After the utter devastation of World War II, in the last year of the war, the Allied powers met in the picturesque New Hampshire town, Bretton Woods, to outline the contours of a new international economic order. Just as the world powers dedicated themselves at the Congress of Vienna to creating a new international system that would preclude devastating conflicts, with the Bretton Woods agreements, “an attempt to rebuild the global economy took shape.”1
As with the Concert of Europe, boundaries among former belligerents were agreed upon. And, as in the preceding century, territorial, military, and economic agreements among powerful nations pushed competition over resources largely onto foreign shores. Superpower rivalries were fought in regions remote from the industrialized centers. Proxy wars were battled in Asia, Africa, and Latin America. The 1890s had had the dubious distinction of being the most war-prone decade, but that record was surpassed during the 1970s.2 Once again, the expansion of military power served as an engine of economic growth, as did control over foreign markets. And once again, “extra-state” conflicts kept the carnage and destruction of war in distant lands, allowing trade among the world’s wealthiest nations to advance. In this way, the new international political and economic order created a space for the resurrection of the world economy.
The peace accords allowed for the rebuilding of war-torn economies and the revival of industry. Both the vanquished and the victors were able to reconstruct their infrastructure and manufacturing sectors. They were not only able to rebuild their industrial facilities; they were also able to incorporate new technologies such as the moving assembly line, which was adopted in Europe in the 1940s. Perhaps more critically, synthetic fibers and petrochemicals reached Europe and Japan in the 1950s. Once these technologies were adopted, European and Japanese manufacturers were able to introduce new products. With their industries growing, Western Europe and Japan embarked upon successful export drives, contributing to a surge in trade. “Production of new chemicals, automobiles, television sets, and synthetics such as nylon grew at two or three times the American rate in the 1950s and 1960s.”3 “Japan was the most dramatic success story,” where Japanese exports were one-twelfth of those of the United States in 1950, by 1973 they were more than one-half.4 In fact, “Postwar economic growth was extraordinary everywhere,” and particularly in the advanced capitalist nations, which, as a whole, “grew three times as fast as in the interwar years and twice as fast as before World War One.”5
As in the previous century, expanding trade over time led to the loosening of protective measures. One of the critical mechanisms was the General Tariffs and Trade agreement (GATT). GATT was to become “a pillar of the Bretton Woods institutional order.”6 Unlike the World Bank or the IMF, GATT was not an organization. It was a periodically scheduled forum—similar in this respect to the Concert of Europe—at which countries met to negotiate tariffs and trade barriers. The first GATT agreements took place over a six-month period in 1947. The talks encompassed “more than forty-five thousand tariffs that covered about half of the world market.”7 Like the trade agreements that started with the Anglo-Franco Cobden-Chevalier Treaty, GATT was made up of a series of bilateral trade agreements, the centerpiece of which was the Most-Favored-Nation clause. This meant that, each agreement signed between two countries (be it over automotive parts or shoes), would be automatically extended to all the other participants. GATT “allowed a gradual and general reduction in trade barriers” across countries and industries. So much so, that by 1967 average tariffs on nonagricultural goods were the lowest they had been since the mid-nineteenth century.8
With all these cumulative changes, the 1960s was to become “the golden era of Bretton Woods.”9 It was a decade in which industry multiplied and world trade exploded. “Exports grew more than twice as rapidly in the economy, 8.6 per cent a year.”10 Indeed, “By 1973 international trade was two or three times as important to every OECD economy as it had been in 1950, more important than during the decades before World War One.”11
Just as Britain dominated the world economy in the nineteenth century, the twentieth century was marked by “a new world order centered on and organized by the United States.”12 And like Britain before it, the United States—now the world’s banker, industrial leader, and military might—was able to spread its liberal agenda even more forcefully than the British had before them.
