Published by EH.NET (November 2006)

Leonard Seabrooke, The Social Sources of Financial Power: Domestic Legitimacy and International Financial Orders. Ithaca, NY: Cornell University Press, 2006. xvii + 223 pp. $45 (cloth), ISBN: 0-8014-4380-6.

Reviewed for EH.NET by David M. Andrews, Department of Politics and International Relations, Scripps College.

This is an interesting book. The author, an associate professor at the Copenhagen Business School, begins by posing a conventional political-economy question — how do states generate financial capacity? — but addresses it unconventionally. Normally the focus of such a study would be, as the author puts it, on “the big end of town,” meaning the relationship between large financial institutions, national regulators and economic elites. Seabrooke instead scrutinizes “the small end of town”: the half of the population below the median income, and in particular the broad group capable of scraping together some savings without ever running the risk of amassing a fortune. Seabrooke insists that the everyday economic struggles faced by this group “have causal significance in shaping a financial system” (p. 1), and that understanding these struggles is necessary for a correct understanding of both domestic and international finance.

The delicate financial relationship between state and society is well known, and it is hardly novel to argue against killing the goose that lays the golden egg. But Seabrooke’s thesis differs from most in his focus on the role of non-elites. He draws attention to what he calls the “financial reform nexus”: the cluster of policies affecting the tax burden, credit access, and prospects for property ownership of lower-income groups. Seabrooke argues that progressive (or what he calls “positive”) state intervention in the financial reform nexus “deepens and broadens the domestic pool of capital and propagates financial practices that bring capital flowing back to the state” (p. xii).

Central to Seabrooke’s discussion is the concept of legitimacy. People have expectations about what forms of state intervention in the economy are appropriate; and while prevailing social norms differ across societies, and from one time period to the next, failure to act in consonance with those norms comes at a price. Seabrooke’s careful case studies counter the conventional wisdom on a number of points; for example, he finds that state intervention in the financial reform nexus in Wilhelmine Germany was regressive (“negative”) rather than progressive (“positive”), as Berlin’s policies consistently favored rentier over bourgeois interests. His focus on local expectations also leads him to unconventional conclusions, as in his characterization of U.S. financial policy in the 1990s. He argues that this was “positive” rather than “negative,” even though domestic income inequality was not relieved — as this latter outcome was not a requirement for legitimacy under prevailing social norms.

The four main cases — England and Germany during the decades prior to the First World War, and the United States and Japan during the late twentieth century — are excellent, and the evidence presented therein is sufficient to establish the plausibility of the book’s main domestic thesis: namely, that there is an intimate connection between the everyday economic struggles faced by the lower half of the domestic population and the financial and political trajectories of individual states.

The book’s claims at the international level, however, find less support. It is certainly true that the cases underline how domestic interests shape the international financial policy preferences of leading states: for example, Seabrooke notes (as have others) the connection between the views of private U.S. banks regarding capital adequacy requirements and official U.S. policy on the same, leading to the Basel Accord in 1988. But that is a conventional story — a story about how actors at “the big end of town” influence international policy. Seabrooke’s intention is more ambitious.

“The key proposition of this book,” Seabrooke writes, “is that if a state intervenes positively to legitimate its financial reform nexus for lower-income groupings, it can provide a sustainable basis from which to increase its international financial capacity” (p. 173). More specifically, “if the principal state [in the international financial order] can legitimate its financial reform nexus to a high degree, it has a more sustainable basis with which to influence the international financial order and encourage other states” to organize their own domestic economies accordingly (p. 17).

To test this thesis, the case studies are structured around two questions: why was Germany unable to replace England as the world’s financial leader in the years before World War I, despite widespread contemporary expectations that it would do so; and likewise “why did Japan fail to wrestle primacy in the international financial order away from the United States” (p. 141) in the late twentieth century. Seabrooke concludes that a large part of the answer has to do with the failure of the challenger state to pursue progressive financial policies at home.

This is a bridge too far. The domestic policies Seabrooke traces so heroically may indeed have played a role in sustaining England’s financial dominance of one hundred years ago, as well as the hegemonic position of the United States today. But the evidence he mounts, while impressive, does not allow us to judge whether that role was decisive or incidental. The respective failures of early twentieth century Germany and late twentieth century Japan, after all, seem overdetermined.

As Seabrooke employs numerous counterfactuals in this volume, I indulge in one here. Had the Japanese state adopted more progressive domestic financial policies toward its non-elites in the late 1980s and 1990s; and had these changes in policy permitted Japan to avoid entirely its long national economic stagnation — a very big if, but let us grant it — the external consequences would doubtless have been profound. Certainly Tokyo would have been in a much stronger position to influence the content of the international financial order — to fight its corner and defend its interests. But it remains far from clear that Japan would then have been able to “wrestle primacy … away from the United States,” even a United States led by the far-from-progressive administration of George W. Bush (the subject of the book’s epilogue).

International financial primacy results from many factors. Domestic legitimacy, understood in Seabrooke’s terms, is logically one of them. Whether legitimacy’s influence is predominant, however, is a question ultimately left unanswered by this very provocative volume.

David M. Andrews is editor of International Monetary Power (Cornell University Press, 2006), and co-editor of Governing the World’s Money (Cornell University Press, 2002).