Forty-five years ago this month, on July 16 and 17, 1978, the leaders of the seven largest economies in the Western world emerged from the Palais Schaumburg in Bonn, the West German capital, bearing a plan for the rejuvenation of the international order. Their 2,882-word communique stipulated a programme for coordinated economic growth by each of the G7 states to raise the world economy out of the debilitating malaise of the 1970s.

Popular memory projects inflation as the foremost economic concern of the 1970s, but the Bonn programme reflected the strategies of British Prime Minister Jim Callaghan and US President Jimmy Carter to target stagnating growth as the collective focal point for the G7. ‘We are concerned, above all, about worldwide unemployment, because it has been at too high a level for many years,’ detailed the dispatch. It acknowledged the currency instability ailing the Western economic system but, rather than invoking the restrictive monetary policies that would come in later years, professed that ‘exchange rate stability can only be achieved by attacking the fundamental problems which have contributed to the present large balance of payments deficits and surpluses’.

‘In historical perspective,’ argue historians Robert Putnam and Nicholas Bayne, ‘the Bonn accords represent a rare and perhaps even unique example of coordination of economic policies.’ Callaghan and Carter had opposed the resistance of Helmut Schmidt, the West German chancellor, to their expansionary programme and developed a commitment to multilateral economic management. One elated official observed, ‘after 30-odd years, the war is finally over; the losers have become the winners economically, and they are no longer reluctant to throw their weight around’. The Bonn Summit was the high point of an era in modern history in which transnational strategies of economic coordination were initiated to reinvigorate a stagnating international system.

Such efforts and ambitions are lost to the story of the 1980s, however. Neoliberalism achieved such a victory under the auspices of Thatcher and Reagan that it subsumes its own prehistory. The rise of neoliberalism is not just a story of intellectual contributions from prominent economists, tax cuts or deregulation, but an outcome of failed policies and squandered ambitions for global reordering from socialist and liberal policymakers, who governed before the victories of right-wing parties. The Anglo-American identity of neoliberalism is well established, but it drew from a heritage of earlier cooperation on visions for the world economy. The Bonn Summit was representative of an alternate strand of thought about the stabilisation of the international order in the 1970s and its failure invited the shift to neoliberalism. From the ruins of Callaghan and Carter’s aspirations to coordinate economic policies across the West came the turn to monetary discipline and the empowerment of financial markets that marked the new era.

The meeting in Bonn of the G7 in July 1978 is the central feature of that lost history. Considered relatively weak in contemporary international politics, the G7s, founded in 1975, originally joined a broad tapestry of Cold War conferences and were, Kristina Spohr and David Reynolds write, ‘intended to shore up the West in an increasingly turbulent world – amid global economic crisis, worsening superpower relations, and the uncertainties engendered by the rise of China’. The demise of the foundations of the postwar system in the 1970s left policymakers searching for new ideas and arenas. The severing of the link between the dollar and the value of gold, enshrined in the Bretton Woods system, unmoored the global currency system, while energy price rises since the Oil Shock of 1973 had upended balances of trade. The harsh realities of interdependence invoked a dangerous spectre of nationalism and jingoism; as Helmut Schmidt commented, ‘the world economy is our fate. It can only be directed through collaboration’. The Carter administration – animated by ideals of ‘Trilateralism’ and cooperation between America, Europe and Japan – and the Callaghan government – recovering from the harsh IMF bailout of 1976 – would be the most passionate advocates of international collaboration as the means to reorder the Western economic system.

By 1978, the sclerotic trajectory of both states called for an ambitious response. Large-scale oil imports from the Middle East contributed to a rapidly increasing American current account deficit, from $1 billion in 1976 to $18 billion in 1977 and a projected $24 billion in 1978, feeding petrodollars back into the global economy and contributing to inflation. Growth had slowed down across the industrialised countries, with Britain’s falling to 0.7 per cent and unemployment remaining at nearly eight per cent in both the UK and the United States, contributing to a postwar record of 16 million unemployed across the OECD. ‘In historical terms it is measurable against any threat to the Western world in this century’, Callaghan told Carter. ‘And it needs a matching response.’

