Why Innovate? Founding the Bank for International Settlements, 1929-1930

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Abstract:

Theories of the development, maintenance, and adaptation of international institutions have been at the center of scholarship in international political economy in the past decade. Functionalist logic, often based on game–theoretic representations of strategic state behavior, has been especially influential in explaining the demand for international institutions. These theories point to the role of international institutions in infusing international relations with a greater degree of certainty, to the general longer–term benefit of cooperating nations. This article draws on a distinct but parallel development in the economic literature on international finance: dynamic contracting and rational expectations approaches to capital market suboptimality. Like functional theories of international cooperation, this approach focuses on the dynamics that lead to inefficient outcomes and provides a theoretical rationale for the development of international institutions to overcome these inefficiencies. When applied in the context of the policy preferences of the key actors (the governments of the major powers, their central bankers, and the dominant international bankers of the day), this approach makes it possible to explain not only the impetus for international financial cooperation, but also why this effort converged on an international financial institution such as the Bank for International Settlements.

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