Wall Street and the City of London Fight Back. The Bretton Woods Era
Britain and the United States began to prosper after the end of the gold standard system in 1933 and in the run-up to the Second World War. Yet, despite the obvious gains from the transformation, the struggle to regain private control over the system continued almost immediately after delegates returned from the 1944 Bretton Woods conference. Wall Street, aided by the City of London, did not give up.
The Creation of the post-Second World War Bretton Woods financial system was an attempt by economists to reinforce the new Keynesian monetary system that had been put in place by the New Deal. In 1944 world leaders delegated their top economists (from the Global South as well as the North; from Britain and the US, but also from Russia, Africa and India20) to confer and then to build an international financial architecture — to be named the Bretton Woods system — that would continue to defend government sovereignty over economic policy.
The system designed by J. M. Keynes and others at Bretton Woods was not the one he had first dreamed up in 1919. It was imperfect, largely because the United States opposed the creation of an independent, international currency and a ‘clearing union’ for balancing surpluses and deficits between nations, and to maintain international economic stability. Instead, the US used its post-war dominance to insist on the dollar as the world’s currency. Soon, even this imperfect system came under attack from Wall Street and the City of London.
In his book Moneyland: Why Thieves and Crooks Now Rule the World and How to Take It Back, Oliver Bullough relates the story of how the revolution in global finance was triggered by one back in 1962. The dismantling of the Bretton Woods system, he explains, was down to the determination and ingenuity of a powerful London banker, Siegmund Warburg. A German outsider in the City of London, he was a man who ‘lived for deals’ and who wanted more than anything to restore private dominance over the finance sector. His bank, S. G. Warburg and Co., began the process of dismantling Bretton Woods by dealing in Eurodollars, and trading ‘offshore’ beyond the reach of US Regulators. The initial plan was to get hold of three billion US dollars holed up in secret Swiss bank accounts, package them up, and lend them on at a profitable rate of interest. However, his planned new bond issue hit a buffer: the Bretton Woods system of checks and balances for the management of cross-border flows of capital.
If Warburg’s bonds, which he intended to exchange for Swiss cash, had been issued in Britain, there would have been a 4 per cent tax on them. So the bank formally issued them at Schiphol airport in the Netherlands. If the interest were to be paid in Britain, it would have attracted another tax, so Warburg arranged for it to be paid in Luxembourg. His bank managed to persuade the London Stock Exchange to list the bonds, despite their not being issued or redeemed in Britain, and talked around the central banks of France, the Netherlands, Sweden, Denmark and Britain, all of whom were rightly concerned about the eurobonds’ impact on currency controls (the ‘walls’ of the oil tanker that was Bretton Woods). The final trick was to pretend the borrower was Autostrade — the Italian state holding company. If IRI had been the borrower, it would have had to deduct tax at source, while Autostrade did not have to.
The cumulative impact of this game of ‘jurisdictional Twister’ was a ‘eurobond’ that paid Warburg’s bank a high real rate of interest, on which no tax of any kind was paid, and which could be turned back into cash anywhere. The ‘walls’ of the international financial fortress had been breached, and henceforth eurobonds were to become the battering ram that broke down the carefully constructed Bretton Woods international system of managed finance. Thanks to Warburg’s ambitions, investors in capital markets had been ‘liberated’ from the oversight and management of regulatory democracy. ‘This is the dark side of globalisation, and there is no positive case to be made for it, unless you are a thief or a thief’s enabler’ writes Bullough.
By gradually discrediting and tearing down the Bretton Woods architecture in the 1950s and 60s, the finance sector and its friends in governments and academia dismantled the international framework of what is universally known as ‘the golden age’ of economics. On one Sunday night in 1971 — and without consulting any of his allies or indeed any international institutions — President Nixon, in an event that became to be known as the ‘Nixon Shock’ , unilaterally dismantled the international financial architecture so carefully constructed at Bretton Woods. He did so without putting any other system in its place. Once again the international finance sector was in control. In the absence of a sound international framework governed by public authority, societies and their elected representatives in both rich and poor countries were once again rendered relatively powerless. Democratic governments were denied effective agency over the management of domestic economies. BY the 1960s, financial deregulation had restored private authority over both the international financial system and nationally economies.
Since then, nation states and their governments have gradually been stripped of the power to direct investment (both public and private), currency exchange rates and interest rates. Instead this power is vested in global, invisible and unaccountable investors and speculators in financial markets — who are free to move their capital across borders without effective hindrance, and regardless of their impact on a nation’s currency or interest rates.
Alan Greenspan was right. The world is once again governed by markets.
