The Political Economy of the Special Relationship
By Jeremy Green
Princeton University Press, 2020
Bretton Woods is often associated with les Trente Glorieuses, the triumph of a certain kind of social democratic governance system, and American hegemony in Western Europe. The postwar system of monetary governance represented a form of “regulated” international capitalism subordinate to the needs of nation states. The termination of this system, then, is often framed in US-centric terms: the Nixon Administration chose to shed the burden of providing stability for the rest of the world, perhaps as a necessary response to US overspending on the Vietnam War and the Great Society Programs.1 In this telling, the failure of Bretton Woods was almost a failure of will.
To understand the system’s collapse, we must also consider the role of financial networks undergirding it. In his book The Political Economy of the Special Relationship, Jeremy Green argues that Bretton Woods echoed “the domestic Keynesian mediation between the polarized alternatives of laissez faire and state planning,” by creating a system which was designed to ensure a combination of international free trade, national balance of payments, and the provision of a welfare state to hold down unemployment. Echoing John Ruggie, he calls this “embedded liberalism.”
Green’s key intervention is to draw attention to the links between the City-Bank-Treasury nexus2 which governs capitalism in the United Kingdom and its American equivalent, the Fed-Treasury-Wall Street complex. This link, he claims, ensured that the US would always have to be in dialogue with its allies, especially the UK. A “transatlantic feedback loop between financial institutions and regulatory authorities in London and New York” transmitted globalizing and financializing pressures in both jurisdictions. For private institutions, this generated both a search for new areas of financial innovation, but also a desire to defend those that did exist from legislative oversight. For public institutions, it strengthened pro-market lobbying to promote pro-market reforms. Green argues that, far from a period of unchallenged US hegemony, Bretton Woods and its aftermath represented a period of “very interactive development” between the UK and the US, where they came to form “a distinctive Anglo-American developmental space that refashioned the global economic order, disrupting the Keynesian compromise in both states and spurring financial liberalization.”
Green begins his narrative on the eve of the First World War and ends with the aftermath of the 2007–08 financial crisis. Using a wide range of sources, including the archives of the Bank of England, Green argues that Bretton Woods was almost immediately destabilized by the existence of the eurodollar: US dollars held in accounts outside of the United States and therefore not subject to American regulations. These “jurisdictional ambiguities” resulted in an influx of offshore American banks into London in the 1960s which “destabilized the prevailing regulatory order” and also “generated feedback pressures on the US New Deal regulatory regime” as American banks sought greater permissiveness from their own regulators.
This growing unregulated money market would have vital implications not only for the failure of Bretton Woods, but for the turn to neoliberalism in the 1980s and onwards. The period, for Green, is not simply one of American hegemony, but of American primacy in constant negotiation with allies—most importantly the United Kingdom.
The postwar order
In 1914, the United Kingdom was the financial center of the world, financing almost two-thirds of global trade—predominantly settled in sterling—through its discount market. The balance of payments was handled through the export of a number of capital goods, primarily ships, steel and coal.3 The First World War and its aftermath would systematically wreck all these advantages. The need to unpeg sterling from gold in 1914 meant that neutral importers and exporters in Asia and the Americas decided to conduct business in dollars, which remained pegged. Companies and financiers were therefore required to turn to New York banks to purchase international imports. The shift from coal to oil as the major global fuel in the 1910s and ‘20s similarly ended British dominance in energy. In 1925, the decision to return the pound to gold at its pre-war level, by then an enormous overvaluation, critically damaged the important shipping and steel export industries. Vast expenditure in two world wars4 further fundamentally altered Britain’s balance of payments, turning it from the world’s largest creditor to one of the United States’ many debtors.