The United States had emerged from World War I with the world’s strongest and most vibrant economy. The war had done a good deal to further the United States’ position. World War I had severely “disrupted European financial markets and reduced the supply of trade credit offered by European banks” all of which provided American banks with a critical opening.13 Yet, even before World War I, “American and German enterprises quickly began to drive British rivals out of international markets and even out of Britain’s domestic market.”14 By the outbreak of war, Germany was dominant in the production of chemicals and pharmaceuticals and the United States outpaced the world in producing “light, volume-produced machinery, firms like Singer and United Shoe Machinery in sewing machines, International Harvester and John Deere in agricultural machines, and Remington Typewriter, National Cash Register, Burroughs Adding Machine, and Computing-Tabulating-Recording (whose name was soon changed to International Business Machines—IBM) in office equipment).”15 Therefore, although the British pound continued to account for a significant portion of foreign trade holdings in central banks, by the end of the 1920s, a substantial share of international trade was financed by dollar-denominated exchanges.16
After World War II, US industrial dominance was solidified. As the only major industrial power not to have been heavily bombed during the six years of carnage, and having been able to grow industries exponentially by producing war supplies, the United States became “the undisputed political and economic leader.”17 Indeed, World War II impelled the growth of US industry, not only because “industrial output greatly increased,” but also because “wartime needs . . . created new technologies that transformed industrial products and processes.”18 For example, part of the United States’ new supremacy came from her dominion over the modern aircraft industry, which had increased by leaps and bounds with the wartime effort. In 1939, the first year of World War II, the United States produced only 5,865 planes; during the penultimate war year, she produced 95,272.19
Thus, by 1945, America had become the preeminent financial and industrial power as Britain before her, with New York the financial center. “With such a level of industry, supported by huge gold reserves, the dollar was king.”20 The United States’ dominant position was further consolidated by the enormous reach of American companies. As the world recovered from World War II and the global political situation stabilized, the largest American corporations, which had flourished in response to war spending, began to look for new investment opportunities abroad. “A new wave of US multinational companies spent $5.4 billion in direct capital investment between 1950 and 1954. Among these were the likes of General Electric, Standard Oil, and IBM, all based in New York.”21 Before the World War II, “the typical international investor was a bondholder or banker who lent money to foreign governments and corporations. In the Bretton Woods era, the typical international investor was a corporation that built factories in foreign nations.”22 Consequently, between 1945 and the mid-1960s, the United States accounted for the vast majority of all new FDI flows.23 In raw numbers, investments made in Europe and Japan by American firms grew twenty times, from two billion dollars in 1950 to forty-one billion in 1973.24
In this way, American multinationals “had a formidable impact on globalization.” They integrated “the world economy in a manner that differs from trade, finance, migration, or technology transfer.”25 American corporations even introduced a “structure that [would come to serve] as a framework for interchanges and relationships, including further mobilization of investments, exports and imports, technology, knowledge, general information transfers, and, most important, management itself.”26 In fact, foreign direct investment made by American multinationals “succeeded in tying the industrialized world together more tightly than it had been since 1914.”27 Ultimately, the global economic liberalization of the latter half of the twentieth century would be part and parcel with American supremacy.
As had happened in the nineteenth century, the expansion of trade led to the creation of an entirely new monetary order: the fiat system. Once again, the unified field of exchange would facilitate global trade and global finance, setting the stage for the second double movement. The new monetary system was developed in response to failures in the economic order that had taken shape during the postbellum period. In many ways, the postwar trade system became a victim of its own success.
At the war’s end, the world depression of the 1930s still loomed large in the thinking of policymakers and the general public. Finance and global capital were regarded as dangerous forces that had to be contained.28 Accordingly, a top priority of the architects of Bretton Woods was to ensure that an international economic collapse of the magnitude of the 1929 crash be made impossible, or at least very difficult. It was regarded of paramount importance to prohibit speculation on “hot money,” money that is regularly moved in and out of currency markets for short-term gain.29 But at the same time that the Bretton Woods negotiators sought to constrain irresponsible capital flows that could undermine domestic economies, they did not want to discourage companies from investing internationally or from borrowing from one another, especially when so many countries were in desperate need of economic support. The solution was to develop a middle ground “between gold standard rigidity and inter-war insecurity.”30
The middle ground adopted was the “dollar-backed gold standard.” As cumbersome as this appellation is, the principle behind the system was fairly straightforward. In the new system, United States dollars, not gold, would be the anchor for international money exchange. In other words, dollars would be the world’s reserve currency. This would be achieved by fixing the value of the dollar to gold. It was decided that the value of one ounce of gold would be set as equal to US$ 35. Fixing the dollar, it was hoped, would curtail destabilizing currency speculation and “hot money.” The flexibility would come by allowing all other currencies to be adjusted as needed.31 In addition, governments were required to maintain capital controls, that is, taxes or prohibitions on moving money across borders for speculative purposes.
