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The Bodley Head, an imprint of Vintage,
20 Vauxhall Bridge Road,
London SW1V 2SA

The Bodley Head is part of the Penguin Random House group of companies whose addresses can be found at global.penguinrandomhouse.com

Yanis Varoufakis has asserted his right to be identified as the author of this Work in accordance with the Copyright, Designs and Patents Act 1988

For my mother, Eleni,
who would have savaged with the greatest elegance
and compassion anyone contemplating the notion
that the weak suffer what they must

Preface: The Red Blanket

One of my enduring childhood memories is the crackling sound of a wireless hidden under a red blanket in the middle of our living room. Every night, at around nine I think, Mum and Dad would huddle together under it, their ears straining, bursting with anticipation. Upon hearing the muffled jingle, followed by a German announcer’s voice, my six-year-old boy’s imagination would travel from our home in Athens to Central Europe, a mythical place I had not visited yet except for the tantalizing glimpses offered by an illustrated Brothers Grimm book I had in my bedroom.

My family’s strange red blanket ritual began in 1967, the inaugural year of Greece’s military dictatorship. Deutsche Welle, the German international radio station that my parents were listening to, became our most precious ally against the crushing power of state propaganda at home: a window looking out to faraway democratic Europe. At the end of each of its hour-long special broadcasts on Greece, my parents and I would sit around the dining table while they mulled over the latest news. Not understanding fully what they were talking about neither bored nor upset me. For I was gripped by a sense of excitement at the strangeness of our predicament: that, to find out what was happening in our very own Athens, we had to travel, through the airwaves – veiled by a red blanket – to a place called Germany.

The reason for the red blanket was a grumpy old neighbour called Gregoris. Gregoris was known for his connections with the secret police and his penchant for spying on my parents, in particular my dad, whose left-wing past made him an excellent target for an ambitious if lowly snitch. After the coup d’état of 21 April 1967 brought the neo-fascist colonels to power, tuning in to Deutsche Welle broadcasts became one of a long list of activities punishable by anything from harassment to torture. Having noticed Gregoris snooping around in our backyard, my parents took no risks. And so it was that the red blanket became our defence from Gregoris’s prying ears.

During the summers my parents would use up their annual leave to escape the colonels’ Greece for a whole month. We would load up our black Morris and head to Austria and southern Germany, where, as my father kept saying during the interminable drive, ‘Democrats can breathe.’ Willy Brandt, the German chancellor, and a little later Bruno Kreisky, his Austrian counterpart, were discussed as if they were family friends who also happened to be great champions of isolating ‘our’ colonels and supporting Greek democrats.

The demeanour of the locals we encountered while holidaying in these German-speaking lands, away from the kitsch neo-fascist aesthetic of the colonels’ propaganda, was consistent with our conviction that we, as Greeks abroad, were being bathed in genuine solidarity. And when our Morris sadly puttered back into Greece, through border crossings replete with photographs of our mad dictator and symbols of his crazy reign, the red blanket beckoned as our only refuge.

Almost fifty years later, in February 2015, I made my first official visit to Berlin as Greece’s finance minister. The Greek economy had collapsed beneath a mountain of debt, and Germany was its main creditor. I was there to discuss what to do about it. My first port of call was, of course, the Federal Ministry of Finance, to meet its incumbent leader, the legendary Dr Wolfgang Schäuble. To him and his minions I was a nuisance. Our left-wing government had just been elected, defeating Dr Schäuble and Chancellor Angela Merkel’s allies in Greece, the New Democracy Party. Our electoral platform was, to say the least, an inconvenience for Germany’s Christian Democratic administration and its plans for keeping the eurozone in order.

The lift door opened onto a long cold corridor at the end of which waited the great man in his famous wheelchair. As I approached, my extended hand was refused. Instead of a handshake, he rushed me purposefully into his office.

While my relations with Dr Schäuble warmed in the months that followed, the shunned hand symbolized a great deal that was wrong with Europe. It was symbolic proof that in the half-century separating my nights under the red blanket and that first meeting in Berlin, Europe had changed profoundly. How could my host even begin to imagine that I had arrived in his city with my head full of childhood memories in which Germany featured as my security blanket?

