By Ian Palmer
Global finance has become a “structural characteristic of the international system, similar to anarchy,” as Robert Keohane and Helen Milner have stated.  In the prolific debates that surround the veracity of Hegemonic Stability Theory (HST), the role of finance in the international system offers crucial insight and supporting evidence in favor of HST. This paper will argue that the system requires a hegemonic presence to remain secure by exploring the creation and proliferation haute finance and its relationship to the system’s hegemon. Haute finance has become the foundation of international cooperation, and even though it is a nonstate actor, literature has shown that it came into existence through Britain’s role as the European hegemon and has endured with the United States at the helm. Haute finance’s underlying influence in the system, and its position as a nonstate actor, has to a degree diminished the hegemon’s power in the system, but not enough for it to not be considered a hegemon. It is unlikely that countries in the future will be capable of denying high finance as “the link between the political and economic organization of the world” and its origins in a hegemonic power will continue to underlie international cooperative systems. 
At the most foundational level, Hegemonic Stability Theory argues that the international system is likely more stable when a dominant power (a hegemon) exists and exerts its power on the system. Beyond this foundational level, it is almost impossible to compare HST scholarship with a consistent standard; many criticisms of HST differ on degrees of dominance needed and degrees to which the hegemon can exert its power. David Lake, a highly cited critic of HST, dedicated his criticism to Stephen Krasner and Charles Kindleberger, who are generally considered the founders of HST. Krasner’s thesis in his landmark article, “State Power and the Structure of International Trade,” is that the world’s propensity for economic openness is borne out of a hegemon that wills it.  Lake and Duncan Snidal, author of “The Limits of Hegemonic Stability Theory,” argue against the idea that a hegemonic state willed or desired a liberal international economic system.  Barry Eichengreen also agrees and extends the criticism of HST to the point of saying that the hegemon does not have the capacity to compel change in the international economic system.  This paper will acknowledge that these counterarguments are actually true, but fall short in refuting HST. The hegemon likely cannot compel other states without threatening the order, as will be addressed below. It also did not single-handedly “will” the current system into existence, however, it did and does serve as the seminal force in its creation and perseverance.
First, we examine the beginning of modern international cooperation, and why international trade has proliferated and become a structural characteristic of the system. The Western international system underwent colossal changes during the 19th Century due to four crucial factors: a stable balance of powers, creation of the international gold standard, the self-regulating market, and the significance of the liberal state.  These factors combined in the same space and time allowed for an effort toward systemic peace, through the Concert of Europe and the Holy Alliance. Polanyi attributes the actual success of the peace effort to an “anonymous factor,” called haute finance, or international banking.  He argues that the system of haute finance was independent from any single government, yet engaged in all of them, and created a connection between finance and diplomacy and international action.  The prosperity and the hundreds of banks that came from the this kind of finance made peace a priority for the European Community, as it seemed that peace and prosperity were linked more closely than were war and prosperity. In turn, stock exchanges grew, foreign investment in industry, public utility, and banks became more prominent, and long-term loans to public and private endeavors abroad became more common.  International cooperation became a necessity in Europe, and would eventually spread to the rest of the world.
While Polanyi argues that haute finance was independent of any government, it was created and survived due to England’s position as the hegemon and center of finance during the 19th Century. Europe spent little time debating the gold standard and that was largely owed to England’s monopoly on gold and its command of almost 60% of all world trade.  Other countries were aware of the monopoly, and joined England in the gold standard (originally a domestic policy by the Bank of England) in an effort to share in the profit. Barry Eichengreen argues that “Britain’s unrivaled market power led to a de facto harmonization of national policies…”  This harmonization was crucial for Polanyi’s analysis. He provides supplementary evidence that the state also created the laissez-faire ideology in which haute finance prospers: “There was nothing natural about laissez-faire; free markets could never have come about by allowing things to take its course… laissez-faire itself was enforced by the state.”  England’s position of dominant power enabled its domestic policies to bleed into the rest of the system and shape it make laissez-faire commonplace and haute finance accessible.
Eichengreen also provides a more foundational understanding for the role of the hegemon in the global economic system. One of Polanyi’s central tenets for the transformation of Western society was the balance of powers at the time. In an international security context, Europe was stable because of the presence of a hegemon to provide the possibility of coalition building. After the fall of Napoleon, England became the world’s greatest empire with command of the world’s greatest navy. Polanyi concedes that every conflict—with the exception of the Prussian War in 1870—was mostly minor and localized.  Peace was necessary first for international banking to begin, which further strengthened the prospect of peace. In this sense, haute finance and a hegemon are complementary. However, they are not equal powers once established. Indeed, once Germany began to grow in power and clash with the political interests of the power structure, the stability of Europe was increasingly threatened. International cooperation was threatened simultaneously. Evidence supporting HST grew, meanwhile. As the hegemon was losing its dominance, the system was becoming less stable and the potency of haute finance—regardless of its position as a nonstate actor—was weakening. “The ability of haute finance to avert the spread of wars was diminishing rapidly. For another seven years peace dragged on but it was only a question of time before the dissolution of nineteenth century economic organization would bring the Hundred Years’ Peace to a close.”  The Great War and the collapse of European stability halted any thought of international cooperation.
After the two world wars, and a desert lacking in capital and international trade, another hegemon came to the front bringing with it another era of haute finance and even greater international cooperation. The trends of the United States acting on the world system and dedicated to international cooperation were nearly the same as when England was influencing the rest of Europe. Similar to Britain, the US acted as the focal point for fiscal policy harmonization during Bretton Woods negotiations, thus making itself the center piece for the new world order.  Under the lead of the new hegemon, members of the Bretton Woods Conference bought into the concept of adjustable exchange rates and the dollar as the global standard. Meanwhile, both the United States and Britain affected global liquidity levels, despite the difference in capacity. Britain’s monopoly over silver mines allowed it to provide supplementary liquidity, as it had little control over other nations’ gold reserves, which were largely fixed. Problems began to arise when Britain lost its place in the balance of powers and the nations were grappling for the authority to have a leading central bank dictate the rate of gold conversion.  Later, the US would provide the global standard with the dollar and the rest of the world would base their exchange rates off of it, allowing the US to run balance-of-payments deficits for the sake of feeding the world liquidity. 