It is any wonder that voters in countries as far apart as Brazil and Turkey, Britain and the Philippines, Russia and the United States, have turned to ‘strong men’ , allegedly to ‘protect’ them, their jobs, their homes and their children from out-of-control, globalised ‘market forces’?
Public Authority over the Green New Deal?
Governments (with the possible exception of the United States) with a mandate to expand public investment on the scaled required by the Green New Deal will inevitably, encounter the opposition of financiers, bankers, and speculators and investors. These will demand high real rates of interest on capital; and the implementation of ‘fiscal rules’ to limit public borrowing, spending and investment, even while they simultaneously build up monstrous mountains of private debt.
How could they be effective? This is how. They would first threaten, and then launch, a rapid, large-scale exodus of financial assets and capital from the country concerned. They could also choose to boycott the market for government bonds. The rapid outflow of mobile capital would cause the nation’s currency to fall in value. In response, the central bank might have to raise its base rate and oblige interest rates across the spectrum of lending in the real economy to rise. While higher rates might — only might — staunch the outflow of financial assets, they inevitably hurt those active in the real economy. As explained earlier, high rates would demand the extraction of even more labour and ecosystem assets for the repayment of debts.
The reason for the exodus of capital would be straight-forward: private financiers believe (wrongly) that public finance ‘crowds out’ private finance. Their aim is to wear down states and privatise all investment, especially risk-free investment backed by taxpayers and governments. (In this sense, many so-called free market capitalists are intensely risk-averse.)
One hundred years ago, in 1919, Europe lay in ruins after a disastrous conflict. Powerful politicians, economists and central bankers offered no hope to the millions of unemployed peoples starving and struggling to rebuild lives after the long and brutal war. It was made clear by the public authorities that there was no money. The war had consumed government finances and left that Allied nations heavily indebted to each other, but especially to the United States. Sounds familiar? The cry went out loud and clear: there is no money for the vital costly task of recovery from war and the building of peace.
One man challenged that orthodoxy and developed an international plan that could have saved the world from the catastrophes of the 1930s. His legacy has conveniently been either forgotten or marginalised.
What Must Be Done?
These are times that call for the intellectual and political courage of giants like Keynes and Roosevelt. If we are to implement the Green New Deal, then today’s political leaders will have to act just as courageously and scrupulously. They will have to dismantle and transform the current globalized financial system and its embedded ideology, to regain the powers and public authority needed to protect and repair the earth’s life support systems.
The world can no longer afford the orthodox economic logic of financialised, globalised capitalism. To secure a future for this and future generations we must, as Vishwas Satgar writes, overcome ‘ the eco-cidal logic of capitalism [with] a democratic eco-socialist nation-building project’.21
The success of the long and effective campaign to deregulate the financial system means that any nation-building project will be fiercely resisted. Private financial firms have for decades now displaced governments in the financing of activities that used to be the domain of the public sector: water, transport, education, housing, environmental services and health. The finance sector has been so successful in marketising and monetising every sphere of collective activity, that there remains almost no private or public asset or activity that has not been commodified, ‘priced’ and marketised globally. Prices of essential services -including health and higher education — have been hiked beyond the reach of millions of people, so that today they are a major cause of the scourge of inequality.
If, in the interests of the ecosystem, we are to move economies away from fossil fuels, then societies and their governments need to regain control over these key sectors. Public oversight and investment in areas such as water, energy, housing and transport will be vital to manage usage in the interests of the ecosystem and of society as a whole, and to make services more sustainable and affordable.
But public spending is not the only economic policy important to the Green New Deal. The exchange rates of currencies, the creation of credit and the rate of interest on credit are important policy levers that will be central to the financing of the Green New Deal in every part of the world. As we discuss in the next chapter, it is important that these ‘economic levers’ are managed in the interests of society and the ecosystems.
The use of these levers for public purpose will be strongly resisted by globalised private equity firms, asset management funds, banks, pension funds, hedge funds, to name but a few. As things stand, they are powerful lobbyists and as a consequence roam the financial stratosphere largely unfettered by democratic regulation or taxation, and with financial fraud effectively decriminalised.22 But there is a lacuna in that political space, a profound contradiction in their position that GND activists could exploit. In fact, despite their abhorrence of state-run institutions and preference for privatisation and deregulation, global financiers benefit richly from the taxpayer-backed public sector and in particular from the services and resources of central banks. That dependence on public resources provides politicians and activists with potential leverage.
Later, I will explore the power taxpayers and their elected representatives have over the private finance sector — a power that lies latent, not sufficiently exploited to bring pressure to bear on Wall Street and the City of London.