By 1974 the Greeks, with moral and political support from Germany, Austria, Sweden, Belgium, Holland and France, had overthrown totalitarianism. Six years after that Greece joined the democratic union of European nations, to the delight of my parents, who could at last fold up the red blanket and put it away in the cupboard. Less than a decade later the cold war ended and Germany was reuniting in the hope of losing itself, in important ways, within a uniting Europe. Central to this project of embedding the new united Germany into a new united Europe was an ambitious programme of monetary union that would put the same money, the same banknotes and even the same coins (one side of which would be identical, no matter where they were issued) into every European’s pocket. ‘Make them use the same money,’ an Athenian taxi driver told me once in the early 1990s, ‘and, before they know it, a United States of Europe will creep up on them.’

By 2001 the two countries brought together beneath our family’s red blanket in the bygone era of my childhood – Greece and Germany – shared the same money, along with more than a dozen other nations. It was an audacious project redolent with an ambition that no European of my generation could resist.

Beacon on the hill

In fact, this process of European integration had begun long before I was even born, in the late 1940s under the tutelage of the United States. It was foreshadowed by the so-called Speech of Hope delivered by US Secretary of State James F. Byrnes in Stuttgart in 1946, in which he promised the people of Germany, for the first time since their defeat, ‘the opportunity, if they will but seize it, to apply their great energies and abilities to the works of peace … the opportunity to show themselves worthy of the respect and friendship of peace-loving nations, and in time, to take an honourable place among members of the United Nations’.

Soon after, Greeks and Germans, together with other Europeans, started to meet and discuss the possibility of joining together in what would later become the European Union. We would unite despite different languages, diverse cultures, distinctive temperaments, and in the process of coming together, we would discover, with great joy, that there were fewer differences between our nations than the differences observed within our nations. And when one nation faced a challenge, as Greece did in 1967 with the military takeover, the rest came together to assist. It took half a century for Europe to heal its war wounds through solidarity and to turn into a beacon on humanity’s proverbial hill, but it did.

Unifying hitherto warring nations on the basis of popular mandates founded on the promise of shared prosperity, the erection of common institutions, the tearing-down of ludicrous borders that previously scarred the continent – this was always a tall order, an enchanting dream. Happily, by the end of the twentieth century, it was an emergent reality. The European Union could even pose as a blueprint that the rest of the world might draw courage and inspiration from so as to eradicate divisions and establish peaceful coexistence across the planet.

Suddenly the world could imagine, realistically, that diverse nations rather than an authoritarian empire might create a common land. We could forge bonds relying not on kin, language, ethnicity or a common enemy, but on common values and humanist principles. A commonwealth became feasible where reason, democracy, respect for human rights and a decent social safety net would provide its multinational, multilingual, multicultured citizens with the stage on which to become the women and men that their talents deserved.

‘When can I have my money back?’

Then came Wall Street’s implosion in 2008 and the ensuing global financial disaster. Nothing would be the same again.

Once the universe of Western finance outgrew planet Earth, its imploding banks and the subsequent credit crunch took their toll on European nations, in particular those relying on the euro. Britain’s Northern Rock was the first European bank to buckle, Greece the first state. A death embrace between insolvent banks and bankrupt states ensued throughout Europe. However, there was a great difference between Britain and countries like Greece: while Gordon Brown could rely on the Bank of England to pump out the cash needed to save the City of London, eurozone governments had a central bank whose charter did not allow it to do the same. Instead, the burden of saving the inane bankers fell on the weakest citizens.

By late 2009 the Greek state’s bankruptcy was threatening French and German banks with the fate of Lehman Brothers. Meanwhile the Irish banks’ annihilation brought down the Irish state, magnifying the woes of France’s and Germany’s banks. Panic-ridden politicians rushed in with gargantuan taxpayer-funded bailouts that burdened the poorest taxpayers, as Google, Facebook and Greece’s oligarchs enjoyed tax immunity. Incredibly, the bailout loans were given under conditions of income-sapping austerity which further attacked the debilitated taxpayers on whom the whole edifice depended. As nothing spreads faster than justifiable panic, Portugal, Spain, Italy and Cyprus were the next dominoes to tumble. Lacking a credible response to the euro’s inevitable crisis, Europe’s governments turned against one another, pointing accusatory fingers everywhere, falling prey to the beggar-thy-neighbour attitude last seen in Europe in the 1930s. By 2010 European solidarity had been eaten up from within, leaving nothing but the wretched shell of a once-solid camaraderie.

What caused the euro crisis? News media and politicians love simple explanations, and from 2010 onwards the story doing the rounds throughout Germany and Protestant north-east Europe went something like this.

