Bretton Woods

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pages: 710 words: 164,527

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

activist fund / activist shareholder / activist investor, Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, business cycle, capital controls, Charles Lindbergh, currency manipulation / currency intervention, currency peg, deindustrialization, European colonialism, facts on the ground, fiat currency, financial independence, floating exchange rates, full employment, global reserve currency, imperial preference, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, margin call, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, New Journalism, open economy, Paul Samuelson, Potemkin village, price mechanism, price stability, psychological pricing, reserve currency, road to serfdom, seigniorage, South China Sea, special drawing rights, The Great Moderation, the market place, trade liberalization, Works Progress Administration

Robust economic recovery in the 1950s and ’60s served to make Bretton Woods synonymous with visionary, cooperative international economic reform. Seven decades on, at a time of great global financial and economic stress, it is perhaps not surprising that blueprints for revamping the international monetary system from the likes of hedge fund guru George Soros, Nobel economist Joseph Stiglitz, and policy wonk Fred Bergsten all hark back to Bretton Woods, and the years of Keynes-White debate that defined it. But can the story of Bretton Woods actually light the way? To be sure, there were major flaws in the monetary framework that emerged from Bretton Woods, which contributed directly to its final collapse in 1971. Indeed, the life span of the Bretton Woods system was considerably shorter, and its operation more troubled, than is commonly reckoned.

“New Light on Harry Dexter White.” Journal of the History of Economic Thought 26:179–195. Bourneuf, Alice. July 6, 1944. Notes on Bretton Woods Conference. Bretton Woods Conference Collection, International Monetary Fund, Box 15. ———. July 13, 1944. Notes on Bretton Woods Conference. Bretton Woods Conference Collection, International Monetary Fund, Box 15. Bureau of Economic Analysis. Aug. 2010. GDP and Other Major NIPA Series, 1929–2010: II. Available at http://www.bea.gov/scb/pdf/2010/08%20August/0810_gdp_nipa_series.pdf. Chambers, Whittaker. 1952. Witness. New York: Random House. ———. Dec. 2, 1953. “The Herring and the Thing.” Look. Chicago Tribune. June 12, 1944. “Babes in Bretton Woods.” ———. July 2, 1944. “Among Those Absent.” ———. July. 3 1944. “White Admits Bankers Fight Money Scheme.” ———. July 7, 1944.

U.S. delegation members Frederick Vinson and Edward E. Brown in conversation at the Bretton Woods conference, July 1944. (Alfred Eisenstaedt/Time & Life Pictures/Getty Images) 8A. J. M. Keynes, flanked by Soviet delegation head M. S. Stepanov (left) and U.S. delegation head Henry Morgenthau, Jr. (right), addressing delegates at the Bretton Woods conference, July 1944. (© Bettmann/CORBIS) 8B. H. D. White (center), flanked by British economists and delegation members Lionel Robbins (left) and Dennis H. Robertson (right), at the Bretton Woods conference, July 1944. (Courtesy of the International Monetary Fund) 9. J. M. Keynes (center), flanked by Soviet delegation head M. S. Stepanov (left) and Yugoslav delegation head Vladimir Rybar (right), at the Bretton Woods conference, July 1944. (Hulton Archive/Getty Images) 10.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

They did not want the markets to have the ability to point out when monetary policy was incompatible with the exchange-rate target. Establishing the Bretton Woods system evoked many of the arguments that still rage today. Graham favoured floating exchange rates, but that turned out to be a policy whose time had not yet come. His arguments (and those of laissez-faire economists like Friedrich Hayek and Ludwig von Mises) were to be taken up in the 1960s and 1970s by the Chicago economists Milton Friedman and Robert Lucas. The creation of the euro owes much to the feeling – prevalent at Bretton Woods – that exchange rates should be stable and speculation curbed. And the need to impose obligations on creditor and surplus nations is now an argument used by the Americans against the Chinese. At heart, Bretton Woods was a system blessed by the Americans, at the time the world’s leading creditor.

This allowed the City of London to rise above the long-term economic decline of Britain and establish itself as one of the world’s great financial centres, a development that is still significant today. The development of the Eurobond market was also an early sign of the international flows of capital that were eventually to help bring down the Bretton Woods system. Money was being transferred across borders and between currencies, and that meant it could switch out of currencies about which investors had doubts. After years of government control, the capital markets were slowly asserting their independence. Bretton Woods survived for just thirteen years after the first easing of capital flows. However, governments played a bigger part in the killing of Bretton Woods than the private sector. Charles de Gaulle, the French President, had enjoyed an uneasy relationship with the American authorities during the Second World War; President Roosevelt had repeatedly attempted to sideline him in favour of less prickly generals.

Sure enough, within four days President Nixon had suspended the convertibility of gold, accompanying the move with a 10 per cent surcharge on imports – a blatant attempt to force other countries to revalue their currencies. The Bretton Woods system was over. It could be argued that Bretton Woods was doomed by the attempt to combine fixed exchange rates with a full employment policy. Arguably these two aims were not compatible for all countries all the time. The switch to floating exchange rates in the 1970s was followed by much higher rates of unemployment than had occurred under Bretton Woods, and the monetarists were accused of being callous about the plight of the unemployed because of their obsession with inflation. Another problem was that the system was insufficiently flexible. It was devised at a time when the US was dominant economically, politically and militarily; only the intellectual reputation of Keynes prevented the system from being completely designed in Washington.


pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liberal capitalism, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, plutocrats, Plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

It was only that, during the 1930s at any rate, a thinker and writer of real quality, in the form of John Maynard Keynes, had lent an intellectual respectability to them. 10 Bretton Woods Bretton Woods is a phrase which denotes an entire era in the monetary management of the world’s economy. If the inter-war period can be called the ‘age of Keynes’, the conference held at the affluent mountain resort town of Bretton Woods, in New Hampshire, was perhaps his most enduring practical legacy. Keynes, however, did not dominate the proceedings at Bretton Woods as much as he would have liked. The American delegation, under the direction of Harry Dexter White, was composed of tough, legally trained bureaucrats who would not be bamboozled by the world-famous Englishman. Of course, by 1944, when the Bretton Woods conference took place, Keynes was at the height of his prestige. The advent of the coalition government in 1940 had swept away Conservatives like Neville Chamberlain who remained rigorously attached to Peelite principles of balanced budgets.

The Agreement, in Boothby’s view, had shown with ‘startling clarity’ that an attempt had been made to ‘revert to the economic system of the nineteenth century’. The ‘Bretton Woods agreement would put us all back on a gold standard more rigid in some respects than has ever existed in the past’.14 This assessment may have owed much to the hyperbole of the political platform, but it hit on an aspect of the truth. Boothby admitted that Bretton Woods allowed sterling to devalue ‘up to 10 per cent’, but stated that Britain’s currency would now be ‘in the hands of an international authority, on which our competitors will have a majority vote, and which is to be located in the U.S.A.’.15 Although Keynes attempted to argue that Bretton Woods was not simply a reversion to the gold standard, he had to admit the link to gold. In a letter to the Economist, written in July 1944, he characterized the ‘old standard’ as ‘rigid’. The Bretton Woods regime, which he referred to as the ‘proposed standard’, would mean that ‘all currencies would have a “link” with gold, but it would be “flexible” enough to permit orderly changes in exchange rates’ in order to ‘avert the breakdown of monetary systems’.16 In May, Keynes had used his new position as a member of the British House of Lords to defend Bretton Woods against the charge that it was a return to the gold standard.

‘If there is one area in which spirits were not prepared for international co-operation, it is certainly in the monetary field,’ he wrote. This was because the ‘idea of money has always been allied to that of national sovereignty’.36 The wider significance of Bretton Woods was in its relative success as an effort of co-ordinated international statesmanship. Although it had the stamp of international co-operation, however, it was clear that no such co-operation could have been achieved without the preponderant power of the United States. Bretton Woods itself was a New Hampshire mountain resort. The institutions of Bretton Woods had been located in Washington, the capital of the dominant military and economic nation in the world. The dollar was the basis of the monetary system. Bretton Woods may have marked a turning point in international co-operation, but it was, at the same time, an emphatic symbol and proof of the hegemony of the United States.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

Keynes and White realized that it was better to accept this and build the safety valves into the system than to ignore it and risk total collapse. The Bretton Woods Model The system they crafted came to be called the Bretton Woods regime, after the New Hampshire resort town at which Keynes, White, and other officials from forty-four nations met in July 1944 at a conference to draft the new rules. The Bretton Woods agreement was an amazing piece of institutional engineering. In about three weeks, Keynes and White supplied the world economy with a new economic philosophy and created two new international organizations: the International Monetary Fund and the World Bank. The deal struck at Bretton Woods would govern the world economy for the first three decades following World War II. Long after the regime became undone during the 1970s and 1980s, the term “Bretton Woods” would remain a wistful reminder of the possibilities of collective deliberation at the global level.

This signaled a momentous transformation in policy beliefs. We need to return to the original Bretton Woods agreement to appreciate its full significance. The Bretton Woods Consensus on Capital Controls It would be difficult to overstate the strength of the consensus in favor of capital controls in the immediate aftermath of World War II. As one American economist put it in 1946: “It is now highly respectable doctrine, in academic and banking circles alike, that a substantial measure of direct control over private capital movements, especially of the so-called ‘hot money’ varieties, will be desirable for most countries not only in the years immediately ahead but also in the long run as well.”11 The Bretton Woods arrangements fully reflected this consensus. As Keynes himself would make clear, the agreement gave every government the “explicit right to control all capital movements” on a permanent basis.

Capital controls were effective through the 1960s, and they worked as the architects of the Bretton Woods regime imagined they would, opening up space for domestic macroeconomic management.14 The Achilles’ heel of the Bretton Woods regime was that it did not address a fundamental conundrum for the international economy: What will play the role of international money in the system? Sustaining a global economy requires a global medium of transaction and store of value—a “money”—that is made available in ample quantities when needed and can be reliably redeemed in exchange for real goods or assets. Gold played this role under the gold standard; we saw the problems that this gave rise to in the 1870s (when a global shortage of gold forced price deflation) and, fatally, in the 1930s. Under Bretton Woods, the U.S. dollar became effectively the “global currency,” serving as the reserve asset of choice for central banks around the world.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

The basis was laid for the dollar crisis of August 1971 and the final abandonment of the Bretton Woods system.61 And just as the US Treasury had been central to the establishment of new forums and mechanisms for the international management of the “dollar crisis” within the Bretton Woods framework, so was it now central to that framework’s dismantling. This did not involve withdrawing from the multilateral management of the contradictions and tensions in the Bretton Woods institutions, but rather bringing into play—as the US inexorably moved towards breaking the dollar’s link to gold—all the links the Treasury and the Fed had developed with other states’ finance ministries and central banks. Inside the Treasury itself, the fate of Bretton Woods appeared to come to rest in the large hands of Paul Volcker. He had left the Treasury for three years to do the obligatory stint on Wall Street required of senior civil servants in the American state’s financial apparatus, and now, despite being a Democrat, he was recruited to take on the post of undersecretary of the Treasury for monetary affairs under Nixon, where from 1969 to 1971 Volcker “for all practical purposes was Treasury.”62 When in August 1971, after two years of trying to “muddle through,” the Nixon administration finally terminated the dollar’s link with gold, the decision was tentative and uncertain.

If there was ever a case where the advantages of relative autonomy were manifest, allowing a capitalist state to act on behalf of capital but not at its behest, it was in the extensive public campaign the US Treasury undertook to get the Bretton Woods agreement endorsed by Congress over the bankers’ opposition. In “one of the most elaborate and sophisticated campaigns ever conducted by a government agency in support of legislation,” the Treasury presented Bretton Woods as a “good business deal for the United States” as well as “the symbol for a new kind of cooperation.”50 The Treasury argued that Wall Street’s portrayal of the Fund as a vehicle for capital controls was substantially incorrect. Its official “backgrounder” to the Bretton Woods Agreement emphasized that it “would be incorrect to assume that most capital exports are prohibited under the Fund’s provisions” and that a “careful examination of the fund proposal will reveal that most capital exports can probably take place freely, and only in a minority of cases will exchange restrictions have to be imposed.”51 This was in fact the way the Treasury expected the Fund to operate—and the way it actually did.52 Even so, passage by Congress was not assured until the Treasury struck a last-minute agreement with the representatives of the American Bankers Association and leading Wall Street banks whereby the Treasury agreed to various amendments in a compromise Bill which set up mechanisms such as the National Advisory Council, to ensure that US representatives to the Fund would act in such a way as to impose greater conditionalities on governments that were given access to its resources.

American State Capacities: From Great War to New Deal From Wilson to Hoover: Isolationism Not The Great Depression and the New Deal State From New Deal to Grand Truce with Capital PART II: THE PROJECT FOR A GLOBAL CAPITALISM 3. Planning the New American Empire Internationalizing the New Deal The Path to Bretton Woods Laying the Domestic Foundations 4. Launching Global Capitalism Evolving the Marshall Plan The American Rescue of European Capitalism “The Rest of the World” PART III: THE TRANSITION TO GLOBAL CAPITALISM 5. The Contradictions of Success Internationalizing Production Internationalizing Finance Detaching from Bretton Woods 6. Structural Power Through Crisis Class, Profits, and Crisis Transition through Crisis Facing the Crisis Together PART IV: THE REALIZATION OF GLOBAL CAPITALISM 7. Renewing Imperial Capacity The Path to Discipline The New Age of Finance The Material Base of Empire 8.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, WikiLeaks, Yom Kippur War

In 1944, the New Dealers’ anxieties led to the famous Bretton Woods conference. The idea of designing a new global order was not so much grandiose as essential. At Bretton Woods a new monetary framework was designed, acknowledging the dollar’s centrality but also taking steps to create international shock absorbers in case the US economy wavered. It took fifteen years before the agreement could be fully implemented. During that preparatory phase, the United States had to put together the essential pieces of the jigsaw puzzle of the Global Plan, of which Bretton Woods was an important piece. Bretton Woods While the war was still raging in Europe and the Pacific, in July 1944, 730 delegates converged on the plush Mount Washington Hotel located in the New Hampshire town of Bretton Woods. Over three weeks of intensive negotiations, they hammered out the nature and institutions of the post-war global monetary order.

The New Dealers, however respectful they might have been of John Maynard Keynes, had another plan: a Global Plan, according to which the dollar would effectively become the world currency and the United States would export goods and capital to Europe and Japan in return for direct investment and political patronage – a hegemony based on the direct financing of foreign capitalist centres in return for an American trade surplus with them.5 The rise of the fallen The Global Plan started life as an attempt to kick-start international trade, create markets for US exports, and address the dearth of international investment by private US companies. But before long it had developed into something bigger and supposedly better. To give Bretton Woods a strong backbone, the New Dealers were determined to support the dollar by creating, within the Bretton Woods fixed exchange system, at least two additional strong currencies that would act as shock absorbers in case the American economy took one of its many periodic downturns. The idea was to find ways to absorb such shocks until Washington managed to reverse the downturn in its own backyard. Without these supporting pillars, the Bretton Woods system, they feared, would be too precariously balanced. However, strong currencies cannot be willed into existence. They must be underpinned by heavy industry, as well as by adjacent trade zones, a form of Lebensraum (or vital space) that provides the requisite demand for manufacturing products.

In a knee-jerk reaction, the stricken government, unable to increase public expenditure itself, will seek ways to ‘import’ demand from abroad. Keynes surmised that it would purposely violate the rules of the Bretton Woods system. Why? The ‘system’ requires that, in order to counter the tendency of the currency to fall during the debt–deflationary crisis, the government should use its dollar reserves to stabilize it within the original ±1 per cent band. But the government, desperate to increase exports as the only way to counter the recession, would have every incentive to do precisely the opposite – to hoard its dollar reserves and instead to approach the Bretton Woods system’s administrators, begging them to allow the currency to be devalued. Box 3.1 Surplus recycling mechanisms: capitalism’s sine qua non Surplus recycling is an integral component of any society that organizes production through the market.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, hiring and firing, housing crisis, inflation targeting, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Robert Shiller, Rubik’s Cube, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

Since the outflows at the end of one crisis have been rapidly followed by the start of inflows into the next one, the history of the international financial system since 1970 can be told through the lens of footloose international debt flows that have ebbed and flowed across regions. The Center Cannot Hold: Collapse of the Bretton Woods Fixed Exchange Rate System The collapse of the Bretton Woods fixed exchange rate system in the early 1970s was a watershed event.10 It marked the end of international efforts to maintain fixed exchange rates across major currencies that had characterized the century since the advent of the classical gold standard in the 1870s. The classical gold standard had broken down during World War I and the gold exchange standard that replaced it between World Wars had foundered because the parities across currencies were too rigid, creating constraining “golden fetters”.11 In response, the 1944 Bretton Woods conference created a new and more flexible fixed exchange rate system in which countries could adjust their parities in the face of persistent trade deficits.

The Versailles Treaty agreed in the aftermath of the war unsuccessfully tried to patch up the pre-war economic order while punishing the Germans with large reparation payments. It led to serial financial and economic instability—and also to World War II. By contrast, the more radical revamp of the global economic order after World War II at the Bretton Woods conference ushered in a long period of growth and prosperity. The crucial question is whether the response to this crisis is a new Versailles or a new Bretton Woods. The first section of this book, “Anatomy of the North Atlantic Financial Crisis”, explains how the North Atlantic financial system became so brittle. There was indeed a powerful anti-regulatory lobby in the United States comprising the large banks, the Federal Reserve, and (to a lesser extent) the Securities and Exchange Commission (SEC).

Rather, they agreed that the European currencies would fluctuate in modestly narrower limits against each other than those implied by bands around the dollar in the Bretton Woods system, an extremely modest move to European monetary integration.11 These new bands were supposed to be put in place in June 1971, but this was upended in the spring when the Germans unilaterally floated their currency against the dollar in the face of mounting inflows from international investors. Interest in forming a currency union continued. Indeed, in October 1972 a Community summit in Paris agreed to start the transition to the second stage of the Werner Plan in January 1974 as well as the creation of a European Monetary Cooperation Fund to support this move.12 This distinctly half-hearted agreement, however, did not survive the final collapse of the Bretton Woods fixed exchange rate system in 1973. Ultimately, the unwillingness of the French, in particular, to surrender sovereignty over fiscal policy to the European Council torpedoed the Werner Report.


pages: 614 words: 174,226

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Appelbaum

"Robert Solow", airline deregulation, Alvin Roth, Andrei Shleifer, anti-communist, battle of ideas, Benoit Mandelbrot, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, Celtic Tiger, central bank independence, clean water, collective bargaining, Corn Laws, correlation does not imply causation, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, desegregation, Diane Coyle, Donald Trump, ending welfare as we know it, financial deregulation, financial innovation, fixed income, floating exchange rates, full employment, George Akerlof, George Gilder, Gini coefficient, greed is good, Growth in a Time of Debt, income inequality, income per capita, index fund, inflation targeting, invisible hand, Isaac Newton, Jean Tirole, John Markoff, Kenneth Arrow, Kenneth Rogoff, land reform, Long Term Capital Management, low cost airline, manufacturing employment, means of production, Menlo Park, minimum wage unemployment, Mohammed Bouazizi, money market fund, Mont Pelerin Society, Network effects, new economy, oil shock, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, price stability, profit motive, Ralph Nader, RAND corporation, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Bork, Robert Gordon, Ronald Coase, Ronald Reagan, Sam Peltzman, Silicon Valley, Simon Kuznets, starchitect, Steve Jobs, supply-chain management, The Chicago School, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, trickle-down economics, ultimatum game, Unsafe at Any Speed, urban renewal, War on Poverty, Washington Consensus

But it was an empty gesture: not one dollar was distributed to workers over the next seven years.11 Foreign demand for dollars also caused the Bretton Woods system to collapse. The United States had promised to sell gold to foreign governments, on demand, at $35 per ounce, but the supply of dollars in foreign hands rose much faster than the supply of gold in the federal government’s vaults. By 1963, foreign governments held enough dollars to claim every ounce of gold at Fort Knox, reducing the Bretton Woods Agreement to a convenient fiction that would last only as long as foreign nations refrained from calling those claims.12 The United States tried to postpone the day of reckoning by slowing the outflow of dollars. But in attempting to preserve the Bretton Woods system, the United States gradually pulled back from its stated purpose of increasing trade among nations.

Among other things, the federal government paid scientists to gather twenty-two samples of a plant called marsh horsetail to investigate a rumor that there was gold inside.16 All the while, the end of Bretton Woods drew nearer. The United States had made a promise it could not keep. By 1969, West Germany alone held enough dollars to drain Fort Knox. Milton Friedman worked to end the Bretton Woods system almost from the hour of its creation, telling anyone who would listen that nations should let financial markets determine exchange rates.* He was among the first to call attention to the fact that Bretton Woods was buttressed and preserved by limits on trade. He also warned, with considerable prescience, that the stability of the system was maintained only by deferring necessary economic adjustments.

His opening salvo came in 1948, on a radio panel with the deputy governor of the Bank of Canada, to whom Friedman offered the unsolicited advice that Canada should float its currency, effectively withdrawing from the Bretton Woods Agreement, which it had only just signed.17 Friedman offered the same advice to every other nation in a 1953 paper, “The Case for Flexible Exchange Rates.” Terminating Bretton Woods in favor of floating rates, he wrote, was “absolutely essential for the fulfillment of our basic economic objective: The achievement and maintenance of a free and prosperous world community engaging in unrestricted multilateral trade.”18 Under the Bretton Woods system, an American business was willing to accept 360 yen instead of $1 because the Japanese government guaranteed that 360 yen could be exchanged for $1. Under a system of floating rates, governments do not guarantee exchange rates.


pages: 264 words: 115,489

Take the Money and Run: Sovereign Wealth Funds and the Demise of American Prosperity by Eric C. Anderson

asset allocation, banking crisis, Bretton Woods, business continuity plan, business process, buy and hold, collective bargaining, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, diversified portfolio, fixed income, floating exchange rates, housing crisis, index fund, Kenneth Rogoff, open economy, passive investing, profit maximization, profit motive, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, sovereign wealth fund, the market place, The Wealth of Nations by Adam Smith, too big to fail, Vanguard fund

To answer that question we need to change gears and take a moment to discuss the current international monetary “system”—or at least what remains of the 1944 Bretton Woods Agreement. Back to Bretton Woods In July 1944, 730 delegates from the 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference. The three-week conference resulted in the signing of the Bretton Woods Agreement, a system of rules, institutions, and procedures designed to regulate the international monetary system and thereby avoid a repeat of the conflicting national policies that contributed to the Great Depression of the 1930s.10 The chief features of the Bretton Woods system were an agreement that each nation would adopt a monetary policy that maintained the exchange rate of its currency within a fixed value, and the use of the International Monetary Fund to temporarily bridge payment imbalances.

The three-week conference resulted in the signing of the Bretton Woods Agreement, a system of rules, institutions, and procedures designed to regulate the international monetary system and thereby avoid a repeat of the conflicting national policies that contributed to the Great Depression of the 1930s.10 The chief features of the Bretton Woods system were an agreement that each nation would adopt a monetary policy that maintained the exchange rate of its currency within a fixed value, and the use of the International Monetary Fund to temporarily bridge payment imbalances. The devil, as the saying goes, is in the details. While the intention of the original Bretton Woods Agreement was to establish a “pegged-rate” currency regime based on the gold standard, in reality the delegates established a principle “reserve currency”—the U.S. dollar. Under this gentlemen’s agreement, Washington promised to link the dollar to gold at the rate of $35 an ounce, and other nations would then “peg” their currencies to the U.S. dollar. As such, the original Bretton Woods Agreement (henceforth “Bretton Woods I”) directly lashed the currencies of a re-emerging Europe and Japan to the U.S. dollar. This meant the values of all other currencies were to be based on their dollar conversion rate.

That is, the value of a currency was/is based upon international perceptions of a particular nation’s economic strengths and weaknesses. In place of the “gold standard,” a currency’s place on the monetary exchange market could fluctuate based on economic, military, and political performance, at home and abroad. This is not to say, however, that the fundamental economic principles underlying Bretton Woods had been buried and forgotten. In 2003, Michael Dooley, David Folkerts-Landau, and Peter Garber released a paper titled, “An Essay on the Revived Bretton Woods System.”15 According to the authors, the international economic and political system existent during Bretton Woods I is best envisioned as consisting of a “core” and a “periphery.” The United States served as the core, whereas Europe and Japan constituted an emerging periphery. According to Dooley, Folkerts-Landau, and Garber, “the periphery countries chose a development strategy of undervalued currencies, controls on capital flows, trade reserve accumulation, and the use of the [core] as a financial intermediary that lent credibility to their own financial systems.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

The system of exchange-rate pegging and controls on capital mobility served to hem in those powerful pools of capital that had wreaked such havoc in the global economy in the period before 1929. Bretton Woods was a significant step forward in reining in the rentier class. But Keynes didn’t get everything he wanted. He was hindered in his battle against international finance by the formidable Dexter White, backed up by the full force of US imperial power. White wished to retain the US dollar as the centre of the international monetary system, whilst Keynes wanted it replaced with a new international currency — the bancor. White emerged victorious, and the US gained the “exorbitant privilege” of controlling the world’s reserve currency.5 In other words, as well as constraining international finance, Bretton Woods also institutionalised American imperialism.6 The Bretton Woods conference marked the dawning of a new era for the global economy.

Combined with dollars leaking out of the US via its growing current account deficit, the global economy was facing a dollar glut by the 1970s. Realising that there were far too many dollars in circulation to keep up the pretence, in 1971 Nixon announced that dollars would no longer be convertible to gold. Bretton Woods was finally over. Many expected a sharp devaluation of the dollar at this point, but this didn’t happen. In fact, the dollar — strong as ever — continued to be used as the global reserve currency, even in the absence of any link with gold. Finally, the real foundations Bretton Woods had been exposed: American imperial power. The gold peg established at Bretton Woods was not the source of the dollar’s value; the source of its value was a collective agreement that dollars would be used as the default global currency, much as English had by that point become the default global language.

The hotel boasted top of the range facilities, including “boot and gun rooms, a furrier and card rooms for the wives, a bowling alley for the kids, a billiard room for the evening”, as well as a preponderance of bars, restaurants and “beautiful women”. The more extravagant, the better — the splendour and superiority of the American way was to be shown at every turn. It is somewhat ironic that the decadent crowd at Bretton Woods came up with an agreement that would hold back the re-emergence of the gilded age of the inter-war years. Bretton Woods was meant to prevent the outbreak of not only another world war, but also another Wall Street Crash. Keynes argued forcefully that doing so would require reining in what he called the “rentier class”: those who made their money from lending and speculation, rather than the production, sale and distribution of commodities.2 In the late eighteenth and early nineteenth century, rentiers had become extremely powerful on the back of the rising profits associated with the industrial revolution and increasing trade within the world’s constellation of empires.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

Nixon, 1972 As World War II wound down, the major Allied economic powers, led by the United States and England, planned for a new world monetary order intended to avoid the mistakes of Versailles and the interwar period. These plans were given final shape at the Bretton Woods Conference held in New Hampshire in July 1944. The result was a set of rules, norms and institutions that shaped the international monetary system for the next three decades. The Bretton Woods era, 1944 to 1973, while punctuated by several recessions, was on the whole a period of currency stability, low inflation, low unemployment, high growth and rising real incomes. This period was, in almost every respect, the opposite of the CWI period, 1921–1936. Under Bretton Woods, the international monetary system was anchored to gold through a U.S. dollar freely convertible into gold by trading partners at $35 per ounce and with other currencies indirectly anchored to gold through fixed exchange rates against the U.S. dollar.

Since 1961, the United States and other leading economic powers had operated the London Gold Pool, essentially a price-fixing open market operation in which participants combined their gold and dollar reserve resources to maintain the market price of gold at the Bretton Woods parity of $35 per ounce. The Gold Pool included the United States, United Kingdom, Germany, France, Italy, Belgium, the Netherlands and Switzerland, with the United States providing 50 percent of the resources and the remainder divided among the other seven members. The pool was partly a response to an outbreak of panic buying of gold in 1960, which had temporarily driven the market price of gold up to $40 per ounce. The Gold Pool was both a buyer and a seller; it would buy on price dips and sell into rallies in order to maintain the $35 price. But by 1965 the pool was almost exclusively a seller. The End of Bretton Woods The public attack on the Bretton Woods system of a dominant dollar anchored to gold began even before the 1967 devaluation of sterling.

Short-term lending to particular countries in the event of trade deficits would be provided by the International Monetary Fund. Countries could only devalue their currencies with IMF permission and that would generally be granted only in cases of persistent trade deficits accompanied by high inflation. Although conceived in the form of a grand international agreement, the Bretton Woods structure was dictated almost single-handedly by the United States at a time when U.S. military and economic power, relative to the rest of the world, was at a height not seen again until the fall of the Soviet Union in 1991. Despite the persistence of Bretton Woods into the 1970s, the seeds of Currency War II were sown in the mid- to late 1960s. One can date the beginning of CWII from 1967, while its antecedents lie in the 1964 landslide election of Lyndon B. Johnson and his “guns and butter” platform. The guns referred to the war in Vietnam and the butter referred to the Great Society social programs, including the war on poverty.


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, Plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

At the end of the 1950s, the Bretton Woods system was finally in working order. It had to confront the two problems that any international monetary system must resolve if it is to be effective. It has to provide a global supply of international liquidities consistent with the needs of international exchange; and it has to assure that balances of payments are adjusted so as to balance out the offer and demand across the different currencies. The Bretton Woods system functioned in conformity with its statutes for a relatively short period, from 1958 to 1971, because it failed to deal with these two problems, and thus proved unable to adapt to the transformations of the world economy. Global Monetary Expansion and the Triffin Dilemma The problem that would undermine the Bretton Woods system was the permanent deficit in the US capital balance.

Then there was the Breton Woods system in the era of labour societies, which lasted for almost three decades after World War Two. We will show how different these systems were in terms of the rules that defined them and the contradictions that ultimately swept them away. This historical detour should also enable us to find some bearings for the era of financial globalisation that has followed the disappearance of the Bretton Woods system. If we do not have accepted rules, is there a system or not? Does the dominant role set for the dollar in the Bretton Woods system endure today? If so, how? In this era, international relations have been affected by something of an Unidentified Flying Object in the monetary landscape: namely, the euro. This is a supranational currency that claims to be uniting nations monetarily but does not rest on any sovereignty compatible with the space in which it circulates.

These would be replaced with principles of collective action that would guide adjustments in the countries that joined the system. These principles were transformed into rules and procedures under the aegis of a consultation forum set up for this very purpose: the International Monetary Fund (IMF). The IMF was created at the Bretton Woods conference as a common subsidiary of the member countries’ governments. It had three responsibilities: to be the guardian of mutually accepted rules; to provide financial aid for the accepted adjustments; and to drive debates on monetary questions. The Bretton Woods accords of July 1944 came at the end of long and complex negotiations. Indeed, these talks saw a clash between two visions for the future. On the one hand was the vision of the US Treasury under Secretary Harry White; on the other hand was that of Lord Keynes, who represented the UK Treasury.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

In the post-1945 period, the separation of national economies was deepened though the hegemony of the USA was established. Capital markets were heavily regulated, exchange rates were fixed in the Bretton Woods framework and convertibility of currencies was restored even among developed countries only by 1960. But thanks to Keynesian macro policies, cycles in each country were quite mild. Depressions were replaced by recessions and sustained growth became the norm rather than cyclical swings. It was only after convertibility had been restored that the US excess spending during the later years of the 1960s spread US inflation to other countries.7 As the economies began to be painfully reintegrated, the Bretton Woods system failed. Exchange rates became variable. The quadrupling of oil prices in 1973 and again a sharp rise in 1979 revived the business cycle.

Therefore the IMF was conceived as an institution to promote collective action in a government-run monetary system under the leadership of the US government. But the gist of the Bretton Woods monetary order was destroyed by sweeping changes brought about by the surge in capital mobility that the US government had intended to provide with a friendly climate. From the early 1970s onwards, the international monetary system (IMS) has been altered decisively in becoming market-led. The metamorphosis has brought more active players in the international arena and woven more channels of interdependence: competing currencies, influential financial centers, the momentous common beliefs of financial markets, the rising economic power of Asian countries. The complexity of such a world was not foreseen in the Bretton Woods Agenda. The IMF has had to adapt its doctrine and missions while keeping its identity.

Being in a position to rebuild the IMS entirely, the two Anglo-Saxon countries had reached a compromise after a lengthy bilateral negotiation that no other country or cluster of countries was able to block. It is the reason why the Bretton Woods Conference is unique and will remain so in the foreseeable future. All prior world conferences failed anyhow: Paris in 1865, Genes in 1922 and London in 1933. So did the grand design to overhaul the IMS launched after the Smithsonian Institute Agreement in December 1971. The IMS has evolved under the spur of market forces. It has never been reformed. Indeed the IMF is not a political institution in its own right, capable of spelling out and imposing a collective good over the confronting interests of its members. As the dissemination of power makes world politics shift further away from the configuration that had made Bretton Woods possible, a minimal political insight is recommended in studying the so-called new financial architecture.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, business cycle, buy and hold, California gold rush, Carmen Reinhart, central bank independence, commoditize, conceptual framework, corporate governance, corporate raider, creative destruction, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, Paul Samuelson, payday loans, plutocrats, Plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

Much of the assistance provided to Europe under the Marshall Plan, like the loans to Europe in WWI and WWII, were largely forgiven. The Bretton Woods Conference in July 1944 was organized, wrote Henry Hazlitt, because of the widespread existence of inflation. But rather than return to the gold standard or some other fixed discipline for maintaining the real value of global currencies, the Bretton Woods Agreement crafted by John Maynard Keynes and his contemporaries institutionalized global inflation under the aegis of the U.S. dollar. “And in spite of the mounting monetary chaos since then, the world’s political officeholders have never seriously reexamined the inflationist assumptions that guided the authors of the Bretton Woods agreements,” noted Hazlitt.24 One of the key measures of the global role of the dollar and inflation in helping to float the world economy after WWII was the growth of the offshore market in dollar deposits—the so-called “Eurodollars.”

Time magazine wrote in 1971: “Welfare reform, cutbacks in defense spending, advocacy of deficit spending, and Keynesian economics were difficult enough for Nixon’s conservative supporters to tolerate, but for many, rapprochement with Communist China was the final straw.” But Nixon’s repudiation of Bretton Woods and devaluation of the dollar had far more significant impact on issues that conservatives hold dear, particularly the value of the dollar and the stability of the U.S. economy. Under the Bretton Woods arrangement, gold and dollars had been established as the reserve for all of the nations outside the Communist sphere. Since in the 1940s there was not sufficient gold to underpin global trade and financial flows except in a fractional way, Keynes and the other Bretton Woods framers essentially made the dollar equal to gold as a backstop for the global economy. Since the United States had virtually all of the monetary gold in the world at the end of WWII with some $35 billion in gold (valued at $35 per ounce), this arrangement seemed to make sense, and for a while it appeared to work.

Truman eventually proposed the expenditure of $17 billion in 1947 and after months of lobbying by its namesake, Secretary of State George Marshall, it was adopted in 1948. Marshall later reported that American women were vastly in favor of the plan and “electric” in persuading the Congress to go along with the proposal.75 Bretton Woods and Global Inflation The Marshall Plan to rebuild Europe, followed by the creation of the International Monetary Fund and the World Bank, created the conditions for European recovery and eventually political union in Europe. Under the Bretton Woods accord, the financial and economic discussions that had been ongoing through the war years were brought together in an ambitious effort to impose a multilateral model on the world and particularly on Europe. In keeping with the popularity of central planning among economists, a coordinated policy on trade and financial flows was envisioned.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

The global financial system started to thaw in anticipation of an Allied victory in the war. The seminal event was the July 1944 Bretton Woods conference. The conference itself was the end result of two years of intense behind-the-scenes struggles between the United States and United Kingdom, represented by Harry Dexter White and John Maynard Keynes respectively, as vividly described by Benn Steil in his book The Battle of Bretton Woods. An alternative to periodic panic and lockdown is a system that is coherent, controlled, and rigorously rule based. That was the case under the classic Bretton Woods system from 1944 to 1971. During that twenty-seven-year golden age, signatories to the Bretton Woods agreement pegged their currencies to the U.S. dollar at fixed exchange rates. The U.S. dollar was pegged to gold at the fixed rate of $35 per ounce.