From 1950 to 1970, the industrialized world “navigated” this “middle road.” The system based on this “monetary compromise” has been described by some in Polanyian terms as a period of “embedded-liberalism.”32 It was liberal because it was not based on protectionism. Participating countries did not have to cloister themselves off from international trade and finance, as communist regimes did. It was embedded in the sense that governments were able to insulate their markets against the most pernicious effects of free-market liberalism. Probusiness policies could be implemented along with substantial government involvement in the economy. This enabled governments to engage in extensive trade, while still providing social safety nets and buffering themselves from wild international speculative bubbles. It was the beginning of what would be termed “the Welfare State.”
For a couple of decades, the compromise was successful. Currency values were kept stable and currency markets were left open to encourage trade and long-term investment, while risky financial flows were kept in check. Indeed, the system achieved its twin goals: it curbed short-term capital flows and was still able to facilitate long-term investment. In fact, the Bretton Woods economic order allowed for the steady reconstruction of industry and the re-emergence of global trade without of the kind of capital mobility that had been so damaging before the World War II. However, as trade and investment were restored, a fatal flaw in the dollar-backed gold standard was revealed. The system placed too much pressure on the United States’ gold stock.33
Troubles began when the United States lost its overarching economic position. In 1946, the United States had been the supreme manufacturer and exporter, producing 50 percent of the world’s industrial output.34 But by the 1960s, as the world economy was restored and commerce and industry were resuscitated globally, Western Europe and Japan had taken over a significant share of international trade. “International competition thereafter intensified as Western Europe and Japan, joined by a whole host of newly industrializing countries challenged the United States . . . to the point where the Bretton Woods agreement cracked and the dollar was devalued.”35 With a decreasing share of the world market, American goods became more costly, which meant the dollar’s purchasing power diminished. But, because the gold-dollar ratio was fixed, the dollar’s official value remained constant. The truth was that, with its purchasing power reduced, the dollar was no longer as strong as the fixed ratio to gold would suggest. The dollar’s strength was nothing more than an artifice, an illusion. It did not take long for investors and overseas banks to recognize the dollar’s weakness. Fearful of the underlying instability of US currency dollars began to be cashed in for gold.
The world economy was now under threat. For, “There was not enough gold in the world, let alone in American reserves, to buy up all the world’s dollars. Eventually the United States would run out of gold, and the promise that the dollar was as good as gold would not be honored.”36 The world risked the very thing the architects of Bretton Woods had tried to avoid: a run on gold. The whole edifice created in 1945 was in danger of coming crashing down. The critical turning point came in 1971 when Nixon took the dollar off the gold standard. If the United States had been willing to decrease its domestic spending or raise interest rates, it might have restored the dollar to the value it was supposed to hold. But President Nixon was facing re-election and was not willing to institute politically costly policies. Instead, Nixon announced to the nation, on August 15, 1971, that the gold window would be closed. Foreign governments could no longer exchange their dollars for gold. Now all currencies would float. The “fiat system” had come into being.