Global System Change
Avoiding climate breakdown will require cathedral thinking. We must lay the foundation while we may not know exactly how to build the ceiling. – Greta Thunberg, speech to British Parliament, 23 April 2019
Many will point out that the global financial system is backed by the most heavily weaponised empire in all history — the United States — and by Wall Street, Frankfurt and the City of London. The forces behind the system, they will rightly observe, are far too powerful for reform, never mind transformation. And moreover those forces have strong, ‘woman-in-the-street’, public backing. As a result, many of the proposals outlined below risk being scoffed at, not only by those heavily invested in the system, but also by thoughtful readers, who will raise legitimate questions. How can this ever be done in an age of digital finance? Given the urgency, how can it be done in time? Given the sophistication of new technology, how can cross-border financial flows be managed? And anyway, how can any of these changes be brought about without international coordination. As the disappointing experience of the UN climate conferences shows, the world’s most powerful leaders appear unable to exercise international leadership. The president of the United States openly derides international collaboration to address major global challenges — including climate breakdown. So, given this political vacuum, who will drive global system change?
These are all justifiable questions and concerns. My answer is this: sooner rather than later the world is going to be faced by a shuddering shock to the system. I am not sure what the shock will be. It could be the flooding or partial destruction of a great city sited close to the rising seas. It could be widespread warfare, with an authoritarian and zealous climate denier leading the world into conflict. Or it could be (in my view, most likely) another collapse of the internationally integrated financial system. Given the rise in global temperatures and extreme weather events, the globalisation of authoritarian right-wing politics, and ever increasing global economic imbalances, none of these scenarios fit the ‘black swan’ theory of difficult-to-predict events.1 All three fall within the realm of normal expectation in history, science and economics.
So much for the shock itself. The question then will be what comes next? How should society respond?
I attach particular importance to preparation for a fundamental disruption because of society’s lack of readiness for the last shock: The Financial Crisis 0f 2007-09. The world’s most powerful establishment figures, including central bankers, having been granted god-like status, neither predicted nor were prepared for that crisis. But, most dismayingly, leaders and activists that can loosely be defined as ‘progressive’ and on the left were equally unprepared—even when they were warned. Many, including the world’s social democratic leaders, had aligned their political parties to the economics of neoliberalism – deregulation, privatisation and the restriction of workers’ rights – and were often personally invested in the system. They were blindsided by events.
That lack of preparedness on the one hand, and collusion on the other, help to explain why the 2007-09 crisis did not provoke political responses that promised to build something different and better. The crisis stripped workers of livelihoods, decent wages, security and often a roof over their heads. But it did not threaten financialised capitalism. On the contrary: the crisis solidified the existing globalised financial order.
How therefore do we begin to think through an alternative to today’s global financial system? The proposals outlined here draw on the experience of the 1930s, when capitalist economic structures were overhauled and the dominance of the finance sector was challenged. However, these proposals will not be comprehensive, and will leave many questions unanswered. That is in part because there can be no serious estimation of the conditions in which transformation will likely take place. Will planetary boundaries have been breached with catastrophic impacts? Will decision-makers have access to technology? Energy? Data? What form will social unrest take? Will institutions survive the hard shock? The future is unknown. This may be naïve of me, but I believe that a general strategy must nevertheless be developed, to encourage those with greatest expertise and experience to come forward and support work on improving and implementing the strategy. That is how we make a social revolution.
For progressives to be clear about the system change that is needed, we must be clear about what kind of world we want. My assumption is that readers of this book share the view that our economic goals is for a ‘steady state’ economy (that is, an economy with a relatively stable, mildly fluctuating product of population and per capita consumption2) that helps to maintain and repair the delicate balance of nature, and respects the laws of ecology and physics (in particular thermodynamics). An economy that delivers social justice for all classes, and ensures a liveable planet for future generations. IN consequence, this must be a world in which women’s rights over their bodies are paramount – for all the obvious reasons, but also so that fertility can be managed. A world in which labour substitutes for carbon: a decarbonised economy will be a job-rich, labour-intensive economy. In it, we will do far more walking and cycling; we will not fly; we will give up meat and grow and consume local, seasonal, slow food. We will make and repair our own garments, rather than exploiting low-paid workers in far-off places. We will use both the sun’s energy and human energy efficiently.
And, to do this, we will overturn the powerful ideology that drives the expansion of economic activity (see below) to unsustainable levels, the ideology of extreme individualism and competition, and will instead celebrate the uniquely human qualities of altruism, empathy and collective action. We will overturn what George Monbiot calls the ‘spirit-crushing’ and society-crushing capitalist system, destroying hope and common purpose. We will revive economic life at the community level by restoring the commons and by collectively managing the earth’s scarce resources, including land – currently monopolized by the very few.3 – Excerpt from Ann Pettifor’s ‘The Case For The Green New Deal’ Book