As long as oil flowed, only Europe, Japan, and Canada mattered to U.S. economic interests, and they were locked in to the Bretton Woods system. No ice-nine solution was imposed because it already existed. The Bretton Woods system was a global ice-nine. The United States controlled over half the world’s gold, as well as the dollar—the only forms of money that mattered. The Bretton Woods system began to wobble badly beginning in 1965. The system suffered combined blows from U.S. inflation, sterling devaluation, and a run on U.S. gold. The United States was unwilling to make structural adjustments it required of other nations. In February 1965, French president Charles de Gaulle famously called for the end of dollar hegemony and a return to a true gold standard. De Gaulle’s finance minister, Valéry Giscard d’Estaing, called the dollar’s role under Bretton Woods “an exorbitant privilege.” The United Kingdom, Japan, and Germany were willing to play along with the pretense that the dollar was as good as gold.

The English-language translation of Somary’s memoir is titled The Raven of Zurich. Somary not only foresaw the First World War, the Great Depression, and the Second World War before others, but he accurately warned about the deflationary and inflationary consequences of those cataclysms. He lived through the demise of the classical gold standard, the currency chaos of the interwar period, and the new Bretton Woods system. He died in 1956 before the Bretton Woods era came to an end. Somary’s success at forecasting extreme events was based on analytic methods similar to ones used in this book. He did not use the same names we use today; complexity theory and behavioral economics were still far in the future when he was engaged with markets. Still, his methods are visible from his writings. A vivid example is a chapter in his memoir called “The Sanjak Railway,” which describes an episode that occurred in 1908 involving Somary’s efforts to syndicate a commercial loan.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Kickstarter, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, Plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

They hoped also to get rid of the nineteenth-century empires, which, in their view, had substantially contributed to the carnage seen in the first half of the twentieth century. That meant, in particular, dismantling the British Empire. It is no mere chance that the conditions Washington laid down for helping the British financially during and after the Second World War were notably tough. The Bretton Woods Conference – which took place in July 1944 in the Mount Washington Hotel in Bretton Woods, New Hampshire – appeared to represent a marked departure from previous behaviour. There was a strong desire to avoid the foolishness of the interwar period, during which time attempts to return to the gold standard at pre-war exchange rates had led to both painful austerity and ultimate economic and financial chaos. Having re-joined the gold standard in 1925 – a year after John Maynard Keynes had termed gold ‘a barbarous relic’2 – the UK was eventually forced to devalue sterling in 1931, thanks to a perilously weak balance of payments position made worse as the world plunged into recession at the beginning of that decade.

As John Maynard Keynes discovered during the Bretton Woods negotiations, cleverness was no substitute for diplomacy and deep pockets. THE BEDROCK OF INSTITUTIONAL GLOBALIZATION These ambitions – driven primarily by American self-interest – led to the creation of three institutions that became the bedrock of post-war economic and financial globalization: the International Monetary Fund (IMF), the World Bank – eventually a supercharged aid agency, but initially designed to facilitate post-war reconstruction – and, two years after the end of the Second World War, the General Agreement on Tariffs and Trade (otherwise known as GATT, the precursor to the World Trade Organization). The IMF was to be run by an American. Unfortunately, the only one in contention – Harry Dexter White, Keynes’ Bretton Woods nemesis – was rumoured to be a Soviet spy.4 President Truman decided that a Belgian, Camille Gutt, would have to do instead.

Government debt levels inevitably soared, leading in some cases to sovereign bond crises. The post-war Bretton Woods institutions – and their offshoots – had not kept pace with the internationalization of market forces. Whilst the OECD had broadened its membership, it was still primarily a ‘rich man’s club’, unable to cope with the growing influence of, for example, China or India. The European Union had created a single market and a shared currency, but lacked the key arrangements that most successful common currency areas – nation states, in other words – take for granted: a common budget, fiscal transfers, a banking union and some form of political union. The IMF was still hamstrung by US dominance – a legacy of Bretton Woods – and was struggling to reshape itself for a world of massive savings imbalances and ever-larger balance of payments disequilibria.


pages: 339 words: 95,270

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Matthew C. Klein

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, Berlin Wall, Bernie Sanders, Branko Milanovic, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, collective bargaining, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, deglobalization, deindustrialization, Deng Xiaoping, Donald Trump, Double Irish / Dutch Sandwich, Fall of the Berlin Wall, falling living standards, financial innovation, financial repression, fixed income, full employment, George Akerlof, global supply chain, global value chain, illegal immigration, income inequality, intangible asset, invention of the telegraph, joint-stock company, land reform, Long Term Capital Management, Malcom McLean invented shipping containers, manufacturing employment, Martin Wolf, mass immigration, Mikhail Gorbachev, money market fund, mortgage debt, New Urbanism, offshore financial centre, oil shock, open economy, paradox of thrift, passive income, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, Wolfgang Streeck

Cut off from the international financial system, the Nazi regime resorted to barter trade to get what it needed by selling advanced manufactures for raw materials, often from the Soviet Union, its ostensible ideological adversary. By the end of the decade, the last vestiges of both the prewar gold standard and the interwar gold-exchange standard had ended.11 Bretton Woods, the Rise of the Dollar, and the Birth of “Exorbitant Privilege” Less than a month after the landings at Normandy, 720 delegates representing forty-four Allied countries met in Bretton Woods, New Hampshire, to discuss what international trade and finance would look like after the war. Everyone agreed that the gold-exchange standard of the 1920s had been a failure and that the monetary anarchy of the 1930s had exacerbated the breakdown in trade and the rise of militarism. A new order was needed to promote international cooperation and economic stability.

By the middle of 1971, things had changed yet again. The London price of gold had crossed $40 by May, and the Bundesbank decided to let the deutschmark float against the dollar. By August, continued threats to American gold holdings, rising unemployment, and the sharp deterioration in the U.S. trade balance convinced President Richard Nixon to end the convertibility of dollars into gold. The Bretton Woods regime had finally ended.18 The Bretton Woods system could have lasted much longer if foreign holders of U.S. dollars had declined to convert their holdings into gold. The world’s bank would have kept growing its balance sheet, accumulating more and more long-term claims on the rest of the world while selling more and more short-term reserve assets. The problem was inflation: the dollar kept losing value against goods and services—including the goods and services employed to mine gold.

,” Journal of Economic History 70, no. 4 (December 2010): 871–97. 16. BIS, Annual Report, 2017, “Understanding Globalization,” https://www.bis.org/publ/arpdf/ar2017e6.htm; BEA, “National Income and Product Accounts,” table 4.1, https://apps.bea.gov/iTable/. 17. Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, N.J.: Princeton University Press, 2013); “Resolution VII: International Economic Problems” and “Closing Address by Henry Morgenthau, Jr. [July 22, 1944],” in Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 1–22, 1944, ed. U.S. State Department (Washington, D.C.: U.S. Government Printing Office, 1944), available at https://fraser.stlouisfed.org. 18. Benn Steil, The Marshall Plan: Dawn of the Cold War (New York: Simon and Schuster, 2018); Robert E.


End the Fed by Ron Paul

affirmative action, Bernie Madoff, Bernie Sanders, Bretton Woods, business cycle, crony capitalism, currency manipulation / currency intervention, fiat currency, Fractional reserve banking, hiring and firing, housing crisis, illegal immigration, invisible hand, Khyber Pass, Long Term Capital Management, market bubble, means of production, moral hazard, Ponzi scheme, price mechanism, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, too big to fail, tulip mania, Y2K

So much for Article 1, Section 10, which places responsibility on the federal government to protect contracts, not to deliberately break them. August 15, 1971, was a major event in the history of the American dollar. In many ways, it was saying the U.S. government was insolvent—it could not meet its monetary commitments. The worldwide run on the American system arrived and the United States refused to pay. A fiat dollar reserve standard replaced the Bretton Woods pseudo-gold standard. There was nothing unexpected here. The failure of Bretton Woods was predicted early on by the Austrian economists, especially Henry Hazlitt, who was writing daily articles for the editorial page of the New York Times. 2 Austrian school economists also knew, even in 1971, that the new paper standard would not provide stability to the financial system. The shift to a new monetary regime was an unprecedented experiment in global monetary planning, a wholesale plunge into the world of paper currency.

The Federal Reserve’s monetary policy has brought us to where we are today—in a tragic economic mess. Though the dollar survives for now, the international financial system built over the past thirty-eight years has been brought down by market forces. The fiat dollar reserve standard that evolved out of the breakdown of Bretton Woods in 1971 has come to an end. That is the significance of the economic crisis in which we find ourselves. Continuation of the same inflationary policies that led to this disaster cannot revive the current system or bring back the Bretton Woods system of 1944. They are finished. What it can do is destroy the dollar. Unfortunately, since the housing bubble burst, signaling the end of a monetary era, everything Congress and the Fed have done has set the stage for a dollar crisis. That’s very bad news since the rejection of the dollar will create, mainly out of fear and a lack of any other ideas, an even greater crisis than the collapse of the international financial system.

Those who understood the free market knew that during a crisis or time of shortage, the market is required more than ever. In allocating scarce resources, imposing wage and price controls is the last thing we need government to do. 1 It only exacerbates the problem, as I well remember. We really never learn much from our mistakes. Wage and price controls were used again during the Korean War and in the early 1970s, after the breakdown of the Bretton Woods Agreement, the unstable gold-exchange standard system established in haste after World War II. I remember my dad as being straitlaced. He believed that we should all follow the rules and obey the government. Yet I do remember being with him on Saturday afternoons when a butcher shop in town had all the meat you wanted, at a price—and without ration stamps. Evidently, it was worth bending the rules a bit to get some meat on the table for his family.


pages: 363 words: 98,024

Keeping at It: The Quest for Sound Money and Good Government by Paul Volcker, Christine Harper

anti-communist, Ayatollah Khomeini, banking crisis, Bretton Woods, business cycle, central bank independence, corporate governance, Credit Default Swap, Donald Trump, fiat currency, financial innovation, fixed income, floating exchange rates, forensic accounting, full employment, global reserve currency, income per capita, inflation targeting, liquidationism / Banker’s doctrine / the Treasury view, margin call, money market fund, Nixon shock, Paul Samuelson, price stability, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Ronald Reagan, Rosa Parks, secular stagnation, Sharpe ratio, Silicon Valley, special drawing rights, too big to fail, traveling salesman, urban planning

We saw bewilderment and bitterness become the breeders of fascism and, finally, of war. So the stakes were very high. Postwar peace and prosperity seemed to depend on maintaining the agreements reached at the summit, the so-called Bretton Woods system. Gold, still seen at the time as the underpinning of all currency, was set at $35 an ounce. All other currencies’ foreign exchange values were fixed against the dollar and the US Treasury promised to convert any nation’s dollars to gold at the $35 price on demand. Williams, however, doubted that the International Monetary Fund created in Bretton Woods could sustain and enforce the new exchange-rate system. In his view, more informal cooperation would be needed, beginning with an understanding between the United States and Britain because their two currencies were globally accepted, used around the world as so-called reserve currencies.

He had larger questions on his mind: Did I think US industry was losing competitive position vis-à-vis a recovering Europe? Was the dollar in jeopardy at its fixed gold price of $35 an ounce embedded in the Bretton Woods agreement? I wasn’t prepared. I parroted the conventional view: Europe and Japan, our main trading partners, still had a long way to go to recover from the war even if their industries were becoming more competitive. They still needed to import from the United States. There was a chronic dollar shortage outside the United States. The fixed foreign exchange rates established at the end of the war were here to stay. There was no danger to America’s promise at the 1944 Bretton Woods monetary conference that it would convert dollars held by foreign governments to gold on demand. Don’t worry. Not my proudest moment. Those very concerns, arguably a bit premature at the time, would become central to my life a few years later.

Milton Friedman, openly and loudly, had been advocating much more radical action: a system of freely floating exchange rates which, in his view, would let the markets rapidly and efficiently correct international payment imbalances and better reconcile differences in national monetary policies. In effect, he was proposing to discard a major part of the Bretton Woods agreement and leave currencies to the whim of the (in his view, perfectly rational) market, without any concern for other countries’ wishes. His principal intellectual opponent was Bob Roosa, who argued that the 1930s experience amply demonstrated the instability that floating exchange rates could create, the very antithesis of the order embodied in the Bretton Woods agreement. In the United States and abroad there was still little support for simply abandoning fixed exchange rates. It was on my first visit as under secretary to a Working Party III meeting of the Organization for Economic Cooperation and Development (OECD)* in Paris that this point was made forcefully by one of my European counterparts.


pages: 209 words: 53,236

The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, bank run, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, Claude Shannon: information theory, Clayton Christensen, cloud computing, corporate governance, cryptocurrency, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, Home mortgage interest deduction, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, Jeff Bezos, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, Marc Andreessen, Mark Zuckerberg, Menlo Park, Metcalfe’s law, money: store of value / unit of account / medium of exchange, mortgage tax deduction, obamacare, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reserve currency, road to serfdom, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, secular stagnation, seigniorage, Silicon Valley, smart grid, South China Sea, special drawing rights, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, time value of money, too big to fail, transaction costs, trickle-down economics, Turing machine, winner-take-all economy, yield curve, zero-sum game

With Arthur Laffer and Milton Friedman, Mundell shaped the Reagan revolution in economics. Believing that reliable monetary values were a necessary complement to low tax rates in enabling economic growth, Mundell was an enthusiast for the monetary stability achieved under the Bretton Woods system. Named after the New Hampshire resort where the agreement was negotiated in 1944, toward the end of World War II, Bretton Woods ushered in twenty-five years of global economic growth of 2.8 percent per year, unequalled before or since. The golden age of Bretton Woods ended in 1971, when for the first time in more than two centuries most of the world’s economies, including the United States, cut all ties to gold. Counseling President Nixon on this historic decision was Milton Friedman, who believed that currencies should float against one another as they do today.

Negotiated in 1944 among all the Allied Powers at Bretton Woods, it made currencies convertible into dollars, which in turn were convertible into gold at thirty-five dollars an ounce. The fixed exchange rates of Bretton Woods provided the stability that lengthened the horizons of global investment and enterprise. Remaining in place throughout the postwar boom, they provided the monetary backing for global growth that averaged 2.8 percent per year for twenty-five years, a level unequaled before or since and almost double the growth rate since 1971. There were few defaults, no banking crises, and an efflorescence of innovation and progress in what even current prophets of “secular stagnation” regard as a golden age.3 After the end of Bretton Woods, in 1971, the monetary regime became mostly dependent on the politics of central banking, chiefly the U.S.

See also China, Chinese currency trading and, 67, 80, 101, 104–10, 128–29, 146 Dodd-Frank Act and, 5–6, 93–94 Great Depression and, 99 Great Recession and, xii–xiii, xvi, 32, 57, 90, 132–33 information technology and, 67 regulations and, 129–32 relationship with the Fed, xxii, 26, 32, 57–58, 123–24, 127, 132, 134 Baotou Steel Rare-Earth Hi-Tech Company, 48 BASF, 158 Beckworth, David, 35 Bernanke, Ben, xvii, 99, 114 Between Debt and the Devil (Turner), 88–89 Bezos, Jeff, 122 Bilton, Nick, 122 bin Laden, Osama, 121 bitcoin, 69–77, 79, 172–73 similarity to gold, 63–67, 72, 74, 78, 85–86, 158, 160–61, 163, 167 Boltzmann, Ludwig, 143, 173–74 bonds, 11, 15, 80, 101, 109, 114, 132, 137, 156, 162–63 Boston Consulting Group, 18 Brazil, Brazilians, 111, 118 Bretton Woods Conference, 2, 49, 151 Bretton Woods standard, 12, 41, 44, 151, 155 Buffett, Warren, 98, 130 Bush, George H. W., xvi Bush, George W., xvi C Canadians, 5 capital gains taxes, xi, xxii, 6, 94, 118, 152, 159 Capital in the Twenty-First Century (Piketty), 88 capitalism, xii, xviii, 4, 22, 25, 31, 48, 85, 89, 116–18, 124, 131, 151, 168 alleged failure of, 5 central rule of, 19 in China, 39, 45, 47–51, 69, 154 criticisms of, 56, 88, 93, 141 government harm to, 59, 110, 124 information theory of capitalism, 20, 24, 84 innovation and, 83 learning curves and, 18–19 Piketty and, 3 Capitalism and Freedom (Friedman), 31 Carnot, Sadi, 142 Carter, Jimmy, 11 Cato Institute, 29, 150 central banks, 20–21, 36–38, 48, 79, 94–95, 105, 116, 123, 136, 151, 155–57, 163 digital currencies as threat to, 44–45, 69, 79, 146–47 Keynesianism and, 171 monetarism and, 29, 31, 33–35, 51, 171–72 in New Zealand, 152 profits from seigniorage, 12, 79–80 quantitative easing and, 80, 123, 147 Turner and, 92 Chávez, Hugo, 46 Chicago Mercantile Exchange, 11 China, Chinese, 29, 39–51, 54, 76, 158 American criticisms of, 40–41, 45–47, 154 currency tied to the dollar, xvi, 14 economy of, 33, 38–51, 92, 106, 110, 116, 118, 154 Friedman’s and Gilder’s advice to, 29–30, 33, 42, 154 recovery from Great Recession, xvi Robert Mundell and, 43–44 Christianity, Christians, 39, 43 Cisco, 119, 160 Citibank, 104, 127 Clinton, Bill, xi, xvi, xxi, 51, 101, 115 Clinton, Hillary, xxii, 6 Coates, Ta-Nehisi, 4 Cold War, xi Communications Act of 1934, 5 communism, communists, 23, 30, 39, 42–43, 47, 50–51, 100 Congress, 26, 33 Connally, John, 99 conservatism, conservatives, xi, xvi–xviii, xx, 35–36, 58, 86, 88, 92 in Israel, 153 Consumer Financial Protection Bureau, 6 consumer price index (CPI), 58, 81–82 Cook, Tim, 122 crash of 2007–2008, xi, xvi–xvii, xxi, 36, 55, 89, 105, 132, 135.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

CHAPTER 2 The Global Money Glut The balance of payments commands, the balance of trade obeys, and not the other way round. —Eugen von Boehm-Bawerk1 When the Bretton Woods international monetary system broke down in 1971, something extraordinary began to happen. The central banks of some countries began printing fiat money and using it to buy the currencies of other countries. Before 1971, currencies were pegged either directly or indirectly to gold. Therefore, there was nothing to be gained by creating fiat money in order to buy any other country’s currency. When the fixed exchange rate system ended with the collapse of the Bretton Woods system, however, that changed. Gradually, it became apparent that a country could gain an export advantage if its central bank created fiat money and used it to buy the currencies of its trading partners.

Since countries could not manipulate gold’s value, trade imbalances were resolved by market-determined adjustments to the price level of both countries. The deficit country experienced falling prices and the surplus country experienced inflation. Those price trends continued until the balance of trade was restored. After the Bretton Woods system broke down in the early 1970s, however, currency values began to move up and down relative to one another—that is to say that currencies were floating rather than fixed. In this post–Bretton Woods arrangement, trade balances are the most important fundamental factor determining the long-term direction of exchange rate movements. A country with a trade surplus will normally experience an appreciating currency, while the currency of a country with a trade deficit will tend to depreciate.

Financial Account Balance, 1970 to 2007 Source: IMF An imbalance of investments on this scale was not possible under a gold standard. It would have involved the outflow of huge quantities of gold from the countries making the foreign investments. At a time when gold was money, the loss of so much gold would have caused a sharp contraction of the money supply and that would have created an economic crisis. In the post–Bretton Woods’ world, however, where money can be created on demand and without limit, the constraint previously imposed by a finite amount of money is no longer a concern. The investments that resulted in the extraordinary surplus on the U.S. financial account were funded with fiat money created by central banks outside the United States. This can be seen very clearly in Exhibit 2.3, which compares the annual increase in total foreign exchange reserves with the balance on the U.S. financial account.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

Charlemagne’s enlightened policies of uniformity, in combination with the continuity of local custom, exist today in the EU’s subsidiarity principle. The contemporary EU motto, “United in diversity,” could as well have been Charlemagne’s. ■ From Bretton Woods to Beijing The euro project is a part of the more broadly based international monetary system, which itself is subject to considerable stress and periodic reformation. Since the Second World War, the system has passed through distinct phases known as Bretton Woods, the Washington Consensus, and the Beijing Consensus. All three of these phrases are shorthand for shared norms of behavior in international finance, what are called the rules of the game. The Washington Consensus arose after the collapse of the Bretton Woods system in the late 1970s. The international monetary system was saved between 1980 and 1983 as Paul Volcker raised interest rates, and Ronald Reagan lowered taxes, and together they created the sound-dollar or King Dollar policy.

When the world returns to a gold standard, either by choice to create inflation, or of necessity to restore confidence, it will be crucial to have support from all the world’s major economic centers. A major economy that does not have sufficient gold will either be relegated to the periphery of any new Bretton Woods–style conference, or refuse to participate because it cannot benefit from gold’s revaluation. As in a poker game, the United States possessed all the chips at Bretton Woods and used them aggressively to dictate the outcome. Were Bretton Woods to happen again, nations such as Russia and China would not permit the United States to impose its will; they would prefer to go their own way rather than be subordinate to U.S. financial hegemony. A more equal starting place would be required to engender a cooperative process for reforming the system.

., involving alternative scenarios of a shooting war between Israel and Iran. Participants were given conventional military scenarios and then asked to assess the financial impact and show how financial weapons might be used as a force multiplier. On October 25, 2012, the Boeing Corporation conducted a financial war game during an offsite conference in Bretton Woods, New Hampshire. The conference was held at the historic Mount Washington Hotel, famous as the site of the 1944 Bretton Woods conference that established the international monetary system, which prevailed from the end of the Second World War until President Nixon closed the gold window in 1971. Although Boeing is a corporation and not a sovereign state, its interest in financial warfare is hardly surprising. Boeing has employees in seventy countries and customers in 150 countries, and it is one of the world’s largest exporters.


pages: 364 words: 112,681

Moneyland: Why Thieves and Crooks Now Rule the World and How to Take It Back by Oliver Bullough

banking crisis, Bernie Madoff, bitcoin, blood diamonds, Bretton Woods, BRICs, British Empire, capital controls, central bank independence, corporate governance, cryptocurrency, cuban missile crisis, dark matter, diversification, Donald Trump, energy security, failed state, Flash crash, Francis Fukuyama: the end of history, full employment, high net worth, if you see hoof prints, think horses—not zebras, income inequality, joint-stock company, liberal capitalism, liberal world order, mass immigration, medical malpractice, offshore financial centre, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, rent-seeking, Richard Feynman, risk tolerance, Sloane Ranger, sovereign wealth fund, WikiLeaks

In this dull but important introductory section (spoiler alert: Bond does succeed in defeating Goldfinger, but not before he gets entangled with the Chicago mob, foils a daring raid on Fort Knox and seduces a lesbian who has ‘never met a man before’), Colonel Smithers dissects the philosophical question at the heart of the Bretton Woods system. By modern standards, Goldfinger wasn’t doing anything wrong, apart perhaps from dodging some taxes. He was buying up gold at a price people were prepared to pay for it, then selling it in another market, where people were prepared to pay more. It was his money. It was his gold. So what was the problem? He was oiling the wheels of commerce, efficiently allocating capital where it could best be used, no? No, because that wasn’t how Bretton Woods worked. Colonel Smithers considered the gold to belong not only to Goldfinger, but also to Great Britain. The system didn’t consider the owner of money to be the only person with a say in what happened to it.

It was the first step in a steady dismantling of all the safeguards created at Bretton Woods. The philosophical question over who really owned money – the person who earned it, or the nation that created it – had been answered. If you had money, thanks to the accommodating bankers of London and Switzerland, you could do what you wanted with it and other governments could not stop you. If they tried, they just made the situation worse, like trying to firm up a leaky inner tube by squeezing it. Money kept heading offshore, however officials tried to stop it. As long as one country tolerated offshore, as Britain did, then the efforts of all the others came to nothing. (If only everyone had listened to Keynes and created an international currency at Bretton Woods, this would not have happened.) This, then, is the origin of the inevitable tension between borderless money and bordered states.

Disapproval of these surreptitious payments should not depend on whether they are benefiting your own side or not. They are inherently harmful. Without trust, liberal democracy cannot function. When representatives of the Allied powers met in Bretton Woods, New Hampshire, in July 1944, they had a keen awareness of the danger of the flow of uncontrolled money, and the power it has to spread instability and damage democracy. ‘A breach must be made and widened in the outmoded and disastrous economic policy of each-country-for-itself,’ wrote the US delegate, Harry Dexter White, in a memo to Treasury Secretary Henry Morgenthau, two years earlier. When Morgenthau himself addressed the opening conference at Bretton Woods, he reflected on the same theme: ‘the thread of economic life in every nation is inseparably woven into a fabric of world economy. Let any thread become frayed and the entire fabric is weakened.


pages: 234 words: 63,149

Every Nation for Itself: Winners and Losers in a G-Zero World by Ian Bremmer

airport security, banking crisis, barriers to entry, Berlin Wall, blood diamonds, Bretton Woods, BRICs, capital controls, clean water, creative destruction, Deng Xiaoping, Doha Development Round, energy security, European colonialism, failed state, global rebalancing, global supply chain, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), Julian Assange, Kickstarter, Martin Wolf, mass immigration, Mikhail Gorbachev, mutually assured destruction, Nelson Mandela, Nixon shock, nuclear winter, Parag Khanna, purchasing power parity, reserve currency, Ronald Reagan, smart grid, South China Sea, sovereign wealth fund, special economic zone, Stuxnet, trade route, uranium enrichment, Washington Consensus, WikiLeaks, Yom Kippur War

First, they wanted to build trade ties abroad to avoid a slide back into depression at home, to help create jobs for 11 million returning soldiers, and to extend the economic gains of the war. Second, they sought to promote democracy and thwart communism by containing the risk that European misery might provoke a third and even more destructive world war. At Bretton Woods, Treasury Secretary Henry Morgenthau Jr. delivered the closing remarks: We are at a crossroad, and we must go one way or the other. The Conference at Bretton Woods has erected a signpost—a signpost pointing down a highway broad enough for all men to walk in step and side by side. If they will set out together, there is nothing on earth that need stop them.8 The proposed destination was universal peace and prosperity, and the road was mapped and paved by the United States and its European allies.

Just as oil markets reached a game-changing moment earlier than most expected, so too did the central contradiction of the Bretton Woods Monetary Agreement. The system it created depended for stability on a U.S. commitment to provide two reserve assets, dollars and gold. Both were offered at a fixed price—gold, for example, could be redeemed at $35 an ounce—but while the supply of dollars was flexible enough to meet changes in demand, the supply of gold was not. In the late 1960s, U.S. government spending, particularly on the Vietnam War, fueled deep current-account and trade deficits. Inflation surged, and several European governments, concerned by a depreciating dollar and unwilling to weaken their own currencies to preserve the peg, demanded gold in exchange for large amounts of their dollar reserves. In response, President Richard Nixon terminated the Bretton Woods agreement. On August 15, 1971, he moved to “suspend temporarily the convertibility of the American dollar into gold or other reserve assets, except in amounts and conditions determined to be . . . in the best interests of the United States.”29 Though the White House described the move as temporary, it has never been reversed.

This is the G-Zero: Everyone is waiting for someone else to put out the fire. How did we reach this breakdown in the international order? FROM THE ASHES The road to the G-Zero begins at the height of American dominance. At the end of World War II, much of Europe lay in ruins for the second time in less than thirty years. Even before the war ended, representatives of forty-four nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, to lay the foundation for a new global economy. From the agreement signed there in July 1944 came the International Monetary Fund, the International Bank for Reconstruction and Development (which soon became part of what would be the World Bank), and a plan to establish new commercial and financial relations among nations and set exchange rates that tied the currencies of each member to the U.S. dollar.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

This was a revival of the Bretton Woods system for the small number within the EEC. The deutschmark was most often the strongest currency. It began to play the role the dollar had played in the Bretton woods system. But there was a crucial difference. The German Bundesbank had always followed orthodox monetary policy with strict control over money supply. There was no support for government debt through printing money. Germany (West Germany until the reunification in 1990) was the beacon of orthodox public finance and monetary policy. It had a sound balance of payments and a strong currency. It seemed to many European countries that they should benefit from an arrangement where the deutschmark became the anchor. Membership of the ERM meant operating within certain rules. As in Bretton Woods, if a country’s currency depreciated away from the allowed bands, deflationary policies would have to be adopted until the currency was brought back under control.

Apart from being the sixtieth anniversary of Indian independence, it was also the thirty-sixth anniversary of the day on which President Richard Nixon announced that the US would renege on its obligation to buy gold at $35 an ounce. That obligation had been the foundation of the postwar system of exchange rates known as the Bretton Woods system. It was named after the town in New Hampshire where in July 1944 the Allies had met and hammered out the postwar order for international monetary relations. The Bretton Woods system kept all exchange rates fixed in relation to the dollar, while the dollar was fixed in terms of gold. This was the Dollar Exchange Standard. It replaced the Gold Standard that had been around for 300 years prior to World War II. Nixon’s rejection of the obligation to buy gold at a fixed price ushered in an era of flexible exchange rates.

He believed that countries running surplus should make an equal effort at importing more, whereby their surpluses would go down and help the deficit countries to export more. The Americans, who were going to be the sole surplus country in the immediate postwar period, did not fancy being compelled to adapt their policy to outside diktats. Keynes’s version of the Bretton Woods system was not accepted in its entirety. Keynes’s plan of creating a common currency for the world was also not acceptable in the circumstances. At Bretton Woods, instead of the Gold Standard, the outcome was the dollar exchange standard, with the dollar’s value fixed in terms of gold. The US agreed to buy and sell gold at $35 an ounce, as the Bank of England had done before World War I (at £3 17s 10½d). But gold was not to circulate domestically, nor would citizens be allowed to present gold bullion for coinage.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

As we have already discussed, when the underlying value of money is put in question, the ramifications extend from the top to the bottom of the monetary hierarchy: from the institutions responsible for the governance of world money, to the workers, consumers, and pensioners whose very livelihoods are put at stake by the dynamics of inflation and deflation. Harvey cites Roosevelt’s New Deal as one major example of these forces at work. Two more recent instances that I want to discuss here are the aftermath of the collapse of the Bretton Woods regime, which saw major struggles between capital and labor being waged against the background of a new international regime of floating exchange rates, and the ongoing crisis within the Eurozone, whose devastating effect across classes and generations is still being played out. One of the classic analyses of the Bretton Woods crisis from the perspective of Marx’s theory of money and credit was advanced by Christian Marazzi in his 1976 paper, “Money in the World Crisis” (Marazzi 1995). Marazzi, an economist, is one of several Marxist thinkers who explored the theoretical implications of post-Fordism (Marazzi 2008, 2010).

There is, in short, a structural connection among money, credit, and class politics, which in the first instance is expressed through wage costs.30 Marazzi deals with the issue of how to define the monetary base in the absence of gold by focusing on power. He suggests that sterling, and subsequently the dollar, had already displaced gold as the “money of all monies” long before the Bretton Woods system collapsed. Increasingly the international power of states, not gold, determined the value of all currencies.31 Credit was increasingly being created ex nihilo, no longer based on accumulated surplus value but on no existing value whatsoever. The demise of Bretton Woods made it impossible for money to maintain even the appearance of being detached from basic struggles over wages. Money and credit now had to take sides in social struggle because their underlying value increasingly depended not on a relationship with gold, however tenuous that relationship might have been, but—directly and explicitly—on their capacity to command labor.

Money and credit now had to take sides in social struggle because their underlying value increasingly depended not on a relationship with gold, however tenuous that relationship might have been, but—directly and explicitly—on their capacity to command labor. In other words, if the underlying value of money was to be sustained, workers would have to pay the price through lower wages. This arrangement, Marazzi argues, was the key problem that states increasingly faced after Bretton Woods. Money became the site of an explicit assertion of state power against the working class. Money lost its mystical appearance. Its apparent independence from politics, and its quality as a thing, were exposed as illusory. Money’s social life, in all of its depth and complexity, came brutally to the fore. Given that the Bretton Woods system was international in scope, the international ramifications of its collapse must also be understood. The demonetarization of gold had had a direct negative effect on Italy, France, and Portugal, whose reserves were dependent on the gold price, and upon the Soviet Union, which used gold to settle its accounts with the outside world.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

eBook <www.wowebook.com> world economy was based on a set of arrangements worked out at the conference of allied finance ministers (which effectively meant the United States and the United Kingdom) at Bretton Woods, New Hampshire, in 1944, with Lord Keynes providing many of the key concepts. To grossly simplify, in the Bretton Woods system, the world’s currencies were effectively pegged to the US dollar in place of the old gold standard, but the US dollar had to maintain a link to gold. Bretton Woods created a new international institution, the International Monetary Fund (IMF), which pooled resources of participating countries in order to make funds available to help them make adjustments necessitated by balance-of-payment problems. The key weakness in the Bretton Woods system was that it required monetary discipline on the part of the United States, whose dollar was in effect the new gold, the anchor for all other currencies.The United Kingdom understood its role as issuer of the global reserve currency and played it well until it could no longer afford it.

The simple fact was (and remains) that the US government could print money without limit if it chose to, and in the 1970s it did so with a vengeance to finance a vast expansion of social spending and the Vietnam War without raising taxes. Other countries got stiffed as America paid its bills in dollars of diminishing value. The Bretton Woods deal included a gold window, where dollar claims could be converted, but the United States lacked the gold. So, over a weekend, with no consultations, the United States blew up the Bretton Woods system, closing the gold window. This kicked off the Great Inflation, and it ushered in an era of floating exchange rates that we are still living with today. OPEC, an attempt by oil producers to use cartel tactics to raise the price of their commodity (priced in dollars) in nominal terms to make up for the fall in the real value of the dollar, was a key side effect.

However, everyone had cheerfully lived with this way of settling foreign exchange trades for generations up to 1971.There just wasn’t that much business under the stable rates of Bretton Woods or the gold standard before. Then, overnight, the global foreign exchange market grew by leaps and bounds as currencies were allowed to float against each other in market trading. This is where the revolution in technology comes into play. If there is a great deal of friction in making a market transaction, as Nobel Prize–winning economist Ronald Coase pointed out 80 years ago, it will tend to be replaced by bureaucratic command and control or not occur at all. This is why so much “business” takes place within huge corporations instead of free markets. Bretton Woods was very much a bureaucratic solution worked out between governments. Ending it opened up a huge scope for market transactions overnight, but the friction encountered was monumental.The key steps in a market transaction are finding a counterparty to take the other side of the trade; qualifying the counterparty as trustworthy; price discovery, which is essentially using the market to determine if the counterparty is offering or taking a fair price; executing the trade—essentially making a contract; and settling the trade (i.e., paying or getting paid).


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, anti-communist, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, failed state, falling living standards, family office, financial deregulation, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global supply chain, high net worth, income inequality, index fund, invisible hand, Jeff Bezos, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price mechanism, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, The Chicago School, Thorstein Veblen, too big to fail, transfer pricing, wealth creators, white picket fence, women in the workforce, zero-sum game

So in 1944, under the intellectual guidance of Keynes and in the dominating presence of his US counterpart Harry Dexter White, the world’s most advanced countries got together at Bretton Woods in New Hampshire and hammered out an agreement to set up a global system of negotiated cooperation, to curb flows of financial capital across borders and to protect countries from these destabilising tides of hot money. The system had a shaky start: from 1945 to 1947 Wall Street interests forced through a brief financial liberalisation which caused huge waves of capital flight from war-shattered Europe, as rich Europeans sent their wealth overseas to escape having to pay for reconstruction. But fears of a communist takeover in Europe soon focused policymakers’ minds, and the Bretton Woods system was at last given teeth. Bretton Woods was a remarkable system and almost unimaginable today. Cross-border finance was heavily constrained, while trade remained fairly free.

