ABSTRACT
Since the 1970s, there has been a steady retreat of the state from the “commanding heights” of the economy around the world. During the Bretton Woods era, Keynesian economic policies reigned supreme, and state guidance of the economy, ranging from outright ownership of heavy industries in the socialist countries of Europe to the more light-handed government regulation found in the United States, was the dominant philosophy. Economists firmly believed that they could end the excesses of the boom–bust business cycle by controlling interests rates and using government regulation. Yet trouble was brewing. As early as 1960, Robert Triffin, a Yale economist, argued in testimony before Congress that since the dollar was the reserve currency under the Bretton Woods agreement, persistent US balance-of-payments deficits were necessary to provide liquidity for the world, but continuing these deficits would undermine confidence in the US dollar and thus lead to the collapse of the fixed exchange rate system. President Johnson’s decision to fight the war in Vietnam and the war on poverty while incurring persistent budgetary deficits only made things worse, and the system quickly deteriorated in the late 1960s with deviations between the official $35/ounce peg and the unofficial price of gold in private markets. The British were the first to feel the sting of this split when they devalued the pound sterling on October 18, 1967 (de Vries, 1976). In 1971, even the mighty US dollar was teetering on the brink of collapse. In response, President Nixon unilaterally closed the gold window, and though the major countries attempted to manage the values of their currencies against the price of gold for the next two years, by 1973, in the wake of the first oil crisis, it was clear that the fixed exchange rate system’s time had come and gone.
