So between 1945 and 1970 in the United States and Britain output, profits and
wages grew at a broadly similar rate. And after 1970 output and profits
continued to grow but real wages flattened out. But why did the link between
workers’ pay and output break down?
Downward pressure on wages came from a number of directions. Reconstruction
in Western Europe and Japan brought increasing competition. A liberal
international trade regime sharpened the effects of this competition. And new
sources of labour were being found outside the core industrial countries. South
Korea and Taiwan followed Japan on an export‐oriented development path and
would in turn be followed by many others, including the two most populous
nations on earth, China and India.
The new technology that made workers more productive also reduced the total
numbers of workers needed in industry after industry. And the new jobs created
in retail and recreation paid less than the jobs lost in manufacturing. After 1980
the power of labour unions was directly challenged by changes in the legal
system in the United States and Britain. Taxation heightened the impact, by
shifting the burden away from the rich and on to the middle and working classes.
But there is one over‐arching reason why labour began to lose ground after 1970
(which led to the rising levels of debt, which led to the current collapse in credit
markets and the wider economy). The reason we’re now in such deep trouble is
Richard Nixon, pretty much. Which is awkward.
Who took money from drug dealers and declared a War on Drugs. Who couldn’t
remember where he was on the day that John Kennedy was shot and was, of
course, in Dallas.
The enthusiastic amateur in the world of covert operations, the war criminal, of
course, the drunken paranoiac and surveillance freak, the first great beneficiary
of the Republican Party’s southern strategy, that rough country melody made up
of racism, resentment and moonshine that Karl Rove would later turn in choral
symphony for his man George W. Bush. I’d rather we could sensibly pin this on
some properly structural cause, some demographic or geopolitical change. At the
very least I ‘d rather we could finger someone a little less obvious and the truth
didn’t sound like the kind of nonsense Eamonn Butler would come up with.
Among his many achievements Nixon did more than any other individual to
destroy the post‐war economic system created at the Bretton Woods conference.
Now there was a good deal going on at Bretton Woods. It wasn’t a meeting of
entirely disinterested and benevolent minds. Maynard Keynes was trying to
salvage what he could of British power, his American counterpart, Henry
Morgenthau, was doing his best to stop him. Morgenthau objective was ‘to move
the financial centre of the world from London and Wall Street to the United
States Treasury, and to create a new concept between nations in international
finance’30. The British state and the financial sector in London were to be
demoted along with Wall Street. But aside from the matter of imperial parricide,
the economists gathered at a ski resort in New Hampshire were driven by the
desire to avoid a re‐run of two recent events; the Great Depression and the
Second World War.
This once broadly welcomed project, to put an end to financial turbulence and
the miseries it brings with it, you know, unemployment, political extremism and
global war, became increasingly controversial in intellectual circles in the
decades that followed. Some felt that the maintenance of peace and prosperity
came at too high a price in terms of freedom for capital. What good was peace
and prosperity, if capitalists had to make do with less than a license to do what
the fuck they wanted all the time, everywhere?
But the authors of the Bretton Woods system recognised that unregulated capital
had caused the American stock market and real estate booms of the 1920s. These
had collapsed in 1929, leading to the Depression. They thought that
protectionism had made things worse by reducing the volumes of international
trade in the decade that followed.
So how would the free movement of goods be secured? Countries would peg
their currencies against one another and strive to avoid running persistent
deficits or surpluses. In the event that a country imported more than it sold
abroad it would be obliged to raise interest rates to reduce domestic demand
and restore its trading position, with short‐term help from the International
Monetary Fund. If it wasn’t possible to maintain a given exchange rate,
governments would arrange an orderly devaluation, a resetting of the terms of
trade that would promote mutually beneficial and sustainable international
trade. Private capital would be closely regulated at home and its movement
across frontiers would be restricted as and when necessary.
The United States underpinned this new system by pegging its currency to gold.
As long as American money was sound the global financial architecture was
I said earlier that our current travails are all Nixon’s fault. They aren’t of course.
They are also the fault of the Vietnamese. Beginning in the mid‐fifties, for reasons
that remain obscure to most people, and were obscure to many high level
planners at the time, the Americans had sought to frustrate national selfdetermination
in Vietnam. Rather than accept the doubtless well‐meaning, albeit
insensitive and violent, leadership of the United States, the Vietnamese
responded with a wave of political organization and public debate. The
Americans felt they had no alternative but to drop very expensive bombs on the
country for more than a decade.
These bombs didn’t pay for themselves. The US government borrowed the
money and paid its industrial corporations to make them, the planes from which
to drop them, and everything else a modern superpower needs for an Asian land
war (which turned out to be a lot). Busy assembling things that could be
dropped on, or crashed into, Vietnam, US industry couldn’t meet demand at
home for consumer goods. So imports from the reviving economies of Western
Europe and Japan increased. The Americans even bought some British cars,
which shows you what a good thing Bretton Woods was, but I digress.
