The Consolidation of Dollar Hegemony After the Collapse of Bretton Woods: Bringing Power Back in

ABSTRACT

Conventional views on the collapse of Bretton Woods suggest that it resulted from its own limitations. The inability of the United States to manage the system given the growing imbalances associated to the need of persistent current account deficits to provide liquidity in dollars, and the resulting inflationary pressures on the one hand, and the increasing disproportion of dollars and gold reserves, on the other, would bring about the end of the system. In other words, the Triffin Dilemma was ultimately correct, and the exorbitant privilege came with a high price tag. The limitations of the dominant view about Bretton Woods are discussed and it is argued that the end of Bretton Woods was a political decision that led to the consolidation of dollar hegemony. The limitations of the conventional view are ultimately tied to mainstream economics.

KEYWORDS:

• Bretton Woods
• heterodox economics

JEL CODES:

• F33
• B50

Acknowledgements

The author would like to thank José Antonio Pereira de Souza and two anonymous referees for their comments, without implicating them.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 For example, Steil (2013, p. 5) tells us that: ‘White's role as the chief architect of Bretton Woods, where he outmaneuvered his far more brilliant but willfully ingenuous British counterpart, marks him as an unrelenting nationalist, seeking to extract every advantage out of the tectonic shift in American and British geopolitical circumstances put in motion by the Second World War.’ The notion that White was able to outmaneuver a naïve Keynes contrasts with the more materialistic notion that what drove the process, and the ultimate predominance of the American proposal, was the earth-shattering change in geopolitical power.

2 There were also significant criticisms of the British Plan. Endres (2005) provides detailed analysis. For a discussion of the critiques of the Bretton Woods plans from a peripheral country, in the work of Raúl Prebisch, see Pérez Caldentey and Vernengo (2021). Prebisch's concerns were with the possibilities for development in the periphery. Helleiner (2014) argues that during the debates at Bretton Woods, the influence of economists from developing countries, particularly from Latin America like Victor Urquidi, implied that there were concerns with development in the original agreement. In this sense, it was the operation of the system that deviated from plan, and caused problems.

3 These anti-Keynesian policies were relatively dominant with the International Monetary Fund (IMF), as can be attested by the early influence of the Polak model within the institution, that would eventually become central to the conditionality attached to the loans provided to developing countries (Polak 1998).

4 For a recent expression of that view, see James (2021, p. 19), who argues, in his defense of laissez-faire policies, that ‘a different currency could become a new international standard. The dollar is not an adequate insurance policy or a viable basis for Washington to reject the need for change.’

5 It should not be surprising that the so-called Hegemonic Stability Theory of the international monetary system, IPE as a relatively independent field, and heterodox economics, as distinctive from orthodox or mainstream marginalist (often referred to as neoclassical) economics, all appeared in the 1970s during the crisis and collapse of the Bretton Woods system. For a discussion of Hegemonic Stability Theories, see Eichengreen (1989), for a history of IPE see Cohen (2008), and for a history of heterodox economics see Lee (2011) and also the discussion in the first chapter of Lavoie (2014). The notion of heterodox economics adopted here implies that both the classical political economy notion of conflictive distribution and the Keynesian notion of the principle of effective demand are the minimum elements of an alternative to the mainstream. It is a broad tent perspective, as defined by Lavoie, but to include many groups not directly related to heterodox economics in his definition, including Latin American structuralists, certain Marxist groups, including some French regulationists, and World System authors.

6 The inter-war understanding for the need to controls movements of capital was particularly strong in the periphery. Prebisch had introduced capital controls as the effective manager of the Central Bank of Argentina, and this was praised by Robert Triffin, when he was in charge of the Latin American section of the Federal Reserve Board, and took Prebisch to the Fed's monetary missions to Santo Domingo and Paraguay in the 1940s. On Prebisch and Triffin on capital controls, see Pérez Caldentey and Vernengo (2018).

7 Carter (2020, p. 361) argues that ‘Keynes convinced himself that the final arrangement was acceptable because the United States would pay more than any other country.’ That the United States would foot the bill was a given. The real reason Keynes accepted the arrangement, besides the fact that he did not had an option really, was that it provided for capital controls and allowed for what he referred to as the ‘euthanasia of the rentier’ central for his views about the possibilities of avoiding another Depression. On Keynes and capital controls, see Crotty (1983, 2019).

8 There are many problems from a logical point of view with the notion of a natural rate of interest, and the notion of a well-behaved investment schedule that are well-established in the literature. For a recent description of the main critiques and their relevance, see Dvoskin and Petri (2017).

