“What the fuck happened in 1971?”

Well, we all know correlation is not causation – and there are many potential causes: deregulation, the oil shocks, the end of Keynesianism, China entering the world trade system, technological change etc. https://wtfhappenedin1971.com/ 

But I happen to think that the end of the Bretton Woods system did play a key role. However, not because it untethered currencies from gold – that was anyway mostly a fictional tether – but because it untethered them from one another and the global trading system in general.

I tend to believe that you could have taken gold out of the equation entirely but crucially, could have kept a coordinated system of currency movements, trade rebalancing and capital controls – when the moves are too extreme – in place.

Coupled with smart Keynesianism – investment in public goods, provision of demand where needed, fair (and high enough) taxes on everyone – and perhaps even a touch or two of ordoliberalism and continued trade liberalization, but within a framework, this could have worked wonders.

It’s not gold we need. But we do need a trade and currency system that reflects the huge imbalances that can build between countries, between sectors and between even individual giant companies and workers. Having thrown this all to the wind was what happened in 1971.

And putting it all together again is very hard. To be clear, I’m not advocating going back to everything pre-1971. Plenty of things – also institutionally and in macro and micro – have since been developed that are worth a lot.

That the world trading system allowed the rise of China and the massive improvement of the livelihoods of billions of people is enormous. But that this happened shouldn’t let us believe that there aren’t also better ways to structure other parts of our system.

A careful evolution of Bretton Woods – with or without gold, doesn’t really matter, imho – would probably have led to similar growth & a better balance (indeed, growth in the developing world excl China was quite spectacular in the 1950s-70s, just from a very low starting point).

So we should keep asking “What the fuck happened in 1971?” and test different hypotheses – there are many variations on this, as alluded to in my first tweet.

It certainly is a prescient question, wherever one stands in regards to possible answers.

PS: We can also recognize that 1950-70 was probably an exceptional phase for many reasons. The cumulated ingenuity of humanity (ideas, innovations, concepts) over four decades (1914-45) was never allowed to flourish and repeatedly destroyed and crushed. Now it suddenly could.

And the enormously strong common purpose of many societies after the world had slid in the abyss two times and was standing on the edge of another – the Cold War and nuclear annihilation – probably did its part too.

For a time, the strengths of democracy, human ingenuity, science, capitalism, the modern administrative state, social welfare and still existing traditional communities and values – from village to church to family to firms – could be harnessed together.

The result was certainly not paradise for everyone – we should not forget what a conservative time the late 40s, 50s, and most of the 60s were, also due to the cataclysms of the decades before – but it was spectacular and impressively equal growth.

Getting some of this back while also keeping our freedoms and rights for everyone, which we grew to cherish and rightly so, is a challenge for the 21st century beyond.

Well, that and to protect life on our planet and keep improving democracy and human rights here and everywhere.