How the US Manages the World Economy | Money

Money | How did the US design the global system with its unique power after World War II? Discover the secrets of the dollar and the American economy on this journey from Bretton Woods to the Global Minotaur.

When World War II ended, the world was in ruins. The great economies of Europe and Asia were devastated; their infrastructures collapsed, industries halted, and millions of lives lost. Amidst this destruction, one country, instead of healing its wounds, had grown stronger: the United States. Being geographically distant from the war’s devastation and having multiplied its production through a massive war economy made the US the undisputed leader of the post-war world and the only power capable of extending credit. So, how did the US use this unique advantage to reshape the global economic and political system according to its interests? The answer leads us to a complex and fascinating mechanism Yanis Varoufakis calls the “Global Minotaur.”

The Post-World War II Scene: The Rising Power USA

Understanding the dynamics behind the US emerging so strong from the war is important. The American economy, shaken by the 1929 Great Depression, hadn’t fully recovered despite President Roosevelt’s “New Deal” reforms. What truly revitalized the economy and turned the US into a production giant was, ironically, World War II.

After entering the war, the US managed its economy with central planning akin to the Soviet Union or Nazi Germany. Government spending skyrocketed, and factories began producing weapons, tanks, and aircraft at full capacity. Giant corporations like Ford produced bombs, and General Motors produced weapons. The government guaranteed production and purchases from these companies and controlled prices and wages (through institutions like the Office of Price Administration). The result was tremendous:

• Unemployment dropped to historically low levels.
• Industrial production nearly tripled.
• Gross Domestic Product (GDP) soared from $90 billion at the start of the war to $223 billion by its end.

Most importantly, since the war was not fought on US soil, its infrastructure remained intact, its factories were unharmed, and its human losses were far less compared to other major powers. When the war ended, while potential rivals (Great Britain, Germany, Japan, etc.) were exhausted, the US possessed a vast portion of the world’s production capacity and financial reserves (estimated at 30% to 50% of global GDP). It was now America’s turn to shape the world.

The Quest For A New Order: The Bretton Woods System (1944)

American planners had learned crucial lessons from the 1929 Depression. The instability of the global economic system and protectionist policies had crippled global trade and fueled political tensions leading to war. Moreover, the fragility of a system overly dependent on a single center (the US at the time) was painfully experienced. Therefore, the post-war system needed to be more stable, predictable, and manageable. The main idea was: “We need to run the world.”

To this end, even before the war ended, delegates from 44 Allied nations gathered in Bretton Woods, New Hampshire, in 1944. The conference aimed to design the post-war global monetary and economic system. Three key institutions and rules were agreed upon at Bretton Woods:

1. International Monetary Fund (IMF): Designed as the “firefighter” of the global financial system. When a country faced a balance of payments crisis or a foreign exchange shortage, the IMF would step in, providing loans under certain conditions (usually structural reforms and austerity measures) to prevent the crisis from deepening and spreading to other countries. As Roosevelt emphasized in his opening speech at the conference, “the economic health of every country is a proper matter of concern to all its neighbors, near and distant.” The IMF took on the task of preventing these chain reactions.
2. World Bank (WB – originally International Bank for Reconstruction and Development – IBRD): Established to finance post-war reconstruction and development projects. It would contribute to the economic development of countries by providing long-term investment loans.
3. Fixed Exchange Rate System (Dollar-Gold Standard): Perhaps the most critical pillar of the system. Unlike the old gold standard, the US dollar was at the center of this system. All other member countries’ currencies were pegged to the dollar at a fixed rate (e.g., $1 = £4). The US dollar, in turn, was pegged to gold ($35 per ounce). Only the US dollar was convertible to gold. If a country (like France) wanted to convert its dollar reserves into gold, the US was obliged to do so. This made the dollar the world’s reserve currency. Everyone needed dollars for trade and reserves.

This system granted the US enormous power and privilege. It placed the dollar, and consequently the American economy, at the center of world trade and finance.