9 This follows view that price moderation requires a credible commitment by the central bank. The gold standard is sometimes described as such a commitment (Bordo and Kydland 1999), and in its absence the Fed had to learn about the inflationary impact of its own policies by exploiting the Phillips Curve. The experience of the Great Moderation showed that a credible fiat regime could also achieve price stability, once the monetary authorities had incorporated the lesson that there was no Phillips relation to be exploited in the long run (Sargent 1999). There are alternative, heterodox, explanations for the acceleration of inflation in the 1970s and the stabilization of the 1980s that would contradict this analysis (Vernengo 2006a).

10 For classical authors the value of gold was determined by the technical conditions of production, often associated to labor needs, and for a given subsistence wage, and not by its relative scarcity. Also, the amount of credit in the economy depended upon the needs of trade, based on the so-called Real Bills Doctrine. Hence, the amount of gold had no direct connection with the price level. For Ricardo, under inconvertible paper currency, and accepting Say's Law, inflation could result from the overissuing of money by the Bank of England. The notion that value, including of gold, was associated to supply and demand, and that the amount of gold, or paper currency in an inconvertible system, would be central for prices only becomes dominant with the rise of marginalism. On the classical views, see Green (1992).

11 Keynes famously argued in the General Theory that ‘I am now no longer of the opinion that the concept of a 'natural' rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis’ (Keynes 1936[2013], p. 243). Arguably, Keynes was unable to completely free himself of the notion of a natural rate, but his emphasis on a conventional interest rate could be developed into a coherent alternative in which the monetary rate, as influenced by the central bank is the anchor of the long-term equilibrium position. In this sense, Keynes was building on a tradition that suggested that monetary factors drive the real ones.

12 Keynes’s views on the euthanasia of the rentier and the socialization of investment could be seen as part of his case for Socialism, as suggested by Crotty (2019), rather than his, perhaps more liberal, preoccupation with saving capitalism from itself. Interestingly enough, Kalecki, the other key author of the Keynesian Revolution, saw the dangers of a less radical and more reformist agenda for the future of capitalism.

13 The concept was first utilized by Arthur Lewis, and then by Immanuel Wallerstein. The concept here is used in a sense closer to Medeiros and Serrano (1999), suggesting that the hegemon helps in lifting the external constraint, and access to funds in the hegemonic currency, to certain geopolitical allies.

14 While that is essentially correct, the follow up notion that the United States was forced to change its position because of its weakened external situation undermines the argument. Citing the work of Robert Gilpin on benevolent and predatory hegemons, Helleiner says that the

United States abandoned its early postwar support for the restrictive Bretton Woods order in large part because of its changing global position. In the early postwar years, the economic strength of the United States and its strategic interests in the cold war encouraged it to assume a ‘benevolent’ hegemonic position in the Western alliance. Many analysts have suggested that beginning in the 1960s, the United States gradually adopted a more self-centered or ‘predatory’ foreign economic policy because of growing current account and budget deficits. In particular, the United States began to seek foreign help in financing and adjusting to these deficits, in order to maintain its policy autonomy. (Helleiner 1994, p. 13)

This would suggest that the basis for the change was economic, and not political as argued here.

15 The rise of Neoliberal ideas and its close relation to corporate and business interests within the United States is well documented in Phillips-Fein (2010). The Neoliberal project, in particular from the 1930s onwards wanted the market re-embedded to preclude the redistributive policies of the New Deal, as noted by Slobodian (2018, p. 19). Further, it is clear that even back then in the 1940s the free mobility of capital was central for the neoliberal project. Slobodian (Slobodian 2018, p. 136) says that ‘[a]gainst Roosevelt's Four Freedoms — of speech, of worship, from fear, from want — neoliberals posed the four freedoms of capital, goods, services, and labor.’

16 Among these innovations, gunpowder and guns have a central role for military power, and these were invented in China. Chase (2003) argues that early firearms were not very effective when used against cavalry because of their overall lack of mobility, poor rates of fire, and limited accuracy. As a result, their effectiveness was restricted to infantry and siege warfare, and they were not used in regions threatened by nomads, like China, in which cavalry warfare was dominant. Andrade (2016) shows, however, that China was able to catch up, and that the lagging behind is also relatively recent.

17 The pioneer work on the origins of what he termed the Tax State is by Joseph Schumpeter. Stasavage (2015, pp. 524–525) argues that the preconditions for the creation of public debt were the existence of a source of revenue, an event requiring an expenditure shock, often warfare, and the need to pay soldiers in monetary terms, rather than using the conscription of civilian populations.

18 Hamilton is often, and incorrectly, seen as a neo-mercantilist. Cohen and DeLong (2016, p. 45) argue that the Hamiltonian project was anti-Ricardian and Smithian. And while it is true that it was against the laissez-faire, approach of some classical political economy authors, it is unclear he departed in other respects. It was a policy difference, but not a conceptual one.

