership may be easier; but where there are few followers, leadership will be less likely to succeed.  Back.

Note 34: See Mark R. Brawley, “Rents and Regime-Type,” paper presented at the 1998 meeting of the International Studies Association, Minneapolis, Minnesota. I intend to test this argument empirically in future research.  Back.

Note 35: Here I make similar assumptions to those made by Ronald Rogowski, Commerce and Coalitions (Princeton: Princeton University Press, 1989), p 19. Rather than treat the Stolper-Samuelson results in factoral terms, I use it to infer policy preferences along sectoral lines. For a more in-depth discussion of factoral and sectoral models, see Mark R. Brawley, “Factoral or Sectoral Conflict? Partially Mobile Factors and the Politics of Trade in Imperial Germany,” International Studies Quarterly 41 (4) (December 1997).  Back.

Note 36: As can be seen, this is merely an extension of the pioneering work of Charles Kindleberger, in “The Rise of Free Trade in Western Europe,” Journal of Economic History 35 (1) (1975).  Back.

Note 37: Or states which will oppose it. The key insight here is that the interests served by hegemonic leadership are economic, and distributed unevenly within countries as well as across them. Traditional structural theories focus on states as single unitary actors pursuing power. By emphasizing relative gains, they stress coercion and competition, rather than mutual gains, hence they have been roundly criticized for their inability to explain examples of cooperation in regime maintenance. These issues will resurface later, particularly in the cases concerning hegemonic leadership of monetary regimes.  Back.

Note 38: Trade will continue to take place, if only because different countries might have different tastes and preferences—though this would be signaled by the rise of intra-good trade. Moreover, one can easily guess that other states might then gain more from trade.  Back.

Note 39: To the extent that factors can flow from the labor-intensive sectors to the capital-intensive sectors, this opposition is tempered.  Back.

Note 40: Jeffry Frieden describes a similar process in “Capital Politics: Creditors and the International Political Economy,” Journal of Public Policy 8 (3/4) (1988).  Back.

Note 41: Long Cycles in World Politics (Seattle: University of Washington Press, 1987), pp. 224–225.  Back.

Note 42: See, for instance the discussion in Paul de Grauwe, International Money: Postwar Trends and Theories (Oxford: Clarendon Press, 1989), p. 1.  Back.

Note 43: Nonrival consumption refers to the fact that one person’s use of the money does not prevent another from using it. In this case, the more a money is used, the more effectively it serves as a medium of exchange. For a deeper discussion of the characteristics of money, and their relevance for international exchange, see de Grauwe, International Money, pp. 1–4.  Back.

Note 44: This was not the case in the past, and there remain many proponents of the “free banking” approach. If the free banking proponents are correct, there would be little or no problems with a floating exchange rate system internationally.  Back.

Note 45: Of course, today, with extensive information and the ability to process it rapidly, such transaction costs can be greatly reduced. This was not true for most of the time periods considered in the cases.  Back.

Note 46: Richard N. Cooper, “Prolegomena to the Choice of an International Monetary System,” International Organization 29 (1) (1975): 63–97.  Back.

Note 47: W. M. Scammell, The Stability of the International Monetary System (Totowa, N. J.: Rowman & Littlefield, 1987), p. 9.  Back.

Note 48: Scammell, The Stability of the International Monetary System, p. 21.  Back.

Note 49: Again, note the difference here between this approach and more simplistic versions of hegemonic stability theory. The argument here stresses collective goods provision, rather than coercive capabilities and the pursuit of relative gains.  Back.

Note 50: This is not to say that stable regimes cannot be created in the absence of a leader. For a closer examination of arguments along those lines, see Robert O. Keohane, After Hegemony (Princeton: Princeton University Press, 1984). It is certainly less likely, however, that even cooperative efforts will succeed in the absence of some sort of leadership. These issues will be dealt with in more detail in the chapter concerning British leadership and the Bank of England, since several recent accounts suggest that hegemonic stability theory cannot account for the gold standard’s characteristics.  Back.

Note 51: For a similar discussion, see Bergsten, The Dilemmas of the Dollar, pp. 101–112. Also see Jonathan Kirshner, Currency and Coercion (Princeton: Princeton University Press, 1995).  Back.

