1970s Bretton Woods & Deregulation PDF

The end of Bretton Woods, the deregulation, and the making of the EU Amatori-Colli, ch. 17-20. Economic history cl. 15 Ay 2024/2025 In this episode Bretton Woods: still a stable system? The end of Bretton Woods The 1970s: a pivot of chan...

The end of Bretton Woods, the deregulation, and the making of the EU Amatori-Colli, ch. 17-20. Economic history cl. 15 Ay 2024/2025 In this episode Bretton Woods: still a stable system? The end of Bretton Woods The 1970s: a pivot of change The oil crisis The rise of neo-liberalism Reagan, the Reaganomics, and the spread of the deregulation a.y. 2024/2025 30067 - cl. 15 2 The Bretton Woods system In the post-WWII period, the Bretton Woods monetary system had guaranteed: economic growth: the period of economic miracles or the ‘Glorious Thirties’ low unemployment rate: average unemployment in major OECD countries is 3% monetary stability price stability relatively free international trade increase in international investment Bretton Woods was also not just a monetary system but part of a larger political project whose pivot was the USA. a.y. 2024/2025 30067 - cl. 15 3 The Bretton Woods system At the time the Bretton Woods agreements were signed, observers held a major belief:  the US would always economically outperform other countries their trade balance would always be in surplus. WHY? a.y. 2024/2025 30067 - cl. 15 4 The Bretton Woods system In the 1950s, however, Europe and Japan began to recover economically faster than expected and their trade balances improved. Europe became an attractive market for American investment and this caused an outflow of dollars from the US to Europe.  How is this translated into the balance of payments of the U.S.? a.y. 2024/2025 30067 - cl. 15 5 The Bretton Woods system After World War II, the dollar was both a reserve and an international currency. It became a source of unlimited liquidity for international aid, for trade flows, for foreign investment, for military spending. This mechanism had already been challenged by Keynes, who believed it would trigger a power logic capable of irreparably unbalancing economic relations. The US was in the position of:  “buying without spending, lending without giving up, giving without losing” Bretton Woods was a fragile and strong system because it allowed a deficit without tears (Jacques Reuff). a.y. 2024/2025 30067 - cl. 15 6 The Bretton Woods system: a stable system? As the dollar established itself as the international currency, the system began to show its first problems. The more dollars the world’s central banks stockpiled as a store of value, the more the US had to print money, and the higher the domestic inflation. Demand of goods increased at a rate that was higher than the one registered for production. Reserve currency paradox: the US was in the situation where it had to either take advantage of its favourable position in using ‘zero cost’ capital on the international market use monetary policy instruments on the domestic market. a.y. 2024/2025 30067 - cl. 15 7 Possible Actions (not taken) Decrease Public Spending. Increasing taxes in order to limit demand (did not do that until mid-1968). Increase interest rate in the private, non-banking sector. to stimulate savings instead of consumption. Inflation continued to rise and affected stronger non protected workers categories. Young people and women The most offset by inflation are the ones at the bottom of the distribution and poor families. Wealthy people derive most of their income from profits that adjust weekly to inflation (having stocks, land, commodities). Strikes and Rebellions spread everywhere in the U.S. and Europe a.y. 2024/2025 30067 - cl. 15 8 Meantime in the World… The Baby Boomer Generation and the exposure to mass media Civil Rights Nuclear Attacks Women Rights War in Vietnam Social Movements Peace Movements Anti Capitalism Movements a.y. 2024/2025 30067 - cl. 15 9 a.y. 2024/2025 30067 - cl. 15 10 a.y. 2024/2025 30067 - cl. 15 11 a.y. 2024/2025 30067 - cl. 15 12 This is the end, my golden friend, the end In August 1971 Nixon had two alternatives: 1) stick to the pledge of dollar convertibility ⟶ restrictive monetary policy, spending cuts, limit wage growth 2) favour national objectives He chose the second option and declared the inconvertibility of the dollar on 15 August 1971. Re-elected in 1972, the US president did not hesitate and took a series of measures: devaluation of the dollar against gold (- 10%) increased tariff protection (+ 10%) price and wage controls a.y. 2024/2025 30067 - cl. 15 13 a.y. 2024/2025 30067 - cl. 15 14 This is the end, my golden friend, the end The collapse of Bretton Woods removed the restrictions on exchange rate fluctuations between currencies. Governments were now free to stimulate the economies of their countries through expansive monetary policies. In the US the money supply grew by around 40% from 1971 to 1973, in Britain by 70% in 1972- 1973. Between 1970 and 1973 industrial production in the major western economies grew from 15% to 25%. Demand for raw materials grew exponentially and consequently so did prices (inflation increased) in the US, food prices rose by 20% in 1973 alone. These inflationary pressures were compounded by the oil crises: the first in 1973 and the second wave in 1979-1980. a.y. 2024/2025 30067 - cl. 15 15  Energy Crisis!!! a.y. 2024/2025 30067 - cl. 15 16 1970s energy crisis The 1970s were characterised by two oil crises: 1973: in reaction to the Yom Kippur War, the Arab OPEC countries imposed an embargo on oil sales to the US and Israel’s allies ⟶ the price of oil tripled in the space of a few months 1979: the Iranian revolution and the ensuing Iran-Iraq war caused a sharp drop in oil production and a sharp increase in the price The drastic effect of higher oil prices was an inflationary spiral: in 1974 consumer prices rose by 12% in the US, 14% in France, 16% in the UK, 23% in Japan. In addition to inflation, economies were hit by unemployment and stagnation. This combination came to be known as stagflation: a phenomenon that had never occurred before. a.y. 2024/2025 30067 - cl. 15 17  Oil price in the US, 1970-2000 a.y. 2024/2025 30067 - cl. 15 18  Inflation in the US, 1953-2015 a.y. 2024/2025 30067 - cl. 15 19 a.y. 2024/2025 30067 - cl. 15 20  Inflation in selected OECD countries, 1950-2000 a.y. 2024/2025 30067 - cl. 15 21 The 1970s: a pivot of change Only a quarter of the consumer price increases were a direct consequence of the oil crisis: economic and monetary policy choices also played an important role. In the developed economies, the reaction of governments was initially Keynesian: expansive monetary policy + expansive fiscal policy. The fiscal stimulus was very generous: increased public sector employment industrial bailouts increased welfare spending a.y. 2024/2025 30067 - cl. 15 22 The 1970s: a pivot of change Overall, in the developed economies Keynesian responses to the crisis did not yield satisfactory results. This paved the way for a neo-liberal reaction that would profoundly reshape the role of government in the economy in the late 1970s and early 1980s. In countries that were trying to get out of underdevelopment, the most common response was to resort to foreign borrowing: because of high inflation, real interest rates were low and international banks were willing to lend. a.y. 2024/2025 30067 - cl. 15 23 The 1970s: a pivot of change In terms of international finance, a triangular circulation was established in the 1970s: oil-exporting countries deposit the proceeds of oil sales - petrodollars - with large international banks big international banks lend to late developing countries (LDCs) LDCs contract borrows to pay both for imports and the heavy oil bills By the end of the 1970s the dollar-denominated foreign debt amounted to hundreds of billions. a.y. 2024/2025 30067 - cl. 15 24 Crisis of international debt Since foreign debt was indexed to the dollar, every one-percentage-point increase in U.S. interest rates cost Third World countries four or five billion dollars annually. Between 1980 and 1983, 34 developing countries were forced to renegotiate their debt. The surge in debt and the increased burdens related to oil prices and the general rise in prices led to the abandonment of import substitution policies previously adopted in many countries... …under the pressure of the IMF, which tied assistance to reforms in line with the "Washington consensus” a.y. 2024/2025 30067 - cl. 15 25 The 1970s: a pivot of change As we said, the ineffectiveness of Keynesian policies paved the way for a neo-liberal that would profoundly reshape the role of the state in the economy. Milton Friedman’s critique of Keynesianism: state intervention distorts the behaviour of economic actors state intervention causes inflationary spirals a.y. 2024/2025 30067 - cl. 15 26 The 1970s: a pivot of change A new economic paradigm begins to assert itself, linked to the centrality of the market and money, and the reduction of the role of the state. This is referred to as neo-liberalism. Monetarism → management and planning of the money supply in an anti-inflationary direction. Supply-side economics → the proper functioning of the market is achieved by acting on the supply, particularly through lower taxation for middle to high-income brackets. a.y. 2024/2025 30067 - cl. 15 27 From Carter to Reagan Beginning in 1979 - during the Carter presidency - in order to crush high US inflation the new Fed chairman Paul Volcker adopted a restrictive monetary policy that lasted almost three years: the Fed raised rates from 10% to 15% and then to 20%, keeping them at these levels until at least the end of 1982. From 1980 to 1982, US economic performance is dominated by the effects of monetary tightening: interest rates (nominal and real) rise caused: Overevaluation of the $ Recession in the economy. Volcker achieved a historic success limiting inflation expansion (even if the effect were not long-lasting) but the US economy went into recession and unemployment rose. a.y. 2024/2025 30067 - cl. 15 28 a.y. 2024/2025 30067 - cl. 15 29 a.y. 2024/2025 30067 - cl. 15 30  Inflation in the US, 1979-1990 a.y. 2024/2025 30067 - cl. 15 31 Reagan and the Reaganomics Starting in 1981 (with the Economic Recovery Act), the new administration of President Ronald Reagan opted for a massive use of fiscal policy to help the US out of the recession caused by Volcker's anti-inflationary policies. Expansionary fiscal policy: tax cuts for the upper and middle class reduced social spending, increased military spending Deregulation Signs of confidence from Reagan policies: Appreciation of the dollar (but with negative consequences on the trade balance) Decline in unemployment (late 1980s due to a structural change in the economy) Control of inflation a.y. 2024/2025 30067 - cl. 15 32 The Reaganomics beyond the US The assertion of the new economic paradigm pushes in the opposite direction to the previous social compromise based on public spending and political regulation of the economy: the new watchwords are less taxes, less public spending, and less regulation. During the 1980s, deregulation affected most industrial and service sectors in the United States. Most European public enterprises (including banks), now perceived as a source of inefficiency, waste and corruption, are privatised during the 1990s. In the late 1990s, industrial economies are freed from state controls and constraints as they have not been since the 1930s → extraordinary growth in the size of private enterprises. a.y. 2024/2025 30067 - cl. 15 33 The Reaganomics beyond the US The process began in Great Britain in the Thatcher years and then involved France and Italy in terms of value. Privatisation ranks first in Great Britain and second in Italy. The collapse of the Soviet Union in 1991 also inaugurated an unprecedented privatisation process in the East: it was part of the transition from a centrally planned state economy to a market economy. Narrative and ideology of privatisation processes: an inseparable link is postulated between economic efficiency and private ownership privatisation as an opportunity to promote greater efficiency and transparency in financial markets a.y. 2024/2025 30067 - cl. 15 34