19 The argument follows the work by Glete (2000), which extends to the work by John Roberts and Geoffrey Parker on the Military Revolution, which preceded the Industrial Revolution.

20 This notion is firmly based on a neo-Chartalist understanding of money and a functional finance role of public debt, which builds on the work of Abba Lerner. This analysis has similarities with the work by Wray (1998). For some differences on the origins of modern money, see Rochon and Vernengo (2003), and for some differences on the role of exchange rates and the external constraint in limiting the scope of fiscal expansion in the periphery, see Vernengo and Pérez Caldentey (2020).

21 For a discussion of Metallist and Chartalist views of money, see Ingham (2004). For a critique of Metallist views of the rise of the west, see Vernengo and Fields (2016).

22 For a discussion of the role of Sir Isaac Newton, as Master of the Mint, see Eichengreen (1996). It must be added that the material conditions for a gold standard were possible since Portugal found great quantities of gold in Brazil, and had signed a free trade agreement, the Treaty of Methuen, with England in 1703. Brazilian gold flows went to London, via Lisbon.

23 This idea in IPE derives from the work of Robert Cox, which builds on the concept of hegemony from Antonio Gramsci. As he says, ‘[h]egemony, for Gramsci, was a condition in which the governed accepted or acquiesced in authority without the need for the application of force’ (Cox 2004, p. 311).

24 Strange (1987), also, attacks the myth of the loss of American hegemonic power. As discussed in Fields and Vernengo (2013, p. 743) the work by Susan Strange can be seen also as suggesting that the United States’ hegemony increased after Bretton Woods.

25 Gavris (2021, p. 14) contextualizes inaccurately the argument in Fields and Vernengo (2013), suggesting that the neo-Chartalist view of hegemonic currencies is ‘a reductionist way to simply mean ‘stabilizer.’’ It is evident that the misquote comes from a discussion of the work by what are referred to as conventional IPE writers (e.g., Philip Cerny, Robert Keohane, Stephen Krasner, and John Ruggie, among others), arguing that the role of the hegemon is to provide space for cooperation. That view is clearly contrasted with a neo-Chartalist view in which the central role of the hegemon is to determine the international unit of account, and is associated in IPE to the work by Strange. Imposing order, rather than managing cooperation, is the main role of the hegemon.

26 For a more balanced view of the possibilities and the likely persistence of American hegemony in the 21st century, see Nye (2015).

27 They do note that ‘Marxist IPE theorists, out of the mainstream, especially in the United States, are not so blind to global macro-events and have a definite theory of the global macroeconomy’ (p. 224). Marxists in this respect can be grouped with other heterodox economic groups within economics, in the same way that the French Regulation School that they discuss, together with the literature on the varieties of capitalism, as being relevant for their notion of macroeconomic regimes. Marxists are particularly relevant, since they do, like Marx, use the categories of the old classical political economy authors from William Petty to David Ricardo.

28 Very often neoliberalism is seen as project to disembed markets from regulatory institutions. If one takes Hayek as central to the neoliberal project, it is worth noticing that ‘both Hayek and Polanyi were ‘concerned with socio-institutional responses to the free market’ [and] Hayek developed his own idea of ‘free markets as socially embedded’’ (Slobodian 2018, p. 6). In other words, the neoliberal approach, which is close to what Blyth and Matthijs (2017) associate with OEP, is also very much concerned with the legal and institutional framework that constrains behavior in free markets. For a discussion of the similarities between Hayek and Polanyi, in this respect, see Mirowski (2018).

29 The details about the determination of prices in classical political economy, as reappraised by Piero Sraffa, are not relevant here, and are clearly delineated in Kurz and Salvadori (1995). It suffices to say that it contrasts with marginalist economics, in which relative prices represent relative scarcity, including in the case of the so-called factors of production. In that case, distribution is, as much as relative prices, determine by supply and demand. Power relations play no direct role in distribution.

30 Some IPE authors, like Baccaro and Pontusson (2016) have incorporated neo-Kaleckian growth models, and the distinction between profit and wage-led regimes into their analysis. For a more thorough discussion of demand-led growth models within heterodox economics, see Freitas and Serrano (2015).

31 Medeiros and Serrano (1999) develop the same topic on the basis of heterodox approaches that build on classical political economy and a tradition that has its foundations on Latin American Structuralism, in particular the work of Conceição Tavares. On the work of Tavares and her followers, see Vernengo (2006b).

32 No doubt that the crises of the last decades, including the Great Recession and the Pandemic, have exacerbated the discontent with neoliberalism and the prominence of populist leaders. But there is a clear direct connection, in the United States, between Goldwater, Wallace, Reagan and Trump. On a different view of the rise of populism, see Judis (2016).