7: 1971 - The Implosion of the Bretton Woods Order and The Crisis of Postwar "Embedded Liberalism" Flashcards
Why was the Cold War also an economic competition?
rivalry between capitalism and state socialism as economic models
national power = economic achievement (measured in GDP or productivity)
- ideology of growth
race for the future and modernisation
modernity = industry
- in the US, symbol of capitalism/growth as the automobile sector
- idea that it delivered to mass consumption
why was the lesson of the 1930s so important in the Cold War economic competition and in shaping the post-WWII international liberal order for the US?
crisis of international capitalism damages US interests
- most competitive country so it damages interests
- damages interests of advanced firms/industries that are hyper-competitive and capable of outsourcing and of financial markets
crisis of capitalism = crisis of (liberal) democracy
- if capitalism goes down, liberal democracies also faces a major challenge since they are argued to prosper on free markets
economic protectionism = economic crisis = tension/conflicts
- economic antagonism and competition fostered when authoritarian regression combines with economic autarchy and protectionism
- connection between economic crisis, economic protectionism and protection if not war
rise of fascism as a consequence of economic problems and lack of social protection
- political radicalism and authoritarian solutions that prospered/developed under conditions of inequality, economic and social backwardness, poverty, etc.
main features of the US-led post-WWII liberal order and monetary regime
BW system as a compromise between the rigidity of the gold standard and free-floating exchange rates - gold-dollar standard
- based on the convertibility of national currencies with gold
liquidity guaranteed by gold and convertible currencies (only the USD)
- national banks had to back up liquidity in circulation by having gold in their reserves
- gold standard as a symbol of civilisation
tight controls on capital flows
- preservation of sovereignty in a way by controlling and limiting capital flows
multilateral solution but national sovereignty/autonomy
- countries except the US lost sovereignty by accepting the dollar as the equivalent of gold
- multilateral solution limited sovereignty while also granting sovereignty
embedded liberalism
optimism on liquidity provided by the IMF and currency/BOP stability
issues with the gold standard
if there has to be ratio with bank reserves and circulating liquidity, you cannot expand circulating liquidity as much as you want since you cannot expand gold reserves beyond a certain limit
gold standard has an intrinsic deflationary nature
- need to find more gold or you cannot keep up with economic growth
- useful to have another reserve unit with gold, capable of expanding reserves and matching circulating liquidity
why was the US the indisputable hegemon in the BW system?
US as liquidity guarantor
- IMF’s failure to fulfil its task
- US also owned between 65%-70% of total gold reserves post-WWII
US superior economic power in trade surpluses
- economy driven first and foremost by the domestic US market with exports never been central
- huge competitive advantage benefitting from dynamic of global integration, the opening up of markets, the possibility to export/invest
dollar gap and reconstruction of Europe
- fairly artificial unique superiority produced by WWII where everyone needed dollars to buy vital commodities and raw materials
centrality of the US market
- potential access to the massive, hyper-integrated and dynamic domestic market
indispensability of US aid, investments and loans
- link between rapid economic recovery and need for dollars
why did western Europe and Japan accept US monetary hegemony?
US aid, loans and investments
- Marshall plan as central
- eagerness to get aid and investments from destroyed/devastated Europe
partial access to US market
- many industries took off once gaining full access to the American market
- was a game changer
US security protection
- economics cannot be separated/disconnected from politics, geopolitics and IR
- security provider via NATO in Europe, via a bilateral treaty with Japan and later Korea
- security guaranteed stability and therefore was an ideal environment for economic growth
advantages of US monetary hegemony for the US
political and economic stability (vs. communism and USSR)
- tool of the policy of containment
- considered interdependent and interrelated
partial access to European and Japanese markets
- interest in opening up commercial and financial markets of allies which meant possibilities for banks, investments, firms to invest
investments
- massive pool of private savings and privately-owned liquidity after WWII in search of profitable opportunities
extreme flexibility of BOP
- exorbitant privilege the US enjoyed in the flexibility of BOP and external balance
- could print gold and expand reserves as much as they wanted since the dollar was convertible
- led to an external deficit (especially from the cost of security commitments) which they made up by printing more
how did the USSR respond to the US as the economic hegemon?
