Working Paper Number
In the aftermath of the Great Depression and World War II, national economies, even those in which markets played a very powerful role, were placed under the ultimate control of governments, while international economic relations were consciously managed by the International Monetary Fund (IMF) and World Bank. Western governments, with varying degrees of enthusiasm, lent support to unions, regulated business, tightly controlled financial markets, and built social welfare systems. They also began to regulate aggregate demand in pursuit of high employment and fast growth, a phenomenon known as the ‘Keynesian revolution.’ Business and financial interests accepted these changes in part because strong capital controls and low levels of trade and investment flows after the war left them without a credible “run-away” threat to undercut government economic policies they disliked. The global prosperity that characterized the quarter century following the war -- the so-called “Golden Age” of modern capitalism -- reinforced the belief that market economies need strong social regulation to function effectively.