Frieden: Global Capitalism: Its Fall and Rise in the Twentieth Century (Chapter 15)

Frieden, Jeffry A. (2006). Global capitalism : its fall and rise in the twentieth century (1st ed.). New York: W.W. Norton. (Chapter 15)

This chapter is an interesting and lively telling of the causes and the tension surrounding the movement away from the gold standard by Nixon in August of 1971. This policy change represented the unraveling of the Bretton Woods agreement made amongst many of the Western Allies in the last stages of WWII. Part of this agreement was that the US dollar would be convertible to gold at the rate of 35$ per ounce.

The decision was made by Nixon amid pressure from both the international monetary order and domestic policies. The expectation was that the dollar would be devalued. This was causing a run on the dollar, as people tried to convert it to gold before the devaluation occurred. The US could have countered this effect. This would have involved a, “raise in interest rates, cut spending, restrain wages and profits, and drive the economy into recession” (340).

After Nixon made the move to fiat money, the dollar devalued rapidly. However, everything returned to normal after successive devaluations in 1973. This effectively killed the Bretton Woods agreement.

“The Bretton Woods system combined freedom to address national concerns with international economic integration” (342). It was an agreement born out of WWII. It created a situation that Frieden highlights as eventually causing the following trends that eventually brought about its own demise. Firstly, it created a regime whereby international finance could gain footing, strength and influence. The second change that brought about the death of Bretton Woods, as highlighted by Frieden, was the pressure that was subsequently placed on the dollar by the strength of economic recovery, especially in Japan and Western Europe.

Eventually, the cause of the rupture in the international monetary order stemmed from the success of the Bretton Woods agreement, and because the US eventually placed domestic economic policies above the international agreements regarding gold convertibility. “The US government was simply unwilling to trim its economy to fit its currency commitments under the Bretton Woods system and chose instead to bring the system to an end” (346).

The effects of the movement away from gold convertibility were seen throughout the world. Some of these effects able to be felt in policies that evolved to create nationalist economic protection in developed countries that did not rely on the antiquated gold standard. Other effects were occurring in less developed countries. The process of development in the 70’s can be seen generally to have caused deficits, inflation, political upheaval, urbanization and inequality. These effects were not universal, as East Asia was able to escape them to a degree. Additionally, Frieden highlights the changes in the socialist world in the 70’s and the insecurity that arose there.

“The postwar era ended in the early 1970s. The developed capitalist world had come out of World War II with a compromise that blended international economic integration with national policy independence, the market with the welfare state” (359). This sounds much like Ruggie’s Embedded Liberalism thesis. The 70’s represented a rupture away from post WWII development. Frieden ends by making the claim that, while the 70’s saw a hemorrhage in the development of developed countries, less developed countries and socialist countries, this was after each of these respective groups were very successful in achieving what they wanted after WWII: respectively, an international trade and finance integration, industrialization, and industrialization.