So when the world’s leading nations put together the Bretton Woods architecture at the end of the war, power had shifted decisively across the Atlantic to Washington, and Keynes and the British establishment failed in their attempts to fashion the new system in a way that would restore Britain to its self-appointed place at the centre of world economic affairs. The empire staggered on for a few years but by then it was an empty shell, ready to crack. It may seem counter-intuitive, but Britain entered its greatest period of broad-based prosperity and economic growth at precisely the moment the City of London was at its lowest ebb. This was no coincidence, for it was a reflection of the age-old clash between finance and other parts of the economy. The Bretton Woods restrictions, preventing speculative financial flows across borders, brought this clash into the sharpest possible relief.

The Bretton Woods restrictions, preventing speculative financial flows across borders, brought this clash into the sharpest possible relief. By the 1950s, members of the City of London could only look with envy at the giant, fragmented yet fast-growing global marketplace which the Bretton Woods controls had now mostly placed out of their reach. Bottling up City activities inside Britain’s war-shattered domestic economy plus the remaining British territories and outposts that still used the pound sterling was bad enough for City profits, but the Bretton Woods system also gave the British government the freedom to impose high taxes on the rich, and strong financial regulations. Heavily constrained, the City became suffused with lethargy. ‘I fear that the various ancient businesses of London have practically come to an end, or continue more as shadows,’ a British official wrote in 1947.3 Oliver Franks, the chairman of Lloyds Bank, lamented that his daily job was ‘like dragging a sleeping elephant to its feet with your own two hands’.


pages: 409 words: 118,448

An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy by Marc Levinson

affirmative action, airline deregulation, banking crisis, Big bang: deregulation of the City of London, Boycotts of Israel, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, car-free, Carmen Reinhart, central bank independence, centre right, clean water, deindustrialization, endogenous growth, falling living standards, financial deregulation, floating exchange rates, full employment, George Gilder, Gini coefficient, global supply chain, income inequality, income per capita, indoor plumbing, informal economy, intermodal, invisible hand, Kenneth Rogoff, knowledge economy, late capitalism, linear programming, manufacturing employment, new economy, Nixon shock, North Sea oil, oil shock, Paul Samuelson, pension reform, price stability, purchasing power parity, refrigerator car, Right to Buy, rising living standards, Robert Gordon, rolodex, Ronald Coase, Ronald Reagan, Simon Kuznets, statistical model, strikebreaker, structural adjustment programs, The Rise and Fall of American Growth, Thomas Malthus, total factor productivity, unorthodox policies, upwardly mobile, War on Poverty, Washington Consensus, Winter of Discontent, Wolfgang Streeck, women in the workforce, working-age population, yield curve, Yom Kippur War, zero-sum game

When the carnage was over, one dollar bought only half as many deutsche marks as it had six years earlier, and just two-thirds as many yen. The dollar-based Bretton Woods system of fixed exchange rates was dead.5 Central bankers were prominent among the mourners, for many of them held a nearly religious belief in the importance of fixed exchange rates. “The Sunday meeting of the governors was marked by an atmosphere of gloom that could not be wholly attributed to the weather,” US Federal Reserve governor Jeffrey Bucher reported after meeting with his counterparts in Switzerland. But the central bankers’ concerns didn’t much matter: the decision to abandon Bretton Woods was irreversible. More consequential was the displeasure of the oil-exporting countries. They had always priced their product in US dollars, but the dollar’s collapse meant that each million barrels of oil would buy fewer German trucks and Japanese I-beams.

From his ornate ground-floor office in Threadneedle Street, opening onto the monastic stillness of an interior garden planted with mulberry trees, the governor of the Bank of England may have exercised greater authority than any other central banker in the world.3 But as Richardson took charge at the Bank, that authority was under threat. Under the Bretton Woods system, governments had maintained a host of regulations to control interest rates and limit the movement of money in order to keep exchange rates fixed. As Bretton Woods blew apart in the early 1970s, however, many of those restrictions were abandoned. Disregarding national borders, money began flowing to places where it could earn higher returns or go untaxed. Much of it ended up in London, the premier international banking center, in accounts denominated in US dollars. A large portion of that money was owned by the oil states of the Middle East and North Africa, which were taking in unprecedented quantities of dollars as they pushed up the price of oil.

Hetzel, “Arthur Burns and Inflation,” Federal Reserve Bank of Richmond Economic Quarterly 84 (Winter 1998): 21–84. 5. The description of the Bretton Woods agreement in this paragraph is extremely simplified. For more background, see Barry Eichengreen, Globalizing Capital: A History of the International Monetary System, 2nd ed. (Princeton, NJ: Princeton University Press, 2008), 91–133. 6. Michael D. Bordo, Ronald MacDonald, and Michael J. Oliver, “Sterling in Crisis, 1964–1967,” European Review of Economic History 13 (2009): 437–459; Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford: Oxford University Press, 2011). Many of the problems that would develop from the Bretton Woods arrangements were described in 1959 by the economist Robert Triffin; see his book Gold and the Dollar Crisis (New Haven, CT: Yale University Press, 1960). 7.


pages: 215 words: 64,460

Shadows of Empire: The Anglosphere in British Politics by Michael Kenny, Nick Pearce

battle of ideas, Berlin Wall, Boris Johnson, Bretton Woods, British Empire, colonial rule, corporate governance, Dominic Cummings, Donald Trump, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, Francis Fukuyama: the end of history, full employment, global reserve currency, imperial preference, informal economy, invention of the telegraph, Khartoum Gordon, labour mobility, liberal capitalism, Mahatma Gandhi, mass immigration, Monroe Doctrine, Nixon shock, quantitative easing, reserve currency, Ronald Reagan, trade route, Washington Consensus

These issues were thrown into relief by the deal struck with the Americans at the Bretton Woods negotiations of 1944, which sought to establish the template for a new economic settlement based upon the convertibility of the dollar and the American ambition to build new global institutions – notably the IMF and the World Bank – under their own tutelage, and indeed on their own soil. The British delegation, led by the celebrity economist John Maynard Keynes, proved unable, in the face of their American counterparts' support for a more extensive liberalisation of the international economy, to make headway with their proposals for an open, world trading system suitably modified to protect Britain's imperial interests: ‘At every step to Bretton Woods, the Americans had reminded [the British], in as brutal a manner as necessary, that there was no room in the new order for the remnants of British imperial glory.’14 The deal agreed at this summit lasted only a short period of time, giving way in 1947 to the Marshall Plan launched by the USA with the goal of reconstructing Western Europe's shattered economies.

This was for a country that had a higher national income per head than the UK or any of the EEC Six. Nixon's Shock Therapy While the fate of New Zealand dairy farmers was being debated, Nixon administered his ‘shock’ to the global economy, unilaterally detaching the dollar from its fixed value against gold and breaking apart the fixed currency exchange rates that had anchored the Bretton Woods system. The USA had designed the Bretton Woods framework when it was a creditor country. By the 1960s it was a deficit nation, whose very success in reconstructing the post-war capitalist world economy had led to persistent trade deficits with Western Europe and Japan. It was simultaneously embarking on major rises in military and social spending under conditions of full employment and, in so doing, putting enormous pressure on the dollar.

As the 1970s ended, Britain and the USA began the process of constructing a new neo-liberal political economy, with the financial sector at its heart. The collapse of the Bretton Woods system also brought to a close an extended period of transition for Great Britain, the Commonwealth and her former colonies. By the early 1970s, little was left of the late Victorian doctrines that had shaped Churchill's worldview. The post-war world saw the gradual, but inexorable, diminution of economic ties with these countries, hastened in the late 1950s by currency convertibility and the rise of Western European markets. Britain had shared in the management of the Bretton Woods system, since the United States had an interest in the stability of sterling. But the UK had been eclipsed by the economic performance of the Western European economies, and also by Japan and the USA itself.


pages: 438 words: 109,306

Tower of Basel: The Shadowy History of the Secret Bank That Runs the World by Adam Lebor

banking crisis, Basel III, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, central bank independence, corporate governance, corporate social responsibility, deindustrialization, eurozone crisis, fiat currency, financial independence, financial innovation, forensic accounting, Goldman Sachs: Vampire Squid, haute cuisine, IBM and the Holocaust, Kickstarter, Occupy movement, offshore financial centre, Ponzi scheme, price stability, quantitative easing, reserve currency, special drawing rights

With such enormous sums moving around the increasingly globalized economy, it was becoming more clear that the world would need a new international financial system to finance postwar reconstruction and stabilize trade. In July 1944 more than seven hundred delegates from the forty-four Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference. Henry Morgenthau and Harry Dexter White led the American delegation. The conference agreed on the creation of the International Monetary Fund (IMF) and an International Bank for Reconstruction and Development (BRD), which became part of the World Bank. The IMF would monitor exchange rates and lend reserve currencies to indebted countries. The new bank would provide loans to underdeveloped countries. Bretton Woods also gave its name to a new international currency exchange system, where currencies were linked to the US dollar. In exchange the United States agreed to fix the price of gold at $35 an ounce.

See Bank for International Settlements The BIS at Work (Eleanor Dulles), 32 BIS committees Basel Committee on Banking Supervision, xx, xxi–xxii, 207–208, 240–242, 256, 257 Committee on Gold and Foreign Exchange, 189 Economic Consultative Committee, xii–xiii, 259 German Credits Arbitration Committee, 74, 76 Global Financial System, xxii, 239, 250 Markets Committee, xvi, 189 Black, Edwin, 105 Black, Eugene, 142, 144, 192 Blair & Company, 169 Blessing, Karl arrest and imprisonment of, 185 as board member of Kontinental-Öl, 184–185 Coombs’ opinion of, 181 on own career, 194 powerful allies of, 185, 186, 187 role of in Nazi Germany, 182–183 view of BIS as political institution, 27–28 Blondheim, David, 32 Bod, Peter Akos, xiii, xxi, 248 Bogni, Rudi, 265 Boisanger, Yves Bréart de, 85 Bonaparte, Napoleon, 29 Booktab, 102 Bosch company, 118 Boughton, James M., 141 Bracken, Brendan, 62 Brazil, xi Bretton Woods Accord, xvi Bretton Woods Conference (1944), 121–125 Brinckmann, Rudolf, 149–151, 176, 192, 197–198 Brinckmann, Wirtz and Company bank, 149–150, 176, 197 Britain BIS, attitude toward, 89, 123–124, 139 in European Payments Union, 167 as founding member of BIS, xvii, 20 gold reserves of, 55 gold standard and, 42 n London Gold Pool, 188 Spanish civil war, view of, 56 World War I reparations, 5, 28, 39 British Security Coordination, 101–102 British Treasury, 110 Brown Brothers Harriman bank, 145–146 Bruning, Heinrich, 28 Bütefisch, Heinrich, 184 Bulgaria, 87, 184 Buna, 100 Bundesbank, xx, 191, 219, 244, 263, 264 Burckhardt, Martin, 199 Burgess, W.

They set interest rates, thus deciding the value of our savings and investments. They decide whether to focus on austerity or growth. Their decisions shape our lives. The BIS’s tradition of secrecy reaches back through the decades. During the 1960s, for example, the bank hosted the London Gold Pool. Eight countries pledged to manipulate the gold market to keep the price at around thirty-five dollars per ounce, in line with the provisions of the Bretton Woods Accord that governed the post–World War II international financial system. Although the London Gold Pool no longer exists, its successor is the BIS Markets Committee, which meets every other month on the occasion of the governors’ meetings to discuss trends in the financial markets. Officials from twenty-one central banks attend. The committee releases occasional papers, but its agenda and discussions remain secret.


pages: 586 words: 160,321

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency peg, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Martin Wolf, mittelstand, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, the payments system, too big to fail, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

But France did not like the extent to which it relied on the US dollar, and General de Gaulle famously tried to revive gold as an alternative. Greatly influenced by the economist Jacques Rueff, de Gaulle had repeatedly insisted that a genuine gold standard would work better than the mixed gold-dollar system of the Bretton Woods regime. The Bretton Woods regime allowed for occasional realignments, but still—as in any fixed exchange rate system—the adjustment problem always loomed large. Tensions particularly rose in the later stages of the Bretton Woods system, especially in the later 1960s, as Germany increasingly built up trade surpluses that reflected a favorable development of productivity gains as well as the containment of wage costs through a collaborative and collective approach to wage setting. (Trade surpluses would become the hallmark of late twentieth-century German-style capitalism.)

In a world where trade deficits can be financed via credit extended from surplus to deficit countries, however, this mechanism does not work anymore as there is no compulsion to adjust. Explicit policy interventions are thus needed to move the price levels in the desired directions. This important caveat illustrates well the importance of capital flow considerations in the analysis of international monetary arrangements. Bretton Woods After World War II, the gold standard was succeeded by the Bretton Woods system, a system of fixed exchange rates (with occasional realignments) and constraints on capital flows that was explicitly designed to give more monetary policy autonomy. At the heart of this system was the US dollar as its leading currency. All currencies were fixed against the dollar, and the dollar itself traded at a fixed rate against gold. This system was clearly closer to the French than to the German ideal.

Meanwhile, Germans often complained that the structure and training of their civil service made it difficult to get high-level representation in international institutions, including the IMF. Since the IMF was created at the International Monetary Conference of the United Nations in 1944, held in Bretton Woods, New Hampshire, there have been eleven managing directors (heads of the IMF), all of them European. The fact that all managing directors (MD) were European was a matter of chance: the principal American architect of the Bretton Woods agreement, Harry Dexter White, was the obvious candidate to be the first MD, but he was accused of being a Soviet spy, with the result that an American became head of the World Bank and a non-American—in practice always a European—headed the IMF. Of the eleven, five were French, and all of them profoundly influenced the development of the Fund in transitional moments: when the fixed exchange rate system broke down, during the Latin American debt crisis, after the collapse of communism, and then during the euro crisis.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

The second reason for the decline of financial repression was the collapse of the Bretton Woods Agreement in 1971–73. Its demise was due in part to the accumulation of US dollars abroad which propelled the growth of ‘Euromarkets’. International dollar hoards increased as the US economy registered persistent trade deficits, leading to growing inability of US authorities to honour the pledge of converting the dollar into gold at a fixed price. The accumulation of dollars became even greater after the first oil shock of 1973, thus catapulting the Euromarkets toward further growth.9 The failure of Bretton Woods was a reflection of the changing balance in the world market as the relative weight of the US economy declined. For our purposes, however, what matters is that the collapse of Bretton Woods eventually led to lifting controls on the capital account.

At the same time, the productive sector in mature countries has exhibited mediocre growth performance, profit rates have remained below the levels of the 1950s and 1960s, unemployment has generally risen and become persistent, and real wages have shown no tendency to rise in a sustained manner. An asymmetry has emerged between the sphere of production and the ballooning sphere of circulation. The rise of finance has been predicated on a radical alteration of the monetary framework of capitalist accumulation, both internationally and domestically. International monetary conditions have been stamped by the collapse of the Bretton Woods Agreement in 1971–73. Bretton Woods had enforced the convertibility of the US dollar into gold at $35 to the ounce, thus fixing exchange rates during the long boom. Its collapse led to the gradual emergence of alternative international monetary arrangements based on the US dollar functioning as inconvertible quasi-world-money. The new arrangements have generated considerable instability of exchange and interest rates, thereby spurring the growth of international financial markets.

Exchange rates among key countries have become flexible since the final collapse of the Bretton Woods Agreement in 1973, and cross-border capital flows have been progressively deregulated. These forms of state intervention – both of which have again been associated with the international role of money – have encouraged the spread of financialization in ways discussed in chapters 8, 9 and 10. Central banking as a lever of financialization: Independent central banks and inflation targeting The importance of central banks in advanced capitalism derives, first and foremost, from control over legal tender. The ascendancy of central banks in the years of financialization has been ultimately linked to the search for a new framework of monetary operations in the 1990s and 2000s. The years that immediately followed the collapse of the Bretton Woods Agreement in 1971–73 were marked by rapid price inflation, indicating problematic management of valueless money as well as the malfunctioning of money as unit of account.


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Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

"Robert Solow", bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Such an effort to reconcile market prices with social values could surprise politicians with its economic effects: On any reasonable measure of economic performance, putting high prices on public goods and environmental resources would lead to higher, not lower, economic growth. Currencies and Financial Relations: Will There Be a New Bretton Woods? A comprehensive reform of the global currency system has been widely demanded in the aftermath of the crisis. The French, Chinese, and many other governments have called for a new Bretton Woods and for a new international reserve currency to replace the dollar. These calls have sometimes been endorsed by such prominent U.S. and British policymakers as Paul Volcker and Gordon Brown. Yet a diminution in the international role of the dollar, or a return to the fixed currencies of the postwar period, are extremely unlikely in the decades ahead.

Exchange rate flexibility gave governments around the world the freedom to cut interest rates and to support their economies with fiscal stimulus that could never have been imagined in the days of Bretton Woods. Conversely, the financial turmoil that engulfed the eurozone after the worst of the banking crisis was over in other countries reminded the world of the dangers of long-term commitments to fixed exchange rates and of the immense costs of defending currencies in a system disturbingly reminiscent of the gold standard of the 1930s. Any reversion to fixed exchange rates, still less to a gold-based system such as Bretton Woods, therefore seems out of the question. Since 1971, the world has lived without any monetary standard for the first time in history, and this is not about to change. Pure paper money is simply too powerful and too useful to be uninvented—like nuclear weapons, penicillin, or the pill.

The Myth of National Bankruptcy The Myth of Burdening Our Grandchildren The Real Case for Tackling Deficits Japanese-Style Paralysis and Zombie Banks The Great Rebalancing of Global Growth Stagflation CHAPTER SEVENTEEN - Politics in Capitalism 4.0 Conservatives Will Keep Winning Until Progressives Find a Narrative More Government Means Smaller Government Democracy Means Less Power for Public Opinion Bigger Deficits Are Necessary but Impossible Priorities: Less Spending and More Taxes International Experience: Learning from Others’ Mistakes Commanding Heights: As Socialism Has Retreated, It Has Won Health Reform: More Government and More Market Health Care Reform Will Become a Conservative Issue Progressives Will Fight for Less Progressive Taxes CHAPTER EIGHTEEN - Finance and Banking in Capitalism 4.0 Finance Is Indispensable Uncertainty and Guarantees Regulation Capital Structures Accounting Credit Ratings and Macroeconomic Assumptions Mortgage Market Reform Fiduciary Duty and Government as a Silent Partner Bankers’ Earnings and Bank Profits Talent and Plunder CHAPTER NINETEEN - The World of Capitalism 4.0 Global Competition between the United States and China Convergence between the United States and Europe The Rivalry of Western and Asian Values Business Interests Will Embrace the New Model Trade and Industrial Structures Limits to Growth and Physical Resources The Environment Can Become a Positive Economic Story Prosperity without Growth Currencies and Financial Relations: Will There Be a New Bretton Woods? Will Global Governance Be Strengthened to Resolve Global Problems? Notes Bibliography Acknowledgements Index Copyright Page In memory of my late parents, Jacob and Esther Kaletsky, who experienced true calamities and crises—the Russian Revolution, the two world wars, the Holocaust, the purges of Stalin—but whose joyful and indomitable spirits lived on. Introduction THE WORLD DID NOT END.


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Postcapitalism: A Guide to Our Future by Paul Mason

Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, microservices, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, WikiLeaks, women in the workforce

The post-war arrangements had effectively locked away instability into two zones of control: relations between currencies and relations between classes. Under the Bretton Woods rules, you were not supposed to devalue your currency to make your exports cheap and boost employment. Instead, if your economy was uncompetitive, you could either protect yourself from international competition through trade barriers, or impose ‘internal devaluation’ – cutting wages, controlling prices, reducing the amount spent on welfare payments. In practice, protectionism was discouraged by the Bretton Woods rules and wage cutting was never seriously attempted until the mid-1970s – which left devaluation. In 1949, Britain devalued Sterling by 30 per cent against the dollar and twenty-three other countries followed suit. A total of 400 official devaluations took place before 1973. So, from the outset, Bretton Woods was a system where states were repeatedly trying to offset their economic failings by manipulating their exchange rates against the dollar.

THE POWER OF EXPLICIT RULES On 1 July 1944, a special train delivered a cargo of economists, statesmen and bankers to White River Junction, Vermont, from where they were ferried to a hotel in New Hampshire. ‘All trains, regular or scheduled, had to look out for us,’ the train’s fireman remembered, ‘we had the right over everything.’14 Their destination was Bretton Woods. There they would design a global monetary system that, like the train, had ‘the right over everything’. The Bretton Woods Conference agreed a system of fixed exchange rates designed to restore pre-1914 stability, only this time with explicit rules. All currencies would be pegged against the dollar, and the USA would peg the dollar to gold at $35 an ounce. Countries whose trade balance became seriously out of kilter would have to buy or sell dollars to keep their own currency at the agreed peg.

Because the banking regulations acted as an effective tax on financial assets, economists calculate they raised the equivalent of a fifth of all government income during the boom, even more in the UK.18 The result was to shrink advanced country debts to a historic low of 25 per cent of GDP by 1973. In short, Bretton Woods achieved something unprecedented: it shrank the debts run up during a global war, suppressed speculation, mobilized savings into productive investment and enabled spectacular growth. It pushed all the latent instability of the system into the sphere of relationships between currencies, but US dominance ensured these were, at first, contained. Right-wing outrage over the inflationary aspect of Bretton Woods was overcome by the greatest period of stability and full production ever known. Keynes had emphasized, at the design stage the importance of explicit rules – going beyond the gentlemen’s agreement that lay behind the Gold Standard.


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Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, structural adjustment programs, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

Kirschner, eds., The Great Wall of Money (Ithaca, NY: Cornell University Press, 2014). For the original, see “Zhou Xiaochuan: Reform the International Monetary System,” March 23, 2009, http://www.pbc.gov.cn/english/130724/2842945/index.html. 34. J. Zhongxia, “The Chinese Delegation at the 1944 Bretton Woods Conference: Reflections for 2015,” https://www.omfif.org/media/1067515/chinese-reflections-on-bretton-woods-by-jin-zhongxia.pdf. 35. M. P. Dooley, D. Folkerts-Landau and P. Garber, “The Revived Bretton Woods System,” International Journal of Finance and Economics 9, no. 4 (October 2004), 307–313. 36. On the China rebalancing effort, see B. Setser, “The Balance of Financial Terror, Circa August 9, 2007,” https://www.cfr.org/blog/balance-financial-terror-circa-august-9-2007. 37. UN, “Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System,” New York, September 2009. 38.

But money and credit and the structure of finance piled on them are constituted by political power, social convention and law in a way that sneakers, smartphones and barrels of oil are not. At the apex of the modern monetary pyramid is fiat money.28 Called into existence and sanctioned by states, it has no “backing” other than its status as legal tender. That uncanny fact became literally true for the first time in 1971–1973 with the collapse of the Bretton Woods system. Under the Bretton Woods agreement of 1944, the dollar, as the anchor of the global monetary system, was tied to gold. This was itself, of course, no more than a convention. When it became too hard for the United States to live with—upholding it would have required deflation—on August 15, 1971, President Nixon abandoned it. This was a historic caesura. For the first time since the advent of money, no currency in the world any longer operated on a metallic standard.

It was no more reducible to Wall Street than the manufacture of iPhones can be reduced to Silicon Valley. Dollar hegemony was made through a network. It was by way of London that the dollar was made global.19 Driven by the search for profit, powered by bank leverage, offshore dollars were from the start a disruptive force. They had scant regard for the official value of the dollar under Bretton Woods and it was the pressure this exercised that helped to make the gold peg increasingly untenable. When the final collapse of Bretton Woods coincided in 1973 with the surge in OPEC dollar revenue, the rush of offshore money through London’s eurodollar accounts became a flood. By the early 1980s both Britain and the United States had abolished all restrictions on capital movements and this was followed in October 1986 by Thatcher’s “Big Bang” deregulation. The City of London was thrown open to outside investment, sacrificing guildlike structures that dated back centuries to the imperative of creating a genuinely global financial center.


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SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bernie Sanders, Black Swan, Blythe Masters, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, longitudinal study, Mark Zuckerberg, mass immigration, McMansion, mittelstand, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, plutocrats, Plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, social intelligence, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, The Rise and Fall of American Growth, too big to fail, women in the workforce, young professional

Another influential think tank is the Council on Foreign Relations, whose board of directors includes former U.S. treasury secretary Robert Rubin, Larry Fink of BlackRock, and Steve Schwarzman of Blackstone. The ones I am personally most familiar with are the Group of Thirty, the Bretton Woods Committee, and the Institute of New Economic Thinking (INET). The Group of Thirty18 focuses on economic issues, and its board includes the heads of the ECB, the Bank of England, BlackRock, and UBS. The Bretton Woods Committee19 examines international economic cooperation and counts Larry Summers, George Soros, Klaus Schwab, and many central bank governors on its board. Both the Group of Thirty and the Bretton Woods Committee congregate during the meetings of the IMF, therefore taking advantage of all the power players being in one place. INET works on reforming economic theories to better serve economies.

“Networking Can Make Some Feel Dirty Says New Study,” Rotman School of Management, press release, September 10, 2014, http://www.eurekalert.org/pub_releases/2014-09/uotr-ncm091014.php. 17. Adam M. Grant, Give and Take: Why Helping Others Drives Our Success (New York: Penguin Group, 2013), Kindle edition. 18. “Current Members,” Group of Thirty, http://group30.org/members. 19. “About the Bretton Woods Committee,” The Bretton Woods Committee, http://www.brettonwoods.org/page/about-the-bretton-woods-committee. CHAPTER 7 1. Adam Smith, The Money Game: Lunch at Scarsdale Fats’ (New York: Open Road Media, 2015), Kindle location 2874, Kindle edition. 2. Susan Pulliam, Kate Kelley, and Carrick Mollenkamp “Hedge Funds Try ‘Career Trade’ Against Euro,” Wall Street Journal, February 26, 2010, http://www.wsj.com/articles/SB1000142405274870379500457508774184807439. 3.

INET works on reforming economic theories to better serve economies. It was founded by George Soros, and the organization quickly found support from other financiers. Its gatherings are prime examples of executive networking, as they attract a truly mind-blowing assortment of Nobel Prize laureates and otherwise überaccomplished academics, central bankers, and top financial executives. INET: Connecting the Connected at Bretton Woods The first INET conference I attended took place in Bretton Woods, in New Hampshire’s White Mountains. Together with George Soros and his team, I took a private plane from Teterboro Airport in New Jersey and arrived an hour later at Mount Washington Regional Airport. It was early April, and the majestic Appalachian Mountains were still covered in snow. A minibus picked us up and made a detour to an observation deck to let us take in the imposing, rugged landscape.


Rogue States by Noam Chomsky

anti-communist, Asian financial crisis, Berlin Wall, Branko Milanovic, Bretton Woods, business cycle, capital controls, collective bargaining, colonial rule, creative destruction, cuban missile crisis, declining real wages, deskilling, Edward Snowden, experimental subject, Fall of the Berlin Wall, floating exchange rates, land reform, liberation theology, Mikhail Gorbachev, Monroe Doctrine, new economy, oil shock, RAND corporation, Silicon Valley, strikebreaker, structural adjustment programs, Tobin tax, union organizing, Washington Consensus

A second was the political order articulated in the UN Charter; the third the economic order formulated at Bretton Woods. Let us take a brief look at these components of the projected international system, focusing on the human rights dimension. The Bretton Woods system functioned into the early 1970s, a period sometimes called the “Golden Age” of post-war industrial capitalism, marked by high growth of the economy and progress in realizing the socioeconomic rights of the UD. These rights were a prominent concern of the framers of Bretton Woods, and their extension during the Golden Age was a contribution to translating the UD from “pious phrases” and a “letter to Santa Claus” to at least a partial reality. One basic principle of the Bretton Woods system was regulation of finance, motivated in large part by the understanding that liberalization could serve as a powerful weapon against democracy and the welfare state, allowing financial capital to become a “virtual Senate” that can impose its own social policies and punish those who deviate by capital flight.

But that luxury was no longer available in the more democratic Bretton Woods era, so that “limits on capital mobility substituted for limits on democracy as a source of insulation from market pressures.” It is therefore natural that the dismantling of the post-war economic order should be accompanied by a sharp attack on substantive democracy and the principles of the UD, primarily by the US and Britain. There is a great deal to say about these topics, but with regard to the human rights aspect, the facts seem reasonably clear and in conformity with the expectations of the founders of the Bretton Woods system. The Political Order and Human Rights The third pillar of post-World War II world order, standing alongside the Bretton Woods international economic system and the UD, is the UN Charter.

Another factor in the debt crisis was the liberalization of financial flows from the early 1970s. The post-war Bretton Woods system was designed by the US and UK to liberalize trade while exchange rates were stabilized and capital movements were subject to regulation and control. The decisions were based on the belief that liberalization of finance may interfere with trade and economic growth, and on the clear understanding that it would undermine government decisionmaking, hence also the welfare state, which had enormous popular support. Not only the social contract that had been won by long and hard struggle, but even substantive democracy, would be damaged by loss of control on capital movements. The Bretton Woods system remained in place through the “golden age” of economic growth and significant welfare benefits.


Globalists: The End of Empire and the Birth of Neoliberalism by Quinn Slobodian

Asian financial crisis, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, collective bargaining, David Ricardo: comparative advantage, Deng Xiaoping, desegregation, Dissolution of the Soviet Union, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, full employment, Gunnar Myrdal, Hernando de Soto, invisible hand, liberal capitalism, liberal world order, market fundamentalism, Martin Wolf, Mercator projection, Mont Pelerin Society, Norbert Wiener, offshore financial centre, oil shock, open economy, pattern recognition, Paul Samuelson, Pearl River Delta, Philip Mirowski, price mechanism, quantitative easing, random walk, rent control, rent-seeking, road to serfdom, Ronald Reagan, special economic zone, statistical model, The Chicago School, the market place, The Wealth of Nations by Adam Smith, theory of mind, Thomas L Friedman, trade liberalization, urban renewal, Washington Consensus, Wolfgang Streeck, zero-sum game

And if the IMF was designed, in part, to expose individual nations to the discipline of the world market, its innovation was in permitting nations to insulate themselves against the vagaries of international speculation and so-­called hot money flows. Policy autonomy—­the ability to tailor economic policy ­toward the goal of the welfare state—­was the hallmark of what was called the Bretton Woods system. The Bretton Woods system realized parts of the neoliberal dream while also deviating radically in other ways. Of more concern was the transformation of the predominant world authority from the League of Nations to the United Nations. Based on the princi­ple of one-­country-­ one-­vote, the UN would usher in the very politicization of economic activity that neoliberal visions of federation sought to prevent.

As the mouthpieces of big business’s two largest interest groups, Heilperin and Cortney articulated a polemical, alternative vision of ­ human rights, created lasting pre­ce­dent for international law, and made concrete Hayek’s 1949 demand for a liberal utopia. THE DANGER OF ECONOMIC DEMOCRACY The Bretton Woods institutions w ­ ere born incomplete. The International Monetary Fund (IMF) was responsible for the world’s money. It helped keep currency values stable by making short-­term loans to nations in trou­ble, and allowing states to adjust their exchange rates when necessary. The World Bank was responsible for reconstruction and development. It made low-­interest, long-­term loans and loan guarantees to help build infrastructure and industrial capacity, first in Western Eu­ rope and then in the Global South. What was missing was a body responsible for overseeing trade. The entity planned to fill this role was the ITO, which would complete the Bretton Woods trio. Like the IMF and the World Bank, it would be ­housed in the UN and provide a ­legal framework for international ­free trade.

., 35 Belgium, 170; Benelux countries, 181; and Eu­ro­pean integration, 184 Bellagio Group, 129, 317n35 Beltrán, Pedro, 165 Berlin, 74, 82; Berlin Conference of 1884–1885, 94, 195; Berlin Wall, 263–264 Bertalanffy, Ludwig von, 227 Bevan, Aneurin, 139 Beveridge, William, 63, 96 Bhagwati, Jagdish, 219 Bilderberg meetings, 129 Biology, 227; neurobiology, 229; physiology, 238–239, 254; sociobiology, 237 Blacks, as a group, 152, 168–169, 171 Böhm, Franz, 7, 114–115, 189, 205, 248, 355n199; critique of democracy, 251; on cybernetics, 233; on decisionism, 257; on economic constitution, 115, 204, 210–213, 253; on “idea of Ordo,” 268; on role of law, 226; as teacher, 208 Böhm-­Bawerk, Eugen, 75 Bonn, Moritz, 95–99, 113, 118, 310n19 Booth, Willis H., 36 Boulding, Kenneth, 227 Boycotts, 179. See also Embargoes; Sanctions Brandt, Karl, 154, 166–167 Brandt, Willy, 258 Brazil, 84, 193, 199, 201, 283, 339n111 Brentano, Lujo, 74 Bretton Woods: Conference, 134, 199; post–­Bretton Woods system, 242; system, 22, 23, 119, 125, 129, 147, 177, 241, 252 Bristol, Lee H., 129–130 Bristol-­Meyers, 129 Britain, 14, 27, 43, 109, 128, 194; and Eu­ro­pean integration, 184, 188, 201 Brussels, 36–37, 191, 195, 197, 352n138 Buchanan, James M., 8, 333n212, 354n188; on constitutional constraints, 237, 294n36; on federalism, 267, 295n43; on Hayek, 235 Buchanan, Pat, 178 Buckley, William F., 263; and Röpke, 162, 165–166, 324n44; on South Africa, 150, 154, 168, 174, 325n49 Bulgaria, 69, 109 Bullock, Charles J., 64, 75 Burma, 201, 339n111 Burnham, James, 179 Bush, George H.


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The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, value at risk, Washington Consensus, Yom Kippur War

., p. 46. 56 Greg Behrman, The Most Noble Adventure: The Marshall Plan and the Time when America Helped Save Europe (New York, 2007). 57 Obstfeld and Taylor, ‘Globalization and Capital Markets’, p. 129. 58 See William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics (Cambridge, MA., 2002). 59 Michael Bordo, ‘The Bretton Woods International Monetary System: A Historical Overview’, in idem and Barry Eichengreen (eds.), A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform (Chicago / London, 1993), pp. 3-98. 60 Christopher S. Chivvis, ‘Charles de Gaulle, Jacques Rueff and French International Monetary Policy under Bretton Woods’, Journal of Contemporary History, 41, 4 (2006), pp. 701-20. 61 Interview with Amy Goodman: http://www.democracynow.org/ article.pl?sid=04/11/09/1526251. 62 John Perkins, Confessions of an Economic Hit Man (New York, 2004), p. xi. 63 Joseph E.

This doctrinal volte-face represents a widespread disillusionment resulting from the destructive behaviour of these movements in the interwar years.54 At Bretton Woods, in New Hampshire’s White Mountains, the soon-to-be-victorious Allies met in July 1944 to devise a new financial architecture for the post-war world. In this new order, trade would be progressively liberalized, but restrictions on capital movements would remain in place. Exchange rates would be fixed, as under the gold standard, but now the anchor - the international reserve currency - would be the dollar rather than gold (though the dollar itself would notionally remain convertible into gold, vast quantities of which sat, immobile but totemic, in Fort Knox). In the words of Keynes, one of the key architects of the Bretton Woods system, ‘control of capital movements’ would be ‘a permanent feature of the post-war system’.55 Even tourists could be prevented from going abroad with more than a pocketful of currency if governments felt unable to make their currencies convertible.