Despite this greatly diminished status, sterling in 1945 was still an important reserve currency, and the advanced infrastructure of the City of London ensured that British finance would continue to be internationally important. The initial American attitude after the war, however, was by no means accommodating to the UK or other western European countries. In 1945–47, the US attempted to force convertibility on European currencies, setting off an inflationary spiral that saw all European countries face capital flight to the safety of New York. The UK resorted to tight exchange controls and a devaluation, while both Italy and France toyed with adopting floating exchange rates. Marshall Aid in 1948 represented a dramatic reversal in US policy, in part offsetting European capital flight across the Atlantic.5
As Green explains it, these vacillating American policies were partly a result of a disagreement between US Treasury officials and the New York banking community. Wall Street financiers such as Randolph Burgess of the National City Bank and Thomas Lamont of J.P. Morgan urged financial cooperation with the British, including the extension of cheap dollar-denominated loans, while the Treasury under Henry Morgenthau preferred more hardball tactics. This conflict mirrored disagreements over the emerging Bretton Woods system. The New York banking lobby regarded their compatriots in London as vital colleagues in the fight against what they saw as excessive regulation, while the Treasury was focused on achieving international stability, with the United States as the lynchpin.
Not only was Wall Street successful in encouraging a policy shift through Marshall Aid, but its financiers also managed to convince the federal government to tone down commitments to cooperative capital controls, which had appeared in the original Bretton Woods architecture. Still, Green notes that most parties were generally satisfied with the negotiations, suggesting a shared commitment to avoid the “unilateral and beggar-thy-neighbor policies of the 1930s” through the creation of fixed exchange rates, and temper the excesses of the gold standard era by creating an institution—the International Monetary Fund—which could shield nations from the most extreme pressures of speculators and deflationary balance of payment issues.
The rise of the eurodollar
“Embedded liberalism was not, though, built on firm foundations,” states Green. Almost as soon as the Bretton Woods institutions were created, the eurodollar would emerge to undermine them. The first eurodollars appeared in the mid-1950s, before Bretton Woods had even come fully online,6 when the Soviet Union, concerned about the prospect of American sanctions, moved some of their dollar deposits out of American banks and into a branch of the Midland Bank in London. Seeking access to greater financing than the weakened sterling could provide, British banks began using dollar deposits to finance their lending activities.
Over the course of the 1960s, US banks opened branches in London to take advantage of the City’s offshore environment. As Green explains, this move was perceived at least in part as a quid pro quo for American banks continuing to abide by New Deal-era regulations, particularly Regulation Q, which limited the amount of interest they could charge American-based borrowers. As early as 1960, Treasury Secretary C. Douglas Dillon told Congress that the eurodollar market could ensure that foreigners kept hold of dollar deposits, taking pressure off America’s gold reserves. Green also quotes an unnamed partner at Chase Manhattan, asserting that without eurodollar financing, the entirety of Wall Street would have suffered a liquidity crisis in the mid-1960s.
By the late 1960s, most American borrowing on the eurodollar market took the form of long-term (three years or more) bonds or debentures. This was notionally to finance capital spending in Europe, given the imposition of capital controls by the Johnson Administration. But there was little doubt that these facilities could fund American operations. In 1968, for example, the American conglomerate Ling-Temco-Vought borrowed $15 million on the eurodollar market to acquire Wilson Sporting Goods, another American company. The facility was provided by a syndicate of British banks and the London branches of American banks. At the time, newspaper reports described this kind of arrangement as “increasingly popular” among the American banking community.7
These transactions, however, raised an essential question for the American political economy: how could American regulators manage the balance of payments and achieve price stability when a focal point of dollar trading was outside the United States?
The United Kingdom, on the other hand, had to deal with the implications of being home to the world’s major offshore market, though the secrecy of the trading meant that its influence only surfaced over time. Green argues that, in practice, the main effect was enriching Britain’s finance sector and granting financiers a strong lobbying position in domestic politics. This may explain why proposals for part-nationalization of the lending sector floundered in the United Kingdom, even as they found limited success in other parts of Europe. Certainly, there was no British equivalent of French dirigisme.
In Green’s telling, the cultivation and protection of the eurodollar market was the center of the “special relationship” between the UK and the US, inaugurating an unprecedented wave of coordinated regulatory and monetary moves. He points to recurrent moments of cooperation: the bilateral work between the Bank of England and the Fed to establish the London Gold Pool in 1960, which stabilized the price of gold after a run; Fed Chair Bill Martin being consulted in 1964 in the run up to the devaluation of the pound; and the role of the Bank of England in negotiating the first Basel Concordat, which set out principles for sharing supervisory responsibility for banks’ foreign branches.