The 1971 “Nixon shock” signaled the end for the Bretton Woods system. “In the realm of international monetary relations, the closest approximation might be a whirlwind: fixed exchange rates came flying apart.”37 The finishing blow was the Nixon administration’s devaluation of the dollar in 1973 in response to massive speculative currency movements against the dollar. At IMF headquarters, an obituary was circulated for Bretton Woods:
R.I.P. We regretfully announce the not unexpected passing away after a long illness of Bretton Woods, at 9 P.M. last Sunday. Bretton was born in New Hampshire in 1944 an died a few days after his 27th birthday […]The fatal stroke occurred this month when parasites called speculators inflated his most important member and caused a rupture of his vital element, dollar-gold convertibility.38
The end of the Bretton Woods compromise symbolized the closure of the period of “embedded liberalism.” Embedded liberalism required that domestic economies be insulated from the pressures of laissez-faire capitalism. Trade could flow but not unrestrictedly; and international investment could be encouraged but with some controls. The system had worked before the Nixon shocks because controls ensured that “Capital flows were minimal.”39 However, once the fiat system was adopted, world financial markets were set free. The sleeping goliath had been released from its dormant state. International speculators could once again “move money in response to differences in national monetary conditions and could threaten the independence of national macroeconomic policy.”40 “The rupture . . . was permanent; . . . the early 1970s marks a caesura in the way the industrial West conducts its business.”41 The global economy went from “a pre-1970 world of limited capital mobility to a post-1980 world of relatively high capital mobility.”42 “Floating and often highly volatile exchange rates thereafter replaced the fixed exchange rates of the postwar boom.”43 Subsequently, there was an ever-greater geographical mobility of capital.44
With the introduction of the fiat system, the seeds were sown for the rebirth of finance capital and its twin, the liberal creed. Certainly, there were differences between the development of the gold standard and the fiat system. For one thing, the United States was not committed to unbounded free trade as Britain had been. The monetary system established at Bretton Woods was one in which production “of world money was taken over by a network of governmental organizations motivated primarily by considerations of welfare, security, and power.”45 This hybrid system was quite different from the British gold standard, in which “the circuits and networks of high finance had been firmly in the hands of private bankers and financiers who organized and managed them with a view to making a profit.”46 Nonetheless, in both epochs a novel international monetary order was called into existence by the exigencies of expanding trade. And the impact of the introduction of both monetary systems was very similar. In both periods, high levels of capital mobility forced governments all over the world to remove or reduce taxation and develop policies that would be supportive of international capital. The foundations for high liberalism were put into place.
What finally tipped the scales away from the social and economic protections baked into the Bretton Woods system was the 1970s oil crises. Not only did these crises mark the end of the post-World War II economic boom, but they also set off a slow but steady ideological turn away from the welfare state and embedded liberalism. Thus, the economic and political balance of the mid-century boom was upended by a contagious economic recession that impacted the world economy in ways that parallel the 1846–47 agrarian recession.
The economic crisis was driven by two oil-price shocks, one in 1973 followed by a second in 1979. The first oil shock occurred when the United States decided to support the Israeli military during the 1973 Yom Kippur War. In retaliation, members of the Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an oil embargo. The embargo lasted until March 1974. At the time, the United States, Canada, Western Europe, Australia, and New Zealand relied heavily on crude oil, and OPEC was their major supplier. Western countries, hence, faced substantial petroleum shortages. As oil prices skyrocketed, all sectors of the economy were affected. Thus began the global recession. A second oil shock occurred in 1979 when oil supply was again curtailed, this time because of the Iranian Revolution.
Like the aftermath of the 1846–47 economic crisis, the global recession of the 1970s produced a shift away from “embedded capitalism,” and toward the wide adoption of laissez-faire fundamentalism. That was because the oil crisis hit the two most advanced liberal economies, the United States and Britain, particularly hard. Both countries experienced a period of “stagflation”: a period of high inflation accompanied by high unemployment. Government was quickly blamed for the recession. With low job creation and escalating consumer prices, it was argued that excessive government spending and highly inflated labor prices created by unions had brought the crisis about. Constraints placed on market freedoms that had long been accepted as necessary state prerogatives were discredited. Markets, it was now argued, could better allocate funds and shift investment in ways that would be profitable to enterprises, regions, and economic sectors.
The 1980s became a period of economic and political restructuring, as the “pressure for financial deregulation gathered pace” and “the attack upon the real wage and organized union power, that began as an economic necessity in the crisis of 1973–5, were simply turned by the neo-conservatives into a governmental virtue.”47 In 1980, this shift would be solemnized as the birth of the Reagan-Thatcher revolution, when “Nineteenth-century beliefs in the ‘self-regulating market’—in Polanyi’s sense—became the official ideology of the US government.”48 Under the tutelage of the two leaders of “the free world,” the four-decades-old Progressive Era regime was abandoned.
