Review 2

Abstract

It is easy to forget how much of the post‐war economic consensus was based on a form of Capitalism Light, where many parts of the free‐market system were heavily curtailed. At the Bretton Woods conference in 1944, Secretary of the Treasury Henry Morgenthau hailed the agreement to create the IMF as ‘driv[ing]… the usurious money lenders from the temple of international finance’. Keynes was convinced that free capital flows should not be a part of the reconstituted world economy. Much of the post‐war prosperity in the US and Europe was built with financial repression, closed capital accounts, no freedom to migrate and a good deal of state ownership of manufacturing companies. What the immediate post‐war era sowed, the 1970s seemed to reap. The share of national income going to labour hit a high. At the same time, the German Social Democrats experimented with more state intervention in the economy, Britain's economy was dominated by the unions, and militant left‐wing movements were on the march in many Western countries. The European Economic Community intervened in an ever lengthening list of agricultural products and state‐sponsored industries – from Airbus to British Leyland – seemed to proliferate. Exchange rates, only recently freed from the shackles of Bretton Woods, were once again being managed by various European stabilisation arrangements. The end of capitalism as we knew it, predicted by the majority of self‐respecting intellectuals for most of the twentieth century, was not necessarily around the corner but seemed to be getting closer. More than one observer predicted that capitalism might be smothered slowly but surely through a multitude of politically‐driven encumbrances. George Gilder's Wealth and Poverty, a 1981 bestseller that made the New York Times list, detailed how inflation and progressive taxation conspired to produce euthanasia of the free enterprise system. In the same year, Ronald Reagan came to office. The great Volker deflation was in full swing, wringing inflation out of the system at horrific social costs.