Green describes Bretton Woods as a compromise between the extremes of total laissez-faire and full state planning (between Edwardian Britain and Soviet Russia, if you will). It did this by pegging international currencies to the dollar, which was in turn pegged to gold, and allowing the introduction of capital controls in order to prevent destabilizing runs. But Green alleges that, in practice, the existence of the City-Bank-Treasury nexus and the Fed-Treasury-Wall Street complex created political pressure in London and Washington to nurture the finance industries, eventually contributing to the collapse of the system.
Free from government regulation, the eurodollar may be the closest we have seen to Hayek’s imagined notion of purely private money. By creating the institutional environment for vast offshore financial and capital flows, the eurodollar market allowed lenders and borrowers to access credit outside of government influence. This hurt attempts by central banks to adjust credit supplies and ensured that they could not shape market interest rates. The significance of the eurodollar’s impact is further demonstrated by the short time Bretton Woods was actually in operation—far from three glorious decades, the system was fully online for less than a decade and a half.
Between the Nixon Shock and 1980, the number of eurodollars in circulation increased more than tenfold, and then nearly doubled again in the following decade. Much of this trading took place in London, but it was conducted by the overseas branches of American banks, a signal of the increasingly standardized banking practices on both sides of the Atlantic. Innovations such as the introduction of rollover credits8 began in London and were soon transmitted to New York.
After the 1986 “Big Bang” of financial deregulation in London, large American investment banks swallowed smaller British merchant banks. With both British and American governments removing capital controls at the same time, London and New York then came into even more direct competition for business, which, in turn, intensified the pressure for competitive liberalization between the two jurisdictions. In addition to this “race to the bottom,” Green argues that the era also saw a coordinated attempt to maximize international liberalization, which he demonstrates through convergence of Fed and Bank of England interest rates throughout the 1980s. In the 1990s, there was an even more dramatic convergent evolution, with both the Federal Funds Effective Rate and the Bank of England Base Rate settling into a minor fluctuation between 5.3 percent and 7.5 percent between 1995 and the end of the century.
The failure of monetarism
The Anglo-American financial relationship—and the centrality of the eurodollar to its dominance—persisted well past the fall of Bretton Woods. Green points to the underlying role of eurodollars in shaping the relationship between Ronald Reagan and Margaret Thatcher. The eurodollar was key to both figures’ visions of liberalized, globalized finance, but it ultimately doomed orthodox monetarism in both jurisdictions.
With the eurodollar in play, central banks could not fight inflation by placing severe limits on the money supply. Thatcher and Reagan both failed to meet their monetary targets and had quietly abandoned the ideology by 1983. Put simply, the Reagan Administration could not adequately restrict the supply of dollars because so many of them were held offshore, out of the US’s regulatory reach, while the Thatcher government’s attempts to restrict the supply of sterling resulted in businesses and money managers increasingly turning to the eurodollar to meet their financing needs. With so many dollars being held in London, it would have been impossible to achieve control of the monetary supply without an even more draconian tightening of domestic supply in both countries.
But, as Green notes, monetarism “was always defined more by its political implications than any semblance of intellectual coherence.” In both the US and the UK, Reaganite and Thatcherite policies—high interest rates, an aggressive stance towards labor relations, and expansion of the defense establishment—broke the back of organized labor, and turned the economy towards finance and away from industry.
For Thatcher, an atmosphere of patriotism and economic growth—fueled by the victory over the Argentine junta in 1982 and the discovery of North Sea oil and gas fields—served as political cover for her deregulatory and privatization agenda. But the decision to keep the pound strong to help the finance industry devastated British export industries, which were priced out of international markets.
In the United States, the strong dollar attracted vast amounts of international capital, teaching the Republicans the important lesson that, in the words of Dick Cheney, “deficits don’t matter.” International capital meant that the Reagan Administration’s regressive tax cuts and ballooning defense expenditure could be implemented without concerns regarding the money supply or the budget deficit, at least until after Reagan (with his characteristic good luck) had left office.
