we won the war

we lost the peace

After two world wars, where everyone, regardless of class, lost people they loved, not even those in government could deny that we needed to look after each other. Coming out of WWII, governments across Europe and in the US agreed that workers should be at the heart of government policy.

For almost thirty years, government policy kept unemployment low and stable. This was unprecedented in peacetime Europe. Many people still call this the golden age of capitalism, and perhaps that’s because it was an attempt to move towards a more socially democratic form, even if it was running on cheap oil and heavily polluting industry.

Today, we are watching the final threads of that social and political commitment being pulled apart, and if we’re not careful, we will be the generation that loses for our children what our grandparents built for us.

Throughout the 1930s, the US had been content to keep the rest of the world oceans away until Japan attacked Pearl Harbor and their attitude changed. When World War II finally ended, the US took the opportunity to shape the world in its own image: to stabilise its own and the world’s economies by creating a stability that would secure American power as the dominant one. We all know about the Cold War and how the US fought the communist USSR, China, and their allies, but what about how they constrained Western Europe’s growing worker-led power?

Although the US had experienced its share of turmoil in WWII, it didn’t feel the pain that Europe did. Thanks to (mostly) avoiding conflict on its own soil, it was one of the few developed nations that came out of the war with its fossil-fuel-dependent industrial base not only intact, but flourishing. By the end of the war, the US accounted for half of the world’s industrial output. This allowed a large influx of money that funded the growing middle class, even for those performing what would be considered traditionally working-class jobs. Famously, General Motors paid its production line workers enough that they could afford to buy one of the cars they were building; although this was thanks more to the collective bargaining powers of the workers’ union, rather than the generosity of the company’s management. The middle class grew because the working class insisted upon their share, and postwar economic rules gave them the power to do so.

The US was also the holder of the world’s gold reserves. Going into WWII, the US was a major creditor nation. During the war, the Allies paid them for weapons and materials, and the Axis paid them for building tanks and other machinery. Ford was in Germany because capitalism will always go where the money is, regardless of what the money does. With its industrial power unchallenged, the US could easily run a trade surplus, and so capital, largely in the form of gold, flowed freely into the country. By the end of the war, the US held two-thirds of the world’s gold, which is why the dollar became as good as gold.

The third pillar that gave the US its dominance after the war was the stability of its government. Perhaps not something that we would recognise today, and not all roses and sunshine for everyone living in the country, but during the first half of the twentieth century, the US had more stability than the empires of Europe and their warring royal families and extreme ideologies.

The US was also one of the key parties that created the Bretton Woods agreement, placing the nation at the centre of the increasingly interdependent Western economies. Given the amount of gold the US held in its treasury, there was good reason to agree that the dollar could be fixed to gold and that other currencies could be fixed to the dollar. Part of the agreement defined capital controls that restricted the freedom of movement of money, that would be used to regulate the fixed currency exchange rates. These controls limited currency speculation, helping to restrict financial expansion and growth pressures.

As with all things, the strength is also the weakness.

At the same time as the Bretton Woods agreement was signed, the IMF and the World Bank were created to help regulate the international monetary system. The voting structure within the IMF was weighted by initial capital contributions to the available loan capital. With the US’s economic dominance, it gained veto power. No major IMF decision could be made without the US approving, which meant Washington could exert inordinate influence over the economic and political decisions of other countries when they came to them in desperation for help. While the workers were enjoying a period of growing political democracy, we didn’t notice that the economic system that enabled political suffrage was being monopolised by an aspiring empire.

Having this power allowed the US to reinforce capitalism as the default system of wealth distribution, specifically an American-flavoured capitalism, whether or not other countries wanted it. For France to receive the IMF’s first-ever loan, the US required France to remove the communists from its cabinet. For anyone who believes in democracy and sovereignty, if not communism, this surely was an insufferable overbearance. It was also the beginning of a pattern that we still see playing out today.

Finally, after thirty years of relative economic stability, the capital controls that were part of the Bretton Woods agreement were undermined by the Eurodollar market. This is where US dollars are held at non-US banks, beyond the reach of the regulators, so bankers could trade speculatively in currencies. This prevented governments from regulating the exchange rates that underpinned the Bretton Woods agreement, and was a large nail in the coffin of worker-led democracy.

The Keynesian policies that kept unemployment low by keeping inflation under control lost their teeth. With speculation open, investor confidence became the key concern for politicians, who began to depend upon continuous expansion and the material throughput that was required. During the 50s, Wall Street bankers lobbied US authorities to avoid subjecting the Eurodollar markets to the agreement’s capital controls. The bankers paid politicians to change who they cared most about. By the end of the 60s, the Eurodollar market was valued at $70 billion, equivalent to approximately $652 billion today.

As the Bretton Woods agreement began to collapse in the early 1970s, the repeated wars between Arab nations and Israel began to shift the geopolitical landscape and cause financial turmoil, prompting the world to question the Keynesian consensus. By this point, countries had fully abandoned the fixed exchange rate system, and the prices of gold and oil became volatile. The oil shock in October 1973, when OAPEC (Organisation of Arab Petroleum Exporting Countries) announced an embargo against countries that had supported Israel during the Yom Kippur War a few days earlier, caused oil prices to rise by 300% in five months, raising prices and reducing production across industries, and leading to a period of stagflation (inflation and unemployment rising at the same time) in the West. As with every oil shock since, it demonstrates how dependent upon oil our economy and society are, as we’re starting to see once again today.

