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Understanding the End of Bretton Woods

Email: The End of Bretton Woods: Context:

Is there a good account of the history and effects of different types of Capital Controls and their effects since Bretton Woods. Just listened to an interesting discussion by Chomsky online at the Z magazine Website. It was his claim that when Nixon and associates worked to dismantle the Bretton Woods treaty and its fixed exchange rates, it was asserted at the time that the results would be increased market volatility, a slowing of world wide growth rates, and extended concentrations of wealth. Do all you economists out there know a where there is a good empirical discussion of the historical record.

My Comment:

Well, increased volatility yes--especially once everyone got straight Rudi Dornbusch's argument in his "Expectations and Exchange Rate Dynamics." But a whole spectrum of people--from Milton Friedman all the way through to John Kenneth Galbraith, if I recall correctly--thought that the result would be faster growth: that the need to defend one's exchange rate parity would no longer lead central banks to choke off economic growth in the so-called stop-go cycle, and that countries could then exercise their freedom to set their monetary policy as they wished. (Yes, it was mistaken, but that was the belief.)

Extended concentrations of wealth... not seen as an issue. Nothing like the enormous upsurge in income and wealth inequality inside the industrial core was forecast in the early 1970s. And in the early 1970s people were much more optimistic about the ability of third-world governments to establish social democracy and rapid economic growth than they are today. Back in the 1970s people still believed that real political democracy would become the most common form of government in the third world, and that a combination of public investments, social insurance and welfare-state redistributions, and aggressive stimulative macroeconomic policy could repeat throughout the third world the same kind of economic miracle that southern Europe had experienced in the generation after World War II. So people expected the world distribution of income to become more equal.

Of course, it hasn't happened: the lost decade of the 1980s in Latin America, the collapse of economic development in Africa (see, for example, Wole Soyinka's The Open Sore of a Continent; or Robert Bates's Markets and States in Tropical Africa). One way (in fact, my favorite way) to view neoliberalism is as a counsel of near-despair. It is an admission that state structures and political controls in developing countries are such that governments cannot perform the kinds of growth-promoting and income-redistributing missions that we take for granted in the social democracies of Europe, that attempts at social democracy tend to collapse into corruption and kleptocracy, and that the best shot at development is to try to cut the interface between government and economy--privatize businesses, diminish regulation, abandon independent monetary policy for currency boards, bet that the most rapid road to increasing incomes and productivity is to make one's economy hostage to the good opinion of foreign investors...

(I do happen to believe that "global neoliberalism" is the best live political option today; but I also believe that that isn't saying much--like saying that it's better to be tarred, feathered, and ridden out of town on a rail than to be hanged, drowned, or shot.)

Brad DeLong


Unless we have another devastating world wide war, we will be locked in a cycle of economic competition for the foreseeable future.

My Comment:

Ummm... International trade is not a war. It is a positive sum game. The richer and more productive are our trading partners, the more of our stuff they buy and the cheaper their stuff is for us to buy. We as a nation are a lot richer--not poorer--because of the successful modernization of western Europe and Japan.