Through Varoufakis’s Lens: The Global Plan (1950-1971)

In his book “The Global Minotaur,” Yanis Varoufakis analyzes the Bretton Woods system and its aftermath within a framework he calls the “Global Plan.” According to Varoufakis, the US aim was not just to place the dollar at the center but also to create other strong industrial centers that would support it while managing the global economy and absorb shocks in potential crises. The lesson of 1929 was not forgotten: a system relying on a single power was fragile.

This “Global Plan” had two main pillars:

1. The Bretton Woods System: The dollar-centric fixed exchange rate system described above.
2. Uplifting Two Strong Allies: Germany and Japan: The US consciously decided to rebuild these two countries it had defeated in the war and turn them into strong industrial economies. According to Varoufakis, this was unprecedented in history; a victorious power rehabilitating its defeated enemies with its own hands.

But why Germany and Japan? Varoufakis lists several reasons:

• Industrial Potential: Both countries had strong industrial bases and skilled labor forces before the war.
• Geopolitical Location: In the Cold War context, Germany in Europe and Japan in Asia were crucial against the Soviet Union. Strengthening these economies economically would create a bulwark against the spread of communism.
• American Control: After the war, both countries were effectively under American occupation and control. Their constitutions were written under American influence, and there was a significant US military presence on their soil. Thus, these countries were US “satellite” states and easy to control.

The Global Surplus Recycling Mechanism:

A critical mechanism was needed for this plan to work: recycling US trade surpluses back into the system. Post-war, the US was the world’s manufacturing hub and consistently ran trade surpluses (selling more than it bought). Instead of accumulating in the US, these surplus dollars needed to flow back to Europe and Japan so that these countries could both recover and have the purchasing power to buy American goods. Varoufakis calls this the “Global Surplus Recycling Mechanism.”

How did this mechanism work?

• Marshall Plan (Europe): Starting in 1948, the US provided approximately $13 billion (much more in today’s money) in aid to European countries (primarily the UK, Germany, France, Italy). This aid came in the form of grants, loans, technology transfer, food, and raw materials. The goal was to revive European economies, boost demand, and ensure this demand was directed towards American goods. So, the US gave money to Europe, Europe bought American goods with this money, the money returned to the US, and the US sent this money back to Europe as investment or aid. Money circulated continuously.
• Supporting Japan (Asia): A similar mechanism operated for Japan. The Korean War (1950-53) created huge demand for Japanese industry; the US procured necessary goods and services for the war from Japan. Subsequently, the US opened its own market wide to Japanese companies (like Sony, Toyota). In the 60s, 30% of Japanese exports went to the US. Furthermore, since the US took responsibility for Japan’s defense, Japan could divert these resources to industry. The US also provided capital and technology transfer to Japan and encouraged its allies to open their markets to Japanese goods. The result was the phenomenal development known as the “Japanese miracle.”

Capitalism’s Golden Age And Its Limits (1950-1971)

The period from approximately 1950 to 1971, which Varoufakis calls the “Global Plan” era, is described by many economists as the “Golden Age of Capitalism.” During this time:

• The global economy grew steadily.
• Exchange rate fluctuations and financial crises were minimal thanks to the Bretton Woods system.
• Welfare state practices became widespread, and inequalities were relatively low.
• Countries like Germany and Japan recovered rapidly, and even many developing countries achieved significant growth rates.
• Inflation was under control.

This era of “managed capitalism” was made possible by US global leadership and deliberate policies. Although the US seemed to “transfer” part of its GDP share (about 20%) to Germany and Japan, it deemed this necessary for the overall stability of the system and the sustainability of its own prosperity.

However, the foundation of this system rested on the US consistently running trade surpluses and maintaining the fixed link between the dollar and gold. This foundation began to crack towards the end of the 1960s.

The System Cracks: The Nixon Shock (1971)

All good things must come to an end. The developments that brought down the Bretton Woods system and Varoufakis’s “Global Plan” became apparent in the late 1960s. There were three main reasons:

1. The Vietnam War: This long and costly war (approx. $494 billion in 2002 prices) started creating massive deficits in the US budget. The US had to borrow heavily and print money to finance war expenditures.
2. The Great Society Programs: Launched during President Johnson’s era, these programs aimed to expand welfare state provisions (health insurance, education spending, etc.) within the US and reduce racial inequalities. However, these programs also increased public spending and the budget deficit.
3. The Rise of Germany and Japan: These two countries, supported by the US, had become so strong that they could now compete with American companies, even producing more efficiently and with higher quality, starting to run trade surpluses against the US. This situation turned the US trade balance negative.

