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When the Bretton Woods system collapsed
By Nick Beams
16 August 2001
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Yesterday marked the 30th anniversary of one of the most significant turning
points in the history of post-war capitalism. On August 15, 1971, without
prior warning to the leaders of the other major capitalist powers, US
president Nixon announced in a Sunday evening televised address to the
nation that the US was removing the gold backing from the dollar. The
commitment by the US to redeem international dollar holdings at the rate of
$35 per ounce had formed the central foundation of the post-war international
financial system set in place at the Bretton Woods conference of 1944.
Nixons unilateral announcement dealt it a fatal blow.
To gauge the impact of Nixons decision and the significance of what
followed it is necessary to consider the historical background to the Bretton
Woods system. The agreement arrived at in the New Hampshire township in
the summer of 1944 was the outcome of a protracted series of discussions
and arguments between the leading economic and financial figures in the US
and British governments over the preceding three years.
Within the Roosevelt administration the conviction had developed, particularly
in the State Department under Cordell Hull, that the root cause of the
economic and political crises of the 1930s lay in the growth of protectionism
as national governments sought to defend their immediate domestic interests
at the expense of the functioning of the global economy as a whole.
Furthermore, it was felt that one of the contributing factors to this turbulence
was the free movement of capital around the world which destabilised
national economies and set in motion the competitive devaluation of national
currencies that played such havoc with international trade.
Consideration of the shape of post-war international economy was very much
to the fore when Roosevelt met British Prime Minister Winston Churchill in
1941 to discuss the terms of Lend Lease (the process through which the US
provided financial and material assistance to the British war effort).
Somewhat to the surprise of the British side, however, the US insisted on the
insertion of a clause in the Atlantic Charter guaranteeing free trade and
access to markets. Both governments committed themselves to further the
enjoyment by all States, great or small, victor or vanquished, of access, on
equal terms, to the trade and raw materials of the world.
The US was determined that the trading bloc, which Britain had formed on
the basis of its old empire, would have to be destroyed in the post-war world.
As Robert Skidelsky puts it in his biography of John Maynard Keynes,
Britains chief negotiator at Bretton Woods: To condense a complicated
story, the Americans tried to use Lend Lease as a lever to destroy Britains
pre-war financial and trading system, based on the sterling area and imperial
preference. While as far as Britain was concerned, the chief aim in
negotiations with the US was, in Keynes words the retention by us of
enough assets to leave us capable of independent action.
Whatever the issues which divided them, the British and US officials were
agreed on one thing: there could not be a return to the pre-World War I
situation where capital was free to move all over the world. International trade
had to take place without the constrictions that had bedeviled the world
economy in the 1930s. But this could only take place if the movement of
capital was not allowed to disrupt trade and currency relationships.
How far removed the policymakers of that time were from todays prevailing
orthodoxy can be seen in the remarks of US treasury secretary Henry
Morgenthau to the Bretton Woods conference. The aim of the agreement, he
told the assembled representatives of 45 nations, was to drive the usurious
moneylenders from the temple of international finance.
Keynes had made clear that if free capital movements were allowed then it
would not be possible to establish the kind of regulated capitalism at which
the new agreement was aimed. Freedom of capital movements, he insisted,
is an essential part of the old laissez-faire system and assumes that it is
right to have an equalisation of interest rates in all parts of the world. ... In
my view the whole management of the domestic economy depends upon
being free to have the appropriate rate of interest without reference to the
rates prevailing elsewhere in the world. Capital control is a corollary to this.
The issue of capital controls was directly connected to the political situation
which confronted the capitalist class after World War II. The eruption of
World War I had brought the Russian Revolution of 1917 and the series of
revolutionary upheavals that had convulsed Europe in the period 1918-23.
With the end of war now in sight, every capitalist government