The Greek grasshoppers did not do their homework and their debt-fuelled summer ended abruptly one day. The Calvinist ants were then called upon to bail them out, together with various other grasshoppers from around Europe. Now, the ants were being told, the Greek grasshoppers did not want to repay their debt; they wanted another bout of loose living, more fun in the sun and another bailout so that they could finance it. They even elected a cabal of socialists and radical lefties to bite the hand that fed them. These grasshoppers had to be taught a lesson, otherwise other Europeans, made of lesser stuff than the ants, would be encouraged to adopt loose living.

It is a powerful story, a story that justifies the tough stance that many advocate against the Greeks, against the government I served in.

‘When am I getting my money back?’ a German junior minister asked me playfully, but with a hint of despondent aggression, on the sidelines of that first meeting with Dr Schäuble. I bit my tongue and smiled politely.

Grasshoppers everywhere

As I hope to demonstrate with this book, Aesop’s fable about the grasshopper and the ant, or any narrative of this type, is terribly misleading as a description of the causes of our current crisis.

For a start, it fails to acknowledge that every nation, including Germany and other surplus nations, has powerful grasshoppers. It neglects to mention that these grasshoppers, of the north and the south, have a habit of forging commanding international alliances against the interests of the good ants that work tirelessly not only in places like Germany but also in places like Greece, Ireland and Portugal. More importantly though, the real cause of the eurozone crisis is nothing to do with the behaviour of grasshoppers or ants or any such thing. It is to do with the eurozone itself and, specifically, with the invention of the euro. Indeed, this book is about a paradox: European peoples, which had hitherto been uniting so splendidly, have ended up increasingly divided by a common currency.

The paradox of a divisive common currency is a central theme of this book. To make sense of this paradox and thus to understand the real reasons why the narrative of grasshoppers and ants, of bailouts and austerity, is so wrong, we will need first to examine the historical roots of the euro in the postwar settlement of Europe, with the Bretton Woods conference of July 1944, in which the economic structure of Europe was forged, and in the collapse of that structure with the so-called Nixon Shock in 1971. It is a story in which the USA played the critical role, and it occupies the first two chapters of this book.

Europe and America: the book in three events

In fact, this book began life as a sequel to my previous one, The Global Minotaur, in which I outlined my take on the causes and nature of the 2008 global crash. Unlike The Global Minotaur, in which America took the lead role, this book casts Europe as its main player. But even though Europe is the protagonist, America provides the air our protagonist breathes, the nutrients that it feeds on, the global context in which it evolves, and also features as a potential victim of our protagonist’s avoidable failures. In this book I turn the spotlight on three historical events that bind together, and at once push apart, Europe and America’s fortunes.

The first occurred in 1971 when, in a bid to preserve its global economic dominance, America expelled Europe from the dollar zone (an equivalent to the eurozone) instituted at Bretton Woods. The influence of this event can be felt to this day throughout Europe and, indeed, feeds back into America itself (see Chapters 1 and 2). The second event was lengthier and came when an unhinged Europe tried repeatedly to make amends for its expulsion from the dollar zone by bundling together its many different currencies into a monetary union of sorts – first into the European Monetary System, then into its very own currency zone (see Chapters 3, 4 and 5). Much of the book is devoted to showing how Europe’s monetary union came about and, importantly, the manner in which its evolution was guided, often unseen, by economic decisions, past and present, made in Washington, DC.

The third event once more begins in the United States with Wall Street’s 2008 implosion. This set off a chain reaction that Europe’s flimsy monetary union was never designed to survive (see Chapters 6 and 7). The book then turns to the root causes of Europe’s failure to deal with its crisis rationally and efficiently, to the ghastly effects of this failure on the peoples of Europe, and to the detrimental impact of this failure on America’s efforts to recover from the never-ending crisis that the 2008 event occasioned (see Chapters 7 and 8).

In short, I see this book as an account of Europe’s crisis in the context of its historic connection to America’s attempts to regulate global capitalism and, crucially, as a warning that the euro crisis is too important for the United States to leave to the Europeans, let alone ignore. Indeed, the euro crisis, the final chapter warns, is weighing down the United States in a manner detrimental to everyone’s future.

Judging by the way it sometimes repeats itself, history has a flair for tragic farce. The cold war began not in Berlin but actually in December 1944 on the streets of Athens – as this book will recount. The euro crisis also started in Athens, in 2010, triggered by Greece’s debt woes. Greece was, by a twist of fate, the birthplace of both the cold war and the euro crisis. For a small nation to be the epicentre of one global disaster is bad luck. To spark off two within living memory is a tragedy.