When these three developments converged, the system’s foundation was shaken:

• The US was no longer running trade surpluses; instead, it began running trade deficits.
• Due to war and social spending, the US was running budget deficits, borrowing, and increasing the amount of dollars in circulation.
• As the amount of dollars in circulation increased, US gold reserves dwindled. Other countries (especially France) began suspecting that the US could no longer redeem its dollars for gold and started demanding gold for their dollar reserves. US gold reserves, which were 20,000 tons in 1950, dropped to 8,000 tons by 1971.

The final blow came in August 1971. First, French President Pompidou sent a warship to exchange dollars for gold. Then, the UK demanded gold worth $3 billion. As pressure mounted, on August 15, 1971, US President Nixon announced on television that the US would no longer convert dollars into gold, unilaterally ending the system. This event became known as the “Nixon Shock” and effectively ended the Bretton Woods system. Seeing the system become unsustainable, America pulled the plug before the deficits reached truly massive proportions. The reaction of other countries? They couldn’t do much. As the Americans said: “The dollar is our currency, but it’s your problem.”

The Birth Of The Global Minotaur (Post-1971)

With the collapse of Bretton Woods, the world economy entered a new era. Varoufakis explains this new era using the myth of the Minotaur from Greek mythology. According to the legend, the Minotaur is a creature, half-man half-bull, imprisoned in a labyrinth by King Minos of Crete, who must be constantly fed human flesh. Athens is forced to send young men and women as tribute to Crete to feed this monster.

According to Varoufakis, after 1971, the US became the Global Minotaur of the world economy. The system now worked like this:

• The US Twin Deficits: The US began running massive trade deficits (buying far more than it sold) and budget deficits (spending far more than its revenue), financing these deficits through continuous borrowing.
• Global Imbalance: The rest of the world (especially Germany, Japan, later China, and oil-producing countries) accumulated large trade surpluses by selling goods to the US.
• The New Recycling Mechanism: What would these surplus-running countries do with the dollars they accumulated? This is where the Minotaur came in. These countries sent their accumulated dollars back to the US. But this time, not through aid like the Marshall Plan, but by buying US Treasury bonds (i.e., lending money to the US government) and investing in American financial markets (Wall Street) (buying stocks, real estate, etc.).
• Feeding the Monster: In essence, the world financed US deficits, while the US kept global demand alive by consuming the goods produced by the rest of the world. The world had to feed the Minotaur (US deficits) because if it didn’t, the US economy, and thus the global system, could collapse. The US consumed, the world produced and financed.

Mechanisms Feeding the Minotaur

But why did the rest of the world agree to send their accumulated dollars back to the US? Varoufakis argues there were four main reasons:

1. The Dollar’s Reserve Currency Status: Even though Bretton Woods collapsed, the dollar remained the de facto world reserve currency. International trade in commodities, especially oil, was still priced in dollars (the Petrodollar system). This kept demand for the dollar constantly alive and made it a safe haven currency. A large portion of the dollars earned by oil-producing countries (like the Saudis – Petrodollars) flowed back into the American financial system.
2. Energy Costs and Competitiveness: The oil shocks of 1973 and 1979 negatively affected the energy-dependent economies of Europe and Japan more than the US. America’s lesser energy dependence gave US companies a competitive edge.
3. US Labor Market and Productivity: After the 1970s, real wages for US workers were suppressed (stagnated for a long time). However, during the same period, the productivity of American companies increased. Low labor costs and high productivity increased the profitability of American companies, making them more attractive to foreign capital.
4. US Geopolitical Power and Financial Attractiveness: America’s status as the world’s hegemon, its political stability, and its deep financial markets (Wall Street) made it a safe haven for foreign capital. The development of financial engineering on Wall Street, new investment instruments, and high potential returns added to its allure. Varoufakis likens the US to a giant “vacuum cleaner,” sucking in surplus capital from around the world. Interest rates rising to as high as 20% in the 80s also increased this attraction.