This period of stagflation was caused by a supply-side shock; oil just wasn’t available in the quantities that we had become accustomed to. Keynesian tools were designed to manage demand, and no amount of demand would conjure oil out of thin air. The inflation spike was intensified by geopolitics rather than government overspending. Those who favoured Monetarism believed they had the answer and took the opportunity to promote the destruction of Keynesian policies. They quietly overlooked that their own principles offered nothing in the case of shortages, either. They spotted a vulnerability in the crisis and used it to their benefit.

The principles of Bretton Woods had broken down, and employment was about to be deprioritised in favour of capital: price stability, market confidence, and low inflation. Bankers and finance ministers began using interest rates as a blunt instrument and considered unemployment as an acceptable cost. Once unemployment became acceptable instead of inflation, economic expansion became the political stabiliser. Growth masked the underlying causes of social tension, free from progressive redistribution of wealth, and through an ever-increasing material throughput. This started the shift away from a worker-centred economy and back towards an owner-centred one.

Throughout the 70s, the Keynesian economics upon which the Bretton Woods agreement was based was slowly but surely eroded by those ideologically opposed to workers being put before capital. Two figures came to define this shift: Chairman of the Federal Reserve, Paul Volcker in the US, who engineered it by conviction, and Labour Prime Minister Callaghan in the UK, who enabled it from inside the party that was supposed to prevent it.

Volcker’s method was to target the money supply and let interest rates go wherever the market pushed them, and they went all the way up to 20%. Between 1979 and 1982, unemployment in the US doubled, from around 6% to over 10%. This wasn’t a surprise; Volcker knew this would happen. In later interviews, he was remarkably candid about unemployment rising as the mechanism to control inflation rather than an unfortunate side effect of his policy. The Fed intentionally controlled inflation by causing a deep recession. They accepted rising unemployment and the weakening of labour’s power. Inflation did fall, but at the cost of millions of jobs and a power rebalance away from the working classes.

As a consequence of Volcker’s interventions, the financial markets expanded dramatically, asset prices became central to the economy, and credit deepened as debt expanded (think 2008 housing crisis). Growth continued, and so did the pressures on our ecology that accompany an economic system dependent on constant expansion.

As people’s wages stagnated or disappeared, they began borrowing more to continue the quality of life they had become accustomed to. This happened both in the household and in the nation-state. Everyone was increasing their debt: governments to make up for the loss of tax revenue, the wealthy to speculate, and the not-so-wealthy to maintain the lifestyle they were used to but couldn’t afford any more. The problem with debt, though, is that it accrues interest that must also be repaid. To keep servicing the growing debt, everyone needed to keep producing, selling, and buying.

Growth could no longer be tempered by governments adopting Monetarist policies; instead, they had to encourage faster and larger growth each year.

In 1981, Reagan continued to destroy worker solidarity; when 11,000 air traffic controllers went on strike for better pay and conditions, he fired them all, sending workers throughout the US the clearest of messages: “You have no power here.”

In Britain, the message for workers came from an unexpected direction. Despite what many of us on the left believe, it wasn’t Thatcher who opened the door to neoliberalism, but Labour. In 1976, James Callaghan’s government approached the IMF for a loan after the previous Conservative government’s budget caused the Sterling crisis. The IMF attached conditions that were just as anti-solidarity as removing the communists from the French government decades earlier. To receive the loan, the UK had to cut public spending and control the money supply. Callaghan had little choice but to accept.

Later that year, at the Labour Party conference he made a speech that is seen as the end of Keynesian economics and the domination of Monetarism in the UK.

We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

Governments could no longer spend their way out of recession, he said. Full employment was no longer the goal.

He said this from the Labour leadership podium. Three years before Thatcher won an election.

The consequences didn’t land equally. The Rust Belt. South Wales. Yorkshire. Communities that had organised around an industry and built their collective bargaining power over generations suddenly found that the industry was gone and their power went with it. Union membership collapsed. Wages stagnated. The gains that the working class had insisted upon in the postwar years were quietly taken back. Without the idea of an industry to organise around, the working and middle classes no longer understood how to stand in solidarity. Their community was based on their employment, and when their employment was taken away, so was their community.

Conversely, communities in other parts of the world also felt dramatic shifts as the industries Western economies were abandoning relocated to regions with looser environmental regulations, allowing corporations to externalise the social and ecological costs of doing business.

This was not an accident of history. It was the result of repeated choices that put statistical averages - inflation, growth, yields - over people and planet, culminating in (sometimes forced) policy decisions made by powerful people on behalf of even more powerful interests. It may not have been planned, but capital and the power it asserts continue to incentivise economic stability above all else.

Government policies prioritise capital objectives and externalise the environmental and human costs. Growth has become the mechanism by which our economy is stabilised, but at this point, our environment can no longer pay for growth at all costs. Unemployment has stopped being a problem to solve and has become a tool to deploy, even though more and more people are unable to feed themselves.

Under Monetarism, ecological safety and human potential are placed behind market confidence.

The consequences have become structural necessities.