The Bretton Woods' System

For at least two decades the Bretton Woods system appeared to be a remarkable success. Instead of the end of WWII and the consequent drop in military expenditure bringing back, as some had feared, the dark days of the Great Depression, it heralded the onset of the ‘long boom’ of the postwar period, the longest period of sustained economic growth the world economy had ever experienced. During the ‘golden age’ of the 1950s and 1960s, OECD member states consistently achieved average growth rates of four to five per cent a year. For many, this was a testament to the new stability in the world economy ushered in by Bretton Woods and the benefits of its mixture of free trade, free capital movement and stable currencies. How far Bretton Woods contributed to the economic boom of the postwar period is, however, a matter of debate. Many, for example, have argued that ‘national’ Keynesianism, through which governments stimulated domestic growth by running permanent budget deficits, had a greater impact than ‘international’ Keynesianism (Skidelsky 2009).

Radical theorists, for their part, linked the long boom to the establishment of a permanent arms economy’, a kind of military Keynesianism’, in which the principal motor for growth was high and sustained military expenditure, legitimized by the Cold War (Oakes 1944).

On the other hand, the economic stability of the period was perhaps not so much a product of a new era of multilateral governance, but, rather, of the overwhelming economic dominance of the USA and the dollar. The USA contained, in 1950, some 60 per cent of all the capital stock across the industrialized world and was responsible for about 60 per cent of all industrial output. What thus made the Golden Age unusual was the USA’s capacity to manage the world economy in its own interests. The Bretton Woods system has therefore been seen as an expression of US hegemony.

However, the long boom of the postwar period started to peter out in the late 1960s, leading to the ‘stagflation’ of the 1970s, in which economic stagnation and rising unemployment was linked to high inflation. The US economy was especially troubled by these difficulties, attempting to cope with spiralling spending at home and abroad, and, for the first time since 1945, facing increasingly stiff foreign competition. In 1971, the USA abandoned the system of fixed exchange rates, signalling, in effect, the end of the Bretton Woods system in its original form. The institutions set up as part of the Bretton Woods agreement nevertheless survived the transition from fixed to floating exchange rates, although their role and future policy focus initially remained unclear. In this context, the leaders and finance ministers of the major industrialized countries started to meet on a regular basis to discuss monetary issues and other matters related to the world economy. By 1975, this had led to the formation of the Group of Seven, or G-7. The economic slowdown in the 1970s also weakened and in some cases reversed GATT’s progress in reducing trade barriers, with industrialized countries in particular pushing-up so-called non-tariff barriers. The resentment that this generated amongst developing countries, combined with recession, lead to growing support for a ‘New International Economic Order’ (NIEO). Attempts to establish a NIEO nevertheless made little headway, a clear demonstration of where the balance of power in the world economy lay. Instead, during the 1980s, the institutions of global economic governance were reoriented around the ideas of the so-called ‘Washington consensus. This, in effect, meant that a system based on embedded liberalism finally gave way to one based on neoliberalism

The End of the Bretton Woods System

Events: On 15 August 1971, US President Richard Nixon launched a New Economic Policy, sometimes called the ‘Nixon shock’. Among other things this suspended the convertibility of the dollar to gold at the established rate. This last measure effectively sounded the death knell of the Bretton Woods system, paving the way for major currencies to float instead of staying fixed. Nixon’s decision was made in the context of emerging difficulties in the US economy. Increased government spending due to the Vietnam War and President Johnson’s Great Society programme of public education and urban redevelopment had led to rampant inflation, which, in turn, worsened the USA’s balance-of-trade position. In addition, the USA was facing stiffer competition from export-orientated economies such as Japan and Germany as well as newly industrializing states such as Korea and Taiwan. The relative decline of the US economy was reflected in the fact that, having been responsible for almost 50 per cent of world industrial output in 1945, this had fallen to about 20 per cent by the early 1970s. Ultimately, the decision to end the Bretton Woods system was determined by the USA’s declining gold stocks and therefore its inability to maintain the value of the dollar. By 1970, US gold stocks were worth $10 billion compared with $25 billion in 1945.

Debate about the significance of the collapse of Bretton Woods focuses on two main issues: why it happened and what it led to. For many commentators, the end of Bretton Woods reflected a decline in US hegemony (Gilpin 1987). For hegemonic stability theorists, a hegemonic power is one that is willing and able to act in ways that allow other states to make relative gains, so long as these help to sustain the liberal economic order. However, confronted by the rise of Japan and Western Europe and facing a growing balance-of payments deficit, the USA opted to place its national interests before those of the liberal world economy. Others, nevertheless, argue that the end of Bretton Woods was not so much an example of declining hegemony but an exercise of audacious hegemonic power in its own right. In this view, the USA had become a ‘predatory hegemon’, willing to dismantle a system of global governance that no longer served its interest. This process was completed in the 1980s by the establishment of the ‘Washington consensus’. For economic liberals, however, these changes had less to do with hegemonic power and more to do with the futility of trying to regulate a market capitalist system. From this perspective, Bretton Woods was doomed to collapse, sooner or later, under the weight of its economic contradictions: markets and regulation are simply not compatible. Whatever its cause, the collapse of Bretton Woods has been widely viewed as a decisive moment in the development of the world economy. Bretton Woods had been based on a model of economic ‘internationalization’, which assumed the existence of a collection of separate and distinct national economies. Its purpose, then, was to provide a more stable and predictable framework within which these national economies could interact. The end of a system of fixed exchange rates contributed, over the following decade or two, to ‘globalizing’ tendencies in the world economy, particularly through the emergence of interlocking currency and financial markets. Once currencies were allowed to float, other controls on finance and capital movements became unsustainable. The triumph of neoliberalism in the 1980s can therefore be traced back to the 1971 ‘Nixon shock’. In that sense, the end of Bretton Woods was a decisive moment in the emergence of accelerated globalization. Nevertheless, the end of Bretton Woods may have been more a consequence of that process than its cause. This can be seen, for instance, in the emergence in the 1960s of Eurocurrency, mainly consisting of Eurodollars, free-floating dollars that were traded in an entirely uncontrolled global market, making the task of maintaining stable exchange rates difficult and ultimately impossible. Emerging global markets may therefore have killed off Bretton Woods.