US/western embargo
- economic warfare where strategically important were not transferred to the USSR
- at the time, there was a separation between capitalist and non-capitalist bloc (unlike now)
- conflicts/tensions between the US and allies who wanted to trade and have economic relations with the USSR
CMEA/Comecon
- USSR tried to set up an alternative economic sphere
- attempt to project an alternative model to the liberal capitalist order was weak and flawed
- USSR itself badly needed resources and raw materials, so so there as the possibility of exploiting countries in this sphere to extract resources
planned economy and accelerated industrialisation
- concentration of investments in heavy industries which resulted in remarkable levels of economic growth
- key variable as the easy input of cheap labour in rural/agricultural countries/economies
what was the Third World/non-Cold War alternative to the BW monetary system or the USSR?
import substitution, industrialisation, modernisation
encompassed political non-alignment and economic self-sufficiency
- import substitution in developing a nationalist autonomous base as a precondition to full autonomy
- reliance on commodities they were rich in
erection of trade barriers, closing to foreign capital and investment
- protectionism, rigid control on foreign capital/investment
creation of indigenous industries to produce goods for the home market
- state played a major role in planning, subsidising and introducing tools to protect national domestic industries and laying conditions for their development
state subsidies
was the Third World/non-Cold War alternative to the BW monetary system or the USSR successful?
success in the short run, failure in the long run
- impossibility to fully immunise and protect systems from global shocks, financial integration post-1970s, liberalisation of capital flows, competition to attract capital flows and high levels of debt accumulated by countries to promote those policies
import substitution completely abandoned from a theoretical and practical point of view
Triffin Dilemma or the Gold and Dollar Crisis of 1960
when the BW compromise stopped functioning
transfer of US dollars which provide liquidity and cover military commitments
- external deficit began to increase from the late 1950s
weakening of the dollar’s credibility (in normal times would devaluate)
- dollar could not devaluate since it had a fixed value with gold
explosion of the BW system in the 1960s
system could not hold
from dollar shortage to dollar glut
- too many dollars printed and in circulation
- parallel market for dollars informally created in Europe
- challenged the credibility of the dollar as a reserve currency and the key monetary anchor of the system
tax cuts, inflation, Vietnam
- increasing levels of public spending with domestic reforms, the Vietnam War, etc. which fed into inflation
- inflation exported abroad so no way of containment
efforts of cooperation
- pressured allies to do more and west Germany asked to pay for part of military expenses
- pressure on central banks to help the US ease pressure on the dollar
US not perceived as the security provider anymore
- period of detente when France left NATO
- no need for external protection in relaxation/reduction of global tensions
increase in private/speculative transactions
- technological changes which made it easier to transfer/wire sums across the globe
France
- began speculation against the dollar and trading gold agains the dollar
- percentage of US gold reserves plummeted from 70% to less than 25%
- dollar under a speculative attack and lost credibility as being as good as gold
economic rebirth of Japan and Germany
- trade competition and crisis of profitability
- other countries were able to now compete so new form of intra-capitalist competition with larger increasing shares of the market taken by non-US industries and firms
Nixon’s response in 1971
end of dollar convertibility in 1971
- unilaterally pulled out of the BW system
- other protectionist measures like temporary 10% tariff on imports
Nixon also concerned with presidential elections of 1972
also devaluation of the dollar in 1971
- radical transformation of international monetary order and capitalist liberal order
definitive end of gold dollar system in 1973 with floating exchange rates
consequences of the collapse of the BW system post-1970s
no predicted economic global collapse like in the 1930s
- focus on the crisis of capitalism
- USSR had huge unmanageable problems but seemed to shield them better than the US and allies
confused and uncertain transition marked by increasing economic integration
- key variable/dynamic was a process of increasing global integration in terms of trade, finance, culture, mobility, etc.
devaluation of dollar with regards to the mark and yen
financial speculation, remove of restrictions
search for alternatives
- beginning of European effort to coordinate monetary policies and create/open up the path towards a common currency
- origins of the euro in 1971
expansion in world supply of money: capital glut
- massive expansion of liquidity so much so that many third world countries had easy/cheap access to credit
why did the dollar still remain the dominant currency post-1970s?
lack of alternatives
US again as the security provider
- unchanged but rethought/relaunched
petrodollars
- oil-producing countries that contributed to the strength of the dollar
- petrodollars reinvested back into the US or used to purchase US weapon systems
US market kept its centrality
- engine of global growth
foreign investments and loans
- major financial monetary and fiscal revolution in 1979 with the Volcker shock
- in 1979 and 1981, Fed increased interest rates up to 20%
