Monetarism and Crisis

Keynesianism appeared to be a spent force by the mid-1970s. The spectre of a socially reformed and economically vibrant capitalism stood shamefaced when confronted with mass unemployment, hyperinflation, balance of payments deficits, depressed rates of profit and sluggish economic growth. Keynesian ‘economic planning’ stumbled when called upon in the 1970s. As indicated by Holloway,1 the abandonment of the Bretton Woods2 system signalled the breakdown of the cornerstone of Keynesianism after the Second World War. The Bretton Woods system regulated the international deficit financing of demand on the world market on the basis of an inflationary supply of dollars to the rest of the world. The international framework of inflationary demand management was built around the recognition of the dollar as the dominant international currency. The dollar was defined in parityto gold.National currency was subordinated to the dollar which performed the dual function of international and national currency. National currency was tied to the dollar by fixed exchange rates, which could be altered only in the case of fundamental disequilibrium. However, the dual function of the dollar implied that the stability of Bretton Woods depended on a US trade surplus compensating for balance of payments imbalances. As long as the US maintained a large trade balance, the dollar functioned as credit that was supplied to other countries as a means of exchange for US-produced commodities.