The United States also had more unilateral power in acting as a lender of last resort, and when it was incapable of doing so, it positioned a collective of nations to act as such, on the terms prescribed by its position as the hegemon. Under the gold standard—and to Eichengreen’s criticism—Britain was incapable of acting as a lender of last resort, as it was not sufficiently far ahead of the rest of the European nations to act as such. However, Lawrence Broz offers the counterpoint that Germany and France together act as the lenders of resort, with the currency provided by Great Britain.  These distinctions in methods between the two countries are important for the sake of HST. The differences in circumstance and the difference in political position—the system of international political economy Britain was affecting was largely only Europe, the United States though, after World War II, was affecting almost the whole world—do not illustrate a difference in actual effect. Although Britain and the United States functioned to varying degrees and exerted varying degrees of power, they both provided hegemonic stability; both countries provided the public goods and security to allow haute finance and international trade to prosper again.
While the history of haute finance and the history of mass international cooperation is predicated on the existence and support of a hegemon, David Lake posits one indisputable argument: there simply is not enough evidence in favor of HST for it to be a well-supported theory.  There are, truly, only two applicable cases for HST: Britain in the 19th Century and the United States in the 20th, which is hardly enough for a statistically significant data set. However, using Lake’s logic further, there also does not exist a counterfactual. Since the genesis of haute finance and intense international cooperation, there has always been a hegemon at the center, albeit a change in the actors. Eichengreen, in a discussion of a book chapter, writes, “the only example of successful multilateralism the historical record provides coincides with a period of exceptional economic dominance by a single power.” 
While Eichengreen—and Lake and Snidal, for that matter—argue well that the hegemon does not effectively compel other states toward international cooperation, however, all of the evidence in this paper illustrates that the hegemon creates and supports a system where successful multilateralism can exist. Polanyi outlines how high finance became an instrument of international cooperation and peace, and his analysis of state-centered ideological spread with Eichengreen’s analysis of hegemonic stability and world finance provide compelling evidence for Hegemonic Stability Theory. Haute finance as a nonstate actor allows states the capability to resist overt demands by the hegemon in finance and global economics—to Snidal’s credit—but that capacity to resist, again, stems from the hegemon’s creation and maintenance of the stable system. The foundation of Hegemonic Stability Theory to provide a suitable balance of powers in a world system for international cooperation and to incentivize other actors to join or mirror its system to profit remains theoretically strong and empirically reinforced.
Ian Palmer is a rising senior at Swarthmore College, where he is pursuing a double major in Political Science and Religion. He is the Journal’s 2018-19 Correspondent for United States and North American Affairs.
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De Melo, Jaime, and Arvind Panagariya. New Dimensions in Regional Integration. Cambridge: Cambridge Univ. Press, 1996.
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Keohane, Robert, Helen V. Milner. Internationalization and Domestic Politics. Cambridge: Cambridge University. 1996.
Lake, David A. "Leadership, Hegemony, and the International Economy: Naked Emperor or Tattered Monarch with Potential?" International Studies Quarterly 37, no. 4 (1993): 459-89. doi:10.2307/2600841.
Polanyi, Karl. The Great Transformation. Boston: Beacon Press, 1945.
Snidal, Duncan. "The Limits of Hegemonic Stability Theory." International Organization 39, no. 04 (1985): 579-614. doi:10.1017/s002081830002703x.
 Keohane, Robert, Helen V. Milner. Internationalization and Domestic Politics. Cambridge: Cambridge University. (1996). 257.
 Polanyi, Karl. The Great Transformation. Boston: Beacon Press, 1945. 10.
 Krasner, Stephen D. "State Power and The Structure of International Trade." In International Political Economy: Perspectives on Global Power and Wealth, edited by Jeffry A. Frieden, David A. Lake, and Lawrence Broz, 43-61. 6th ed. New York: W.W. Norton &, 2010.
 Snidal, Duncan. "The Limits of Hegemonic Stability Theory." International Organization 39, no. 04 (1985): 579-614. doi:10.1017/s002081830002703x. 612.
 Eichengreen, Barry. "Hegemonic Stability Theories of the International Monetary System." In International Political Economy: Perspectives on Global Power and Wealth, edited by Jeffrey A. Frieden and David A. Lake, 220-44. 4th ed. London: Routledge, 2002. 220.
 Ibid. 3.
 Ibid. 9.
 Ibid. 10.
 Ibid. 11.
 Eichengreen, 224.
 Ibid. 230.
 Polanyi, 144.
 Ibid., 6.
 Ibid. 19.
 Eichengreen, 232.
 Ibid. 236.
 Broz, Lawrence. "The Domestic Politics of International Monetary Order: The Gold Standard." In International Political Economy: Perspectives on Global Power and Wealth, edited by Jeffrey A. Frieden and David A. Lake, 199-219. 4th ed. London: Routledge, 2002.
 Lake, David A. "Leadership, Hegemony, and the International Economy: Naked Emperor or Tattered Monarch with Potential?" International Studies Quarterly 37, no. 4 (1993): 459-89. doi:10.2307/2600841.
 De Melo, Jaime, and Arvind Panagariya. New Dimensions in Regional Integration. Cambridge: Cambridge Univ. Press, 1996. 120.