Under the terms of the Bretton Woods agreements the government needed to
raise domestic interest rates and taxes to curb demand. Devaluation wasn’t
possible while the peg was in place. The British could devalue, that was a
psychological shock but it meant little in the wider world. The dollar was
different. Pegged to gold it was the fixed point around which the world’s trading
The dollar’s peg to gold had underpinned its claim to hard currency status in the
period after World War II and it had therefore helped restore confidence in the
global economy. But now the French were insisting on actually being paid in the
gold that the US Treasury assured everyone the dollar was worth. On April 15th
1971 Nixon broke the peg. From now on a dollar would be worth as much gold as
it could buy on the open market. The dollar was no longer a fixed point. A few
years later the Americans removed controls on capital, further undermining the
ability of central banks to manage exchange rates. By 1976 the world’s
currencies were in most instances no longer being set by multilateral
government agreement. Financial markets were pricing them against each other.
The floating world in which we now live was born and Bretton Woods was dead.
Under Bretton Woods persistent imbalances between countries were not
permitted. Everyone had to play fair and only buy from abroad roughly the same
amount as they could sell there. In the floating world this order and restraint
went out of the window. From now on the financial markets would decide the
rates of exchange. Countries could run chronic deficits in trade for as long as
foreign investors were willing to buy their assets or lend them money. Two
countries with a long tradition of endemic corruption and financial chicanery
leapt to take advantage of this liberation from the discipline of Bretton Woods.
Britain and the United States.
Both countries ran up huge deficits, dispensed with large chunks of their
manufacturing base and paid for foreign goods with cheap foreign credit;
‘between 2000 and 2008 [America] received over $5.7 trillion from abroad to
invest, equivalent to over 40% of its 2007 GDP’31. In the same period Britain
drew in foreign capital worth 20% of its 2007 GDP. Meanwhile the removal of
controls on private finance opened up a new world of opportunities abroad.
According to Peter Gowan the new global system created by Nixon was intended
to ‘liberate the American state from succumbing to its own economic
weaknesses and would strengthen the political power of the American state’. He
quotes Eric Helleiner’s claim that ‘the basis of American power was being shifted
from one of direct power over other states to a more market‐based or
“structural” form of power’32. Wall Street’s speculative financiers worked with
the American state to maintain the country’s global pre‐eminence. And it is in the
context of this alliance between the financial interest and the state that the
careers of Alan Greenspan, Robert Rubin, Larry Summers and the rest should be
So the brief, statist hiccup of Bretton Woods was out the way. Now we had
something called the information standard. The former chairman of Citibank,
Walter Wriston, explained:
The gold standard, which was replaced by the gold exchange standard,
which was replaced by the Bretton Woods arrangements, has now been
replaced by the information standard. Unlike the other standards, the
information standard is in place, operating, will never go away, and has
substantially changed the world. What it means, very simply, is that bad
monetary and fiscal policies anywhere in the world are reflected within
minutes on the Reuters screens in the trading rooms of the world. Money
only goes where it’s wanted, and only stays where it’s well treated, and
once you tie the world together with telecommunications and
information, the ball game is over. It’s a new world, and the fact is, the
information standard is more draconian that any gold standard … For the
first time in history the politicians can’t stop it. 33
The mixture of bombast, bullshit and historical myopia is characteristic of the
financial mandarin style. It is up to use to ensure that he is wrong when he says
the information standard will never go away. He is certainly wrong, as is now
obvious, to identify ‘bad fiscal and monetary policies’ with whatever the
international speculators didn’t like. But Wriston was right in the essentials; the
world was to be run by a parliament of financiers, albeit one reliant on more or
less covert support from the US state.
So foreign capital could flow into a country and blow bubbles in its asset
markets. Investors could spin yarns about the glittering prospects for growth,
the accommodating labour laws, and they could even believe them. If they
changed their minds they could leave in the blink of a Reuters screen. True, the
currency would then collapse and the country pumped and dumped in this way
would suddenly be facing years of hardship as bubbles in its asset markets
unwound. But, that’s the information standard for you.
Foreign investors, Anglo‐American investors, to put it less coyly, could even in
theory create a bubble, and sell out at the point of maximum profitability. Still,
let’s leave to one side the possibility that the most brilliant and ruthless
financiers in the world might have known what they were doing, for fear that we
will be dismissed as conspiracy theorists.34
Incidentally, the Helleiner/Gowan thesis, that what came to be known as
globalization was the deliberate and conscious creation of state planners
working with financiers, finds corroboration in an unexpected place, the
acknowledgments of Tom Friedman’s love letter to the emerging world order,
The Lexus and the Olive Tree. In the main body of the text Friedman goes on at
tedious length about how no one is in charge, and how globalization was being
driven by new technology and the unstoppable dynamism of free markets. But
right at the end he thanks a whole bunch of people for their help with the book,
including former Treasury Secretary Robert Rubin and Federal Reserve
Chairman Alan Greenspan. Among those he mentions in this context are a hedge
fund manager and a bond trader. Not that surprising, you might think. But
Friedman then goes on to thank a whole other bunch of people ‘from the private
sector’. The bond trader and the hedge fund manager are public servants of some
sort, as far as Friedman is concerned.35 This makes sense if one thinks of the
finance sector as an element of American state power.