This house of cards came falling down in 2007–08. Green attributes the financial crisis to the global buildup of payment imbalances leading to a savings glut. Successive US balance of payments deficits caused a net outflow of dollars, swelling the supply of eurodollars. Foreign banks and the foreign branches of American banks were only too keen to compete to recycle these vast funds because they were free of reserve requirements and deposit insurance assessments. In search of yield, the finance industry came upon the subprime mortgage sector.
Unconventional monetary policies adopted by the Fed in the aftermath—quantitative easing and interest rates held close to zero percent—were copied worldwide. Vast bailouts for a range of financial institutions, the Fed’s extension of dollar swap lines to select central banks, and domestic austerity programs formed a new political consensus. National economies were left chronically under-stimulated while finance rapidly recovered.
In Green’s narrative, the eurodollar and unregulated financial transactions were central to the failure of Bretton Woods, the neoliberal turn, and the 2008 financial crisis. Unregulated is not the same as uncontrolled: the dollar guaranteed by the Fed is controlled by governors appointed by elected politicians, the unregulated money of the eurodollar was controlled by the financiers of Wall Street and the City.
In today’s unregulated system, new modes of financial engineering direct vast quantities of funds to new financial products bought and sold by the same class of people. This has imposed very real, deleterious consequences on the rest of the economy. The strength of the dollar has fed an ever-growing American trade deficit and tilted the economy towards various rent-extracting industries rather than productivity growth. In the United Kingdom, the rise of finance has led money to flow into the City while leaving the rest of the country behind.
In the failure of Bretton Woods, Green sees a de facto conspiracy of Anglo-American bankers, who embark on what he calls “financial lobbying,” aided and abetted by the Bank of England and the Fed. The turbulent period was also marked by deeper flaws. Almost immediately after the full conversion of currencies had been achieved, Bretton Woods proved unable to cope with the existence of the eurodollar. The 1960s saw a series of patch-up jobs to deal with the worldwide dollar glut before Nixon put the system out of its misery in 1971. While Anglo-American financiers did undermine Bretton Woods through the use of offshore exchanges, why did a system of global monetary management fail to consider that a country’s fiat currency might be held outside its borders?
At the original conference, Harry Dexter White shot down Keynes’s plans for an international clearing union, which would have managed national balances of payments through automatic interest rate changes. The system that did result more closely resembled Dexter White’s initial aims, creating a global order with dollar dominance. White was clear throughout negotiations that the dollar must be central to any postwar international monetary system, receiving the privileges of becoming the international currency. The objective was not to create a stable economic world safe for national-level social democracies, it was to cement American financial hegemony. This was broadly successful in the long term. The dollar is now the lynchpin of international markets, and the Fed, through the extension of swap lines, is now arguably the world’s central bank.
Green alerts us not only to the core challenges of Bretton Woods, but also the postwar social democratic order surrounding it. The system could not manage the globalized nature of modern capitalism—controlling the eurodollar was never its purpose to begin with. With questions around global macroeconomic management again in flux, and unregulated financial markets continuing to pose challenges to global schemes, it would be wise to consider where the last attempt at progressive global regulation went wrong.
For an account of this thesis, see James T. Patterson, Grand Expectations (1996).↩
The City of London, the Bank of England, and the HM Treasury↩
In an important sense the entire British Empire was basically epiphenomenal to this fact, as seen in John Darwin, Unfinished Empire (2013) and David Edgerton, The Rise and Fall of the British Nation (2018).↩
The United Kingdom was the only power to be at war on every day of both conflicts (as they’re conventionally dated).↩
Eric Helleiner, States and the Reemergence of Global Finance (1994).↩
Western European currencies would not achieve full convertibility with the dollar until 1958, and the first eurodollars are believed to have been created in 1955–56.↩
Robert A. Wright, “Ling Raising $425-Million For Unopposed J.&L. Bid,” New York Times, May 11, 1968.↩
A practice whereby a foreign exchange trader receives a net payment of interest on a long position on a currency pair overnight when the long currency pays a higher rate of interest than the short currency in the pair.↩