Thus, for the next quarter century, did governments resolve the so-called ‘trilemma’, according to which a country can choose any two out of three policy options:1. full freedom of cross-border capital movements; 2. a fixed exchange rate; 3. an independent monetary policy oriented towards domestic objectives.57 Under Bretton Woods, the countries of the Western world opted for 2 and 3. Indeed, the trend was for capital controls to be tightened rather than loosened as time went on. A good example is the Interest Equalization Act passed by the United States in 1963, which was expressly designed to discourage Americans from investing in foreign securities. Yet there was always an unsustainable quality to the Bretton Woods system. For the so-called Third World, the various attempts to replicate the Marshall Plan through government-to-government aid programmes proved deeply disappointing. Over time, American aid in particular became hedged around with political and military conditions that were not always in the best interests of the recipients.


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Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo

affirmative action, Asian financial crisis, Bob Geldof, Bretton Woods, business cycle, buy and hold, colonial rule, correlation does not imply causation, credit crunch, diversification, diversified portfolio, en.wikipedia.org, European colonialism, failed state, financial innovation, financial intermediation, Hernando de Soto, income inequality, information asymmetry, invisible hand, Live Aid, M-Pesa, market fundamentalism, Mexican peso crisis / tequila crisis, microcredit, moral hazard, Ponzi scheme, rent-seeking, Ronald Reagan, sovereign wealth fund, The Chicago School, trade liberalization, transaction costs, trickle-down economics, Washington Consensus, Yom Kippur War

Post-war aid can be broken down into seven broad categories: its birth at Bretton Woods in the 1940s; the era of the Marshall Plan in the 1950s; the decade of industrialization of the 1960s; the shift towards aid as an answer to poverty in the 1970s; aid as the tool for stabilization and structural adjustment in the 1980s; aid as a buttress of democracy and governance in the 1990s; culminating in the present-day obsession with aid as the only solution to Africa’s myriad of problems. The main agenda of the Bretton Woods conference was to restructure international finance, establish a multilateral trading system and construct a framework for economic cooperation that would avoid a repeat of the Great Depression of the 1930s. As they anticipated the post-Second World War era, the architects of the 1944 Bretton Woods gathering foresaw that if Europe were to regain any semblance of social, political or economic stability, vast injections of aid would have to be poured in.

., ‘How to Keep Developing Countries in their Place: Cut Them Off from Capital’, Ashmore Investment Management Ltd, 4 October 2001 —, ‘Promoting Development’, Pension and Fund Management, Winter 2002, at http://www.publicservice.co.uk/pdf/tlr/winter2002/p66.pdf —, ‘Emerging Market Local Currency Debt’, AME Information, 23 September 2003 —, ‘Emerging Market Debt: Asset Class Characteristics, Alpha Generation: The Case for Protection’, Ashmore Investment Management Ltd presentation, 4 February 2005 Bordo, Michael D., ‘Is There a Good Case for a New Bretton Woods International Monetary System?’, American Economic Review, 85 (1995), 2, pp. 317–22, at http://links.jstor.org/sici?sici=00028282%28199505%2985%3A2%3C317%3AITAGCF%3E2.0.CO%3B2-A BRAC, Ultra Poor Programme in Bangladesh, at http://www.brac.net Braithwaite, John and Peter Drahos, ‘Bretton Woods: Birth and Breakdown’, Global Policy Forum, April 2001, at http://www.globalpolicy.org/socecon/bwi-wto/2001/braithwa.htm Brenner, Reuven, The Force of Finance: Triumph of the Capital Markets, New York: Texere, 2002 Broadman, Harry G., Africa’s Silk Road: China and India’s New Economic Frontier, Washington, DC: The World Bank, 2007 Brookins, Carole, ‘Anticorruption efforts of the MDBs’, testimony before the Senate Foreign Relations Committee, 13 May 2004, JS-1550 at www.senate.gov/~foreign/testimony/2004/BrookinsTestimony040513.pdf Bulow, Jeremy, ‘First World Governments and Third World Debt’, Brookings Papers on Economic Activity (2002), 1, pp. 229–55 Burkett, Paul, review of ‘The Age of Diminished Expectations: U.S.

Therefore, for the purposes of this book, aid is defined as the sum total of both concessional loans and grants. It is these billions that have hampered, stifled and retarded Africa’s development. And it is these billions that Dead Aid will address. 2. A Brief History of Aid The tale of aid begins in earnest in the first three weeks of July 1944, at a meeting held at the Mount Washington Hotel in Bretton Woods, New Hampshire, USA. Against the backdrop of the Second World War, over 700 delegates from some forty-four countries resolved to establish a framework for a global system of financial and monetary management.1 As discussed later, it is from this gathering that the dominant framework of aid-infused development would emerge. The origins of large-scale aid transfers date as far back as the nineteenth century – when even in 1896 the US provided overseas assistance in the form of food aid.


pages: 338 words: 104,684

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, Bernie Madoff, Bernie Sanders, blockchain, Bretton Woods, business cycle, capital controls, central bank independence, collective bargaining, COVID-19, Covid-19, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, decarbonisation, deindustrialization, discrete time, Donald Trump, eurozone crisis, fiat currency, floating exchange rates, Food sovereignty, full employment, Gini coefficient, global reserve currency, global supply chain, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, Jeff Bezos, liquidity trap, Mahatma Gandhi, manufacturing employment, market bubble, Mason jar, mortgage debt, Naomi Klein, new economy, New Urbanism, Nixon shock, obamacare, open economy, Paul Samuelson, Ponzi scheme, price anchoring, price stability, pushing on a string, quantitative easing, race to the bottom, reserve currency, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, trade liberalization, urban planning, working-age population, Works Progress Administration, yield curve, zero-sum game

In the end, Volcker’s rate hikes drove many developing countries into crisis, fueling a rapid economic downfall from which some countries have yet to fully recover.27 Back when Bretton Woods was still in effect, the system established a host of international organizations, including the IMF, the World Bank, and the General Agreement on Tariffs and Trade (now the World Trade Organization or WTO). Within the Bretton Woods system, these organizations focused on actively governing the conditions of trade among countries. This involved a variety of tools, like tariffs and capital controls, aimed at keeping trade flows stable and national economies at least somewhat insulated from one another. When Bretton Woods ended, the global institutions it created remained. But over time, their governing philosophy shifted: the religion of free trade took over, and the tariffs and capital controls were relaxed in the name of trade liberalization.

The new system restored convertibility by replacing the old gold standard with a new gold exchange standard. Instead of directly pegging currencies to a fixed price of gold, the system was replaced by convertibility into the US dollar, reflecting the dominance of the US in world trade (and the fact that the Allies won the war!). This new system—known as the Bretton Woods framework—called for the US dollar to be pegged to the value of gold. Moreover, all other currencies in the system were then pegged to the US dollar’s value. The exchange rate applied at the time set the price of gold at $35 an ounce. In effect Bretton Woods recreated a gold standard system, one step removed, with the US dollar now providing the central link in the monetary chain. Governments could now sell gold to the United States Treasury at the price of $35 per ounce, and the US Treasury had to honor the terms of that exchange.

From this point on, most major currencies were no longer on a fixed exchange rate. Abandoning fixed exchange rates and floating the currency gave currency-issuing governments like the US expanded policy space to sustain full employment. Notwithstanding the collapse of the Bretton Woods system of fixed exchange rates, gold standard thinking still dominates our discourse on trade policy, which is why so many politicians still regard trade deficits as inherently dangerous. On a gold standard the government can run out of gold. With the end of the gold standard and/or fixed global exchange rates, this kind of thinking is no longer valid. The only residual legacy left from Bretton Woods is that the US dollar still plays a central role in the global economy. When companies and governments around the world engage in trade with one another, they write an enormous portion of those contracts in US dollars—even when the country doing the buying and the country doing the selling don’t use dollars as their internal domestic currency!


pages: 275 words: 84,980

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives) by David Birch

agricultural Revolution, Airbnb, bank run, banks create money, bitcoin, blockchain, Bretton Woods, British Empire, Broken windows theory, Burning Man, business cycle, capital controls, cashless society, Clayton Christensen, clockwork universe, creative destruction, credit crunch, cross-subsidies, crowdsourcing, cryptocurrency, David Graeber, dematerialisation, Diane Coyle, disruptive innovation, distributed ledger, double entry bookkeeping, Ethereum, ethereum blockchain, facts on the ground, fault tolerance, fiat currency, financial exclusion, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, index card, informal economy, Internet of things, invention of the printing press, invention of the telegraph, invention of the telephone, invisible hand, Irish bank strikes, Isaac Newton, Jane Jacobs, Kenneth Rogoff, knowledge economy, Kuwabatake Sanjuro: assassination market, large denomination, M-Pesa, market clearing, market fundamentalism, Marshall McLuhan, Martin Wolf, mobile money, money: store of value / unit of account / medium of exchange, new economy, Northern Rock, Pingit, prediction markets, price stability, QR code, quantitative easing, railway mania, Ralph Waldo Emerson, Real Time Gross Settlement, reserve currency, Satoshi Nakamoto, seigniorage, Silicon Valley, smart contracts, social graph, special drawing rights, technoutopianism, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, wage slave, Washington Consensus, wikimedia commons

This mutiny caused a panic on the London Stock Exchange and a run on the pound, bringing Britain’s economic troubles to a head and finally forcing it off the gold standard for good on 21 September 1931. The United States left on 5 June 1933. As World War II drew to a close, the Allied nations decided to create a new international monetary system. Delegates from many nations came together in July 1944 in Bretton Woods, New Hampshire, and after three weeks of discussions drew up the Bretton Woods Agreement, which created the International Monetary Fund and the International Bank for Reconstruction and Development (now part of the World Bank). The goal from the beginning was to come up with some international infrastructure to use instead of the gold standard. The position of John Maynard Keynes, probably the world’s most famous economist at the time, was that the gold standard was a non-starter (Conway 2014a).

His view was that it had worked only briefly in the late nineteenth century, and even then only because of a sequence of happy accidents. It failed because when countries found themselves with a balance of payments deficit, the painful adjustment was ‘compulsory for the debtor and voluntary for the creditor’.******** Thus, the Bretton Woods delegates decided to replace the old gold standard with a new system based on the US dollar, with that dollar backed by gold. Under the terms of the agreement the United States would sell gold at $35 per ounce to any foreigner who wanted it. Straightforward. However, the Bretton Woods system that came into being towards the end of the 1950s was a very different arrangement from the one Keynes and the other delegates had devised in 1944. The World Bank had been designed in large part to finance European recovery but in the event the Marshall Plan aid was twenty times greater than any of the bank’s loans.

When the economy is pottering along nicely, no one (least of all the politicians who are ‘in charge of’ the economy) stops to wonder what money is, what banks do or what the disruptive impact of technological change might be. I spend much of my working life looking at ways for banks, payments companies and governments to exploit new technologies, and I often therefore have to think about how the digital economy will evolve. Money is an essential part of that economy, but a common assumption seems to be that it will carry on at it is now, as if the post-Bretton Woods fiat currency is a natural phenomenon or the final stage of a directed evolutionary process. Christine Desan, Leo Gottlieb Professor at the Harvard Law School, asks why, if industrial-age capitalism was the result of the seventeenth-century ‘redesign’ of money, we do not debate the design of money more, and I agree with her wholeheartedly (Desan 2014a). We should. The structure of central banks, commercial banks and international institutions that we have in the present comes from another age and must change.


pages: 221 words: 46,396

The Left Case Against the EU by Costas Lapavitsas

anti-work, banking crisis, Bretton Woods, capital controls, central bank independence, collective bargaining, declining real wages, eurozone crisis, Francis Fukuyama: the end of history, global reserve currency, hiring and firing, neoliberal agenda, offshore financial centre, post-work, price stability, quantitative easing, reserve currency, Ronald Reagan, Washington Consensus, Wolfgang Streeck

The great historical peculiarity of the euro is that its pivotal role has been formally associated not with any single state, but with the transnational mechanisms of the EMU as a whole. This fact has critically affected the ascendancy of neoliberalism in the EU, while strongly conditioning German hegemony. It has also muddied the waters for the Left. Creating the euro: a lever of neoliberalism and conditional German hegemony In the late 1960s the Bretton Woods system of fixed exchange rates and controls over capital flows and other international payments began to unravel, eventually coming to an end, as was noted above, in 1971–3. The disappearance of Bretton Woods put the governments of European countries – especially smaller ones – under considerable pressure to prevent major upheavals in exchange rates and to protect their international competitiveness. It became imperative to manage payments and other obligations among European states, for which a new institutional framework was required.

Nonetheless, the Werner Report led to no concrete policy or institutional outcomes – it had come before its time. After the collapse of Bretton Woods and the turmoil that followed in the global markets in the 1970s, the pressures to manage exchange rates in Europe accumulated further. The instability caused by greatly fluctuating rates was felt particularly severely by the smaller countries of Europe. The ‘Snake in the Tunnel’ was adopted in 1972–3, followed for a period by the ‘Snake out of the Tunnel’. The aim of these initiatives was to manage the joint fluctuations of exchange rates relative to the dollar but also relative to each other through regular interventions by central banks. The ‘Tunnel’ had already been created in 1971 by the Smithsonian Agreement, which followed Bretton Woods and allowed currencies to fluctuate relative to the US dollar within the margins of +2.25% and −2.25%.

However, the instrument used for final payments is money that is the monopoly of the state. Despite the relentless emphasis on competition and free markets during the last four decades, there is no competition in issuing this most important traded entity in contemporary capitalist economies. The state’s monopoly over the final means of payment has indeed become absolute in the years of neoliberalism as gold has fallen completely by the wayside since the collapse of the Bretton Woods Agreement in 1971–3. A dollar is a promise by the US government to pay a dollar, and no more. This self-referential relationship rests on the authority of the state and tremendously augments its power to intervene and shape economic policy. Neoliberalism as actual policy, rather than as ideology, has relied heavily on the state to alter the institutional structure of both economy and society in favour of markets.


pages: 497 words: 143,175

Pivotal Decade: How the United States Traded Factories for Finance in the Seventies by Judith Stein

"Robert Solow", 1960s counterculture, activist lawyer, affirmative action, airline deregulation, anti-communist, Ayatollah Khomeini, barriers to entry, Berlin Wall, blue-collar work, Bretton Woods, business cycle, capital controls, centre right, collective bargaining, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, desegregation, energy security, Fall of the Berlin Wall, falling living standards, feminist movement, financial deregulation, floating exchange rates, full employment, Gunnar Myrdal, income inequality, income per capita, intermodal, invisible hand, knowledge worker, laissez-faire capitalism, liberal capitalism, Long Term Capital Management, manufacturing employment, market bubble, Martin Wolf, new economy, oil shale / tar sands, oil shock, open economy, Paul Samuelson, payday loans, post-industrial society, post-oil, price mechanism, price stability, Ralph Nader, RAND corporation, reserve currency, Robert Gordon, Ronald Reagan, Simon Kuznets, strikebreaker, trade liberalization, union organizing, urban planning, urban renewal, War on Poverty, Washington Consensus, working poor, Yom Kippur War

Other countries have allowed exports to lead their economic growth and enjoyed the U.S. deficit while complaining about it.”40 To return to a pegged exchange rate system, which they claimed to prefer, Europeans would have to agree to symmetrical adjustment, imposing obligations on surplus and deficit countries alike. But the Bretton Woods system had come to depend on adjustment by deficit countries alone, and that is why it broke down. Like the Chinese position today, the Europeans and Japanese rejected the notion that surplus countries should bear their share of adjustment. They feared that revaluations of their currencies would depress exports, output, and employment. The United States looked at the situation differently. During the Kennedy-Johnson years, the government supported the value of the dollar, fixed by the Bretton Woods agreement. Now government officials questioned that policy because they came to believe that the dollar was overvalued, leading to declining exports and jobs.

Most of the foreign media was critical. Paul Volcker was sent to London to brief the financial ministers and chief bankers of the big countries. He reported “that they [the Europeans] did not feel anger as much as anguish that the United States had not arrived with a prepared solution to save the system [Bretton Woods].”86 The administration was divided on the fate of the fixed exchange system. Shultz, like his monetarist mentor Milton Friedman, wanted flexible rates. Volcker and Burns sought to salvage as many of the trees of Bretton Woods as they could. Connally and Nixon, who had neither institutional nor ideological loyalties, were agnostic. Both just wanted to get the job done— reverse the balance of payments, produce prosperity, and reduce unemployment. The bold action, especially the temporary border tax, was the stick to get the Europeans to accept a big shift in exchange rates, trade liberalization, and more help on defense costs.

Robert Ingersoll, “Nixon-Tanaka Summit Background Paper V: Trade and Payments—Issues and Recommendations, June 29, 1972, Central Foreign Policy Files, 1970–73, POL 7 Japan, RG 59, DNSA. 118. William A. Lovett, Alfred E. Eckes Jr., and Richard L. Brinkman, U.S. Trade Policy: History, Theory, and the WTO (Armonk, N.Y.: M. E. Sharpe, 1999), 14–15. 119. Martin Wolf, “Why Obama Must Mend a Sick World Economy,” Financial Times, Jan. 20. 2009; Nouriel Roubini, “Bretton Woods III?” http://www forbes.com/2009/04/19/bretton-woods-economic-ecrisis-renminbi-opinions. CHAPTER 3. 1972 1. Arthur H. Miller, Warren E. Miller, Alden S. Raine, and Thad A. Brown, “A Majority Party in Disarray: Policy Polarization in the 1972 Election,” The American Political Science Review, 70 (Sept. 1976), 755. 2. Cited in Mark Stricherz, Boston Globe, Nov. 23, 2003. 3. George McGovern, Grassroots: The Autobiography of McGovern (New York: Random House, 1977), 130. 4.


pages: 309 words: 85,584

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit by William Keegan

banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, British Empire, capital controls, congestion charging, deindustrialization, Donald Trump, Etonian, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial thriller, floating exchange rates, full employment, gig economy, inflation targeting, Just-in-time delivery, light touch regulation, liquidity trap, Martin Wolf, moral hazard, negative equity, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, oil shock, Parkinson's law, Paul Samuelson, pre–internet, price mechanism, quantitative easing, Ronald Reagan, school vouchers, short selling, South Sea Bubble, The Chicago School, transaction costs, tulip mania, Winter of Discontent, Yom Kippur War

But in the late 1960s and early ’70s, under the Bretton Woods system of ‘fixed but adjustable exchange rates’, I would find myself writing front-page stories about changes of a fraction of 1 per cent between, say, the pound and the dollar or D-Mark or French franc. In a sense, I was brought up as an economic journalist on the Bretton Woods system, which had been set up under the influence of Keynes in reaction to the economic horrors of the interwar years. To work properly, it required controls on movements of capital: such movements can far outweigh the impact of currency flows precipitated by ordinary trade. We have seen the lengths to which the Wilson government went to try to avoid changes, such as the devaluation of the pound in 1967, which were in fact necessary. But when the Bretton Woods system broke down in 1971–73 – with the Nixon administration no longer being prepared to support the rates of other currencies against the US dollar, which was itself devalued – the world embarked on not so much a system as a non-system of ‘floating rates’.

But the price of Wilson’s stand was, as his biographer Ben Pimlott pointed out, giving moral support for American foreign policy, not least in Vietnam, because propping up the pound required US intervention in the foreign exchange markets. Moreover, US officials were concerned that a devaluation of the pound could have repercussions elsewhere – which did eventually happen later, at the turn of the decade, when the cost of the Vietnam War put strains on the dollar, opening the floodgates, and ending with the break-up of the Bretton Woods fixed exchange rate system (see Crisis 6). However, despite the fact that UK support for American foreign policy was deeply unpopular at home, instigating many an anti-war demonstration on the streets of London, Wilson does go down in history with credit for resisting American demands for him to send British troops to Vietnam. Denis Healey, Defence Secretary at the time, claimed to me years later that he had stiffened Wilson’s arm in this matter, insisting that Britain’s support should be purely vocal.

It had been because oil was so cheap that successive Chancellors saw the price of petrol at the pumps as a ready milch cow for extra duty. But the quintupling of what was known as ‘the posted price’ was, as they say, ‘something else’. There were two factors behind this quite dramatic increase in the price of oil. The first was that, after the devaluation of the US dollar associated with the break-up of the Bretton Woods fixed exchange rate system in 1971–73, the oil producers were noticing the impact on their revenue – the price being quoted then, as now, in dollars. But the real force was imparted by the outbreak of the Yom Kippur War between Arab states and Israel between 6 and 25 October 1973. Israel was invaded by Egyptian and Syrian forces. With the West, led by the US, supporting Israel, the Saudi king called for Arab solidarity, and the Arab states imposed an embargo on shipments of oil to the oil importers.


Green Economics: An Introduction to Theory, Policy and Practice by Molly Scott Cato

Albert Einstein, back-to-the-land, banking crisis, banks create money, basic income, Bretton Woods, Buy land – they’re not making it any more, carbon footprint, central bank independence, clean water, Community Supported Agriculture, congestion charging, corporate social responsibility, David Ricardo: comparative advantage, deskilling, energy security, food miles, Food sovereignty, Fractional reserve banking, full employment, gender pay gap, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), job satisfaction, land reform, land value tax, Mahatma Gandhi, market fundamentalism, mortgage debt, passive income, peak oil, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, reserve currency, the built environment, The Spirit Level, Tobin tax, University of East Anglia, wikimedia commons

Greening trade globally The global architecture for the trade regime was created as part of the Bretton Woods framework to ensure international peace and harmony following the disaster of the Second World War. At this time most of the countries that now make up the United Nations did not even exist – they were still the ‘possessions’ of the Western industrialized countries, which under the colonial system claimed ownership of their resources as well. It is little wonder that this system has failed to protect the interests of the newly emerging states. A managed system for global trading would be based around attempts to ensure balanced budgets, so that countries could run neither large-scale surpluses nor deficits (an idea which UK negotiator J. M. Keynes took to the Bretton Woods negotiations nearly 70 years ago). As part of the reordering of international economic relations that is a central thread running through green economics, a new international trade system is of crucial importance.

Now we imagine a world parliament, where each country sends a number of representatives so that all countries’ interests are equally represented. We now have a much broaderbased and democratic way of deciding whether the solutions to Iraq’s problems will be solved by a US invasion, or about policies to tackle climate change. But 4 GREEN ECONOMICS Photo 1.1 The men who devised the existing financial system: US Secretary of the Treasury Morgenthau addressing the opening meeting of the Bretton Woods Conference, 8 July 1944 Source: Photo from the US National Archives made available via the IMF website now we need to extend this further, to include all the other species with whom we share this planet in our decision making. We need a representative from the deep-sea fish, the deciduous trees, the Arctic mammals, and so on. If we imagine putting to the vote in such a parliament the issue of our human wish to increase the number of nuclear power stations, we begin to see how narrow our current decision making structures are.

Chapter 4 focuses on work, which from a green perspective should be a fulfilling and community-building activity, not just a means of earning money for survival. Schumacher’s idea of ‘right livelihood’ and James Robertson’s thinking about ‘ownwork’ are explained. Chapter 5 explores how money shapes and controls the global economy, beginning with the establishment of the current monetary system at Bretton Woods at the end of the Second World War and moving on to consider empowering local alternatives. To round off this part, Chapter 6 offers a green perspective on economic development. How would local economies look within a green vision? Which economic sectors would thrive in the low-carbon world of the future? And where would we find the resources we need in a bioregional world? Part III moves on from the vision to deal with the reality, and presents green policies in action across today’s world.


pages: 338 words: 106,936

The Physics of Wall Street: A Brief History of Predicting the Unpredictable by James Owen Weatherall

Albert Einstein, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Asian financial crisis, bank run, beat the dealer, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, business cycle, butterfly effect, buy and hold, capital asset pricing model, Carmen Reinhart, Claude Shannon: information theory, collateralized debt obligation, collective bargaining, dark matter, Edward Lorenz: Chaos theory, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, George Akerlof, Gerolamo Cardano, Henri Poincaré, invisible hand, Isaac Newton, iterative process, John Nash: game theory, Kenneth Rogoff, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, martingale, Myron Scholes, new economy, Paul Lévy, Paul Samuelson, prediction markets, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical arbitrage, statistical model, stochastic process, The Chicago School, The Myth of the Rational Market, tulip mania, Vilfredo Pareto, volatility smile

Once again, Chicago’s influential economists, and especially the famous monetarist Milton Friedman, were behind the initiative. In 1968, when Nixon was elected president, Friedman wrote him a letter urging him to abandon the so-called Bretton Woods system. Bretton Woods, named for the town in New Hampshire where the system was devised in July 1944, was the international monetary agreement put in place at the end of World War II. The Bretton Woods conference led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (now part of the World Bank). More important for our story was the fact that under the Bretton Woods system, major world currencies were valued at fixed exchange rates, based on the value of the U.S. dollar (and ultimately on gold, because the dollar was freely exchangeable for gold, at least for foreign governments).

Such a rush in fact occurred in late 1967, which was the impetus for Friedman to write his letter. But for a thinker like Friedman, the Bretton Woods system was ill conceived from the start: it was hopeless for governments to try to set exchange rates at all. Exchange rates, like anything else, should be determined freely in an open market. Nixon didn’t listen to Friedman at first, but by 1971, with increased spending in Vietnam accelerating the accumulation of U.S. debt, he saw the writing on the wall. First West Germany and Japan pulled out of the Bretton Woods agreement and announced their currencies would no longer maintain parity with the dollar. Then, rather than wait for the world economy to collapse, Nixon administered the coup de grâce to the Bretton Woods system by ending the convertibility of U.S. dollars to gold. Over the next years, the fixed exchange rates gave way to floating rates, creating a system whereby the relative prices of currencies were determined on the open market.

Friedman wrote him a letter . . .”: This is from Milton Friedman’s foreword to Melamed (1993). “Bretton Woods, named for the town in New Hampshire . . .”: For more on the Bretton Woods system, see Markham (2002) and MacKenzie (2006), as well as Eichengreen (2008) and Melamed (1993). “. . . Leo Melamed, the chairman of the Chicago Mercantile Exchange . . .”: For more on the history of the CME and the IMM, see Melamed (1993). “What does the IMM have to do with Black and Scholes . . .”: I am grateful to John Conheeney, former chief executive of Merrill Lynch Futures and former board member of both the Chicago Board of Trade and the Chicago Mercantile Exchange, for pointing out the relationship between the decay of Bretton Woods and the rise of derivatives trading. “The distinction may seem inconsequential . . .”: I am grateful to Emanuel Derman for pointing out to me how consequential the differences are, from the perspective of practicing bankers.


The Future of Money by Bernard Lietaer

agricultural Revolution, banks create money, barriers to entry, Bretton Woods, business cycle, clean water, complexity theory, corporate raider, dematerialisation, discounted cash flows, diversification, fiat currency, financial deregulation, financial innovation, floating exchange rates, full employment, George Gilder, German hyperinflation, global reserve currency, Golden Gate Park, Howard Rheingold, informal economy, invention of the telephone, invention of writing, Lao Tzu, Mahatma Gandhi, means of production, microcredit, money: store of value / unit of account / medium of exchange, Norbert Wiener, North Sea oil, offshore financial centre, pattern recognition, post-industrial society, price stability, reserve currency, Ronald Reagan, seigniorage, Silicon Valley, South Sea Bubble, The Future of Employment, the market place, the payments system, Thomas Davenport, trade route, transaction costs, trickle-down economics, working poor

Why a multi-level currency system? The criticism of ‘undue complexity' is valid only if habit makes us overlook the inefficiencies and complexities of the money system of 1999. This system involves some 170 different national currencies, disorganised in eight different types of monetary systems according to the IMF's own reports. In any case, the record of the post-Bretton Woods monetary modus vivendi is clearly unsatisfactory. During the nearly three decades since the demise of the Bretton Woods arrangements, the annual rate of economic growth in developed countries has fallen by a third, and the incidents of international financial crises have increased sharply - to the point where even countries that follow sound economic policies are often stricken along with the profligate. According to figures cited by the World Bank no fewer than 69 countries have endured serious banking crises since the late nineteen-seventies, and 87 nations have seen runs on their currency since 1975.

Back in the 1960s, the proponents of freely floating currency exchanges used to argue that currency volatility would drop as soon as a free market was established. Foreign exchange markets are certainly now much more open and free than they were in the 1960s, when the Bretton Woods fixed-exchange-rate system was operational. However, an OECD (the Organization of Economic Co-operation and Development based in Paris) statistical study came to some sobering conclusions, directly contradicting the theoretical forecast. The past 25 years of floating exchanges have revealed an average foreign exchange volatility four times higher than under the Bretton Woods fixed-exchange system. It does not require a statistical rocket scientist to understand why the volatility increases with the speculative volume of the trades. Simple common sense explains it just as well.

Initially designed as a clearinghouse for transactions among central banks, it has evolved into a meeting ground for central bankers and a research centre about issues of interest to the monetary system as a whole. Website: http://www.bis.org/ Barters: The direct exchange of goods or services unmediated by any type of currency. Bonds: Financial instrument sold by a borrower against periodic payment of interest and of the principal at maturity. Bretton Woods: Township in New Hampshire where the Bretton Woods Agreement was finalised in 1945 after negotiations mainly between the British and the US. The system agreed upon has also been called the dollar gold equivalence standard, because it gave the status of official global reserve currency to the US$, on condition that the US guaranteed the convertibility of dollars into gold on demand of other central banks, at a fixed rate of 535 per ounce.


pages: 571 words: 106,255

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

Airbnb, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, global reserve currency, high net worth, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, market bubble, market clearing, means of production, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, zero-sum game

They did not, of course, and in practice, the exchange rates were anything but fixed and provisions were made for allowing governments to alter these rates to address a “fundamental disequilibrium.”12 In order to manage this global system of hopefully fixed exchange rates, and address any potential fundamental disequilibrium, the Bretton Woods conference established the International Monetary Fund, which acted as a global coordination body between central banks with the express aim of achieving stability of exchange rates and financial flows. In essence, Bretton Woods attempted to achieve through central planning what the international gold standard of the nineteenth century had achieved spontaneously. Under the classical gold standard the monetary unit was gold while capital and goods flowed freely between countries, spontaneously adjusting flows without any need for central control or direction, and never resulting in balance of payment crises: whatever amount of money or goods moved across borders did so at the discretion of its owners and no macroeconomic problems could emerge. In the Bretton Woods system, however, governments were dominated by Keynesian economists who viewed activist fiscal and monetary policy as a natural and important part of government policy.

Along with the establishment of the World Bank and IMF in Bretton Woods, the United States and its allies wanted to establish another international financial institution to specialize in arranging trade policy. The initial attempt to establish an International Trade Organization failed after the U.S. Congress refused to ratify the treaty, but a replacement was sought in the General Agreement on Trade and Tariffs, commencing in 1948. GATT was meant to help the IMF in the impossible task of balancing budgets and trade to ensure financial stability—in other words, centrally planning global trade and fiscal and monetary policy to remain in balance, as if such a thing were possible. An important, but often overlooked, aspect of the Bretton Woods system was that most of the member countries had moved large amounts of their gold reserves to the United States and received dollars in exchange, at a rate of $35 per ounce.

Table of Contents Cover Title Page About the Author Foreword Prologue Notes Chapter 1: Money Notes Chapter 2: Primitive Moneys Notes Chapter 3: Monetary Metals Why Gold? Roman Golden Age and Decline Byzantium and the Bezant The Renaissance La Belle Époque Notes Chapter 4: Government Money Monetary Nationalism and the End of the Free World The Interwar Era World War II and Bretton Woods Government Money's Track Record Notes Chapter 5: Money and Time Preference Monetary Inflation Saving and Capital Accumulation Innovations: “Zero to One” versus “One to Many” Artistic Flourishing Notes Chapter 6: Capitalism's Information System Capital Market Socialism Business Cycles and Financial Crises Sound Basis for Trade Notes Chapter 7: Sound Money and Individual Freedom Should Government Manage the Money Supply?


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The Marshall Plan: Dawn of the Cold War by Benn Steil

Albert Einstein, Alistair Cooke, anti-communist, Berlin Wall, Bretton Woods, British Empire, business cycle, Carmen Reinhart, centre right, currency manipulation / currency intervention, deindustrialization, disintermediation, Dissolution of the Soviet Union, Donald Trump, eurozone crisis, facts on the ground, Fall of the Berlin Wall, full employment, imperial preference, invisible hand, Kenneth Rogoff, kremlinology, land reform, Mikhail Gorbachev, Monroe Doctrine, new economy, open economy, Potemkin village, RAND corporation, Ronald Reagan, structural adjustment programs, the market place, trade liberalization, Transnistria, Winter of Discontent, Works Progress Administration, éminence grise

When bankrupt Britain had been holding the fort alone against Nazi Germany in 1941, Congress still demanded economic “consideration” for Lend-Lease aid—which was merely in the form of loans, and not grants. When in 1945 Morgenthau and White fought to justify the Bretton Woods monetary and financial agreements before Congress, they were again touting only loans, and not grants, to revive the collapsed international trading system. That vision would be challenged by the new International Bank for Reconstruction and Development (IBRD), whose 1946/47 annual report observed, understatedly, that “the problem [of recovery] is deeper and more difficult than was envisioned at Bretton Woods.”86 Even just a few days before the president’s address, Truman had delivered a major speech on foreign economic policy at Baylor University that, having been written largely before the Greek and Turkish crisis, went little beyond calling for reciprocal agreements to boost trade.

APPENDIX D * * * MAPS * * * * * * MAP 1 * * * THE GEOSTRATEGIC IMPORTANCE OF RUSSIA * * * MAP 2 * * * DIVIDED GERMANY AND BERLIN, 1945 * * * MAP 3 * * * POLITICAL MAP OF EUROPE, 1943 * * * MAP 4 * * * POLITICAL MAP OF EUROPE, 1949 * * * MAP 5 * * * INVERTED VIEW OF RUSSIA’S WESTERN BORDER ABOUT THE AUTHOR © DON POLLARD BENN STEIL is senior fellow and director of international economics at the Council on Foreign Relations. His previous book, the prize-winning The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, was called “a triumph of economic and diplomatic history” by the Financial Times, “a superb history” by The Wall Street Journal, and “the gold standard on its subject” by The New York Times. He lives in New York with his wife and two boys. MEET THE AUTHORS, WATCH VIDEOS AND MORE AT SimonandSchuster.com Authors.SimonandSchuster.com/Benn-Steil @simonbooks * * * ALSO BY BENN STEIL * * * The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order We hope you enjoyed reading this Simon & Schuster ebook

Henry Morgenthau, his old Hyde Park neighbor who, with little knowledge of economics or foreign affairs, had run the Treasury since 1934, used his platform and access to great effect. Not having policy ideas of his own so much as instincts, Morgenthau relied on his ambitious, obliquitous deputy, Harry Dexter White, to give them form and substance. White, one of the most enigmatic American political figures of the twentieth century, boosted Treasury’s global influence through his mastery of the forty-four-nation Bretton Woods Conference, which created the IMF in 1944, and the war-aid terms imposed on the penurious British. Yet like Henry Wallace—who who would tap him as a future treasury secretary during his 1948 presidential campaign—White was also a great admirer of the Soviet Union and its economic system. He would, over the course of twelve years in Washington, to a much greater degree than Wallace, use his position to aid Moscow materially and with secret intelligence.25 He would also give substance to the so-called Morgenthau Plan to deindustrialize postwar Germany—effectively to render the country pastoral and infirm.


pages: 429 words: 120,332

Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens by Nicholas Shaxson

Asian financial crisis, asset-backed security, bank run, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, collapse of Lehman Brothers, computerized trading, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, Double Irish / Dutch Sandwich, failed state, financial deregulation, financial innovation, Fractional reserve banking, full employment, high net worth, income inequality, Kenneth Rogoff, laissez-faire capitalism, land reform, land value tax, light touch regulation, Long Term Capital Management, Martin Wolf, money market fund, New Journalism, Northern Rock, offshore financial centre, oil shock, old-boy network, out of africa, passive income, plutocrats, Plutocrats, Ponzi scheme, race to the bottom, regulatory arbitrage, reserve currency, Ronald Reagan, shareholder value, The Spirit Level, too big to fail, transfer pricing, Washington Consensus

They argued that controls on capital would be more effective if the countries receiving that flight assisted in their enforcement.”18 In the earliest drafts of the Bretton Woods agreements, both Keynes and White had required that the governments of countries receiving the flight capital would share information with the victims of that flight. In short, they wanted transparency in international finance. Without the lure of secrecy, capital would have far fewer incentives to flee. Enter Wall Street bankers and their lobbyists. U.S. banks had profited hugely from handling European flight capital in the 1930s, and, fearing that transparency would hurt New York’s allure, they gutted the proposals. While early drafts of the IMF’s Articles of Association had “required” cooperation on capital flight, the final version that emerged from the Bretton Woods conference saw that word replaced with “permitted.” And through that one-word gateway drove a great, silent procession of coaches and horses across the Atlantic, laden with treasure from a shattered Europe.

