Don’t forget the 1970s financial revolution got us here

The collapse of the Bretton Woods system in the early 1970s has shaped almost every aspect of global affairs but is too often neglected, by Nat Dyer

There will be lots of discussion at the global economic gathering in Davos this week along the lines of a question posed by BBC correspondent Bridget Kendall, “Are we seeing the seeds of a new international order which might displace the postwar rules-based system championed by the US and its allies?” In other words, will America under Donald Trump and a resurgent China replace the international system of the United Nations, the World Bank and the IMF set up in 1945?

Kendall sought to answer the question in her recent three-part series, The Death of the Postwar Settlement on BBC Radio 4. It was wide-ranging and in many ways brilliant. It also missed out a major slice of history – a financial revolution the early 1970s – which is coming to be seen as the pivot which helped create our modern, globalised world.

Many other accounts of how we got into the present global predicament – widening gaps between rich and poor, fragmenting societies and yo-yo financial crises – have the same blind spot. Famously, students studying economics in the years prior to the 2008 global financial crisis were taught models which neglected both finance and history. Even more worrying, I found no discussion on the impacts of the breakdown of Bretton Woods in a new textbook by CORE – a prominent economics education charity – designed to correct the failings of pre-2008 economics teaching. Even Kate Raworth’s Doughnut Economics, which is a fabulous take-down of the ludicrous idea of perfectly rational ‘economic man’, traces today’s economic mess back to Margaret Thatcher and Ronald Regan in the 1980s, not mentioning the financial revolution the decade before.

The financial revolution of the early 1970s is coming to be seen as the pivot which helped create our modern, globalised world.

Fortunately, a number of recent books such as The Finance Curse by Nicholas Shaxson and Moneyland by Oliver Bullough (my review here) show in Bullough’s words a “growing consensus that a key inflexion point for the modern world came when the postwar Bretton Woods system collapsed under the weight of offshore finance in the 70s”.

So, what was the 1970s revolution? At the close of the Second World War, the USA oversaw the creation of a new international architecture which included the United Nations and a tightly-controlled financial system known as Bretton Woods after a New Hampshire ski resort which hosted the talks. As Sky economics editor Ed Conway wrote in The Summit the Bretton Woods system “permitted the longest period of stability and economic growth in history”. This Golden Age of Capitalism – with a relatively modest gap between rich and poor, low unemployment and virtually no banking crises – came to an end in the early 1970s when American President Richard Nixon pulled out, as economists such as Milton Friedman had urged. The reasons are complicated but included London’s booming offshore “Eurodollar” market, the rise of Germany and Japan and the US’s growing debt due to the Vietnam War.

“Almost immediately after the demise of [Bretton Woods]”, Conway writes, “every single measure of the size, profitability and leverage of the banking industry began to increase at unprecedented rates.”

Although Bretton Woods was not perfect, the before and after contrast is striking. A Bank of England study cited by Conway calculates GDP growth of 2.8% between 1948 and the early 1970s compared to 1.8% between the early 1970s and 2008. Despite frequent calls for a ‘new Bretton Woods’ the world’s financial system has been run on an ad hoc basis ever since increasingly dominated by loosely-regulated, volatile finance. “Almost immediately after the demise of [Bretton Woods]”, Conway writes, “every single measure of the size, profitability and leverage of the banking industry began to increase at unprecedented rates.” The path of global politics and economics just does not make sense if you ignore the revolution in the early 1970s.

One reason for all this forgetting is the separation between the academic study of economics and politics. Despite decades of reform attempts, by pioneers such as Susan Strange, too much academic work treats the economy as a mathematical puzzle and assumes that power politics has no influence or studies politics as a competition between states ignoring other sources of power such as the swirling flows of money under the surface. Strange also saw 1973 as the starting pistol for what she called Casino Capitalism and believed that as increasingly powerful financial markets helped bring down the Communist world, they may also bury liberal democracies.

This brings us full circle back to Bridget Kendall’s question about whether we are seeing the end of the “postwar rules-based system”. The first answer to that must be to acknowledge that the rules set down for postwar financial order were gone long before Trump and the rise of China with far-reaching implications.

This drifting out of collective memory suits those who do not want to see finance re-regulated.

The Bretton Woods’ rules now seem antiquated: their architects haunted by the global economic misery unleashed by the Wall Street Crash of 1929 wanted to make finance primarily national and constrained cross-border flows of money. Only those now at retirement age ever worked with the old system. This drifting out of collective memory suits those who do not want to see finance re-regulated.

So even if it is not discussed in Davos, let’s not forget that it was the financial revolution of the 1970s which helped to create our globalised world. It may just point the path to a better tomorrow.