Thanks to these mechanisms, the US was able to finance its twin deficits from the 70s until 2008, and the Global Minotaur system functioned. During this period, the growth of countries like Germany and Japan slowed down, while the US economy (especially the financial sector) continued to grow, fueled by capital inflows from abroad. However, this growth did little to benefit the American working class while increasing the wealth of capital owners and the financial sector.

The Wounded Monster: The 2008 Crisis And Aftermath

Like any system, the Global Minotaur system had its limits. Uncontrolled financial engineering on Wall Street, excessive risk-taking, and greed led to the global financial crisis that erupted in 2008. According to Varoufakis, this crisis mortally wounded the Minotaur.

The effects of the crisis on the Minotaur were:

• Decline in US Demand: The US economy entered a severe recession after the crisis. Unemployment rose, and demand fell. This meant the US could no longer consume the rest of the world’s goods as before. The Minotaur’s primary function was damaged. US trade deficits did not grow as fast in the post-crisis period (until 2020).
• Changes in Capital Flows: The crisis shook confidence in the US financial system. Although US Treasuries remained a safe haven, the trend of massive and ever-increasing capital inflows seen before the crisis was disrupted. While money continued to flow in, it stagnated relative to GDP.

Varoufakis argues that the post-2008 era is one where the Minotaur system has become unsustainable. The monster was wounded and could no longer perform its old function.

A New World Order? Protectionism And Uncertainties

The events following the 2008 crisis, especially the steps taken by the US during Donald Trump’s presidency (trade wars, imposing tariffs even on allies, etc.), strengthened the signs that the end of the Global Minotaur system was near. Trump’s policies seemed to convey the message: “I will no longer play this Minotaur role; I will close my own deficits.”

This situation was bad news, especially for countries like Germany that are dependent on exports to the US. Europe had already been hit hard by the 2008 crisis and was struggling to recover. US introversion meant another blow to the European economy.

So, what will replace the Minotaur if it dies? The answer to this question is not yet clear. Perhaps the US, seeing the system as unsustainable, is trying to manage the transition to a multipolar world on its own terms, just as it did in 1971. It might be increasing its self-sufficiency and reducing its global commitments. However, this transition process is painful and full of uncertainties. Trade wars, rising geopolitical tensions, and shifts in global supply chains could be the birth pangs of a new global economic order.

Final Thoughts

The system established by the US after World War II, conceptualized by Yanis Varoufakis as the “Global Minotaur,” dominated the world economy for about 60 years. First, the US uplifted and managed its allies through the “Global Plan,” and after 1971, it assumed the role of the “Global Minotaur,” absorbing the rest of the world’s savings through its deficits and directing global demand. However, the 2008 crisis wounded this monster, and the system’s sustainability came into question. The global economic and political uncertainties we experience today might be the death throes of the Minotaur and the birth pangs of a new order. Understanding this complex structure is crucial for interpreting potential future developments. Varoufakis’s analysis offers an insightful perspective in this regard.

Bibliography

• Varoufakis, Yanis. The Global Minotaur: America, Europe and the Future of the Global Economy. Zed Books, 2011 (and later editions). (The main source for the text’s argument.)
• Eichengreen, Barry. Golden Age of Capitalism: Reinterpreting the Postwar Experience. Oxford University Press, 1996. (An important work on the post-war “Golden Age”.)
• Frieden, Jeffry A. Global Capitalism: Its Fall and Rise in the Twentieth Century. W. W. Norton & Company, 2006. (Covers 20th-century global economic history with a broad perspective.)
• Kindleberger, Charles P. Manias, Panics, and Crashes: A History of Financial Crises. Palgrave Macmillan, 2005 (and earlier editions). (A classic work on financial crises and hegemonic stability theory.)
• Gilpin, Robert. The Political Economy of International Relations. Princeton University Press, 1987. (A foundational text in the field of international political economy.)

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