It is not intelligent, it is not beautiful, it is not just, it is not virtuous—and it doesn’t deliver the goods. In short, we dislike it, and we are beginning to despise it.” On this broad point his American colleagues were with him: Morgenthau said that the aim must be “to drive the usurious money-lenders from the temple of international finance.”13 Keynes’s negotiations culminated in the Bretton Woods Conference in 1944, the outcome of which would shape the international financial architecture for decades. The conference involved many nations but was an American production: The U.S. Treasury stage-managed the drafting committees and the conference to produce the desired results. U.S. Commission chairmen would prevent a vote on anything they didn’t want voted on and would arrange the discussion to stop inconvenient topics from being aired.14 It was hard to see what the international “monkey house” of delegations from other countries would do, Keynes archly commented: “Acute alcohol poisoning would set in before the end.”

He did not get his wishes, and when these matters were decided at a subsequent meeting in 1946, Keynes said acidly that he hoped “there is no malicious fairy, no Carabosse”—a reference to the wicked fairy-tale godmother figure of Sleeping Beauty, popularized in Tchaikovsky’s and later Diaghilev’s ballet—“whom he has overlooked and forgotten to ask to the party.” Fred Vinson, a top U.S. negotiator, who felt he was the target of the remark, was heard to say in response, “I don’t mind being called malicious—but I do mind being called a fairy.”15 Many people today see the IMF and World Bank—the children of the Bretton Woods Conference—as the handmaidens of globalization, of unfettered trade and capital flows, and the instruments of Wall Street bankers. This was not the original idea. Keynes did want open trade, but finance was to remain tightly regulated: otherwise, surges of flighty capital would generate recurrent crises that would hamper growth, disrupt and discredit trade, and possibly drive fragile European economies into the arms of the communists.


pages: 273 words: 87,159

The Vanishing Middle Class: Prejudice and Power in a Dual Economy by Peter Temin

"Robert Solow", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Affordable Care Act / Obamacare, American Legislative Exchange Council, American Society of Civil Engineers: Report Card, anti-communist, Bernie Sanders, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carried interest, clean water, corporate raider, Corrections Corporation of America, crack epidemic, deindustrialization, desegregation, Donald Trump, Edward Glaeser, Ferguson, Missouri, financial innovation, financial intermediation, floating exchange rates, full employment, income inequality, intangible asset, invisible hand, longitudinal study, low skilled workers, low-wage service sector, mandatory minimum, manufacturing employment, Mark Zuckerberg, mass immigration, mass incarceration, means of production, mortgage debt, Network effects, New Urbanism, Nixon shock, obamacare, offshore financial centre, oil shock, plutocrats, Plutocrats, Powell Memorandum, price stability, race to the bottom, road to serfdom, Ronald Reagan, secular stagnation, Silicon Valley, Simon Kuznets, the scientific method, War on Poverty, Washington Consensus, white flight, working poor

Reluctant to raise taxes soon after the Kennedy tax cut of the previous year and lacking congressional support as well, he overheated the economy and put great pressure on the value of the dollar, fixed at that time by the Bretton Woods system that regulated international commerce after the Second World War. The postwar dollar shortage turned into a dollar glut.1 President Nixon set himself up in opposition to Johnson. He won election to the presidency through a Southern Strategy that appealed to Southern racism and opposition to the Civil Rights Movement. He abandoned Johnson’s War on Poverty and declared a War on Drugs in 1971. He also abandoned the fixed exchange rate of the Bretton Woods system to deal with the strain on the dollar exerted by the expanding war in Vietnam.2 Nixon switched the United States to a floating exchange rate, transferring responsibility for the domestic economy from the federal government, which controls fiscal policy, to the Federal Reserve System, which controls monetary policy.

Nixon also replaced the ailing draft for Army soldiers with the volunteer army at this time, a plan he also started before the Oil Shock. The draft had become difficult as the Vietnam War dragged on, and conservatives argued against the idea of forced service. This was an early step in the privatization of the military.4 The Oil Shock also raised the question of how the members of OPEC were going to hold their newly acquired wealth. The highly regulated financial system established at Bretton Woods in the 1940s could not easily absorb this large inflow of cash, and the cash found a temporary home in the arrangement for dollar deposits outside the United States. These dollar deposits in European banks were known as Eurodollars, and they were not heavily regulated by either the United States or Europe. Much of the cash went to Switzerland, where banks were willing to preserve the anonymity of the depositors.

As a result, inflation-adjusted after-tax income was 200 percent higher in 2011 than it was in 1979 for households in that group. In contrast, households in the bottom quintile experienced inflation-adjusted after-tax income growth of 1.2 percent per year, on average. Consequently, inflation-adjusted after-tax income was 48 percent higher in 2011 than it was in 1979 for that income group.”21 The most important part of the new program was the deregulation of finance. Instead of bringing the Eurodollar system into the Bretton Woods system, new policies made American finance more like the Eurodollar system. There was a great need for financial help as the gyrations of prices and exchange rates in the 1970s and early 1980s took a fearsome toll on American industry. Resources needed to be shifted from one industry to another, and finance was needed to buy and sell companies in this process. Financial people argued that the great needs of finance required free hands to manage the economic transformation.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Twenty years on, the power of the United States to prevent a mutual insurance arrangement among Asian countries is limited. The governance of the global monetary order is in danger of fragmentation. In the evolving multi-polar world, there are few remnants of the idealism of Bretton Woods. The combination of free trade and American power was a stabilising force. As the financier and historian James Macdonald puts it, ‘The unspoken bargain was that the United States would exercise a near monopoly of military force. However, it would use its force not to gain exclusive economic advantages, but as an impartial protector of Western interests. Under the American umbrella, the non-Communist world flourished.’17 The world of Bretton Woods passed away a long while ago, and with it the effectiveness of the post-war institutions that defined it – the International Monetary Fund, the World Bank and the Organisation for Economic Cooperation and Development (OECD).

Such bonds have been issued by a number of industrialised countries over the past thirty years (King and Low, 2014). 23 Germany, with its own objective of promoting its export sector, was a notable exception. 24 Charles Dumas (2004, 2006 (with Chovleva)) provided an early analysis of this problem. 25 Its reversal was a striking feature of what came to be known as the Bretton Woods II international monetary system. Although some foreign direct investment did move from advanced to emerging economies, it was more than offset by financial flows in the opposite direction. This analysis of the Bretton Woods II system was first put forward by Dooley, Folkerts-Landau and Garber (2003). Those authors refined and extended the analysis in a series of papers over the following decade. A key part of their argument is that China wanted to lend large sums to advanced economies so that, in the event of a major economic or political disturbance, these claims would act as ‘collateral’ against the foreign direct investment made by the same economies in China.

Inspired by a rather naive version of Keynesian ideas, it focused on policies to boost the demand for goods and services rather than the ability of the economy to produce them. As the former outstripped the latter, the result was inflation. On the other side of the Atlantic, the growing cost of the Vietnam War in the late 1960s also led to higher inflation. Rising inflation put pressure on the internationally agreed framework within which countries had traded with each other since the Bretton Woods Agreement of 1944, named after the conference held in the New Hampshire town in July of that year. Designed to allow a war-damaged Europe slowly to rebuild its economy and reintegrate into the world trading system, the agreement created an international monetary system under which countries set their own interest rates but fixed their exchange rates among themselves. For this to be possible, movements of capital between countries had to be severely restricted – otherwise capital would move to where interest rates were highest, making it impossible to maintain either differences in those rates or fixed exchange rates.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

As we have seen, his International Clearing Union plan of 1941 set up a system of sanctions against persistent creditor hoarding. But the United States rejected the Keynes plan, and at the Bretton Woods conference of 1944 substituted an institution of its own devising – the International Monetary Fund – which upheld the orthodox policy of debtor adjustment, finance for deficits being confined to short-term help. The American motive was clear: they had no wish to place their hard-earned dollars automatically at the disposal of profligate debtors. The IMF thus provided no limit on persistent reserve accumulation. Bretton Woods laid the intellectual basis for the ‘structural adjustment’ programmes which the IMF would insist on as the condition of its loans to Latin America and East Asia in the 1980s and 1990s, and which the ‘troika’ of the IMF, European Central Bank and European Commission would demand as the condition of financing the foreign debt of Mediterranean countries following the crisis of 2008–9.

What was intended to be restored was the nineteenth-century free trade/gold standard system, improved by experience of the interwar years. This reflected the American conviction that the troubles of that period had been brought about by trade and currency wars. Keynes influenced Harry Dexter White, the architect of the Bretton Woods system, but there were more parochial influences. Keynes’s own specific idea – ‘the doctrine of creditor adjustment’ (pp. 127–8) – was not accepted at Bretton Woods. This meant that the 1944 Agreement provided no mechanism for dealing with the ‘dollar gap’ that resulted from a quasi-permanent US current account surplus. In the 1920s, America’s export surplus had been a deflationary drag on the world economy. In the 1950s the surplus was gradually whittled away, turning negative by the end of the decade.

Deterioration: 1969–73 These years can be divided as follows: 1. The Mild Recession of 1970–71 Modestly restrictive policies in 1968–9, designed to reverse the rise of inflation, produced a mild recession in 1970–71 on both sides of the Atlantic, which failed to eliminate the higher inflation but nearly doubled the rate of unemployment. 2. The Breakdown of Bretton Woods, 1971 The rise in unemployment, and looming elections in a number of OECD countries, prompted a simultaneous shift to expansionary policy in the early 1970s. The Bretton Woods system was already under strain from the late 1960s as the growing size of the United States payments deficits ‘effectively removed the balance-of164 t h e k e y n e si a n a s c e n da n c y payments constraints in other OECD countries, and facilitated a massive expansion of money supplies’.45 However, the Triffin paradox now came into play.


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Money Mischief: Episodes in Monetary History by Milton Friedman

Bretton Woods, British Empire, business cycle, currency peg, double entry bookkeeping, fiat currency, financial innovation, fixed income, floating exchange rates, full employment, German hyperinflation, income per capita, law of one price, money market fund, oil shock, price anchoring, price stability, transaction costs

But there is ample evidence by now that these are at best temporary expedients and generally lead to the conversion of minor problems into major crises. That was certainly the experience under Bretton Woods before 1971. Exchange rate changes were numerous and often massive. The system worked only so long as the United States followed a moderately noninflationary policy and remained passive with respect to capital movements and exchange controls imposed by other countries. It has been equally true of the succession of monetary arrangements in the Common Market: the European Payments Union, the "snake," the current EMS. None of these arrangements has been able to avoid exchange crises and exchange rate changes, and several have simply broken down. The EMS has been working reasonably well because Germany has been willing to play the role that the United States played under Bretton Woods, of pursuing a moderately noninflationary policy and tolerating capital movements and foreign exchange controls imposed by other member countries.

For present purposes, we can simplify our attempt to demystify money by concentrating on the monetary arrangement that, while historically a very special case, is currently the general rule: a pure paper money that has practically no value as a commodity in itself. Such an arrangement has been the general rule only since President Richard M. Nixon "closed the gold window" on August 15, 1971—that is, terminated the obligation that the United States had assumed at Bretton Woods to convert dollars held by foreign monetary authorities into gold at the fixed price of $35 an ounce. Before 1971, every major currency from time immemorial had been linked directly or indirectly to a commodity. Occasional departures from a fixed link did occur but, generally, only at times of crisis. As Irving Fisher wrote in 1911, in evaluating past experience with such episodes: "Irredeemable paper money has almost invariably proved a curse to the country employing it" (1929, p. 131).

In the major Western countries, the link to gold and the resulting long-term predictability of the price level meant that, until sometime after World War II, interest rates behaved as if prices were expected to be stable and neither inflation nor deflation was anticipated. Nominal returns on nominal assets were relatively stable, while real returns were highly unstable, absorbing almost fully inflation and deflation (as displayed in Figure 1). Beginning in the 1960s, and especially after the end of Bretton Woods in 1971, interest rates started to parallel rates of inflation. Nominal returns on nominal assets became more variable; real returns on nominal assets, less variable. CHAPTER 3 The Crime of 1873* I am persuaded history will write it [the Act of 1873] down as the greatest legislative crime and the most stupendous conspiracy against the welfare of the people of the United States and of Europe which this or any other age has witnessed.


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The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bernie Madoff, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, Hyman Minsky, index fund, intangible asset, interest rate swap, Isaac Newton, joint-stock company, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, merger arbitrage, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

If one party is from Japan and the other from Switzerland, should the transaction take place in yen, Swiss francs or some other currency such as the US dollar? Equally important, when should the currency be delivered? Just as the price of the goods being sold is central to the transaction, so the exchange rate (which is the price of one currency in terms of another) can determine whether the parties make a profit or a loss. BRETTON WOODS AND AFTER: THE ROLE OF FORECASTING TODAY The post-war system of fixed exchange rates was set up in 1944 at an international conference held in Bretton Woods, New Hampshire. Although not fully operational until 1958, the Bretton Woods system pegged the world’s major currencies at fixed rates to the dollar. In turn the dollar was given the strength to act as the linchpin of the world’s financial system because of its ‘convertibility’, at a set rate, into gold. Gradually the system broke down as the American economy ran into trouble because of President Johnson’s attempts to finance the Vietnam War and his ‘Great Society’ reforms at the same time.

If they sold dollars and bought a strong currency such as the Deutschmark, they were highly unlikely to lose money, but if the dollar devalued, they would make substantial gains. The enormous scale of international capital flows today means that no central bank has the reserves to defend its currency against market speculation indefinitely. As a consequence, a Bretton Woods-type system is unlikely ever to return. Why have exchange rates been so unstable since the collapse of the Bretton Woods system? Many theories have been developed to explain why exchange rates change, but none has so far explained their movements in such a way that future exchange-rate moves can then be predicted with any degree of accuracy. Economic theories attempt to explain exchange-rate moves in the long run. Foreign-exchange dealers have to predict exchange rates in the very short run indeed – a day or two at the most.

And, with governments round the world quailing in the face of the cost of state pension schemes, citizens are realizing that they may depend on the financial markets for their security in old age. Why has all this happened? In part, it is because of the breakdown of the financial system that prevailed from the end of the Second World War until the early 1970s. That system, generally known as Bretton Woods, combined fixed exchange rates with strict controls on capital flows, so restricting the scope for financial market activity. Under fixed exchange rates, currency speculation was only profitable at occasional times, such as when Britain was forced to devalue sterling in 1967. Foreign-exchange controls also made it difficult for investors to buy equities outside their home markets. That reduced the scope for share trading and ensured that the UK equity market was a protected haven, dominated by small firms operating in a climate which author Philip Augar has described as ‘gentlemanly capitalism’.


pages: 7,371 words: 186,208

The Long Twentieth Century: Money, Power, and the Origins of Our Times by Giovanni Arrighi

anti-communist, Asian financial crisis, barriers to entry, Bretton Woods, British Empire, business climate, business process, colonial rule, commoditize, Corn Laws, creative destruction, cuban missile crisis, David Ricardo: comparative advantage, declining real wages, deindustrialization, double entry bookkeeping, European colonialism, financial independence, financial intermediation, floating exchange rates, income inequality, informal economy, invisible hand, joint-stock company, Joseph Schumpeter, late capitalism, London Interbank Offered Rate, means of production, money: store of value / unit of account / medium of exchange, new economy, offshore financial centre, oil shock, Peace of Westphalia, profit maximization, Project for a New American Century, RAND corporation, reserve currency, spice trade, the market place, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, trade route, transaction costs, transatlantic slave trade, transcontinental railway, upwardly mobile, Yom Kippur War

As these more traditional instruments of power came to be deployed in the protection and reorganization of the “free world,” the Bretton Woods organizations (the IMF and the World Bank) and the United Nations either became supplementary instruments wielded by the US government in the exercise of its world hegemonic functions or, if they could not be used in this way, were impeded in the exercise of their own institutional functions. Thus, throughout the 19505 and 19605 the International Monetary Fund (IMF) and the World Bank played little or no role in the regulation of world money in comparison with, and in relation to, a select ensemble of national central banks, led by the US Federal Reserve System. It was only with the crisis of US hegemony in the 1970s and, above all, in the 19805 that for the first time the Bretton Woods organizations rose to prominence in global monetary regulation.

Similarly, in the early 19505 the UN Security Council and General Assembly were used instrumentally by the US government to legitimate its intervention in the Korean civil war, and subsequently lost all centrality in the regulation of interstate 70 THE LONG TWENTIETH CENTURY conflicts until their revitalization in the late 1980s and early 1990s. We shall return to the significance of this recent resurgence of the Bretton Woods and UN organizations. But for now let us emphasize that the instrumental use and partial atrophy of these organizations at the moment of maximum expansion of US world hegemony did not involve a return to the strategies and structures of British world hegemony. Quite apart from the fact that simply by remaining in place the Bretton Woods and UN organizations retained much of their ideological value in the legitimation of US hegemony — in sharp contrast to the absence of transstatal and inter-statal organizations of comparable visibility, permanence, and legitimacy in the establishment and reproduction of British hegemony — US “free worldism” was as much a negation as it was a continuation of British free-trade imperialism.

As the troubles of the US economy eased and the international situation deteriorated further, Roosevelt’s internationalist predispositions resurfaced and led to a rapprochement with Wall Street. But in spite of the close cooperation between Washington and Wall Street during the Second World War, at Bretton Woods bankers and financiers were conspicuous by their absence. Washington rather than New York was confirmed as the primary seat of “production” of world money, and security considerations remained paramount in the shaping of the post-war monetary world order. However, the fact that world liquidity was now centralized in the US banking system enabled the US financial elite to find enough support among economic nationalists in Washington to impose on the Bretton Woods institutions its unshakeable belief in the virtues of sound money in general and of the gold standard in particular (Van Dormael 1978: 97-8, 240-65). As a result, Keynes’s and Whites original consensus on the need to banish the deflationary bias of the international gold standard and to create a climate of world expansion consistent with the social and economic objectives of the New Deal had little impact on US monetary policies (Gardner 1986: 71-100, 112-14).


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The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas by Janek Wasserman

Albert Einstein, American Legislative Exchange Council, anti-communist, battle of ideas, Berlin Wall, Bretton Woods, business cycle, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, different worldview, Donald Trump, experimental economics, Fall of the Berlin Wall, floating exchange rates, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, Gunnar Myrdal, housing crisis, Internet Archive, invisible hand, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liberal capitalism, market fundamentalism, mass immigration, means of production, Menlo Park, Mont Pelerin Society, New Journalism, New Urbanism, old-boy network, Paul Samuelson, Philip Mirowski, price mechanism, price stability, RAND corporation, random walk, rent control, road to serfdom, Robert Bork, rolodex, Ronald Coase, Ronald Reagan, Silicon Valley, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, union organizing, urban planning, Vilfredo Pareto, Washington Consensus, zero-sum game, éminence grise

I can assure you I miss the presence of you [at the Group of Thirty, or G-30].”71 The G-30, a powerful consulting group formed in 1978 to address problems in the global economy, evolved out of a series of conferences on the international monetary system that “the Quartet” had orchestrated in the early 1960s. Over twenty-seven meetings, Machlup and his colleagues reshaped the Bretton Woods landscape, providing the intellectual foundation for the shift from the postwar gold exchange standard to floating exchange rates and financial liberalization. In coordinating elite networks of academics, government officials, and financial leaders, the Machlup Group proved as significant to the neoliberal order as Hayek and the MPS or Haberler and GATT.72 By the time Machlup convened the first conference of scholars at the RF-owned Villa Serbelloni on Lake Como in Bellagio, Italy, in 1963, the Bretton Woods monetary system faced mounting problems. Established in the waning days of World War II, the Bretton Woods participants hoped to avoid the problems that plagued interwar European economic stability: uncoordinated exchange rates, balance of payments discrepancies, and punitive national economic policies.

Social Research 48, no. 3 (1981): 456–71. ———. The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers. New York: Simon and Schuster, 1953. Heilbroner, Robert, and Irving Howe. “The World after Communism.” Dissent, Fall 1990, 429–35. Helleiner, Robert. Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order. Ithaca, NY: Cornell University Press, 2014. ———. States and the Reemergence of Global Finance: From Bretton Woods to the 1990s. Ithaca, NY: Cornell University Press, 1994. Hennings, Klaus. The Austrian Theory of Value and Capital. Cheltenham, UK: Elgar, 1997. Hilferding, Rudolf. “Böhm-Bawerk’s Criticism of Marx.” In Böhm, Karl Marx, 119–96. ———. Finance Capital: A Study of the Latest Phase of Capitalist Development.

When he did, the Mises-Kreis little resembled its predecessor, producing a different, more dogmatic “Austrian economics.” Haberler and Machlup took on leadership roles in incipient debates on globalization and trade liberalization by spearheading new policy initiatives. Haberler’s recasting of international trade signaled the beginning of a new “liberal international economic order.” Machlup starred in “reforming the world monetary system,” propelling the international monetary debates that overturned the Bretton Woods order. In the first decades after World War II, the Austrians shifted their attention to developing new thought collectives and epistemic communities, modifying and adapting earlier Austrian School traditions along the way.6 The Creation of the MPS The MPS was the most enduring postwar Austrian institution, drawing much of its appeal from the earlier ideas, interaction rituals, and ideological views of the school.


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More: The 10,000-Year Rise of the World Economy by Philip Coggan

"Robert Solow", accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Andrei Shleifer, anti-communist, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Berlin Wall, Bob Noyce, Branko Milanovic, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, credit crunch, Credit Default Swap, crony capitalism, currency peg, debt deflation, Deng Xiaoping, discovery of the americas, Donald Trump, Erik Brynjolfsson, European colonialism, eurozone crisis, falling living standards, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, Frederick Winslow Taylor, full employment, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, global supply chain, global value chain, Gordon Gekko, greed is good, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, Ignaz Semmelweis: hand washing, income inequality, income per capita, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, TaskRabbit, Thales and the olive presses, Thales of Miletus, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, Yom Kippur War, zero-sum game

But the newly independent countries were dependent on commodity exports, and were often run by kleptocratic dictators. The per capita growth rate from 1950 to 1973 was 2%, below the world average, and half the growth rate of western Europe. The collapse of Bretton Woods In 1960, an economist named Robert Triffin predicted to the US Congress that the Bretton Woods system would eventually collapse. His argument related to the conflict between the dollar’s domestic and international roles. The dollar was the centrepiece of the Bretton Woods system since it was the currency to which others were pegged. That meant that central bankers in the rest of the world wanted to accumulate dollars as part of their foreign exchange reserves. (In a crisis, they could sell their dollars and buy their domestic currency to support their exchange rate.)

After 1943, it became fairly clear that the Germans would be defeated and the Allies started to plan a post-war settlement. Among the first issues to be settled was the monetary system. A return to the full gold standard seemed out of the question, not least because the US economy was even more dominant than before. But politicians worried about adopting floating exchange rates, which seemed a recipe for chaos. A conference was duly organised at the Bretton Woods hotel in the mountains of New Hampshire. Harry Morgenthau, the US Treasury secretary, said at the opening ceremony that “We came here to work out methods which would do away with the economic evils – the competitive currency devaluations and destructive impediments to trade – which preceded the present war.”1 The British were represented by their top economist, John Maynard Keynes, and the Americans by Harry Dexter White, a Treasury official who was passing secrets to the Soviet Union, according to KGB archives.

All currency systems are subject to a trilemma, in which countries can choose two options but not all three. The three options are a fixed exchange rate, an independent monetary policy, and free capital movement. Under the gold standard, the currency was fixed and capital could flow freely. But monetary policy had to be adjusted in order to maintain the currency peg, with interest rates rising or falling regardless of domestic economic conditions. The Bretton Woods system chose a different pairing. Exchange rates were fixed but countries had freedom (with some limits) to adjust their own monetary policy. The only way such a system could work was by restricting capital flows. If they had not been, investors would have been free to move their capital to whichever country had the highest interest rates, confident that they could not face a currency loss by devaluation.


Propaganda and the Public Mind by Noam Chomsky, David Barsamian

Albert Einstein, Asian financial crisis, Bretton Woods, business cycle, capital controls, deindustrialization, European colonialism, experimental subject, Howard Zinn, Hyman Minsky, interchangeable parts, liberation theology, Martin Wolf, one-state solution, Ralph Nader, RAND corporation, school vouchers, Silicon Valley, structural adjustment programs, Thomas L Friedman, Tobin tax, Washington Consensus

Mearsheimer, “India Needs the Bomb,” New York Times, March 24, 2000, p. A21. 29. See The Bulletin of the Atomic Scientists 56: 2 (March-April 2000), pp. 22-41. 30. Tariq Ali, “The Panic Button,” Guardian, October 14, 1999, p. 21. 31. Marc L. Miringoff and Marque-Luisa Miringoff, The Social Health of the Nation: How America Is Really Doing (New York: Oxford UP, 1999). 32. Bretton Woods Commission, Bretton Woods: Looking into the Future (Washington, DC: Bretton Woods Commission, 1994). See Martin Wolf, “Bretton Woods at an Awkward Age,” Financial Times, October 7, 1994, p. 19, and Michael Prowse, “IMF and World Bank ‘Must Adapt to New Global Financial Landscape,’” Financial Times, July 7, 1994, p. 5. 33. UNCTAD, Trade and Development Report, 1999 (Geneva: UNCTAD, 1999). For a review, see Chakravarthi Raghavan, Third World Economics, November 1-15,1999.

In fact, there’s another side of the story which is known to economists but is barely reported. That is that even the major economic indicators have deteriorated since the reforms began worldwide. A couple of years ago there was a Bretton Woods commission headed by Paul Volcker, the former head of the Federal Reserve Board, and a very respectable figure in the profession. Their report came out about five years ago.32 They studied what had happened to the global economy and the U.S. economy since the so-called reforms were instituted in the early 1970s, when the post-World War II Bretton Woods system was dismantled. Their conclusion was that in the industrial countries economic growth had declined by half. It was still growth, but half the rate of the previous period. Other studies make it about two-thirds.

Its last annual report said that we have to approach these questions with “humility,” because nobody has a clue as to what’s going on.46 Jeffrey Sachs, an economist at Harvard, said in a recent article that we have to recognize that the international economy is “dimly understood.”47 In fact, every international economist who is even semihonest tells you, We don’t really understand what’s going on, but we have some ideas. So anything that’s said—certainly anything that I say—you want to add many grains of salt to, because nobody really understands. However, some things are moderately clear and there’s a fair consensus. Through the Bretton Woods era—roughly from the end of the Second World War up to the early 1970s—exchange rates were pretty close to fixed and capital was more or less controlled. So there weren’t extreme capital flows. That was changed in the early 1970s by decision. Capital flow was liberalized. There have been associated events, maybe consequences, maybe not. The humility comes back. Associated with this period of liberalization of capital has been a number of things.


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Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

activist fund / activist shareholder / activist investor, banking crisis, basic income, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, creative destruction, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, fixed income, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, labour mobility, late capitalism, liberal capitalism, means of production, moral hazard, Myron Scholes, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

The crisis of the tax state From tax state to debt state Debt state and distribution The politics of the debt state Debt politics as international financial diplomacy 3 THE POLITICS OF THE CONSOLIDATION STATE: NEOLIBERALISM IN EUROPE Integration and liberalization The European Union as a liberalization machine Institutional change: from Keynes to Hayek The consolidation state as a European multilevel regime Fiscal consolidation as a remodelling of the state Growth: back to the future Excursus on regional growth programmes On the strategic capacity of the European consolidation state Resistance within the international consolidation state 4 LOOKING AHEAD What now? Capitalism or democracy The euro as a frivolous experiment Democracy in Euroland? In praise of devaluation For a European Bretton Woods Gaining time BIBLIOGRAPHY INDEX INTRODUCTION Crisis Theory: Then and Now Buying Time is an expanded version of the Adorno Lectures I gave in June 2012 at the Institut für Sozialforschung, almost exactly forty years after I graduated in sociology from Frankfurt University.1 I cannot say that I was a ‘disciple’ of Adorno. I attended some of his lectures and seminars, but did not understand much; that’s how it was in those days, and people accepted it.

The underlying dynamic, allowing for local variations, is the same – even for countries considered as far apart from each other as Sweden and the United States. What becomes particularly visible in a study over time is the leading role of the largest and most capitalist of all the capitalist countries, the United States, where all the trend-setting developments originated: the ending of the Bretton Woods system and of inflation, the growth of budget deficits as a result of tax resistance and tax cuts, the rise of debt-financing of government activity, the wave of fiscal consolidations in the 1990s, finance market deregulation as part of a policy of privatizing government functions, and, of course, the financial and fiscal crisis of 2008. The causal links and mechanisms of interest to sociologists also operate in a temporal dimension, and indeed over long periods of time as far as the adaptation and change of institutions or whole societies are concerned.

A devaluation regime spares countries having to negotiate over structural reforms and transfer payments; interference by ‘competitive’ countries in less ‘competitive’ ones is as unnecessary as ‘growth packages’, which are at constant risk of being misunderstood by their recipients as market entry charges or a form of intergovernmental taxation on economic performance, and therefore of being rejected by those who have to pay for them. International conflicts arise only if a country devalues its currency too often in too short intervals – a practice that, however, quickly loses more in trust than it would gain from the restoration of its export capacity. For this reason alone, there is no danger that countries will use devaluation in excess to improve their market position.23 FOR A EUROPEAN BRETTON WOODS The European Monetary Union was a political mistake. In a eurozone marked by great heterogeneity of member-states, it eliminated devaluation without also eliminating nation-states and democracy at national level.24 Instead of making things worse by rushing ahead to complement monetary union with ‘political union’ – which would in practice be nothing other than a final enthronement of the consolidation state – an attempt might be made, as long as the crisis keeps its future settlement open, to undo the euro and return to an orderly system of flexible exchange rates in Europe.25 Such a system, which would recognize the differences among European societies instead of trying to reform them out of existence along neoliberal lines, would be politically and economically far less demanding than monetary union.


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Empire by Michael Hardt, Antonio Negri

Berlin Wall, Bretton Woods, colonial rule, conceptual framework, equal pay for equal work, European colonialism, Fall of the Berlin Wall, feminist movement, Francis Fukuyama: the end of history, global pandemic, global village, Haight Ashbury, informal economy, invisible hand, late capitalism, low skilled workers, mass immigration, means of production, Monroe Doctrine, Nelson Mandela, New Urbanism, open borders, post-industrial society, postindustrial economy, Scramble for Africa, social intelligence, The Wealth of Nations by Adam Smith, union organizing, urban planning

For a thorough historical account ofthe events and the protagonists at the Bretton Woods Conference, see Armand Van Dormael, Bretton Woods: Birth of a Monetary System (London: Macmillan, 1978). For a historical account that gives a broader view ofthe comprehensive U.S. preparation for hegemony in the postwar period by posing the economic planning at Bretton Woods together with the political planning at Dum- barton Oaks, see George Schild, Bretton Woods and Dumbarton Oaks: American Economic and Political Postwar Planning in the Summer of 1944 (New York: St. Martin’s Press, 1995). 9. Giovanni Arrighi, The Long Twentieth Century (London: Verso, 1994), p. 278–279. 10. On the international financial crisis that began in the 1970s with the collapse of the Bretton Woods mechanisms, see Peter Coffey, The World Monetary Crisis (New York: St.

Capitalist Responseto theCrisis As the global confluence ofstruggles undermined the capitalist and imperialist capacities ofdiscipline, the economic order that had dominated the globe for almost thirty years, the Golden Age of U.S. hegemony and capitalist growth, began to unravel. The form and substance ofthe capitalist management ofinternational develop- ment for the postwar period were dictated at the conference at Bretton Woods, New Hampshire, in 1944.8 The Bretton Woods system was based on three fundamental elements. Its first characteris- tic was the comprehensive economic hegemony ofthe United States over all the nonsocialist countries. This hegemony was secured R E S I S T A N C E , C R I S I S , T R A N S F O R M A T I O N 265 through the strategic choice ofa liberal development based on relatively free trade and moreover by maintaining gold (of which the United States possessed about one third ofthe world total) as the guarantee ofthe power ofthe dollar.

Reform in the dominant capitalist countries could thus be financed by a surplus ofexports to the United States and guaranteed by the monetary system ofthe dollar. Finally, Bretton Woods dictated the establish- ment ofa quasi-imperialist relationship ofthe United States over all the subordinate nonsocialist countries. Economic development within the United States and stabilization and reform in Europe and Japan were all guaranteed by the United States insofar as it accumulated imperialist superprofits through its relationship to the subordinate countries. The system ofU.S. monetary hegemony was a fundamentally new arrangement because, whereas the control ofprevious interna- tional monetary systems (notably the British) had been firmly in the hands ofprivate bankers and financiers, Bretton Woods gave control to a series ofgovernmental and regulatory organizations, including the International Monetary Fund, the World Bank, and ultimately the U.S.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

"Robert Solow", Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Berlin Wall, book scanning, Bretton Woods, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, premature optimization, price stability, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Shiller, short selling, Silicon Valley, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

But the “disequilibrium” in the current account grows (the current account deficit increases) to “crisis dimensions, requiring drastic action at home, international consultation, and help from abroad.”76 38   e u r o t r a g e d y Almost as if he could foresee the recurring need to devalue the French franc and the tendency for French authorities to cling to the fixed rate and delay that decision until a financial crisis loomed, Friedman called for abandoning the Bretton Woods system.77 It was time, he insisted, for currencies to float freely: the exchange rate—​the currency’s price—​should not be decided once every several years by the government or the IMF but should be determined continuously by market forces of supply and demand. Under floating or “flexible” exchange rates, the value of the currency would, he said, respond to rising inflation and widening current account deficits well before crisis-​like conditions set in. The exchange rate, a “sensitive” price, would act like a shock absorber. Over the two decades that followed, Friedman was proven right in his diagnosis of the shortcomings of fixed exchange rates. The Bretton Woods system was poorly equipped to deal with persistent differentials in inflation rates across countries.

France, quite simply, had been unable to get its own house in order. three leaps in the dark 39 By the late 1960s, many countries found it impossible to live within the constraints of fixed exchange rates and the postwar Bretton Woods system of fixed-​but-​adjustable exchange rates was slowly breaking down. The United States, the linchpin of the system, struck the final blow. Running high inflation rates, it could not sustain its commitment to pay $35 for an ounce of gold. On March 15, 1968, a “two-​tier” system was introduced under which central banks would continue to transact with one another at the $35 price but would not interfere in the setting of gold’s market price. At that point, monetary historian Michael Bordo says, the Bretton Woods system effectively ended, although an attempt to stay within a fixed exchange rate regime continued for some years.79 In March 1969, another towering economist, Harry Gordon Johnson, repeated Friedman’s call for flexible exchange rates.