In February 1978, Jim Callaghan and his advisors began to urgently consider the crisis facing the world economy. The principal intellectual progenitor of this more wide-ranging approach was the Labour peer and close confidante of Callaghan, Harold Lever. Lever had served as an envoy to the United States during the IMF crisis of 1976, and he argued that, because of the dollar’s instability, there was ‘very deep questioning of the whole basis of our present monetary system’. Motivated by Lever’s contribution, Callaghan called upon the relevant members of the civil service and the cabinet together into an informal grouping known as ‘The Seminar’, requesting each provide a ‘thoroughly prepared and well-found paper setting out our argument for a new economic initiative to break out of the present economic recession’.

Entitled ‘International Action of Growth, Currency Stability, Energy and Other Matters’, the resulting article was concluded in early March and outlined a diagnosis of the causes of the crisis and presented solutions in the areas of growth, long-term capital flows, energy, trade, and currency stability. The ‘Five-Point Plan’, as it was nicknamed, was an ambitious, social democratic programme for transnational economic stimulation to end the blight of unemployment and redress the current account imbalances among the G7 states. The plan was premised upon the theory that the United States, West Germany, and Japan would be able to pull the industrialised world into recovery through economic expansion. Each state would stimulate domestic demand for foreign goods and services, which would in turn foster growth among all parties. In particular, if Germany and Japan expanded their economies this would enable the Carter administration to reduce the US balance of payments deficit and stabilise the stagnating dollar in the system of flexible exchange rates. It was economic policy for a fragile political order; Daniel Sargent argues that it ‘followed a grand strategic logic’ with its goal of calming the discordant international system and revitalising the West in its struggle with its Cold War rival.

On March 14, Callaghan wrote to Carter and included the Five-Point Plan. He opened, ‘We need to restore international confidence by a new act of collective leadership in the management of the world economy.’ The letter arrived as the administration was reported to be considering ‘a little shock therapy’ to international currency markets, and the White House was ‘jolted out of its torpor’ by the prospect of a visit from Callaghan and discussions about a potential coordinated approach. The leaders met soon afterwards and Carter affirmed the American commitment to the British plan, forming the basis of the preparations for the summit in Bonn that July.

West Germany presented the most ardent opposition to the Anglo-American plan for coordinated expansion. ‘I am not convinced that the vulgar Keynesian economics, which some politicians have now adopted, thirty years after Keynes,’ Helmut Schmidt complained, ‘is really the way to judge a much more complicated situation.’ The German response was, Julian Germann argues, ‘a grand economic strategy that sought to defeat the interventionist and expansionary responses of the European left and to commit the United States to monetary discipline’.

Another aspect of the push for international economic reform in the 1970s, on which Schmidt was also focused, was the creation of the European Monetary System and the fixing of the continental currencies within a certain band as a prologue to the development of monetary union. For Britain, however, the coordinated vision for global stability had to come ahead of European efforts, and the Bonn Summit remained the focal point of British foreign economic policy. Callaghan told Roy Jenkins – the British President of the European Commission – that he thought, ‘it would be a mistake to give the impression… that the Europeans were uninterested in American currency problems’ and he ‘was not in favour of embarking on anything which might cut across the rebuilding of a world monetary system.’ To President Carter, Callaghan was more blunt: ‘Frankly I don’t think it would be attractive to the United Kingdom and I don’t think it would be good for the world as a whole.’

Eschewing European economic centralisation, Callaghan hoped that the Bonn Summit would be a landmark moment for the whole international order as he attempted to orchestrate a cooperative and specific package for the G7 states. He revealed his hopes and fears in an interview with Panorama a few weeks before the meeting.

Interviewer: ‘Can I ask you, Prime Minister, do you think that the July Summit will be what has been described as an “economic watershed”? Something, perhaps, comparable in history to the Bretton Woods agreement which laid the foundations for the postwar financial system? Is that what you would like?’

Callaghan: ‘I think it could be. It could be for good or for ill… I always say we don’t have an international monetary system such as we had for 25 years, we’ve now got a monetary mess in my view. If you add these things together then the nature of the world could change very considerably in the eighties and in my view not for the better.’