The information standard took its pound of flesh from Thailand and other Asian
countries in the late nineties. At the time plenty of British and American
commentators were on hand to pontificate about the crony capitalism and moral
hazard that had grown so lushly in the tropical heat. The naïve natives had
obviously gone mad in a speculative property market. Foreign capital had done
no more than restore sanity, albeit at a regrettable price in terms of job losses
and recession. And what about the domestic banks who presided over the mess?
Well one influential writer on finance took a very dim view indeed. The British
journalist Martin Wolf wrote, in tones of Olympian disdain:
The management of any systematically important bank that has to be
rescued by the state should be disbarred, as a matter of course, from
further work in the financial industry. A substantial fine should also be
levied … Managers are, in an important sense, public servants. If they
abuse that trust, they should be treated accordingly.36
So the deputy editor of the Financial Times will doubtless be calling loudly for the
British and American managers of systematically important banks to be
disbarred and fined, although he hasn’t started to do so yet. Perhaps he is
waiting for the right moment.
This problem – a global economy disrupted to suit the short‐term interests of the
finance sector – was what Keynes and the other architects of Bretton Woods had
tried to avoid. As the Indian economist Prabhat Patnaik explains:
John Maynard Keynes […] had located the fundamental defect of the free
market system in its incapacity to distinguish between `speculation’ and
`enterprise.’ Hence, it had a tendency to be dominated by speculators,
interested not in the long‐term yield on assets but only in the short‐term
appreciation in asset values. Their whims and caprices, causing sharp
swings in asset prices, determined the magnitude of productive
investment and, therefore, the level of aggregate demand, employment
and output in the economy. The real lives of millions of people were
determined by the whims of ‘a bunch of speculators’ under the free
It is for this reason that Keynes had recommended that government ‘let finance
be primarily national’. Instead, under the terms of the information standard
bankers were roaming the earth telling each other tall stories about the growth
potential and likely prospects of one country after another. Time and again they
would forego the workaday rigours of successful investing and indulge instead in
the short‐term high of the speculative rush.
Nixon left the White House in disgrace after a scandal involving an absurd
burglary at Democratic Party headquarters in the Watergate building. His
bombing of Vietnam and Cambodia went unpunished. His corrupt dealings with
organised crime went unpunished. He was indeed a statesman of world
historical significance, and never more so than in his decision to destroy Bretton
Nixon found a world ordered through a concert of national governments exerting
sovereign control over their own economies. It was a world managed imperfectly
by men who were not the equals of the system’s great authors. It had its fair
share of villainy, to be sure, and more as it began to fall away, but it was ordered
nonetheless. He left a world that would be subject to ever more frequent and
severe financial crises. Implicit in Nixon’s reforms of the financial system was the
world in which we now live; a ruin presided over by bankers.
The current crisis has not emerged blamelessly from the rhythms of man’s folly.
It has an immediate cause in the build‐up of debt in Britain and, more
significantly, the United States. This build‐up of debt was caused in turn by a
breakdown in the link between economic expansion and wages in the
industrialised West. Workers who had dutifully spent their wages on all manner
of gadgets and goods now no longer had the means to do their patriotic duty as
consumers without external assistance.
And why did the link break down? America could run chronic trade deficits once
it did away with Bretton Woods. If workers in the United States and elsewhere
tried to claim higher wages their jobs could be shifted offshore. In a floating
world investment could go where it was welcome, where the climate was
congenial. Any attempts by governments to act in ways that capitalists didn’t like
could be vetoed by the threat of capital flight; the bond market became the
preferred reincarnation of the power hungry, because it could intimidate
The information standard was a harsh mistress, albeit one prone to change her
mind – or reveal her true intentions ‐ at less than a moment’s notice (remember,
the financial markets approved of the way the American and British economies
were being run right up until they changed their minds). International investors
took advantage of the low rates of tax and the cheap labour, and they were happy
to see populations take on ever‐higher levels of debt. They had taken control of
the world and were happy to exchange any claim to legitimacy they might have
had for a quick killing.
The dollar (and sterling with it) could stave off collapse as long as foreign capital
poured in from Europe, the Middle East and Asia. Consumers could buy goods
with borrowed money, with the right inducements. It turns out that consumer
demands could be sustained against a background of sluggish growth in real
incomes if the population thought that they were getting richer. The dot.com and
real estate bubbles encouraged people to borrow money and run down their
savings. After all, their shares, and later their houses, were worth more money
every month. Until they weren’t.
The arrangements of the last decade had nothing to recommend them, except to
those who through them retained control of the world. The rising levels of drug,
the social breakdown caused by alcoholism and gambling, the long hours and the
agitated consumption, all were tribute paid by the insecure majority to a calmly
It was all madness. It eerily echoed the policies that had led to the depression of
the 1930s. But the politicians and economists seemed intent on seeing how long
they could keep the lunacy alive. It is now over, and it is time to decide what will
Next: What next?
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