Spiegel Online, August 5. http://​www.spiegel.de/​international/​europe/​euro-​struggles-​can-​be-​traced-​to-​ origins-​of-​common-​currency-​a-​831842-​druck.html. Bone, James. 2013. “Draghi ‘Not to Blame’ for Scandal.” Times, January 29. Bone, James. 2014. “Italy’s Youngest Prime Minister Promises Revolution on Twitter.” Times, February 23. Bordo, Michael. 1981. “The Classical Gold Standard: Some Lessons for Today.” Federal Reserve Bank of St. Louis Review 63, no. 6: 1–​17. Bordo, Michael. 1993. “The Bretton Woods International Monetary System: A Historical Overview.” In A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, edited by Michael D. Bordo and Barry Eichengreen. Chicago: University of Chicago Press. http://​www.nber.org/​ chapters/​c6867. Bordo, Michael, Angela Redish, and Hugh Rockoff. 2015. “Why Didn’t Canada Have a Banking Crisis in 2008 (or in 1930, or 1907, or . . .)?” Economic History Review 68, no. 1: 218–​243.


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Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, business cycle, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

Taken together, economists’ models are our best cognitive guide to the endless hills and valleys that constitute social experience. * Whether White was actually a Soviet spy has been an ongoing controversy. The case against White was made forcefully in Benn Steil’s The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, NJ: Princeton University Press, 2013). For the argument on the other side, see James M. Boughton, “Dirtying White: Why Does Benn Steil’s History of Bretton Woods Distort the Ideas of Harry Dexter White?” Nation, June 24, 2013. Whatever the facts of the case, it is clear that the International Monetary Fund and the World Bank served quite well the economic interests of the United States (as well as those of the rest of the Western world) in the decades following the end of the Second World War.

Acemoglu, Daron, 206 advertising, prisoners’ dilemma and, 14–15 Africa, Washington Consensus and, 162 agriculture: subsidies in, 149, 194 subsistence vs. modern, 75, 88 Airbus, 15 airline industry, deregulation of, 168 Akerlof, George, 68, 69n Algan, Yann, 79n, 200n Allen, Danielle, xiv American Economic Review (AER), 30–31 American Political Science Review (APSR), 30–31 Angrist, Joshua, 108 antelopes, 35n antipoverty programs, 3–4 cash grants vs. subsidies in, 4 antitrust law, 161 Argentina, 166 arguments, mathematics and, 35n Arrow, Kenneth, 31, 49–51 Ash, Michael, 77 Asia, economic growth and, 163–64, 166 asset bubbles, 152–58 asymmetric information, 68–69, 70, 71 Auctions: Theory and Practice (Klemperer), 36n “Auctions and Bidding: A Primer” (Milgrom), 36n auction theory, 36, 168 automobiles, effect of sales tax and demand on, 180–81 balanced budgets, 171 Bangladesh, 57–58, 123 Bank of England, 197 banks, banking, 1n, 2 computational models and, 38 credit rationing in, 64–65 globalization and, 165–66 Great Recession and, 152–59 insurance in, 155 regulation of, 155, 158–59 shadow sector in, 153 bargaining, 124–25, 143 Battle of Bretton Woods, The: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Steil), 1n–2n bed nets, randomized testing and, 106, 204 behavioral economics, 69–71, 104–7, 202–4 Berlin, Isaiah, 175 Bernanke, Ben, 134–35 Bertrand competition, 68 Bhagwati, Jagdish, 182n–83n big data, 38–39, 40 Bloomberg, Michael, 4 Boeing, 15 Böhm-Bawerk, Eugen von, 119 Bordo, Michael D., 127n Borges, Jorge Luis, 43–44, 86 Boston University, 3 Boughton, James M., 1n Boulding, Kenneth, 11 bounded rationality, 203 Bowles, Samuel, 71n Brazil: antipoverty programs of, 4 globalization and, 166 Bretton Woods Conference (1944), 1–2 Britain, Great, property rights and, 98 bubbles, 152–58 business cycles, 125–37 balanced budgets and, 171 capital flow in, 127 classical economics and, 126–27, 129, 137 inflation in, 126–27, 133, 135, 137 new classical models and, 130–34, 136–37 butterfly effect, 39 California, University of: at Berkeley, 107, 136, 147 at Los Angeles, 139 Cameron, David, 109 capacity utilization rates, 130 capital, neoclassical distribution theory and, 122, 124 capital flow: in business cycles, 127 economic growth and, 17–18, 114, 164–67 globalization and, 164–67 growth diagnostics and, 90 speculation and, 2 capitalism, 118–24, 127, 144, 205, 207 carbon, emissions quotas vs. taxes in reduction of, 188–90, 191–92 Card, David, 57 Carlyle, Thomas, 118 carpooling, 192, 193–94 cartels, 95 Cartwright, Nancy, 20, 22n, 29 cash grants, 4, 55, 105–6 Cassidy, John, 157n Central Bank of India, 154 Chang, Ha-Joon, 11 chaos theory, butterfly effect and, 39 Chicago, University of, 131, 152 Chicago Board of Trade, 55 Chile, antipoverty programs and, 4 China, People’s Republic of, 156, 163, 164 cigarette industry, taxation and, 27–28 Clark, John Bates, 119 “Classical Gold Standard, The: Some Lessons for Today” (Bordo), 127n classical unemployment, 126 climate change, 188–90, 191–92 climate modeling, 38, 40 Cochrane, John, 131 coffee, 179, 185 Colander, David, 85 collective bargaining, 124–25, 143 Colombia, educational vouchers in, 24 colonialism, developmental economics and, 206–7 “Colonial Origins of Comparative Development, The” (Acemoglu, Robinson, and Johnson), 206–7 Columbia University, 2, 108 commitment, in game theory, 33 comparative advantage, 52–55, 58n, 59–60, 139, 170 compensation for risk models, 110 competition, critical assumptions in, 28–29 complementarities, 42 computable general equilibrium (CGE) models, 41 computational models, 38, 41 computers, model complexity and, 38 Comte, Auguste, 81 conditional cash transfer (CCT) programs, 4, 105–6 congestion pricing, 2–3 Constitution, U.S., 187 construction industry, Great Recession and, 156 consumers, consumption, 119, 129, 130, 132, 136, 167 cross-price elasticity in, 180–81 consumer’s utility, 119 contextual truths, 20, 174 contingency, 25, 145, 173–74, 185 contracts, 88, 98, 161, 205 coordination models, 16–17, 42, 200 corn futures, 55 corruption, 87, 89, 91 costs, behavioral economics and, 70 Cotterman, Nancy, xiv Cournot, Antoine-Augustin, 13n Cournot competition, 68 credibility, in game theory, 33 “Credible Worlds, Capacities and Mechanisms” (Sugden), 172n credit rating agencies, 155 credit rationing, 64–65 critical assumptions, 18, 26–29, 94–98, 150–51, 180, 183–84, 202 cross-price elasticity, 180–81 Cuba, 57 currency: appreciation of, 60, 167 depreciation of, 153 economic growth and, 163–64, 167 current account deficits, 153 Curry, Brendan, xv Dahl, Gordon B., 151n Darwin, Charles, 113 Davis, Donald, 108 day care, 71, 190–91 Debreu, Gerard, 49–51 debt, national, 153 decision trees, 89–90, 90 DeLong, Brad, 136 democracy, social sciences and, 205 deposit insurance, 155 depreciation, currency, 153 Depression, Great, 2, 128, 153 deregulation, 143, 155, 158–59, 162, 168 derivatives, 153, 155 deterrence, in game theory, 33 development economics, 75–76, 86–93, 90, 159–67, 169, 201, 202 colonial settlement and, 206–7 institutions and, 98, 161, 202, 205–7 reform fatigue and, 88 diagnostic analysis, 86–93, 90, 97, 110–11 Dijkgraaf, Robbert, xiv “Dirtying White: Why Does Benn Steil’s History of Bretton Woods Distort the Ideas of Harry Dexter White?”

My friends and coauthors Sharun Mukand and Arvind Subramanian generously gave their time and helped shape the overall project with their ideas and contributions. Last but not least, my greatest debt, as always, is to my wife, pınar Doan, who gave me her love and support throughout, in addition to helping me clarify my argument and discussion of economics concepts. Economics Rules INTRODUCTION The Use and Misuse of Economic Ideas Delegates from forty-four nations met in the New Hampshire resort of Bretton Woods in July 1944 to construct the postwar international economic order. When they left three weeks later, they had designed the constitution of a global system that would last for more than three decades. The system was the brainchild of two economists: the towering English giant of the profession, John Maynard Keynes; and the US Treasury official Harry Dexter White.* Keynes and White differed on many matters, especially where issues of national interest were at stake, but they had in common a mental frame shaped by the experience of the interwar period.


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The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Exhibit 4.1 Equity vs. bond performance is closely linked to the business cycle; commodities tend to lag in a recession (average monthly, real total returns (since 1950)) Note: We use US NBER recessions. We further divide expansions and recessions if growth is positive or negative. Usually late expansion with positive growth is the longest phase in the cycle. Pre-1973 oil prices were regulated by the Texas Railroad Commission and gold prices were fixed by Bretton Woods until 1968. In the later phases of expansion, the best-performing assets remain equities, but these are dominated by equities with a higher beta, or those that tend to amplify movements in underlying fundamentals to a greater degree, such as EM equities. Commodities tend to be more neutral in this phase, and fixed income assets tend to underperform as a consequence of a higher investor tolerance for risk and, in most cases, higher inflation.

1961–1962 ‘Kennedy Slide’: Rising rates from 1959 Cold War tension No - 1966 Inflation following Johnson Great Society programme; Fed raised rates by approximately 1.5% in 1 year No - 1968–1970 Vietnam war and inflation; Fed raised rates to 9% from 4% 2 years before; between the start of 1968 and mid-1968 rates rose by 3% Yes Dec 1969 – Nov 1970 1973–1974 The crash after the collapse of the Bretton Woods system over the previous 2 years, with the associated ‘Nixon Shock’ and USD devaluation under the Smithsonian Agreement 1973 Oil Crisis: Price of oil rose from $3 per barrel to nearly $12 Yes Nov 1973 – Mar 1975 1980–1982 ‘Volcker crash’; the 1979 second oil crisis was followed by strong inflation; the Fed raised its rates from 9% to 19% in six months Yes Jan 1980 – July 1980 Jul 1981 – Nov 1982 1987 Black Monday: Flash Crash: computerised ‘programme trading’ strategies swamped the market; tensions between the US and Germany over currency valuations No - 1990 Gulf War: Iraq invasion of Kuwait; oil prices doubled Yes July 1990 – Mar 1991 2000–2002 Dotcom bubble; technology companies bankruptcy; Enron scandal; 09/11 attacks Yes Mar 2001 – Nov 2001 2007–2009 Housing bubble; sub-prime loan & CDS collapse; US housing market collapse Yes Dec 2007 – Jun 2009 Extending this analysis shows that, on the standard definition (of declines of 20% or more), there have been 27 bear markets in the S&P 500 since 1835 and 10 in the post-war period.

Although the economic environment was conducive to strong returns in the equity markets in this period, valuations also recovered from their post-war levels aided by a secular decline in the equity risk premium as many of the risks to the global system faded. New international institutions and a rule-based global trading system emerged.1 The setting up of the International Monetary Fund (IMF) and the World Bank, as part of the new international payments system known as the Bretton Woods monetary system, helped to reduce uncertainty. Meanwhile, global trade was strengthened and expanded by stronger institutional frameworks, such as the General Agreement on Tariffs and Trade (GATT), created in 1948, and the United Nations Conference on Trade and Development (UNCTAD), founded in 1964. In the same year, the sixth round of GATT negotiations started, commonly referred to as the Kennedy Round of multilateral trade negotiations.


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Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, John Meriwether, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Paul Samuelson, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond, zero-sum game

He learned a lot of his theory from his experience as an investor and this theory in turn modified his practice as an investor.” Keynes’ distaste of floating currencies (ironically his original vehicle of choice for speculating) eventually led him to participate in the construction of a global fixed currency regime at Bretton Woods in 1945.The post-World War II economic landscape, coupled with the ensuing Cold War–induced peace and the relative stability fostered by Bretton Woods, led to a boom in 500 450 Keynes 400 UK Broad Country Index Initial Base Value (100) 350 300 250 200 150 100 50 19 45 19 44 19 43 19 42 19 41 19 40 19 39 19 38 19 37 19 36 19 35 19 34 19 33 19 32 19 31 19 30 19 29 19 28 0 FIGURE 2.1 King’s College Cambridge Chest Fund and the UK Broad Country Equity Index Source: Motley Fool.

THE HISTORY OF GLOBAL MACRO HEDGE FUNDS 7 developed-country equity markets starting in 1945 and lasting until the early 1970s. During that time, there were few better opportunities in the global markets than buying and holding stocks. It wasn’t until the breakdown of the Bretton Woods Agreement in 1971, and the subsequent decline in the U.S. dollar, that the investment universe again offered the opportunities that spawned the next generation of global macro managers. POLITICIANS AND SPECULATORS Recent history is riddled with examples of politicians attempting to place blame on speculators for shortcomings in their own policies, and the breakdown of Bretton Woods was no exception. When the currency regime unraveled, President Nixon attempted to lay blame on speculators for “waging an all-out war on the dollar.” In truth, his own inflationary policies are more often cited as the underlying problem, with speculators a mere symptom of the problem.

Sometimes speculators add to volatility; other times they dampen it.The important point is, they don’t influence the trend. Underlying pressures combined with policy decisions drive market events. THE NEXT GENERATION OF GLOBAL MACRO MANAGERS The next round of global macro managers emerged out of the breakdown of the Bretton Woods fixed currency regime, which untethered the world’s markets. With currencies freely floating, a new dimension was added to the investment decision landscape. Exchange rate volatility was introduced while new tradable products were rapidly being developed. Prior to the breakdown of Bretton Woods, most active trading was done in the liquid equity and physical commodity markets. As such, two different streams of global macro hedge fund managers emerged out of these two worlds in parallel. 8 INSIDE THE HOUSE OF MONEY The Equity Stream One stream of global macro hedge fund managers emerged out of the international equity trading and investing world.


Super Continent: The Logic of Eurasian Integration by Kent E. Calder

3D printing, air freight, Asian financial crisis, Berlin Wall, blockchain, Bretton Woods, business intelligence, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, colonial rule, Credit Default Swap, cuban missile crisis, deindustrialization, demographic transition, Deng Xiaoping, disruptive innovation, Doha Development Round, Donald Trump, energy transition, European colonialism, failed state, Fall of the Berlin Wall, Gini coefficient, housing crisis, income inequality, industrial cluster, industrial robot, interest rate swap, intermodal, Internet of things, invention of movable type, inventory management, John Markoff, liberal world order, Malacca Straits, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, new economy, oil shale / tar sands, oil shock, purchasing power parity, quantitative easing, reserve currency, Ronald Reagan, seigniorage, smart cities, smart grid, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, supply-chain management, Thomas L Friedman, trade liberalization, trade route, transcontinental railway, UNCLOS, UNCLOS, union organizing, Washington Consensus, working-age population, zero-sum game

Profile of the Current System of Global Affairs The major structural features of our current global political economy grew out of the World War II peace settlement, and hence strongly reflect the overwhelming position of political, economic, and military strength that the Toward a New World Order 207 United States enjoyed at that time. The core was the Bretton Woods system of international finance, established at a gathering of distinguished financial specialists in July 1944, led by Lord Maynard Keynes of Britain and Harry Dexter White of the United States. It was quintessentially a regulatory system in Lowi’s parlance—an elaborate, formalized structure of institutions and rules, with concentrated costs and diffuse, broadly distributed benefits. One single power—the United States—played a tortured hegemonic role. The historic Bretton Woods conference, setting forth a plan to reconfigure the international financial system so as to avoid repeating the coordination failures of the Depression years, proposed establishing multiple multilateral financial institutions, in each of which the United States was to hold veto power.

Our point of departure is the important analytical 18 chapter 1 distinction made by Theodore Lowi among three functional categories of policy decisions— distributive, regulatory, and redistributive.36 The costs and benefits generated in the three types of cases are, as Lowi points out, crucially different. Table 1.4 suggests implications for concrete systems of international order. ta b l e 1 . 4 Systems of international order Rules Based Leadership Structure Yes No Unitary REGULATORY (Bretton Woods System) TRIBUTARY (Traditional Chinese World Order) Plural CONCERT OF POWERS (Congress of Vienna) DISTRIBUTIVE REGIONALISM/ GLOBALISM (Belt and Road Initiative) Regulatory and redistributive policies diffuse benefits to broad categories of individuals but concentrate costs. While equitable in many ways due to their broad application to general classes of people and situations, policies in these categories tend to provoke conflict and implementation resistance precisely because costs are so clearly concentrated and benefits are diffuse.

Conceptually, these distinctions generate a typology of international system types, based on the structure of costs and benefits generated and the degree of pluralism in the leadership of the international system in question.38 A configuration with distributive characteristics that embodies aspirations to order international affairs in general can be described as “distributive globalism.” China’s Belt and Road Initiative of recent years falls into this category, Eurasian Reconnection and Renaissance 19 and the US Marshall Plan of the late 1940s shared some of the same general characteristics. The foregoing categories are simply abstract types, and do not correspond precisely to any specific systems in the real world. They are, however, evocative. The classic Bretton Woods system of the early post–World War II years was clearly regulatory; China’s BRI of recent years is clearly distributive. This distinction, we suggest, has important consequences for both the normative acceptability and the political acceptability of both types of systems in the broader world. Distributive Globalism as a Resolution? In the preceding section we introduced the concept of distributive globalism, or a cosmopolitan orientation toward providing incentives that concentrate divisible benefits and diffuse prospective costs.


Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, technology bubble, transaction costs, yield curve

Though infrequent, devaluations 94 Triumph of the Optimists: 101 Years of Global Investment Returns and revaluations were often large. When the United States devalued the dollar in 1971, the Bretton Woods System collapsed. After some last-ditch attempts to set new fixed rates, the world turned in 1973 to the floating exchange rate system that persists to the present day. There were thus four exchange rate regimes over the twentieth century. During 1900–14 the gold standard was in effect. After that, apart from a brief return to the Gold Exchange Standard, the period 1914–45 contained the two world wars. The Bretton Woods fixed-rate system then operated from 1946–71. Finally, the period since has been one of floating exchange rates. Currencies went through an adjustment to the Bretton Woods system until 1949. It is therefore helpful to start by dividing our period into two: 1900–49 and 1950–2000.

There is a pervasive tendency for real exchange rates to have been more volatile in the recent floating-rate period, than in the earlier Bretton Woods era as demonstrated more formally by Taylor (2001). Increased currency volatility has come as a disappointment to the proponents of floating rates and to those who had accepted their arguments. On average, the fifteen non-US countries had a volatility of exchange rates relative to the dollar that was 2.4 times as large during the floating rate period, as compared to the Bretton Woods period. The average volatility of the fifteen non-UK countries’ sterling exchange rates was 2.1 times as large as in the Bretton Woods period (not shown in the chart), while that of the non-Japanese countries’ yen exchange rate, and of the non-German countries’ Deutschemark exchange rate were also much increased.

As Figure 7-1 shows, this kept exchange rates stable until the gold standard broke down in 1914 at the start of the First World War. It was briefly reinstated from 1925–31 as the Gold Exchange Standard. However, competitive devaluations, beggar-thy-neighbor trade policies, and the destructive effects of wars punctuated the first half of the twentieth century. In 1944 at Bretton Woods, New Hampshire, the Allied nations created the International Monetary Fund (IMF) and the World Bank to instigate a new post-war monetary system. Implemented in 1946, the Bretton Woods Agreement required each government to peg its exchange rate to the dollar or gold. Since one ounce of gold was priced at $35, and the US Treasury stood ready to exchange dollars for gold, exchange rates were fixed against the dollar. They were to fluctuate only within 1 percent of the stated value of the currency, and central banks were to intervene in foreign exchange markets to defend currencies from temporary pressures.


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How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

Ordinary members of the public hear much more about the equity market—the “stock market”—in the news and general chatter, but the bond market is much bigger and more important, in global financial terms: as an investor tells Michael Lewis in The Big Short, “The equity world is like a fucking zit compared to the bond market.”23 Bretton Woods The setting for a conference in July 1944 where the Allies set out the agreement to regulate international economic relations after the war. Countries agreed to fixed exchange rates, tied to the US dollar, which in turn was tied to the ownership of actual, physical gold; the conference also agreed to the creation of the International Monetary Fund and the International Bank of Reconstruction and Development, which was to become the World Bank. The specific aim of the conference was to avoid the “beggar thy neighbor” policies between states that had played such a role in the turmoil of the twentieth century. The Bretton Woods system lasted from 1945 until President Nixon unilaterally took the USA off it on 15 August 1971, an event known as the “Nixon shock,” which reintroduced free-floating currencies.

Gold does not tarnish, is portable but satisfyingly heavy, looks attractive, is fungible or easily interchangable, and is very hard to mine—that’s a virtue, for a currency, because it means there’s no easy way for someone to find loads of it and make the value decline. All the gold in the world would fit in a cube roughly twenty meters on each side. Those reasons add together to make gold historically the most popular underpinning for coinage and thence for paper money and modern currencies. Gold hasn’t played this role globally since 1971, when President Nixon ended the Bretton Woods system, in which the US dollar was underpinned by gold reserves and linked to foreign currencies through fixed exchange rates. The value of gold sharply declined after that, losing two-thirds of its value, but in the noughties, as global uncertainties rose, gold had an extraordinary ten years, surging in price from $271 an ounce in 2001 to a peak of more than $1,800 in 2011. The explanation for that is that “gold is where money goes when it’s scared.”

By November 1923, a dollar was worth 630 billion marks, a loaf of bread cost 140 billion marks, and Germany was disintegrating under the strain. The result was the destruction of German society as it was then constituted, which led directly to the rise of the Nazis—a history that needs to be borne in mind whenever it seems the Germans are being a bit uptight about holding the line against inflation in the euro zone. IMF The International Monetary Fund. This is the organization, created by the Bretton Woods agreement, that takes money from member countries and disburses it to countries in need of a cash injection, always with strict conditions attached. The IMF insists on sharp crackdowns on public spending, removing price controls, privatizing state-owned businesses, and liberalizing trade. To countries on the receiving end of this process, it sometimes seems as if the IMF imposes an off-the-shelf kit of solutions regardless of local history and difficulty and circumstance.


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Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

As that consensus began to unravel in the 1970s with the failure of the Bretton Woods system of fixed but adjustable exchange rates, countries slowly moved away from capital controls to the world we’re now living in. In a world of constant financial innovation, it became increasingly difficult to impose capital controls successfully. Moreover, capital controls allowed countries to pursue bad domestic policies for too long, ultimately to their own detriment. Nevertheless, the abolition of capital controls has hardly been plain sailing. Some economists foresaw the problems associated with newly liberalized capital markets. James Tobin (1918–2002), for example, suggested in 1972 a (now-eponymous) tax – to be paid on foreign-exchange transactions – to limit speculative cross-border capital flows. He feared that the failures of Bretton Woods would be replaced by anarchy in the capital markets.

That, I believe, is a false distinction. The distinction was made because the credit crunch that began in 2007 cried out for a global solution; for a while, then, there was a commonality of interest. History suggests, however, that commonalities of interest do not last very long. Until and unless the G20 is able to confront the difficulties outlined in this book, it is likely to head the same way as the League of Nations and the Bretton Woods exchange-rate system – in other words, into the dustbin of history. The G20 doesn’t really have the teeth to offer the international rule of law which was, in effect, forced upon the world by the imperial powers in the nineteenth century. What might a new international order begin to look like? Already, there are clues dotted around the world. I suspect governments will increasingly use their influence to conduct foreign policy through their influence on international markets, encouraging the creation of bilateral relationships that appear to be driven by commercial interests but which, in reality, are an important part of modern-day realpolitik.

That rethink must involve a better understanding of the role of emerging nations in determining inflation, both in the emerging world and in the West.1 BACK TO THE 1970S For those brought up in the 1970s, the achievement of price stability became the big macroeconomic prize. During that decade, one economic disaster followed another, largely because there was no monetary discipline and, hence, no anchor for inflationary expectations. The commodity price surge at the beginning of the 1970s came about partly because the US over-stimulated demand in a bid to fund the Vietnam War. The collapse of the Bretton Woods exchange-rate system, and the volatility that followed, reflected the willingness to tolerate inflation as the ‘acceptable’ cost of delivering a low rate of unemployment. The quadrupling of oil prices at the end of 1973, as a consequence of the Arab oil embargo (itself a reaction to the Yom Kippur War), was only possible because the inflation genie was already out of the bottle. As inflation – and expectations of inflation – picked up, so industrial relations deteriorated, creating a legacy of strikes, huge wage and price increases and the beginnings of so-called ‘stagflation’, whereby inflation went up but economic growth and employment came down.


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The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

Airbnb, altcoin, bank run, banking crisis, bitcoin, blockchain, Bretton Woods, buy and hold, California gold rush, capital controls, carbon footprint, clean water, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cryptocurrency, David Graeber, disintermediation, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, intangible asset, Internet of things, inventory management, Joi Ito, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, money: store of value / unit of account / medium of exchange, Nelson Mandela, Network effects, new economy, new new economy, Nixon shock, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, underbanked, WikiLeaks, Y Combinator, Y2K, zero-sum game, Zimmermann PGP

After all, there is no fully endorsed international criminal court; the one in The Hague isn’t recognized by Washington. The international realm exists in a state of quasi anarchy—a perfect fit for borderless cryptocurrencies. Some international agreements do stick, such as the Bretton Woods system of pegged currencies established in 1944 amid the crisis of World War II (and ended when President Nixon squelched the gold standard in 1971). Might a cryptocurrency crisis goad governments into another such sweeping agreement? A Bretton Woods II? Those who’ve dreamed of the IMF’s playing an intermediary role in international commerce, who’ve wanted to free the world of its unhealthy dependence on the dollar and to reduce the excessive influence of the Fed and U.S. Treasury, might suddenly feel empowered. The Chinese and the French, who’ve pushed to have the IMF’s Special Drawing Rights elevated from their current role as mere units of accounting to becoming an international reserve currency for storing central bank deposits, might have themselves a new cause.

Some of the more cryptocurrency-friendly states: The Web site BitLegal offers comprehensive reports on the legal status of bitcoin around the world, http://www.bitlegal.net/index.php. Wences Casares, the CEO of bitcoin wallet: Interviewed by Michael J. Casey, September 12, 2014. Zurich-based investment manager and high-tech: Richard Olsen, interviewed by Michael J. Casey, December 11, 2013, and June 13, 2014. when the dollar goes digital, “national borders are”: Eswar Prasad, interviewed by Michael J. Casey, February 7, 2014. such as the Bretton Woods system of pegged: M. J. Stephey, “Bretton Woods System,” Time, October 21, 2008, http://content.time.com/time/business/article/0,8599,1852254,00.html. “If suddenly the entire world starts”: Roger Ver, speaking at the North American Bitcoin Conference, Miami Beach, January 26, 2014. Index The index that appeared in the print version of this title does not match the pages in your e-book. Please use the search function on your e-reading device to search for terms of interest.

Britain—led by the economist John Maynard Keynes—wanted an internationally based solution to be run by the newly created International Monetary Fund. But in the end, the United States, as the only major power not devastated by war and with its currency now globally dominant, called the shots. The U.S. dollar became the central pole around which the global economy would function. It remains so today. The pact signed at the Bretton Woods Conference in 1944 repegged the dollar to gold and then got the rest of the world to peg their currencies to the dollar. Foreign governments holding reserves in dollars were given the right to redeem them in gold at a fixed rate. It worked as a financial stabilizer for two and half decades, but by the late 1960s the system’s own constraints—in this case imposed directly on the Fed—made it unsustainable.


Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Pérez

agricultural Revolution, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, business cycle, capital controls, commoditize, Corn Laws, creative destruction, David Ricardo: comparative advantage, deindustrialization, distributed generation, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Hyman Minsky, informal economy, joint-stock company, Joseph Schumpeter, knowledge economy, late capitalism, market fundamentalism, new economy, nuclear winter, offshore financial centre, post-industrial society, profit motive, railway mania, Robert Shiller, Robert Shiller, Sand Hill Road, Silicon Valley, Simon Kuznets, South Sea Bubble, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, trade route, tulip mania, Upton Sinclair, Washington Consensus

The event in question, though apparently small and relatively isolated, is experienced by the pioneers of the time as the discovery of a new territory, as a powerful announcement of what those technologies can offer far into the future and as a call for entrepreneurial action. By contrast, any attempt at indicating an ending date for each revolution would be relatively meaningless. It is true that certain events can be felt by society as announcing the ‘end of an era’, such as the 1973 oil crisis and the 1971 breakdown of the Bretton Woods agreement on the dollar. Nevertheless, as will be discussed in the next chapter, each set of technologies undergoes a difficult and prolonged period of stretching when the impending exhaustion of its potential becomes increasingly visible. This phenomenon is crucial to the present interpretation. When each technological revolution irrupts, the logic and the effects of its predecessor are still fully dominant and exert powerful resistance.

The Turning Point: Rethinking and Rerouting Development The notion of a ‘turning point’ is a conceptual device to represent the fundamental changes required to move the economy from a Frenzy mode, shaped by financial criteria, to a Synergy mode, solidly based on growing production capabilities. The turning point then is neither an event nor a phase; it is a process of contextual change. It can take any amount of time, from a few months to several years, it can be marked by clear-cut events such as the Bretton Woods meetings, enabling the orderly international Deployment of the fourth surge, or the repeal of the Corn Laws in Britain, facilitating the Synergy of the second. It could also be happening in the background with a series of changes that seem to come together as deployment begins. The turning point has to do with the balance between individual and social interests within capitalism. It is the swing of the pendulum from the extreme individualism of Frenzy to giving greater attention to collective well being, usually through the regulatory intervention of the state and the active participation of other forms of civil society.

Hours of work, salaries, health, social security, protection, the risk of invalidity and old age pensions stopped being a personal issue’ and became more and more a responsibility taken up by the state.211 For the full development of the Age of the Automobile, a wide range of institutions was set up. Many of them were to put order in international finance, investment and trade: The International Monetary Fund (IMF), the World Bank, the Bank of International Settlements (BIS), the Marshall Plan and supervisory agencies, the reserve role assigned to the US dollar in the Bretton Woods accords, the General Agreement on Tariffs and Trade (GATT) and others. Many more were to establish an orderly framework at the national level: Keynesian policies, separate regulatory bodies for banks, securities, insurance, savings (to avoid the mixed financial services that allowed risking people’s savings in 209. On the crucial importance of this for the deployment of the paradigm, see Lloyd-Jones and Lewis (1998). 210.


pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

Airbnb, bank run, Bernie Madoff, bitcoin, Bretton Woods, buy and hold, Carmen Reinhart, corporate raider, correlation does not imply causation, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, money market fund, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Travis Kalanick, Uber for X, War on Poverty, yield curve

Stated simply, the first major decline in the value of the dollar had nothing to do with the Fed. So incensed was Fed Chairman Eugene Meyer by FDR’s decision that he actually resigned.6 Let’s shift to 1944 and the Bretton Woods monetary conference at the Mount Washington Hotel. The U.S. delegation was led by members of the U.S. Treasury; assistant secretary Harry Dexter White was the lead U.S. delegate. With the dollar pegged to gold at 1/35th of an ounce, the currencies of the free world would peg theirs to a dollar that had a stable definition. At least from the standpoint of the United States, the global currency agreement, per Benn Steil’s The Battle of Bretton Woods (2013), was largely a creation of the Treasury and the Roosevelt White House.7 And while there were sometimes large wiggles in the dollar price of gold in the aftermath of 1944, the dollar was defined as 1/35th of an ounce right up until 1971.

INDEX Adapt (Harford), 32, 64–65 The Age of Reagan (Hayward), 49, 169 Allison, John, 119, 152, 172–73 Altig, David, 156 Amazon, 97–98, 108, 125, 143, 155 Ambassador Hotel, 34, 35–36 Apple Computer, 30–31, 125, 143 Apple Music, 9–10 Austin, Texas, 123, 148 Austrian School of economics, 79, 87, 88–89, 90, 91–95, 113–14, 141 See also von Mises, Ludwig Bain Capital, 126 Baker Hughes, 73 Baltimore, Maryland, 135, 139–40, 143 Baltimore Ravens, 17 The Baltimore Sun, 135 banking bank cash reserve and capital requirements, 98–102 federal deposit insurance, 101–2 housing boom and “easy credit,” 113–22 inability of banks to multiply money and credit, 86–92, 96 insolvent banks and necessity of the Fed, 164–65 interbank lending rates, 114–16, 156–58 lending practices, 86–90, 98–102, 109–10 necessity of traditional banks, 105–12 proposed Glass-Steagall reintroduction, 102–3 and Wall Street, 126, 129–31 Bank of America, 89, 103, 108, 120 Bank of Bird-in-Hand, 111 Bank of Japan, 152, 159 Bartley, Robert, 70, 71, 72 Bartley, Robert L., 157–58 The Battle of Bretton Woods (Steil), 95, 169 Bear Stearns, 120 Beatty, Warren, 23–24, 28 Beckworth, David, 138–39 Berkshire Hathaway, 62, 85 Bernanke, Ben, 41–47, 72, 106, 128, 149, 154, 164 Bezos, Jeff, 59, 97–98, 150 Biden, Joe, 59 billion-dollar “unicorn” companies, 28, 148 Biography of the Dollar (Karmin), 100 Bitcoin, 144 Blinder, Alan, 1 Bloomberg news organization, 42 Blumenthal, Michael, 117, 170 Bonnie & Clyde (film), 23 Brady, Tom, 16 Bretton Woods monetary conference, 95, 169 Brookes, Warren, 49, 50, 69, 72, 97 Brown, James, 25 Buffett, Warren, 59, 62, 78, 85, 150 Burns, Arthur, 169, 170 Bush, George W., 71, 72–73, 118–19, 121, 171 cab fares during periods of heavy demand, 11–12 Candy, John, 22 Capital City (Kessner), 30 capitalism credit and crowdsourcing, 110 failure as feature of, 58, 89, 100, 125 and filling of unmet needs, 112, 179 turning scarcity into abundance, 53–54, 81 car companies, 56–57 car manufacturing process, 65–66 Carroll, Pete, 18–20 Carter, Jimmy, 117, 170 Cassel, Gustav, 119 Cato Institute, 135 The CEO Tightrope (Trammell), 123–24 The Changed Face of Banking (Smith), 111, 129 Chinese economy, 94, 96, 118, 135–36, 137, 138 Chinese stock market, 152–53 Citadel hedge fund, 41, 42, 43 Citigroup, 128 Cleveland, Ohio, 137–38 Clinton, Bill, 51–52, 71, 72, 171 Clinton, Hillary, 48, 51–52, 59 coaching and recruiting of college athletes, 15–21, 78–79 Cochrane, John, 102 computer company failures, 57 Congress.

Perhaps even more interesting about the Austrian critique of the Fed in the 1920s, and the strange supposition that it was the cause of the Roaring Twenties boom, is that in isolation, the Fed was “tight.” This isn’t to say that credit created in the real economy sat idle thanks to the Fed, but it is to say that the Fed itself, worried in Austrian fashion about too much credit creation, actually attempted to slam on the brakes. As economic historian Benn Steil recalls about the 1920s Fed in The Battle of Bretton Woods (2013), a history of the steps that led to the post–WWII gold standard: Unlike the Bank of England in the late nineteenth century, the U.S. Federal Reserve of the 1920s simply did not follow the cardinal rule of the gold standard—that is, to expand credit conditions when gold flowed in, and contract them when gold flowed out. It frequently did the opposite.11 The availability of credit in an economy is a function of production in same, and investor excitement about production in same.


pages: 327 words: 90,542

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"Robert Solow", 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Berlin Wall, bitcoin, Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, plutocrats, Plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

Their efforts to develop and to improve living standards provided further impetus for global expansion, but despite their new freedom, most initially found themselves continuing to provide raw materials, investment outlets, markets, and cheap labor for the industrialized countries of the West. The international monetary order and infrastructure of postwar economic expansion was provided by the Bretton Woods Agreement of July 1944. Bretton Woods sought to ensure that there would be no return to the conditions of the Great Depression, especially the collapse of growth, employment, and international trade, and the rise of protectionism that accompanied it. The focus was on establishing free trade based on the convertibility of currencies with stable exchange rates. In the past this problem had been solved through the gold standard, whereby the government or central bank of a country guaranteed to redeem notes upon demand for a fixed amount of gold.