Note 52: Scammell, The Stability of the International Monetary System, p. 55.  Back.

Note 53: According to Bergsten, such internationally used currencies typically develop overhangs; see The Dilemmas of the Dollar, pp. 129–130.  Back.

Note 54: Scammell, The Stability of the International Monetary System, p. 55.  Back.

Note 55: For the best example of this, see J. Lawrence Broz, The International Origins of the Federal Reserve System (Ithaca: Cornell University Press, 1997).  Back.

Note 56: Vera C. Smith, The Rationale of Central Banking (London: P. S. King, 1936), p. 2.  Back.

Note 57: See J. Lawrence Broz, “The Origins of Central Banking,” International Organization 52 (2) (Spring 1998).  Back.

Note 58: Charles Goodhart, The Evolution of Central Banks (Cambridge: MIT Press, 1988), p. 7.  Back.

Note 59: Smith, The Rationale of Central Banking, p. 148; Michiel de Kock, Central Banking (Westminister: P. S. King & Staples, 1938), pp. 15–18.  Back.

Note 60: This argument can be represented with an indifference curve, with one axis for confidence and the other for liquidity. Policy instruments determine the slope of the indifference curve itself. Use of existing policy instruments drives the outcome along the curve. At stake here is adjustment of both confidence and liquidity—thus moving to an entirely new indifference curve.  Back.

Note 61: If one is still picturing this in terms of indifference curves, the movement of the indifference curve may simply be a shift along one dimension.  Back.

Note 62: For one of the few to recognize this need, see the discussion in Modelski, Long Cycles in World Politics, pp. 224–225. Modelski argues that a successful world leader would need a “politico-strategic organization for global reach,” which has traditionally been a navy, plus its supporting bases, intelligence network, and supplies. This is fairly different, however, from the decisionmaking body I am focusing on.  Back.

Note 63: Samuel Huntington, The Soldier and the State (Cambridge: Harvard University Press, 1957), p. 26.  Back.

Note 64: It is important to note that there does not have to be 100 percent backing of the reserves to insure confidence; reserves have to be held high enough to ensure against numerous simultaneous transfers out of the currency. See Bergsten, Dilemmas of the Dollar, summary to chapters 4–6.  Back.

Note 65: Authors such as Robert Gilpin and Carlo Cipolla have argued that as hegemonic obligations increase and the hegemon’s economy slows down, one natural response for meeting increased obligations in the short-run is to debase the currency via inflation. Michael R. Smith notes that on this dimension the British and American cases clearly vary, since British decline after World War I is tied with deflation whereas American decline in the 1970s is linked with inflation. See Power, Norms, and Inflation (New York: Aldine de Gruyter, 1992), pp. 69, 85–91. Of course, Cipolla and Gilpin may be right if you simply want to explain how overhangs develop, rather than explain responses to overhangs.  Back.

Note 66: The role of the Treasury is especially underrated in its influence on central bank policy. According to Alex Cukierman, sectoral analysis is the traditional method political scientists use to explain central bank behavior. The central bank is treated as a mediator between different domestic interests which are pushing for conflicting goals in monetary policy. In his own analysis Cukierman focuses more on the role of other state institutions to explain where the pressures shaping central bank policy originate. As he argues, “in most countries central banks are highly dependent on the government in general and the treasury or ministry of finance in particular” when formulating policy. See Central Bank Strategy, Credibility and Independence: Theory and Evidence (Cambridge: MIT Press, 1992), pp. 43–44.  Back.

Note 67: Kupchan would explain this being out of step as the result of an unchanging “strategic culture.” Thus it is incumbent for Kupchan to explain why such strategic culture changes in some but not all cases; in my argument, the focus is on clashes between the treasury (with its concerns about budgetary considerations) and other bureaucratic actors (with their own narrow responsibilities); the failure to bring policy coherence is the result of institutional relations and competition, rather than ideas.  Back.

Note 68: In other words, this includes perhaps six cases of the entire afterglow hypothesis, but certainly more than six separate examples of responses to overstretch.  Back.