The scale of ambition, coordination of British and American strategy, and a willingness by Carter to accede to Schmidt’s demands on energy imports gradually moved the leaders to an agreement. The gulf between the two visions had been considerable, yet, Schmidt understood the stakes of the summit he was hosting and that the accumulated political will of Britain and the United States was mustered against him. He explained, ‘If other countries do something, I would strive for international compromise and a package deal and would be willing to take some steps.’

Schmidt opened the summit on July 16 with a speech saturated with metaphors on the merits of collaboration. ‘We are at the foot of a mountain but we are determined to reach the summit. Governments working together is a good sign.’ He declared, ‘We should all tie our hopes in a rope party of reason and work together.’ It had been that idea of collective responsibility – undergirded by an awareness of the dangers of failure – that had brought Schmidt so far toward compromise, and he conceded that he would stimulate domestic economic demand in West Germany in exchange for American energy reforms. The parties negotiated a programme along the lines of the original British contribution, premised upon the idea that demand stimulus could be used as a way to increase foreign supply and, consequently, growth in all the respective countries. With greater convergence of growth rates and less extreme current account imbalances across borders, the world economy could experience both high employment and low inflation. The discussion produced a communique that bullet pointed the contributions of each state, ranging from Italy’s aspiration to achieve a one-and-a-half percent increase in economic growth, financed by a cut in public expenditure and investment stimulus, to the German and Japanese commitments on domestic growth, to be brought about through tax cuts. ‘The measures on which we have agreed are mutually reinforcing’, stated the paper. ‘Their total effect should thus be more than the sum of their parts.’

Callaghan explained to the press that the outcome established ‘a blend of independence and interdependence’ which tailored domestic policy to the requirements of the international economy. The Bonn accords were meant to mark the first episode of a sustained programme of cooperation through the forthcoming years to redress the discord fostered by energy and currency crises. Watching the domestic policies of the seven richest nations in the West being haggled over among heads of state, Carter commented that it could be ‘a brave new world’.

That world never came. Bonn, for all the energy and hope channelled into it, became a casualty of history as the global economy resisted the intentions of the G7 states. The Iranian revolution fostered economic insecurity and energy price rises, impeding the value of the dollar as markets expressed their scepticism of American authority. The vaulting ambitions of Bonn were wrecked by the power of financial forces that could not be managed from the conference rooms of Western capitals. Within a year Callaghan had been replaced by Margaret Thatcher, and Carter was speaking of a ‘Crisis of Confidence’ in the American psyche, as another oil shock and recurring inflation invalidated the core tenets of his more progressive platform.

The shifting parameters of the economic debate fixated on monetary discipline as the stabilising mechanism for the dollar and an international order oriented around American power. The appointment of Paul Volcker in August 1979, and the resulting drastic raising of interest rates two months later, was the apotheosis of that movement towards ending inflation at the expense of other considerations. The neoliberal order was built from the Volcker Shock and its recalibration of the political economy of the Western system that empowered the financial revolution of the 1980s.

Yet, the intellectual concord between Thatcher and Reagan had a precursor in that of Callaghan and Carter, with Anglo-American collaboration setting the tenor of the international economic debate through the 1970s onwards – particularly when the European states were focussed on regional currency reforms. The international Keynesianism pioneered by Carter and Callaghan is a fragment of a story that could have been. ‘We used to think that you could spend your way out of a recession,’ Callaghan said in 1976. ‘I tell you in all candour that that option no longer exists.’ This was an admission of defeat for one ideological vision, but it did not mean the passing of the torch to neoliberalism. Rather, Callaghan’s scope turned to the international stage and a plan with the other G7 states for collective rejuvenation.

The hope and ultimate futility of that vision should not be lost. The spectre of the 1970s has a hold over contemporary policymakers. The decade is a totem of fear and warning and its resolution constitutes a caesura between epochs in modern history, whether the triumph of neoliberalism is perceived as the result of intentional implementation by intellectuals and policymakers, or the reluctant outcome of a failed progressivism.