The West, moreover, did not want to confer any advantage on the communist Soviet Union, which controlled a sizeable proportion of known gold reserves and had emerged as a geopolitical rival to the US. Bretton Woods therefore established a system of fixed exchange rates using the US dollar as a reserve currency. The dollar was to have a set relationship to gold, at US$35 an ounce, and the US government committed to converting dollars into gold at that price. Other countries would peg their currencies to it, giving the US an unprecedented influence in the global economy that exists to this day. Supreme as the world's currency, the dollar was now as good as gold. Bretton Woods also established the International Bank for Reconstruction and Development (better known as the World Bank) and the International Monetary Fund (IMF). Together with the 1947 General Agreement on Tariffs and Trade (or GATT), which evolved into the World Trade Organization, and the United Nations, which in 1945 succeeded the League of Nations, these institutions promoted relative stability in the world economy.

In October 1973, Arab members of the Organization of the Petroleum Exporting Countries (OPEC) proclaimed an oil embargo, in response to US backing for Israel during the Yom Kippur War and in support of the Palestinians. The price of oil rose from US$3 per barrel to nearly US$12. In 1979, in the wake of the Iranian revolution, oil output fell and the price rose to nearly US$40 per barrel. This resulted in higher inflation and a sharp global economic slowdown. This decade saw the collapse of the Bretton Woods international monetary system. The cost to the US of the Vietnam War and the Great Society programs had spurred sharp increases in prices, along with large budget deficits and increased dollar outflows to pay for the expenditures. Fearing devaluation of the US currency relative to the German Deutsche Mark and the Japanese yen, traders sought to change dollars into gold. By the early 1970s, dollar holders had lost faith in the ability of the US to back its currency with gold, as the ratio of gold available to dollars deteriorated from 55 percent to 22 percent.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta analysis, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, Pareto efficiency, postindustrial economy, price stability, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, special economic zone, spectrum auction, Steven Pinker, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

Well-functioning, sustainable markets are backed by a wide range of institutions that provide the critical functions of regulation, redistribution, monetary and fiscal stability, and conflict management. These institutional functions have so far been provided largely by the nation-state. Throughout the postwar period, this not only did not impede the development of global markets but it facilitated it in many ways. The guiding philosophy behind the Bretton Woods regime, which governed the world economy until the 1970s, was that nations—not only the advanced nations but also the newly independent ones—needed the policy space within which they could manage their economies and protect their social contracts. Capital controls, restricting the free flow of finance between countries, were viewed as an inherent element of the global financial system. Trade liberalization remained limited to manufactured goods and to industrialized nations; when imports of textiles and clothing from low-cost countries threatened domestic social bargains by causing job losses in affected industries and regions, these, too, were carved out as special regimes.

Trade liberalization remained limited to manufactured goods and to industrialized nations; when imports of textiles and clothing from low-cost countries threatened domestic social bargains by causing job losses in affected industries and regions, these, too, were carved out as special regimes. Yet trade and investment flows grew by leaps and bounds, in no small part because the Bretton Woods recipe made for healthy domestic policy environments. In fact, economic globalization relied critically on the rules maintained by the major trading and financial centers. As John Agnew has emphasized, national monetary systems, central banks, and financial regulatory practices were the cornerstones of financial globalization.12 In trade, it was more the domestic political bargains than GATT rules that sustained the openness that came to prevail.

Suitably enough, the countries that did the best in the new regime were those that did not let their enthusiasm for free trade and free flows of capital get the better of them. China, which engineered history’s most impressive poverty reduction and growth outcomes, was, of course, a major beneficiary of others’ economic openness. But for its part, it followed a highly cautious strategy that combined extensive industrial policies with selective, delayed import liberalization and capital controls. Effectively, China played the globalization game by Bretton Woods rules rather than by hyperglobalization rules. Is Global Governance Feasible or Desirable? By now it is widely understood that globalization’s ills derive from the imbalance between the global nature of markets and the domestic nature of the rules that govern them. As a matter of logic, the imbalance can be corrected in only one of two ways: expand governance beyond the nation-state or restrict the reach of markets.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

Formulated for and in Latin America during a period of chronic inflation following the debt crisis of the prior decade, these ideas quickly became the instruction sheet applied to any developing or transitioning (from communism) economy in the 1990s. Reinventing the Bretton Woods Institutions These Bretton Woods institutions (so named because they were set up in the aftermath of the 1944 Bretton Woods conference that reshaped the world economy after World War II) were, by the early 1980s, having a tough time of it.80 The IMF, in particular, had lost its original role and was struggling to find a new mission. The IMF was originally designed to provide offsetting finance to states facing exchange-rate shocks under the fixed-exchange-rate system that governed the world’s money from the 1940s until the 1970s—the Bretton Woods system that pegged the dollar to gold and everyone else’s currency to the dollar. Once the United States shut down gold convertibility in 1971, Bretton Woods fell apart, and the world’s major currencies began to float against each other.

The financial community will welcome neither of these two options, but it is not as if the other options on the table are great for them either. Those alternative choices are, first, what is known as financial repression, and second, a renewed effort to seriously collect taxes on a global scale. These efforts to get us out of this mess may not be popular, but one, or both, is coming. The End of Banking The story of the crisis reconstructed in chapters 2 and 3 can, and perhaps should, be seen in a bigger context. At the end of the Bretton Woods era, when the United States finally went off gold in 1971, states around the world had to adjust to what Eric Helleiner has called “the reemergence of global finance.”3 Floating exchange rates, deregulation, disintermediation, and the rest, which made finance the most profitable sector of the American and British economies by the 2000s, was the new order of things. But what was it all really based upon?

Friedrich describes him as “the spokesman for the creed of the neo-liberals in German and European politics.” Freidrich, American Political Science Review 49, 2 (1955): 510. 29. I thank Josef Hien for the details on this important transition period. 30. See the description of the Wirtschaftwunder at http://en.wikipedia.org/wiki/Wirtschaftswunder. 31. Allen, “Underdevelopment,” 271. The fact that all of this was made possible by an astonishingly favorable macroeconomic context—the Bretton Woods international monetary system and American acceptance of an undervalued Deutschmark given Germany’s strategic position in the Cold War—should also be acknowledged. It seldom is, however, especially among German policy makers. 32. Allen, “Underdevelopment,” 271 and 268. 33. Ibid., 277. 34. Ibid., 281. 35. Peter J. Katzenstein, ed., Between Power and Plenty (Ithaca, NY: Cornell University Press, 1976). 36.


pages: 258 words: 63,367

Making the Future: The Unipolar Imperial Moment by Noam Chomsky

"Robert Solow", Albert Einstein, Berlin Wall, Bretton Woods, British Empire, capital controls, collective bargaining, corporate governance, corporate personhood, creative destruction, deindustrialization, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Frank Gehry, full employment, Howard Zinn, Joseph Schumpeter, kremlinology, liberation theology, Long Term Capital Management, market fundamentalism, Mikhail Gorbachev, Nelson Mandela, Occupy movement, oil shale / tar sands, precariat, RAND corporation, Ronald Reagan, structural adjustment programs, The Great Moderation, too big to fail, uranium enrichment, Washington Consensus, WikiLeaks, working poor

Investors and lenders can “vote” by capital flight, attacks on currencies and other devices offered by financial liberalization. That is one reason why the Bretton Woods system established by the United States and Britain after World War II instituted regulated currencies and permitted capital controls. The Great Depression and the war had aroused powerful radical democratic currents, ranging from the anti-fascist resistance to working-class organization. These pressures made it necessary to permit social democratic policies. The Bretton Woods system was designed in part to create a space for government action responding to public will—for some measure of democracy, that is. John Maynard Keynes, the British negotiator, considered the most important achievement of Bretton Woods to be establishment of the right of governments to restrict capital movement. In dramatic contrast, in the neoliberal phase after the breakdown of the Bretton Woods system in the 1970s, the U.S.

In dramatic contrast, in the neoliberal phase after the breakdown of the Bretton Woods system in the 1970s, the U.S. Treasury now regards free capital mobility as a “fundamental right,” unlike such alleged “rights” as those guaranteed by the Universal Declaration of Human Rights: health, education, decent employment, security and other rights that the Reagan and Bush administrations have dismissed as “letters to Santa Claus,” “preposterous,” mere “myths.” In earlier years the public had not been much of a problem. The reasons are reviewed by Barry Eichengreen in his standard scholarly history of the international monetary system. He explains that in the nineteenth century, governments had not yet been “politicized by universal male suffrage and the rise of trade unionism and parliamentary labor parties.”

He explains that in the nineteenth century, governments had not yet been “politicized by universal male suffrage and the rise of trade unionism and parliamentary labor parties.” Therefore the severe costs imposed by the virtual parliament could be transferred to the general population. But with the radicalization of the general public during the Great Depression and the anti-fascist war, that luxury was no longer available to private power and wealth. Hence in the Bretton Woods system, “limits on capital mobility substituted for limits on democracy as a source of insulation from market pressures.” The obvious corollary is that after the dismantling of the postwar system in the 1970s, democracy is restricted. It has therefore become necessary to control and marginalize the public in some fashion, processes particularly evident in the more business-run societies like the United States. The management of electoral extravaganzas by the public relations industry is one illustration.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Black Swan, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, joint-stock company, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

However, there were no significant failures of US financial firms when the US stock prices declined by 40 percent between 2001 and 2003, and the ensuing recession was brief and shallow. The range of movement in the values of national currencies since the early 1970s has been much larger than ever before. In 1971 the United States abandoned the US gold parity of $35 an ounce that had been established in 1934. The effort to retain a modified version of the Bretton Woods system of pegged currencies that was formalized in the Smithsonian Agreement of 1972 failed and a floating exchange rate arrangement was adopted by default early in 1973. At the beginning of the 1970s, the dominant market view was that the German mark and the Japanese yen might appreciate by 10 to 12 percent because their inflation rates had been below the US rate in the previous few years. The German mark and the Japanese yen appreciated more rapidly than anticipated through most of the 1970s, and then both currencies depreciated significantly in the first half of the 1980s, although not to the levels of the early 1970s.

The exceptional feature of the 1970s was the surge in the US and world inflation rates during peacetime; the two previous episodes of sharply rising prices in the twentieth century were during and after the First and Second World Wars. Payments imbalances surged in the late 1960s and early 1970s, which led to a massive increase in money supplies. The 1970s inflation followed from the breakdown in the Bretton Woods arrangement of parities for national currencies, which eliminated the national ‘anchors’ for monetary policies. One dramatic impact of the increase in the US inflation rate that began in the late 1960s was that interest rates on both short-term and long-term US dollar securities increased. The interest rates that banks in the United States could pay on their deposits bumped into the ceilings set by the Federal Reserve on US dollar deposits.

Alternatively, the change in the regulations enabled borrowers to reduce their anticipated costs of credit by tapping into foreign markets. The second feature of the period since the early 1970s is that the differences in interest rates and in anticipated rates of return on similar securities denominated in different currencies have become much larger once countries were no longer committed to parities for their currencies. The divergences in national inflation rates were larger – although the departure from the Bretton Woods system of adjustable parities occurred because of differences between the United States, and Germany and several other European countries on the maximum acceptable inflation rate. Cross-border money flows occur when the differences in the anticipated rates of return on similar securities available in different countries does not correspond with the anticipated rates of change in the currency values.


pages: 494 words: 132,975

Keynes Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

"Robert Solow", airport security, banking crisis, Bretton Woods, British Empire, business cycle, collective bargaining, complexity theory, creative destruction, cuban missile crisis, Francis Fukuyama: the end of history, full employment, Gordon Gekko, greed is good, Gunnar Myrdal, if you build it, they will come, Isaac Newton, Joseph Schumpeter, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, means of production, Mont Pelerin Society, mortgage debt, New Journalism, Northern Rock, Paul Samuelson, Philip Mirowski, price mechanism, pushing on a string, road to serfdom, Robert Bork, Ronald Reagan, Simon Kuznets, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, trickle-down economics, War on Poverty, Yom Kippur War

“Nixon agreed but said that it would first promote economic growth and assure that the economy was expanding before the 1972 election. I replied that it might not be worth winning the election at the cost of a major inflation subsequently. Nixon said something like, ‘We’ll worry about that when it happens.’”26 In August 1971, Nixon brought to an end the Bretton Woods fixed-currency regime. If Friedman, an inveterate opponent of Bretton Woods, was given cause to celebrate, it was short-lived: Nixon also imposed a legally binding price and income freeze. “The last time I saw Nixon in the Oval Office, with George Shultz,” Friedman recalled, “President Nixon said to me, ‘Don’t blame George for this silly business of wage and price control.’ . . . I said to him, ‘Oh, no, Mr. President, I don’t blame George, I blame you.”27 Friedman blanched at Nixon’s record: he had failed to cut federal spending as a percentage of national income and introduced rules governing the environment to a raft of new government agencies.

Once that battle was lost, however, Keynes readjusted his thoughts to accommodate the new conditions and concluded that there was some virtue in harnessing all currencies to a single common measure, such as gold, once the turbulence in the world economy caused by World War I had passed. In A Treatise he went one stage further, proposing the formation of a new mechanism to link currencies together, a “Supra-national Central Bank,” a notion that would come to fruition in the Bretton Woods fixed-currency exchange agreement of 1944. Instead of fixing currencies to the price of gold, which Keynes argued was in reality little more than fixing them to the dollar, he proposed in A Treatise that it would be more equitable if currencies were aligned to a basket of sixty key internationally traded commodities and allowed to float annually up to 2 percent either side of their pegged value.

So we became personally very great friends, including Lydia Lopokova.”27 In August 1940, Keynes was given an unpaid Treasury job that allowed him to rove across all areas of economic policy. In particular, he was asked to negotiate war loans from America. He developed plans for a postwar economic order to replace the unbridled competition between nations that had fomented the war, and he invented a more orderly system of currency trading fixed around a revived gold standard, what became the Bretton Woods agreement. He was also instrumental in conceiving two other pivotal organizations, the International Monetary Fund and the World Bank. Hayek, meanwhile, set out on his pessimistic masterwork, The Road to Serfdom.28 As his biographer Alan Ebenstein observed, “‘The Road to Serfdom’ revolutionized Hayek’s life. Before its publication, he was an unknown professor of economics. A year after it was published, he was famous around the world.”29 Not bad for a book that Hayek, with rare modesty, believed only a few hundred would read.30 Hayek had written to Walter Lippmann in 1937, “I wish I could make my ‘progressive’ friends here understand that democracy is possible only under capitalism and that collectivist experiments lead inevitably to fascism.”31 Originally titled “The Nemesis of the Planned Society,” the book drew on ideas Hayek had explored in two essays in 1938 and 1939, that those who advocate a planned economy in place of a free market are, however well intentioned, treading a path that could lead to tyranny.


pages: 358 words: 119,272

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Albert Einstein, asset allocation, banking crisis, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, floating exchange rates, Fractional reserve banking, full employment, hindsight bias, Kickstarter, Long Term Capital Management, market bubble, mortgage tax deduction, Myron Scholes, new economy, oil shock, price stability, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

DOW JONES INDUSTRIAL AVERAGE – DECEMBER 1968 TO SEPTEMBER 1982 Source: Dow Jones & Co. The key events that shaped the period from 1968 to 1982 were the demise of the Bretton Woods agreement and the acceleration in inflation. Speculation on the sustainability of the international monetary agreement had been growing for years. As early as 1960, Yale Professor Robert Triffin had warned, in his book Gold and the Dollar Crisis, that the US would be forced to run regular current account deficits to provide the rest of the world with the necessary liquidity to grow. [69] He pointed out that the long-term result of these deficits would be to undermine faith in the dollar as the world reserve currency and thus the stability of the Bretton Woods system itself. Eleven years later, Triffin’s prediction came to pass when, on 15 August 1971, President Nixon declared the US was suspending the redemption of dollars for gold.

Eleven years later, Triffin’s prediction came to pass when, on 15 August 1971, President Nixon declared the US was suspending the redemption of dollars for gold. The US dollar devalued in December 1971, from $35 to $38 an ounce of gold, and early in 1973 it was devalued to $42. By March 1973, any possibility of resurrecting Bretton Woods was dead and the dollar entered free float. With the gold link gone, a key factor for economic discipline to contain inflation was removed. The equity and bond markets had been worried by inflation in the late 1960s and the end of the Bretton Woods agreement exacerbated these concerns. Inflation, and the fight against it, drove the 1968-82 bear market. FIGURE 100. US CONSUMER PRICE INDEX (% CHANGE YEAR-ON-YEAR) Source: Datastream In 1969, investors were coping with a vicious decline in equity prices as the Fed pushed short-term interest rates above 9%.

In impacting these monetary factors, the Fed hopes to steer the economy to produce a combination of high economic growth and low inflation. Having determined its monetary target, in 2005 a level for the Fed funds interest rate, changes in the bank reserves are the mechanism through which the target is met. Investors regularly assess changes in the Fed’s balance sheet for the impact on bank reserves and, thus, monetary policy in general. Under the gold standard, the gold-exchange standard and the Bretton Woods agreements of July 1944, there were varying degrees of restraint placed on the Fed by the need to keep the dollar stable on the international exchanges. Since the 1970s, the Federal Reserve has been subject to no such fetters. Over the years investors have sought to assess whether monetary policy was loose, leading to potentially higher growth, but also higher inflation, or tight, leading to potentially lower growth and lower inflation.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

Many are under British jurisdiction, and he should combine with France’s President Sarkozy—rotating head of the EU until Christmas—to insist that Britain join with the rest of the world to constrain if not eliminate an important source of financial destabilization. I would like the U.S. to consider going back to Bretton Woods basics—unfashionable though it may seem. It was not just Lyndon B. Johnson who opened the way to the Republicans’ “Southern Strategy” and nearly 40 years of conservative dominance: It was also Nixon’s abandonment of government-led economic disciplines through his suspension of Bretton Woods fixed exchange rates. Obama should propose the end of floating exchange rates and argue for a system of managed rates between the euro, dollar and yen to bring back more pre-dictability into the system. The American, EU and Japanese governments would undertake, as in Bretton Woods I, whatever economic action is needed to maintain stability between their exchange rates. There would also be explicit rules on exchange rate rigging—a more effective way of tackling the China issue than threatening it with tariffs.

The EU has forced the pace by declaring that the summiteers should come up with answers by the end of next February. The Obama team is compelled to engage. Nonetheless, it is an ambitious deadline. It took nearly two years of discussion before there was sufficient agreement to attempt the 1944 Bretton Woods Conference in New Hampshire that famously established the post-war international financial system and to which the current summit process is being compared. But shared awareness that the system is broken and that the world risks a credit-crunch-induced global depression is concentrating minds wonderfully. Where to start? The architects of Bretton Woods I knew they had to avoid the beggar-my-neighbor policies of the 1930s—economic autarchy and hyper-militarization—and that if the U.S. and Britain could clinch a deal, then everybody else would have to follow. Even then it was a struggle.

The U.S. only agreed to the I.M.F. managing a system of fixed exchange rates if in effect the U.S. ran it. The dream of creating a system of global financial governance was passed up. Realpolitik had triumphed. The system then only lasted as long as the Americans thought the benefits of running it outweighed the costs. When in 1971 the Nixon administration was faced with the choice of increasing taxes to finance the Vietnam War or abandoning the Bretton Woods fixed-exchange-rate system that delivered pre-dictability and less risk in international financial relationships, it had no hesitation. The markets would do the job instead—and if other governments did not like the new risks, tough. For a long time, it looked as though private markets could step into the breach—recycling first petrodollars in the 1970s and then Asian dollars back into the global system.


pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, business cycle, buy and hold, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop - Herbert Stein's Law, index fund, Lao Tzu, margin call, market bubble, McMansion, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

—Niall Ferguson Made in China If the monetary policy of Bulgaria is inflationary, the rest of the world doesn’t even shrug. If the fiscal policy of Bolivia is reckless, the global economy is unaffected. Not so with the United States. Since the end of World War II, the U.S. dollar has been the reserve currency of the world. Just as central banks including our own once held gold and issued their currencies as a marker for gold, under the Bretton Woods agreement, foreign central banks have held U.S. dollars against which they issue their own currencies. Despite the abrogation of the U.S. promise of dollar /gold redeemability, the dollar standard has persisted. Almost two thirds of foreign currency reserves are held in dollars. As the world’s leading reserve currency, the advantages for the United States are several. This dollar standard results in greater market demand for dollars and therefore a higher exchange rate than would otherwise exist.

Making the federal guarantee of the agencies’ bonds explicit in the face of the stock collapse shows concern for the bondholders, Chinese and Japanese among them. Ironically, however, except for inflation, those guarantees can only ever be effected by borrowing more money from . . . places like China and Japan! America’s bankers have a problem. Brand Name America Just as the costs of the Vietnam War were instrumental in the collapse of the Bretton Woods gold exchange monetary system, Bush’s elective war in Iraq will be noted as the straw that broke the dollar standard that has prevailed since 1971. There was always something inherently unstable about the neoconservative fantasy of a “unipolar world.” Empires do extend themselves into collapse. But it was more than just the dollar cost of war and empire. There were other consequences, harder to calculate but nonetheless real.

“Maybe we can price the oil in the euro,” said OPEC secretary-general Abdalla El-Badri in an interview that suggested member nations had been having lively discussions about a pricing change. One has to suspect that a pricing change might not be gradual in the face of escalating dollar inflation. Just as supermodel Gisele Bündchen may have preferred to be paid in euros, during the inflation of the 1970s singer Bette Midler demanded payment in gold South African Krugerrands to perform overseas. When it was inevitable that the Bretton Woods dollar gold exchange standard couldn’t last, France could send warships to pick up its gold in New York. Under the existing dollar standard, there is nothing to pick up. Those that get out early can preserve their capital; others will be left holding the “IOU Nothing.” There is reason to believe that Persian Gulf region money is moving out of dollars and into gold. In November 2008, Gulfnews.com reported a two-week Saudi gold buying spree of about $3.5 billion.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, Gunnar Myrdal, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

It sought decolonisation and the dismantling of former empires (British, French, Dutch, etc.) and brokered the birth of the United Nations and the Bretton Woods Agreement of 1944 which defined rules of international trade. When the Cold War broke out, the US used its military might to offer (‘sell’) protection to all those who chose to align themselves with the non-communist world. The United States, in short, assumed the position of a hegemonic power within the non-communist world. It led a global alliance to keep as much of the world as possible open for capital surplus absorption. It pursued its own agenda while seeming to act for the universal good. The support the US offered to stimulate the capitalist recovery in Europe and Japan immediately after the Second World War was an example of such a strategy. It ruled by a mix of coercion and consent. At the Bretton Woods conference of 1944, the British negotiator, the renowned economist John Maynard Keynes, had sought a global currency unit outside of any one nation’s control.

Then send it to the United States, Argentina or South Africa where it can be profitably deployed. Surplus capital in Taiwan? Then send it to create sweatshops in China or Vietnam. Capital surpluses in the Gulf States in the 1970s? Then send them to Mexico via the New York investment banks. For all of this to happen effectively ultimately requires the creation of state-like international institutions such as those set up under the Bretton Woods Agreement to facilitate and regulate the international flows of capital. The World Bank and the International Monetary Fund, along with the Bank of International Settlements in Basel, are central here, but other organisations, such as the Organisation for Economic Co-operation and Development (OECD) and the G7 (later the G8), now expanded to the G20, also play an influential role as the world’s central banks and treasury departments seek to coordinate their actions to constitute an evolving global financial architecture for an international version of the state–finance nexus.

The geographical variations in institutional arrangements are considerable and the mechanisms for inter-state coordination, such as the Bank of International Settlements in Basel and the International Monetary Fund, also have an influential role. The powers involved in the construction of arrangements such as those that assembled to make key international decisions on the future financial architecture of the world trading system, as at Bretton Woods in 1944, are typically élite, expert, highly technocratic and undemocratic. And so it continues in our own times. Only those initiated into the secret ways are being called upon to correct them. Broad-based political struggles do take place, however, over and around the state–finance nexus. More often populist than class-based, these protests typically focus on the actions of that class faction that controls the state–finance nexus.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

We do that without any promise that offshore, mobile private wealth will reciprocate by contributing their fair share to the taxation system. These tensions between private financial interests and society as a whole have throughout history been manifest in struggles for control over the money production system. Only intermittently has society succeeded in asserting democratic management of the system, by subordinating the interests of private wealth to wider interests. The Bretton Woods era (1945–71) was a time during which the private banking and finance sector acted as servant to and not master of the economy. Thanks largely to John Maynard Keynes’s theories, his understanding of the monetary system, and to the implementation of his monetary policies during this period, the financial system was made to work largely in the interests of wider society. However from the 1960s onwards, private wealth, led largely by private bankers, in collusion with elected politicians, began again to wrest control of the monetary system away from the regulatory democracy of governments.

Under the Tripartite Agreement, the British and US governments had agreed to support the French exchange rate so that monetary reform was global and cooperative. Public authority over finance and cheap money prevailed over the greater part of the world. The modern age With the exception of the five years of the 1945 Labour government in Britain, the decisiveness of this re-alignment of class interests was ruptured in the post-war age. The most obvious statement of intent was the United States’ rejection at the 1944 Bretton Woods Conference of the British Government’s proposal for Keynes’s International Clearing Union (ICA). The ICA was to be a global, independent bank that would hold all international reserves and would manage and ‘clear’ all debiting and crediting payments between countries, and by that means determine changes in exchange rates. Instead, to reflect the hegemonic role the United States played in a world ruined by war, the US dollar was given a central role in the post–World War II world.

Sir Peter Middleton, permanent secretary to the Treasury from 1983 to 1991, described the mood there when he first joined in 1960: It was a period of confidence and consensus in the Treasury. A post-war deflation had been avoided. The commitment in the wartime White Paper to employment policy to maintain a high and stable level of employment had been achieved to an extent greater than anyone expected – and was reiterated both in the 1956 White Paper on the economic implications of full employment and in the Radcliffe Report in 1959. We had lived within the Bretton Woods arrangements – a little precariously at times but successfully.14 But the achievement of full employment was disregarded by economists and policymakers then, much as it is disregarded today: as a non-event. They promoted instead an agenda based on ‘growth’ and financial liberalisation. From the early 1960s with full unemployment at 2 percent, British policymakers echoed the OECD in setting an explicit target for real annual ‘growth’ of 4 percent.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

Gao Xiqing continues, “‘If China has $2 trillion, Japan has almost $2 trillion, and Russia has some, and all the others, then—let’s throw away the ideological differences and think about what’s good for everyone.’ We can get all the relevant people together and think up what people are calling the second Bretton Woods system, like the first Bretton Woods convention did.”33 The replacement might be gold-based, especially if China has a say in the matter, but the United States would be ill advised not to monetize its debt first, since there is nothing stopping it from doing so. It is also possible, but not desirable, that there would be a system such as between 1934 and 1971 (bracketing the Bretton Woods era) when international transactions occur in currency backed by gold, but paper dollars would continue to be used for legal tender domestically. But instead in the April 2009 G-20 meeting the idea was floated that a new reserve currency might be constructed using a basket of currencies including the ruble and the yuan.

Instead it became the highest and in fact dominant bidder in the world market for gold, and exhibited a crazed preference for the metal. The price increase from $20.67 to $35 triggered a mining boom, and the United States bought more than the total production of the world’s mines through the Great Depression. By the early 1950s, the United States would own three-fourths of all monetary gold and half of cumulative world production since the beginning of time.50 The establishment of pegged exchange rates in the Bretton Woods Agreement of 1944 could be seen as a global gold-exchange standard pyramiding all the world’s money upon gold held by the United States, placing America in a position not unlike that of Britain at the height of its empire. Ironically, from that moment forward, the United States mimicked the actions of its aging parent, repudiating this backing of its currency and providing a beacon for the world to follow it down the path of adopting a purely paperbased currency system.

While by 1933 specie’s share of the money supply (M2) had dropped to 1.9 percent from 5.3 percent in 1913, when combined Flat-Earth Economics 89 with gold or silver notes, overall hard-backed currency still comprised 58 percent of currency in circulation.12 13 In the context of competitive devaluations from other countries, Roosevelt’s new U.S. peg may be understandable, but the government predation that occurred simultaneously is not. The torch for hard money, long carried by the Democratic Party, completely burned out by the end of the interwar period. After World War II, the Bretton Woods system would stabilize exchange rates, but domestic money creation would become nearly completely elastic. The grand success of the Marshall Plan era contrasted pleasantly with the sudden boom-bust cycle that followed World War I. Many if not most current day economists look at the increase in money supply in the late 1930s, which stemmed mostly from the monetization of government debt issued to fund the New Deal, as the impetus of the economic recovery.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, plutocrats, Plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

The Fed Demystified A WORLD RESTORED: THE DOLLAR BECOMES THE NEW GOLD The Conference held at the Bretton Woods Hotel in New Hampshire during 1944 was a blend of British brain and American brawn acting to put the world economy back together. Keynes had the plan, and the United States had the money. The big idea was to turn the U.S. dollar into the global reserve currency, meaning the money that all central banks paid each other in to settle the ‘‘balance of payments’’ mismatches that always arose from cross-border trade and investment. Under the old gold standard, the global reserve currency was the British Pound but only because it was fully convertible to gold at a fixed rate. The new Bretton Woods system pegged each country’s currency to the U.S. dollar within a fixed range and in turn pegged the dollar to gold.

In 1971, the level and trend of inflation (which is to say, erosion of the real value of the dollar) had reached the point where the United States was experiencing a classic gold drain. Remember, under Bretton Woods, all currencies were pegged to the dollar and the dollar to gold. Foreign countries were getting tired of selling their stuff to the United States for dollars that kept shrinking. They increasingly demanded to convert their dollar reserves into gold. Since U.S. gold reserves were a tiny fraction of the dollars we had pumped overseas to buy everything from oil to whole companies, this could not go on very long. Nixon’s solution was to unilaterally dump the Bretton Woods system that had underpinned post-war recovery and growth. The United States severed the link between the dollar and gold by closing the ‘‘gold window’’ that allowed other countries to swap dollars claims for gold bullion.

So, he launched the Great Society and the War on Poverty, vastly increasing the size and spending of the federal government in the process. At the same time, he expanded the war in Vietnam, which he inherited from Kennedy. This explosion in federal spending was unlike those of the Roosevelt years in one key aspect. They were not nearly as fully financed by taxation. The United States, of course, could always ‘‘print dollars,’’ since the dollar had become the ‘‘new gold’’ under Bretton Woods. So, massive U.S. deficits and government borrowing could be inflated away at the expense of our trading partners and holders of U.S. bonds. The U.S. example spread to places like the U.K. that needed to kick-start sluggish economies. This was not a partisan political thing, either. Richard Nixon won power in 1968 and maintained high levels The Natural History of Financial Folly of spending on domestic programs and the Vietnam War.


pages: 851 words: 247,711

The Atlantic and Its Enemies: A History of the Cold War by Norman Stone

affirmative action, Ayatollah Khomeini, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, central bank independence, Deng Xiaoping, desegregation, Dissolution of the Soviet Union, European colonialism, facts on the ground, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, Gunnar Myrdal, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, illegal immigration, income per capita, interchangeable parts, Jane Jacobs, Joseph Schumpeter, labour mobility, land reform, long peace, mass immigration, means of production, Mikhail Gorbachev, Mitch Kapor, new economy, Norman Mailer, North Sea oil, oil shock, Paul Samuelson, Ponzi scheme, popular capitalism, price mechanism, price stability, RAND corporation, rent-seeking, Ronald Reagan, Silicon Valley, special drawing rights, Steve Jobs, strikebreaker, The Death and Life of Great American Cities, trade liberalization, trickle-down economics, V2 rocket, War on Poverty, Washington Consensus, Yom Kippur War, éminence grise

Bohley, Bärbel Böhm, Karl Bokassa, Jean-Bédel Bolivia Bologna Bolsheviks: and bureaucracy and China Civil War Congress of the Peoples of the East (1920) lies of Revolution and science Bond, James (fictional character) Bonn Borinage Borland Software Corporation Borodin, Mikhail Boston Bourgès-Maunoury, Maurice BP (British Petroleum) Bradlee, Ben Braestrup, Peter Brandt, Willy: background and character elected Chancellor foreign minister mayor of West Berlin memoirs Nobel Peace Prize Ostpolitik resignation Braşov Bratislava author’s imprisonment in Braudel, Fernand Braun, Otto Brazil Breakfast at Tiffany’s (film) Brecht, Bertolt Brentano, Lujo Brescia Brest-Litovsk Bretherton, Russell Bretton Woods conference (1944) Bretton Woods system end of Triffin Dilemma Brezhnev, Leonid: and Afghanistan and arms limitiation talks background and character and de Gaulle death and East Germany and Helsinki conference (1975) and Johnson and Middle East nationalities policy and Orthodox Church ‘our common European home’ and Poland political reforms and ‘Prague Spring’ and Soviet satellite states and Stalin succeeds Khrushchev and Vietnam Brioni island Britain: agriculture atomic bombs automobile industry balance of payments banking system and Chinesewar civil service class system coal industry Communist Party council housing crime cultural institutions currency controls and Cyprus defence expenditure Department of Trade and Industry Depression (1930s) devaluation of sterling divorce rates economic and political decline education system (see also universities) and EEC/EU and Egypt emigration and establishment of NATO and European Exchange Rate Mechanism (ERM) Falklands War (1982) family breakdown film industry financial deregulation fishing industry general elections: (1945); (1950); (1951); (1959); (1970); (1974); (1979); (1983) gold reserves and GreekWar IMF bail-out (1976) import surcharges income per capita Industrial Revolution industrial wastelands inflation intelligentsia and Iran Lend-Lease aid and Malaya and Marshall Plan middle classes miners’ strike (1984-5) monarchy National Health Service nationalization of industry navy North Sea oil nuclear weapons oil imports Poll Tax post-war debt post-war shortages and rationing privatizations productivity levels property prices public transport race riots scientific and technological developments Second World War shipbuilding steel industry strikes Suez crisis taxation television textile industry trade unions underclass unemployment universities Welfare State Westland affair (‘Westgate’; 1986) winter weather of 1946-7 withdrawal of forces from Gulf (1971) zone of occupation in Germany British Airways British Commonwealth British Empire: American antipathy towards decline of decolonization revitalization attempts trade British Leyland (automobile manufacturer) British Petroleum (BP) British Steel British Telecom Brittan, Sir Samuel Bronfman, Edgar Brown, Andrew Brucan, Silviu Bruce, David Bruges Brussels Brussels Exhibition (1958) Brussels Pact (1948) Bryan, William Jennings Brzezinski, Zbigniew Bucak, Mehmet Celal Bucharest Buck, Pearl S.

The essential was trade liberalization, and that could not be managed unless there were some means of payment, i.e. recognition of the various paper currencies. The old Bank for International Settlements at Basle in Switzerland - originally set up to handle the Reparations payments of the First World War - was revitalized, with a European Payments Union (in 1950). This again followed an Atlantic example. In 1944, at Bretton Woods in New Hampshire, the Americans and British had developed institutions that were meant to stop the collapse of world trade that had occurred in the Great Slump of the 1930s. The collapse - two thirds - had been a disaster, causing unemployment in millions and millions, and bringing dictatorships in dozens, the worst of them Hitler’s. A chief reason for the disaster had been monetary - the loss of a common standard of exchange, in this case gold, when the British ran out of reserves and neither the Americans nor the French, who had gold, would move in to support the system.

The outstanding feature of post-war Europe was of course the ‘German economic miracle’: the moonscape of 1945 had been utterly transformed. As the Treaty of Rome took effect on 1 January 1958, the various restrictions on money exchange were dismantled, and the dollar could invade any market that its owners chose. Now, the institutions that had been thought up towards the end of the war came into their own: ‘Bretton Woods’ to run world trade and foreign exchange, through the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (GATT), which regularly assembled to discuss the liberation of commercial exchange. The European Payments Union lost its function, though the Bank for International Settlements at Basle in Switzerland carried on as a sort of catch-all institution. Here was an enormous and essential difference with the post-war of 1919.


