Western Europe and the collapse of Bretton Woods
| Published date | 01 June 2019 |
| Date | 01 June 2019 |
| DOI | 10.1177/0020702019852698 |
| Author | Michael De Groot |
| Subject Matter | Scholarly Essays |
Scholarly Essay
Western Europe
and the collapse
of Bretton Woods
Michael De Groot
Perry World House, University of Pennsylvania, Philadelphia,
Pennsylvania, United States
Abstract
This article contends that Western Europe played a crucial and overlooked role in the
collapse of Bretton Woods. Most scholars highlight the role of the United States,
focusing on the impact of US balance of payments deficits, Washington’s inability to
manage inflation, the weakness of the US dollar, and American domestic politics.
Drawing on archival research in Britain, Germany, the Netherlands, and the United
States, this article argues that Western European decisions to float their currencies
at various points from 1969 to 1973 undermined the fixed exchange rate system. The
British, Dutch, and West Germans opted to float their currencies as a means of pro-
tecting against imported inflation or protecting their reserve assets, but each float
reinforced speculators’ expectations that governments would break from their fixed
parities. The acceleration of financial globalization and the expansion of the
Euromarkets in the 1960s made Bretton Woods increasingly difficult to defend.
Keywords
Bretton Woods, diplomacy, Western Europe, Britain, the Netherlands, West Germany,
globalization, finance, United States
Fearing the implications of the British current account deficit and deteriorating
labour relations, speculators rushed to sell sterling on 15 June 1972. By the follow-
ing week, intervention by central banks across the industrial democracies to sup-
port sterling had cost the Bank of England US$2.6 billion, a significant proportion
of the US$8.25 billion in reserves that Britain had held at the beginning of the
month. After facing a run on sterling for eight days, the British Treasury
announced that it would allow the pound to float on the market to relieve the
International Journal
2019, Vol. 74(2) 282–300
!The Author(s) 2019
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DOI: 10.1177/0020702019852698
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Corresponding author:
Michael De Groot, University of Pennsylvania, Perry World House, 3803 Locust Walk, Philadelphia,
Pennsylvania, 19104 United States.
Email: mbd3dy@virginia.edu
speculative pressure. Prime Minister Edward Heath pointed to the ‘‘vast masses of
highly mobile funds which can be switched out of one currency into another at very
short notice and in enormous volume. What was done to the [Deutsche Mark] in
Spring 1971, what happened to sterling last week, can be thrown at any currency
however sound, whatever its support, and dislodge it from its accepted parity.’’
1
Heath’s counterparts across the industrial democracies shared his concern about
the disruptive potential of transnational capital flows, and the assault on sterling in
late June 1972 represented just one of a number of currency crises in the late 1960s
and early 1970s that led to the unravelling of the Bretton Woods international
monetary system. This article examines the collapse of Bretton Woods, paying
particular attention to the impact of financial globalization in Western Europe.
Drawing on archival research in Britain, Germany, the Netherlands, and the
United States, it contends that Western Europe played a crucial and overlooked
role. Most studies focus on the United States, highlighting factors such as the US
balance of payments deficits, Washington’s inability to control inflation, and the
link between American domestic politics and President Richard M. Nixon’s
dramatic decision in August 1971 to decouple the US dollar from gold.
2
The United States undoubtedly played a central role, but this article argues that
Nixon was not the only ‘‘destroyer of Bretton Woods.’’
3
US military and economic
hegemony in the postwar international order required participation from followers
to ensure that the system functioned. In the case of Bretton Woods, the United
States had to coexist within a larger world of currencies and economies. Bretton
Woods operated as a system, and financial globalization placed pressure on all
currencies that speculators deemed under- or overvalued, not merely the US
dollar.
4
Real economic concerns about the balance of payments, trade accounts,
1. Treasury Historical Memorandum no. 30, ‘‘The collapse of the Bretton Woods system 1968–1973,’’
October 1976, United Kingdom National Archives (UKNA), Kew, England, T 267/36.
2. Financial globalization refers to the process of integrating markets and increasing cross-border
financial flows, embodied by the growing power of the Euromarkets. This argument aligns with
new works such as Barry Eichengreen, Globalizing Capital: A History of the International Monetary
System (Princeton: Princeton University Press, 2015) and Daniel J. Sargent, A Superpower
Transformed: The Remaking of American Foreign Relations (New York: Oxford University Press,
2015). Traditional arguments tend to emphasize the decline of US economic strength relative to the
growing strength of the European Economic Community and Japan, and the chronic US balance of
payments deficits. See, for example, Fred L. Block, The Origins of the International Economic
Disorder: A Study of United States International Monetary Policy from World War II to the
Present (Berkeley and Los Angeles: University of California Press, 1977); David P. Calleo and
Benjamin M. Rowland, America and the World Political Economy: Atlantic Dreams and National
Realities (Bloomington, IN: Indiana University Press, 1973); Joanne Gowa, Closing the Gold
Window: Domestic Politics and the End of Bretton Woods (Ithaca: Cornell University Press,
1983). For a study that links US monetary policy to larger overseas objectives, see Francis J.
Gavin, Gold, Dollars, & Power, 1958–1971 (Chapel Hill: University of North Carolina Press, 2004).
3. Diane B. Kunz, Butter and Guns: America’s Cold War Economic Diplomacy (New York: Free Press,
1997), 192.
4. William Glenn Gray’s articles on the disruptive effects of the Deutsche Mark’s strength illustrate
the value of examining West German behaviour during the collapse of Bretton Woods, and this
article expands on Gray’s framework by considering the contributions of other Western European
currencies as well. See William Glenn Gray, ‘‘Floating the system: Germany, the United States, and
the breakdown of Bretton Woods, 1969–1973,’’ Diplomatic History 31, no. 2 (2007): 295–323;
De Groot 283
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