When Margaret Thatcher came to power in 1979, Britain had had a relatively socialized economy. There was widespread government ownership of industries and trade unions were very powerful.49 However, in the 1970s, the economy suffered a severe setback. By “1975, inflation hit twenty-five per cent. The next year, Britain became the first developed country to receive an I.M.F. bailout.”50 Thatcher believed Britain’s Keynesian economic policies, which gave government the power to intercede in the economy to keep employment levels high and reduce the harm that market forces could produce, were the problem. Thatcher set out to free the economy from such undue restraints. She privatized the major government-owned industries and sold government-owned housing to tenants. As Thatcher, when Regan assumed office in 1981, the American economy was also experiencing a severe downturn. Political crises in the 1970s had gravely reduced world oil production. The price of gas at the pump increased exponentially. Even worse, the scarcity of oil was such that gas had to be rationed across the United States. With gas prices skyrocketing, the price of all goods rose. Regan was elected on a platform to “make America great again.” He argued that the problem with the American economy was the “nanny” welfare state, which had allowed the federal government to balloon and hampered business. To reduce inflation and improve job creation, Regan set out to restructure the economy. His “trickle down” economic theory was based on the assumption that when industry leaders prospered, the rest of the country would prosper. He, therefore, introduced policies designed to end constraints on trade and industry. He undermined the power of labor unions, retrenched government regulations, and lowered tax rates.
The “Reagan-Thatcher Revolution” marked the rebirth of the “liberal creed,” of laissez-faire economics. Because of the inordinate power of the United States, especially after the establishment of GATT and the WTO, “austerity, fiscal retrenchment, and erosion of the social compromise between big labour and big government became the watchwords in every state in the advanced capitalist world.”51 By 1986, some version of the neo-liberal mantra of free markets and preventing government excess was being intoned in financial centers around the globe. For the second time in history, the world would be subject to the unstable flux of mobile capital, almost wholly freed from political restraints.
But just as Polanyi describes the hypocrisy of nineteenth-century free-trader ideologues, in the twentieth century, governments that most loudly championed non-intervention and fiscal conservatism became more, rather than less, interventionist. The difference was that now the interventions were designed to protect capital and industry, not the weakest members of society. The “modalities, targets of, as well as the capacity for, state intervention” was changed, but this did not mean that state interventionism decreased; to the contrary “in some respects—particularly regarding labour control—state intervention [became] more crucial.”52 What was true of this second period of disembedded markets was that government was now working to protect capital interests rather than society. Above all, the liberal creed had once again triumphed. Social protections that had been the anchor of the Bretton Woods system had been eliminated. High liberalism was on the move and society was once again being steamrolled by global capital. The double movement had been set in motion.
Just as the post-Napoleonic War period, the post-World War II period was a novel interlude of sustained accords among the major powers. The prolonged peace in both epochs allowed for investment in industry, the flourishing of innovative technologies, and the resurgence of international commerce. As world trade steadily rose, there developed a demand for a new monetary system that gave capital enhanced mobility. Expanding trade and capital mobility greased the wheels that produced global economic shocks. The remnants of the protectionist order crumbled and liberalism triumphed over social protections. The world was poised for an era of globalization and the double movement.
In the final analysis, the postbellum periods provided the space among the advanced industrial countries that would allow for a confluence of global trade and global finance. Schumpeter was arguably correct that technological innovation set in motion the extraordinary modernization of the late nineteenth and twentieth centuries. Revolutions in transportation and communications collapsed time and space, forever altering social, political, and economic relations. But the reason technology reached such zeniths was because an extended period of peace among the most advanced nations allowed innovation and international commerce to soar. If technological revolutions created the unfathomable level of global interconnectivity that set off the double movement, it was the politics that preceded it, the sustained period of international stability, which created the possibility for those revolutions to unfold.