Hopes and Prospects by Noam Chomsky

"Robert Solow", Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, British Empire, capital controls, colonial rule, corporate personhood, Credit Default Swap, cuban missile crisis, David Ricardo: comparative advantage, deskilling, en.wikipedia.org, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Firefox, Howard Zinn, Hyman Minsky, invisible hand, liberation theology, market fundamentalism, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, moral hazard, Nelson Mandela, new economy, nuremberg principles, one-state solution, open borders, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ralph Waldo Emerson, RAND corporation, Ronald Reagan, structural adjustment programs, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, trade liberalization, uranium enrichment, Washington Consensus

Under powerful public pressure, such measures for undermining democracy were restricted under the Bretton Woods system established after World War II. The Great Depression and the war aroused radical democratic currents, taking many forms, from the antifascist resistance to working-class organization. These pressures made it possible—and from a different point of view, necessary—to permit social democratic policies. The Bretton Woods system was presumably designed in part for that purpose, with the understanding that capital controls and regulated currencies would create a space for government action responding to public will—for some measure of democracy, that is. Keynes considered the most important achievement of Bretton Woods to be establishment of the right of governments to restrict capital movement. In dramatic contrast, in the neoliberal phase that followed, the U.S.

Furthermore, “the growth of labor, capital, and total factor productivity have all fallen precipitously since the 1960s in the OECD [Organisation for Economic Co-operation and Development] countries.”11 In brief, the twenty-five years of economic sovereignty, state-coordinated economic growth, and capital controls under the Bretton Woods system led to better social and economic results than the following twenty-five years of neoliberalism, by just about every relevant measure, and by significant margins. It is important to stress that the results include social indicators. In the United States, for example, growth during the Bretton Woods period was not only the highest ever over a lengthy period, but was also egalitarian. Real wages closely tracked increase in productivity, and social indicators closely tracked growth. That continued until the mid-1970s, when neoliberal policies began to be imposed.

But, he argued, thanks to “the natural disinclination which every man has to quit the country of his birth and connections,” and “fancied or real insecurity of capital” abroad, most men of property would “be satisfied with the low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations,” feelings that “I should be sorry to see weakened,” he added. We need not tarry on the force of their arguments, but the instincts of the classical economists were insightful.8 The post–World War II period conforms closely to these conclusions. There have been two phases. The first was under the economic regime established by the United States and Britain at Bretton Woods after the war, negotiated by Harry Dexter White for the United States and John Maynard Keynes for England. They shared the belief that economic sovereignty is a crucial factor in growth. The system they designed was based on capital controls and regulated currencies in order to protect economic sovereignty, and to permit state intervention to carry out social democratic measures. The regime lasted for about twenty-five years, and was extremely successful by historical standards.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

By contrast, a fiscal policy based on a correct understanding of the nature of money would only call for austerity measures if the economy were facing inflationary pressures. Money and monetary policy We observed earlier that the orthodox view of money is particularly concerned that an exogenously determined excess amount of money in the economy will lead to inflation. As Marvin Goodfriend has put it in relation to the ending of the gold-dollar standard underpinning international monetary relations in the early 1970s: ‘With the collapse of Bretton Woods, for the first time in modern history, all the world’s currencies were de-linked from gold or any other commodity. The lack of any formal constraint on money creation contributed to nervousness about inflation.’13 Orthodox economists, informed by the quantity theory of money, felt that monetary policy-makers should ensure that the quantity of money available in the economy did not contribute to inflation.

Arguing that ‘science is not a business’, Gary Pisano suggests that the VC model is especially problematic for science-based sectors characterised by complex and interdisciplinary knowledge bases.61 It is precisely due to the short-term nature of private finance that the role of public finance is so important in nurturing the parts of the innovation chain subject to long lead times and high uncertainty. While in some countries this has occurred through public agencies, such as DARPA and NIH (discussed above), in others patient finance has been provided through publicly owned development banks, otherwise known as state investment banks. State investment banks (SIBs) have their historical roots in the monetary agreements of Bretton Woods and the reconstruction plans for Europe following World War II. The idea was to create an institution that promoted financial stability through a permanent flow of finance to fund the reconstruction plan and unleash agricultural production potential, thus preventing the deleterious effects that speculative private finance could have on post-World War II economic recovery. Following this rationale, the International Bank for Reconstruction and Development (IBRD) was created, providing its first loan to France in 1947.62 Other national development banks were founded around that time, such as KfW in Germany (1948),63 with the aim of channelling international and national funds to the promotion of long-term growth, infrastructure and modern industry.

It was the measures of the welfare state, such as free (or subsidised) education and healthcare, labour union-secured salaries and a progressive tax structure, along with complementary institutional innovations such as the credit system, unemployment insurance and mortgage guarantees, which made it possible for growing numbers of the population—including blue-collar workers—to aspire to a suburban home and the new lifestyle. Thus, the social safety net and suburbanisation, together with the Cold War, defined the optimal space for successful profitable innovation with dynamic, reliable and synergistic markets. On the global stage, complementary institutional innovations, such as the World Bank, the IMF, the GATT, the Bretton Woods agreement on the ‘gold dollar’, the UN (and, ironically, also the Cold War) stabilised international economies and trade, furthering the positive-sum game created between business and society. A similar process of state-enabled convergence in innovation has occurred during every deployment period. Each technological revolution makes feasible a wide range of new interrelated infrastructures, production equipment and life-shaping goods and services.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"Robert Solow", Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

Nationalist proto-fascist movements sprouted in the most unlikely places, and propounded arguments bereft of a scintilla of sense. “Nightmare” did not register as hyperbolic; it was the banjax of the vanities. The Winter of Our Disconnect I remember when I first felt that chill shiver of recognition that the aftermath of the crisis might be suspended in a fugue state far worse than the somnolent contraction itself. I was attending the second meeting of the Institute for New Economic Thinking (INET) at Bretton Woods in New Hampshire in April 2011.2 There probably would have been better places to take the temperature of the postcrisis Zeitgeist and observe the praxis of the political economy than up in the White Mountains, but I had been fascinated by the peccadilloes of the economics profession for too long, and anyway had felt that the first INET meeting at Cambridge University in 2010 bore some small promise—for instance, when protestors disrupted the IMF platitudes of Dominique Strauss-Kahn in Kings great hall, or when Lord Adair Turner bravely suggested we needed a much smaller financial sector.

The range of economic positions proved much less varied than at the first meeting, and one couldn’t help notice that the agenda seemed more pitched toward capturing the attention of journalists and bloggers, and those more interested in getting to see some star power up close than sampling complex thinking outside the box. It bespoke an unhealthy obsession with Guaranteed Legitimacy and Righteous Sound Thinking. But, eventually, even the journalists and the bloggers sensed the chill in the proceedings. Here were a few contemporary responses: University economists, of the sort gathered at Bretton Woods, are now under relentless pressure to conform to a narrow, established paradigm. Inexplicably most supporters of that paradigm also feel that the crisis confirmed its validity.3 The last great crash caused a revolution in economics. Why hasn’t this one? . . . None of those theories appears to have appreciably shaped the economic policy proposals coming from the White House or Congress, where lawmakers draw much of their economic inspiration from think tanks built on dogma . . .

For example, when the irrepressible Yves Smith asked Larry Summers about whether banking risks in the United States could not be helpfully diminished if its large institutions were run (read: compensated at the top) more like utility companies, he immediately aborted any effort at an intellectually honest answer by making it sound as if she were proposing to bring state socialism to banking. A man who reportedly earned millions for having advised hedge funds one day a week for a year shortly before serving in the Obama Administration (and who is quite likely, now that he’s out, to do so again), he ought to have been patriotic and intellectually honest enough to provide a real answer.6 The most interesting moment at a recent conference held in Bretton Woods, New Hampshire—site of the 1945 conference that created today’s global economic architecture—came when Financial Times columnist Martin Wolf quizzed former United States Treasury Secretary Larry Summers, President Barack Obama’s ex-assistant for economic policy. “[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?”


pages: 286 words: 82,970

A World in Disarray: American Foreign Policy and the Crisis of the Old Order by Richard Haass

access to a mobile phone, anti-communist, Berlin Wall, Bretton Woods, carbon footprint, central bank independence, colonial rule, cuban missile crisis, currency manipulation / currency intervention, deindustrialization, Doha Development Round, Donald Trump, Edward Snowden, energy security, European colonialism, failed state, Fall of the Berlin Wall, floating exchange rates, global pandemic, global reserve currency, hiring and firing, immigration reform, invisible hand, Mikhail Gorbachev, Monroe Doctrine, moral hazard, mutually assured destruction, open economy, quantitative easing, RAND corporation, reserve currency, Ronald Reagan, South China Sea, special drawing rights, Steven Pinker, UNCLOS, UNCLOS, uranium enrichment, Yom Kippur War

If they could not, many countries or colonies on a path to becoming countries would never know stability. And there needed to be a mechanism for trade and investment and tourism to work, something that required a system for managing dozens of national currencies in a fashion that would spur growth and facilitate interactions of every sort. The result, to use the shorthand, was the Bretton Woods system, a set of arrangements along with a number of global institutions created when many of the world’s finance ministers gathered in 1944 at Bretton Woods, New Hampshire. One goal was to promote the recovery of war-ravaged countries and the development of poor ones; this became the province of the International Bank for Reconstruction and Development, more commonly known as the World Bank. Another goal was to set up a functional monetary system that would reflect the desire of sovereign states to control their own fate but also to be able to trade and invest with others.

DeFrank, The Politics of Diplomacy: Revolution, War and Peace, 1989–1992 (New York: Putnam, 1995). 3. THE OTHER ORDER 1. G. John Ikenberry, Liberal Leviathan: The Origins, Crisis, and Transformation of the American World Order (Princeton, NJ: Princeton University Press, 2011). 2. See Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, NJ: Princeton University Press, 2013); Harold James, International Monetary Cooperation Since Bretton Woods (New York: Oxford University Press, 1996); and Barry Eichengreen, Globalizing Capital: A History of the International Monetary System, 2nd ed. (Princeton, NJ: Princeton University Press, 2008). 3. “Charter of the United Nations,” June 26, 1945, Chapter VI, Article 33, and Chapter VII, Article 42, www.un.org/en/charter-united-nations/index.html. 4.

The dollar became the effective world currency given the size and strength of the U.S. economy; all currencies were “fixed” in relation to the dollar, which in turn was backed by gold. In principle, anyone could exchange excess dollars for gold. The International Monetary Fund (IMF) was established to provide loans on a temporary basis to governments running a net deficit so that they could meet their short-term spending needs and reach a point of fiscal balance.2 A related but distinct set of issues concerning trade was formally taken up not at the Bretton Woods gathering but separately by trade ministers. The intent was to create an entity called the International Trade Organization, but differences between countries (and the politics within them) precluded it at the time. Instead, a series of major meetings over the decades developed rules for global trade and led to a number of important pacts that reduced tariff barriers. (These all came under the rubric of the General Agreement on Tariffs and Trade, or GATT.)


pages: 421 words: 120,332

The World in 2050: Four Forces Shaping Civilization's Northern Future by Laurence C. Smith

Bretton Woods, BRICs, business cycle, clean water, Climategate, colonial rule, deglobalization, demographic transition, Deng Xiaoping, energy security, flex fuel, G4S, global supply chain, Google Earth, guest worker program, Hans Island, hydrogen economy, ice-free Arctic, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, invisible hand, land tenure, Martin Wolf, megacity, Mikhail Gorbachev, New Urbanism, oil shale / tar sands, oil shock, peak oil, Pearl River Delta, purchasing power parity, Ronald Reagan, Ronald Reagan: Tear down this wall, side project, Silicon Valley, smart grid, sovereign wealth fund, special economic zone, standardized shipping container, The Wealth of Nations by Adam Smith, Thomas Malthus, trade liberalization, trade route, UNCLOS, UNCLOS, urban planning, Washington Consensus, Y2K

It all began with a big conference in the Mount Washington Resort near Bretton Woods, New Hampshire, in July 1944. Over seven hundred delegates from forty-four countries—including Britain’s John Maynard Keynes (whose ideas later found new life in the wake of the 2008 global credit meltdown)—were in attendance. World War II was drawing to a close. Governments were turning their attention to their shattered economies and how to rebuild them after two catastrophic wars, a global depression, a long escalation of protectionist tariffs, and some crazy currency devaluations. Everyone at the conference wanted to figure out how to stabilize currencies, get loans to war-ravaged countries for rebuilding, and get international trade moving again. The outcome of this conference was something called the Bretton Woods Agreement. Among other things, it stabilized international currencies by pegging them to the value of gold (which lasted until 1971, when President Richard Nixon dropped the U.S. dollar from the gold standard).

But its most persistent legacy was the birth of three new international institutions: the International Monetary Fund (IMF) to administer a new monetary system; the International Bank for Reconstruction and Development (IBRD) to provide loans—today, the World Bank; and the General Agreement on Tariffs and Trade (GATT) to fashion and enforce trade agreements—today, the World Trade Organization (WTO). These three institutions guided much of the global reconstruction effort after the war; and during the 1950s their purpose expanded to giving loans to developing countries to help them industrialize. Today these three powerful institutions—the IMF, World Bank, and WTO—are the prime actors making and enforcing the rules of our global economy. Up until the demise of the Bretton Woods monetary regulatory system in the early 1970s, it presided for three decades over what some have called the “golden age of controlled capitalism.”29 But by the 1980s, “controlled capitalism” had fallen to a revolution of “neoliberalism”—the deregulation and elimination of tariffs and other controls on international trade and capital flows. The neoliberalism movement was championed by British prime minister Margaret Thatcher and U.S. president Ronald Reagan, but was rooted in the ideas of Adam Smith.

Bush stated that global trade expansion had been one of the “highest priorities of his administration.”32 Notice that the origins of today’s great global integration are at odds with one of its most widely promulgated myths: that globalization has emerged organically, born from fast Internet technology and the “invisible hand” of free markets. In truth, this global force owes its existence to a long history of entirely purposeful policy decisions, championed especially by the United States and Britain, dating to the waning days of World War II. Many who write about globalization see it as exploding suddenly in the 1970s or 1980s, thus missing the institutional groundwork laid first under Bretton Woods, pressed upon the developing world by its daughter institutions the IMF, WTO, and World Bank, and subsequently advanced by U.S. presidential administrations of both political parties ever since. Its foundations are now codified into decades of historical precedent and a plethora of free-trade treaties. They are engrained in generations of politicians and business CEOs, and were reaffirmed even during the turmoil of the 2008-09 global financial crisis.33 This megatrend has roots going back more than sixty years and is now a deep, powerful global force already shaping the twenty-first century economy.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

Letter to Her Majesty the Queen, 22 July 2009, http://media.ft.com/cms/3e3b6ca8-7a08-11de-b86f-00144feabdco.pdf. 6. The NEC, founded under President William Jefferson Clinton, is distinct from the Council of Economic Advisers, founded in 1946 under President Harry Truman. 7. Lawrence Summers and Martin Wolf, ‘A Conversation on New Economic Thinking’, Bretton Woods Conference, Institute for New Economic Thinking, 8 April 2011, http://ineteconomics.org/video/bretton-woods/larry-summers-and-martin-wolf-new-economic-thinking. 8. Ben Bernanke, Chairman of the Federal Reserve, also stressed the intellectual debt of central bankers to the journalist, Walter Bagehot, in a lecture on the Federal Reserve’s response to the crisis. See Bernanke, ‘The Federal Reserve’s Response to the Financial Crisis’, Lecture 3, George Washington University School of Business, 27 March 2012, http://www.federalreserve.gov/newsevents/lectures/federal-reserve-response-to-the-financial-crisis.htm. 9. http://rwer.wordpress.com/2013/02/19/robert-lucas-on-the-slump. 10.

Speech at the 14th IMF Annual Research Conference in Honor of Stanley Fischer, 18 November 2013. http://larrysummers.com/imf-fourteenth-annual-research-conference-in-honor-of-stanley-fischer. Summers, Lawrence. ‘Why Stagnation Might Prove to Be the New Normal’, 15 December 2013, Financial Times. http://www.ft.com/cms/s/2/87cb15ea-5d1a-11e3-a558-00144feabdc0.html. Summers, Lawrence and Martin Wolf. ‘A Conversation on New Economic Thinking’, Bretton Woods Conference, Institute for New Economic Thinking, 8 April 2011. http://ineteconomics.org/video/bretton-woods/larry-summers-and-martin-wolf-new-economic-thinking. Taleb, Nassim Nicholas. Fooled by Randomness: The Hidden Role of Chance in Life and the Markets (London: Penguin, 2004). Taleb, Nassim Nicholas.The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007). Tarullo, Daniel K. ‘Statement by Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System before the Committee on Banking, Housing, and Urban Affairs, US Senate’, Washington DC, 11 July 2013. http://www.federalreserve.gov/newsevents/testimony/tarullo20130711a.htm.

The purpose of the rest of the book is to answer the second. Nobody doubts the crisis has had macroeconomic consequences, the difference being only over what they are and how long-lasting they will prove to be. But the view that the crisis had macroeconomic roots is controversial. Michael Dooley of the University of California at Santa Cruz and Peter Garber of Deutsche Bank, two of the authors of the influential ‘Bretton Woods II’ hypothesis (which explained and justified the fixed exchange-rate regimes adopted by many developing countries, notably China, as a sensible way of achieving rapid export-led industrial growth), reject the notion out of hand.6 They argue that the blame lies ‘with ineffective supervision and regulation of financial markets in the U.S. and other industrial countries driven by ill-conceived policy choices’.7 This chapter will argue, in opposition to this view, that understanding the underlying economics of the crisis is crucial.


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Liberalism at Large: The World According to the Economist by Alex Zevin

activist fund / activist shareholder / activist investor, affirmative action, anti-communist, Asian financial crisis, bank run, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, Chelsea Manning, collective bargaining, Columbine, Corn Laws, corporate governance, corporate social responsibility, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, desegregation, disruptive innovation, Donald Trump, Edward Snowden, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, Gini coefficient, global supply chain, hiring and firing, imperial preference, income inequality, interest rate derivative, invisible hand, John von Neumann, Joseph Schumpeter, Julian Assange, Khartoum Gordon, land reform, liberal capitalism, liberal world order, light touch regulation, Long Term Capital Management, market bubble, Martin Wolf, means of production, Mikhail Gorbachev, Monroe Doctrine, Mont Pelerin Society, moral hazard, Naomi Klein, new economy, New Journalism, Norman Macrae, Northern Rock, Occupy movement, Philip Mirowski, plutocrats, Plutocrats, price stability, quantitative easing, race to the bottom, railway mania, rent control, rent-seeking, road to serfdom, Ronald Reagan, Rosa Parks, Snapchat, Socratic dialogue, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade liberalization, trade route, unbanked and underbanked, underbanked, unorthodox policies, upwardly mobile, War on Poverty, WikiLeaks, Winter of Discontent, Yom Kippur War, young professional

Nicholas, Chicago 1981, pp. 493–94; Isaiah Berlin, 1 February 1945, in Flourishing: Letters 1928–1946, London 2004, p. 528. 57.Peter Clarke, The Last Thousand Days of the British Empire: Churchill, Roosevelt and the Birth of the Pax Americana, London 2008, pp. 146–48. 58.There was, in other words, no reason for the US to reject certain currency controls, or bilateral clearing schemes of the sort Britain had just signed with Belgium – a ‘miniature Keynes Plan’, designed to smooth payment imbalances between surplus and deficit countries, which the US rejected at Bretton Woods. Such controls would expand ‘the sum total of world trade’, as opposed to the bad kind of discrimination, which simply transferred ‘markets from one supplier to another’: ‘Peacetime Mutual Aid’, 13 December 1945. For Britain’s weak (and wishful) negotiating posture at Bretton Woods, and the acrimony it and the loan terms generated, see Benn Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton 2013. 59.Leo Amery to Layton, 23 January 1945, Layton Papers, TCC, Box 81.137–138. 60.This advice was given ‘against our better judgment’.

Richard Nixon, with scant respect for the former, received barely a slap on the wrist over Watergate. The Economist viewed the affair as a mildly amusing intrigue almost up to the day the president resigned.61 Macrae, at any rate, looking to escape from the corset of fixed exchange, praised Nixon for dismantling Bretton Woods between 1971 and 1973.62 Andrew Knight: Special Relationships, 1974–86 The Economist may have applauded the delinking of the dollar from gold and the effective end of the Bretton Woods system of fixed exchange in 1973. But this drastic step also pointed to a deep, rumbling crisis of the liberal capitalist order that America had built after 1945. In one sense, this was a testament to its success, in particular in Germany and Japan. Two decades after their wartime defeat, newer, lower-cost industries in both countries – making everything from cars to consumer electronics – began to capture market share from American firms abroad and at home.

See Keith Tribe, ‘Liberalism and Neoliberalism in Britain, 1930–1980’, in The Road from Mount Pèlerin, eds. Philip Mirowski and Dieter Plehwe, Cambridge 2009, p. 89. 54.Eurocurrency markets undermined the Bretton Woods system, since they operated without reference to the official, gold-backed value of the US dollar. For the competitive deregulatory pressures they exerted on policymakers, and their role in the formation of a transatlantic ‘City-Bank-Treasury’ – ‘Federal Reserve-Wall Street-Treasury’ nexus, see J. Green, ‘Anglo-American Development, the Euromarkets, and the Deeper Origins of Neoliberal Deregulation’, Review of International Studies, July 2016, pp. 9–14; Eric Helleiner, States and the Reemergence of Global Finance, From Bretton Woods to the 1990s, Ithaca 1994, pp. 15–16. For the slow ‘divorce’ between the City and sterling, in favour of alternative strategies after 1967, see Gary Burn, The Re-Emergence of Global Finance, London 2006, pp. 93–98, 184–85.


Profit Over People: Neoliberalism and Global Order by Noam Chomsky

Bernie Sanders, Bretton Woods, declining real wages, deindustrialization, full employment, invisible hand, joint-stock company, land reform, liberal capitalism, manufacturing employment, means of production, Monroe Doctrine, Ronald Reagan, strikebreaker, structural adjustment programs, Telecommunications Act of 1996, The Wealth of Nations by Adam Smith, Thomas Malthus, union organizing, Washington Consensus

Free flow of capital, in contrast, would create what some international economists call a “virtual senate,” in which highly concentrated financial capital imposes its own social policies on reluctant populations, punishing governments that deviate by capital flight.19 The Bretton Woods assumptions largely prevailed during the “Golden Age” of high levels of growth of the economy and productivity, and extension of the social contract, through the 1950s and 1960s. The system was dismantled by Richard Nixon with the support of Britain, and, later, other major powers. The new orthodoxy became institutionalized as part of the “Washington consensus.” Its outcomes conform rather well to the expectations of the designers of the Bretton Woods system. Enthusiasm for the “economic miracles” wrought by the new orthodoxy is ebbing, however, among the managers of the global economy, as the near disasters that have accelerated since financial flows were liberalized from the 1970s have begun to threaten the “domestic constituencies” as well as the general public.

V The Zapatista Uprising Major changes have taken place in the global order in the past quarter century. By 1970 the “affluent alliance” of the post-war years was running on to the rocks, and there was growing pressure on corporate profits. Recognizing that the United States was no longer able to play the role of “international banker” that had been so beneficial to US-based multinationals, Richard Nixon dismantled the international economic order (The Bretton Woods system), suspending the convertibility of the dollar to gold, imposing wage-price controls and an import surcharge, and initiating fiscal measures that directed states power, beyond the previous norm, to welfare for the rich. These have been the guiding policies since, accelerated during the Reagan years and maintained by the “New Democrats.” The unremitting class war waged by business sectors was intensified, increasingly on a global scale.

It helps bring about the “significant wage restraint” and “atypical restraint on compensation increases [that] appears to be mainly the consequence of greater worker insecurity” that so encourage Fed chair Alan Greenspan and the Clinton administration, sustaining the “economic miracle” that arouses awe among its beneficiaries and deluded observers, particularly abroad. There are few surprises here. The designers of the post–World War II international economic system advocated freedom of trade but regulation of capital; that was the basic framework of the Bretton Woods system of 1944, including the charter of the lMF. One reason was the (rather plausible) expectation that liberalization of finance would impede freedom of trade. Another was the recognition that it would serve as a powerful weapon against democracy and the welfare state, which had enormous public support. Regulation of capital would allow governments to carry out monetary and tax policies and to sustain full employment and social programs without fear of capital flight, US negotiator Harry Dexter White pointed out, with the agreement of his British counterpart, John Maynard Keynes.


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The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

"Robert Solow", air freight, Andrei Shleifer, battle of ideas, Bretton Woods, British Empire, business process, business process outsourcing, Carmen Reinhart, clean water, colonial rule, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, Deng Xiaoping, desegregation, discovery of the americas, Edward Glaeser, en.wikipedia.org, European colonialism, Francisco Pizarro, fundamental attribution error, germ theory of disease, greed is good, Gunnar Myrdal, income per capita, invisible hand, James Watt: steam engine, Jane Jacobs, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, M-Pesa, microcredit, Monroe Doctrine, oil shock, place-making, Ponzi scheme, risk/return, road to serfdom, Silicon Valley, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas L Friedman, urban planning, urban renewal, Washington Consensus, WikiLeaks, World Values Survey, young professional

But it would be replaced by an even larger proposal by the same Harry Dexter White to create a new organization: the World Bank. THE ORIGINAL SIN AT BRETTON WOODS The World Bank was founded in 1944 at the Bretton Woods conference, which had been set up by the soon-to-be victorious Allies to plan postwar economic cooperation. The Bank would provide long-term financing and expert advice to what would become known as “developing countries.” It would be the most powerful institution at the heart of the development community, which would include rich-country government aid agencies, international philanthropies, the United Nations and other international agencies, and the development experts advising all of the above. The same Bretton Woods conference also founded the International Monetary Fund (IMF), which would bail countries out of short-term financial crises.

The same Bretton Woods conference also founded the International Monetary Fund (IMF), which would bail countries out of short-term financial crises. Both the Bank and the Fund still have these powerful roles today. A key moment in the hardening consensus for technocratic development was the approval at Bretton Woods of one particular clause in the Bank’s 1944 Articles of Agreement. Article IV, Section 10, was a “nonpolitical clause,” as it became known, which would make it easier to overlook unlovely autocrats among America’s anti-Soviet allies during the Cold War: “The Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in its decisions by the political character of the government of the member or members concerned. Only economic considerations shall be relevant to their decisions.”25 The nonpolitical clause had a political motivation in 1944. Ironically, this motivation for Article IV, Section 10, was originally to allow support for the Soviet Union—then a wartime ally.

Such loans subject to such an expert committee “will be based on more careful studies of their utility than has ever been true with most private investments made to foreign countries.” This made clear “the necessity for selecting the most able men to manage the Bank.” The Bank “should also have the authority to send the experts into the field.”32 When White as Morgenthau’s deputy became the key American decision-maker at Bretton Woods, White’s original 1941 draft became the basis for the Article IV, Section 10, nonpolitical clause for the World Bank. Harry Dexter White died in 1948, just as the World Bank began operations. But White had a former Harvard graduate school classmate and lifelong friend—Lauchlin Currie—to carry on his technocratic legacy at the World Bank. Lauchlin Currie had enthusiastically supported all of the Latin American and World Bank initiatives as Roosevelt’s chief White House economist since 1939.33 The irony, of course, is that the article against politics made it easier to use the Bank to pursue politics.


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Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

Discussion of more recent times tends to focus on England, as housing markets and policies have varied widely across the nations of the UK, particularly since devolution around the turn of the millennium. 2 A bushel is an old unit of volume which was used mostly for agricultural products such as wheat. 3 The Bretton Woods system was developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, from 1 to 22 July 1944. The major outcome of the Bretton Woods conference was the introduction of an adjustable pegged foreign exchange rate system whereby all currencies were linked to the US dollar which, in turn, was made convertible to gold at a fixed price. The conference also saw the creation of two global institutions that still play important roles today – the International Monetary Fund (IMF) and the World Bank.

Figure 4.1 New houses built by tenure (United Kingdom) (source: Office for National Statistics, 2016a) Figure 4.2 Trends in tenure type from 1918 to 2013 (Great Britain) (%) (source: Office for National Statistics, 2016b; figures for 1918 and 1939 are for England and Wales only) Post-war Britain – along with much of the developed world – enjoyed high levels of economic growth, moderate rates of inflation and full employment. Economic policy making was dominated by Keynesian thought (see Box 4.3) and the pursuit of bold social reforms such as the establishment of the welfare state, the nationalisation of the railways and the creation of the National Health Service. This period is often described as the ‘Golden Age of Capitalism’, and lasted until the collapse of the Bretton Woods fixed exchange rate regime in 1971.3 In the mixed economy of the Keynesian era, state-sponsored house building by councils coexisted with development by private firms, and to a much lesser extent by non-profit housing associations. The years in which the state built most were also those in which the market built most, suggesting that state supply caused little if any crowding out of private investment.

Together, these changes created a major bias in favour of owner-occupation, and contributed towards the continued rise in homeownership in the 1970s and 1980s – against the headwinds of rising house prices. 4.4 1970 onwards: the emergence of ‘residential capitalism’ The 1970s was a period of huge change, socially, politically and economically. While an immediate shortage of housing was no longer a major concern following the large-scale building in the post-war era, the UK economy faced multiple challenges as the dynamics of the global economy were transformed following the collapse of the Bretton Woods system. These included runaway inflation, oil price shocks, high interest rates and increasing tensions between industry and trade unions. This ultimately led to the election of Margaret Thatcher as prime minister in 1979, along with the emergence of monetarism and a more market-orientated approach to social and economic policy (see Box 4.4). Seen in retrospect, the economic and political upheavals of the 1970s have overshadowed some of the dramatic changes to the housing landscape.


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The Weightless World: Strategies for Managing the Digital Economy by Diane Coyle

"Robert Solow", barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, blue-collar work, Bretton Woods, business cycle, clean water, computer age, Corn Laws, creative destruction, cross-subsidies, David Ricardo: comparative advantage, dematerialisation, Diane Coyle, Edward Glaeser, everywhere but in the productivity statistics, financial deregulation, full employment, George Santayana, global village, hiring and firing, Howard Rheingold, income inequality, informal economy, invention of the sewing machine, invisible hand, Jane Jacobs, Joseph Schumpeter, Kickstarter, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Marshall McLuhan, mass immigration, McJob, microcredit, moral panic, Network effects, new economy, Nick Leeson, night-watchman state, North Sea oil, offshore financial centre, pension reform, pensions crisis, Ronald Reagan, Silicon Valley, spinning jenny, The Death and Life of Great American Cities, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tobin tax, two tier labour market, very high income, War on Poverty, winner-take-all economy, working-age population

International trade collapsed. International investment came to comprise the American bankrolling of western Europe and to a far smaller extent the British subsidy of its colonies and commonwealth. For global markets, 1945 was year zero. Under the Bretton Woods system established after World War II — named after the location of its founding conference — international capital flows grew slowly, limited by exchange controls. Intermittent balance of payments deficits in some countries were the main force driving the flows. It was not until after the Bretton Woods arrangements began to crumble that the growth in the financial markets began to head up the graph. The birth of the Big Swinging Dick A brief history of the recent growth of the international markets will demonstrate why their power this past decade or so has been fuelled by the growth of government.

Those agreements — the Plaza Accord and the Louvre Accord — hold one clue to effective management of the financial markets. Broadly speaking, taming the global markets will involve international co-operation. But the existing framework for international economic management is inadequate. The Bretton Woods system has broken down, and nothing has taken its place. Ad hoc interventions by a handful of the industrialised countries will not be powerful enough to govern the international financial markets. Even worse, they have neither clear aims nor political legitimacy. The underlying problem was diagnosed by Lawrence Summers, then number two at the US Treasury, at a conference called in 1995 for the 50th anniversary of Bretton Woods. He said: ‘With the passage of the communist threat an important adhesive binding industrial democracies to each other and their allies in the developing world has been lost’. The dissolution of the Globalism and Globaloney 185 security glue means there is less need to co-operate and indeed there has been less co-operation.

Nor is it generally capital spending that is expected to generate a future return, but rather current expenditure on everyday services. The payments on the borrowing will depend on tomorrow’s taxpayers financing them instead of today’s. This pattern of borrowing in the international capital markets is a phenomenon dating from the 1970s. International capital flows grew at a steady pace for the first quarter century after the post-war Bretton Woods confer- The Weightless World 174 ence in the summer of 1945, and the ‘offshore’ Euro-market for short-term lending and borrowing on a large scale was well-established by the mid-1960s. But the great leap forward stemmed from the OPEC oil crisis. The mainly Arab members of the Organisation of Petroleum Exporting Countries decided in 1973 as a result of the Middle East war to exercise their muscle by quadrupling the price of oil.


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How the World Works by Noam Chomsky, Arthur Naiman, David Barsamian

affirmative action, anti-communist, Ayatollah Khomeini, Berlin Wall, Bernie Sanders, Bretton Woods, British Empire, business climate, capital controls, clean water, corporate governance, deindustrialization, Fall of the Berlin Wall, feminist movement, glass ceiling, Howard Zinn, income inequality, interchangeable parts, Isaac Newton, joint-stock company, land reform, liberation theology, Monroe Doctrine, offshore financial centre, plutocrats, Plutocrats, race to the bottom, Ralph Nader, Ronald Reagan, Rosa Parks, single-payer health, strikebreaker, Telecommunications Act of 1996, transfer pricing, union organizing, War on Poverty, working poor

The costs of the Vietnam War were very significant for the US economy, and extremely beneficial for its rivals. That tended to shift the world balance. In any event, by the early 1970s, the US felt that it could no longer sustain its traditional role as—essentially—international banker. (This role was codified in the Bretton Woods agreements at the end of the Second World War, in which currencies were regulated relative to one another, and in which the de facto international currency, the US dollar, was fixed to gold.) Nixon dismantled the Bretton Woods system around 1970. That led to tremendous growth in unregulated financial capital. That growth was rapidly accelerated by the short-term rise in the price of commodities like oil, which led to a huge flow of petrodollars into the international system. Furthermore, the telecommunications revolution made it extremely easy to transfer capital—or, rather, the electronic equivalent of capital—from one place to another.

He recognized that US dominance of the global system had declined, and that in the new “tripolar” world order (with Japan and German-based Europe playing a larger role), the US could no longer serve—in effect—as the world’s banker. That led to a lot more pressure on corporate profits in the US and, consequently, to a big attack on social welfare gains. The crumbs that were permitted to ordinary people had to be taken away. Everything had to go to the rich. There was also a tremendous expansion of unregulated capital in the world. In 1971, Nixon dismantled the Bretton Woods system, thereby deregulating currencies. That, and a number of other changes, tremendously expanded the amount of unregulated capital in the world, and accelerated what’s called the globalization (or the internationalization) of the economy. That’s a fancy way of saying that you export jobs to high-repression, low-wage areas—which undercuts the opportunities for productive labor at home. It’s a way of increasing corporate profits, of course.

They were, of course, correct, and Soros is correct insofar as he reiterates that view. On the other hand, he also makes the common assumption that the market system is spreading, which just isn’t true. What’s spreading is a kind of corporate mercantilism that’s supported by—and crucially relies on—large-scale state power. Soros made his money by financial speculations that become possible when telecommunications innovations and the government’s destruction of the Bretton Woods system (which regulated currencies and capital flow) allowed for very rapid transfers of capital. That isn’t global capitalism. As we sit here, the World Economic Forum is being held in Davos, Switzerland. It’s a six-day meeting of political and corporate elites, with people like Bill Gates, John Welch of GE, Benjamin Netanyahu, Newt Gingrich and so on. The companies represented at this forum do something like $4.5 trillion worth of business a year.


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