There is another reason to look to the past as we contemplate Europe’s future. Following the tumult of Europe’s expulsion from the dollar zone in 1971 (the subject of Chapter 1), European nations attempted to huddle together, like sheep in a storm. But as the solidarity of the 1970s evolved into a badly designed common currency, toxic bailouts produced psychological fault lines along the Alps and up the Rhine. An irrepressible evil is crawling out of these fault lines (see Chapters 7 and 8) with the power to devastate the European project and, moreover, to destabilize the world at large. These new divisions remind us that it would be foolhardy to forget how Europe has managed, twice in the past century, to become so unhinged as to inflict stupendous damage upon itself and the world.

The moment monetary union between different nations begins to fragment, and as the fault lines expand inexorably, only serious dialogue and a readiness to return to the drawing board can mend the fences on which peace and shared prosperity must rely. The lack of such a dialogue in the 1930s led to the disintegration of that era’s common currency: the gold standard. Eighty years later, it is happening all over again in a Europe that ought to know better. Europeans have taken far too long to understand that 2008 is our version of 1929. Wall Street was the epicentre on both occasions and, once finance melted, credit evaporated and paper assets went up in smoke, the common currency began to unravel. Before long the working class in one nation turned against the working classes of all other nations, looking to protectionism for succour. In 1929 protectionism took the form of devaluing one’s currency vis-à-vis others. As we shall see, in 2010 it took the form of devaluing one’s labour vis-à-vis others. In a depressingly similar chain of events, it was not long before underpaid German workers hated the Greeks and underemployed Greek workers hated the Germans. With the eurozone buffeted by a massive economic downturn, the whole world watched eagerly to see how this postmodern version of the 1930s would pan out. They are still watching.

‘A debt is a debt is a debt!’ was what another high-ranking official of the Federal Republic of Germany told me during that first official visit to Berlin. Upon hearing this, it was impossible not to be reminded of something Manolis Glezos, Greece’s symbol of resistance against the Nazis, wrote in a book in 2012 entitled Even If It Were a Single Deutsche Mark.¹ This carried an equivalent message to the German official’s pronouncement: every Deutsche Mark of war reparations owed to Greece must be paid. Even one Deutsche Mark paid could help undo a gross injustice. Just as in Germany, once the euro crisis erupted and it was considered self-evident that the Greeks were insufferable debtors, so too in Greece, Germany’s unpaid wartime debts may remain for ever unforgiven.

The last thing I needed, as I was attempting to establish common ground with Germany’s Ministry of Finance, was this clash of moralizing narratives. Ethical issues are central to bringing peoples together. Closure must be achieved so as to heal festering wounds, as South Africa’s Truth and Reconciliation Commission so vividly demonstrated. But when it comes to managing modern finance and a complicated, ill-designed monetary union, biblical economics is an insidious enemy. A debt may be a debt, but an unpayable debt does not get paid unless it is sensibly restructured. Neither German teenagers in 1953 – when the United States convened a conference in London to ‘write down’ (to reduce without payment) Germany’s public debt to, among other nations, Greece – nor Greek teenagers in 2010 deserved a life of misery because of unpayable debts amassed by a previous generation.

Upon hearing this statement I thought, Yikes! Using these meetings to bring about a rapprochement will not be easy. A tale of two debts was turning into a morality play with no end. Europe is an ancient continent, and our debts to each other stretch decades, centuries and millennia into the past. Counting them vindictively and pointing moralizing fingers at each other was precisely what we did not need in the midst of an economic crisis in which large new debt piled upon mountains of legacy liabilities was a mere by-product.

Capitalism, lest we forget, flourished only after debt was de-moralized. Debt prisons had to be replaced by limited liability, and finance had to ride roughshod over any guilty feelings debtors had been encumbered with before ‘the rapid improvement of all instruments of production … [and] the immensely facilitated means of communication’ could draw ‘all, even the most barbarian, nations into civilization’ – to quote from none other than Karl Marx.²

My response in Berlin was that restructuring Greece’s public debt was essential for creating the growth spurt necessary to help us repay our debts; otherwise Greece would have nothing with which to pay. The proposal went down like a lead balloon.

Ghosts of a common past

On the day our government was sworn in in late January 2015, Prime Minister Alexis Tsipras laid a wreath at a memorial commemorating the execution of Greek patriots by the Nazis. The international press considered this a symbolic gesture of defiance towards Berlin and insinuated that we were attempting to draw parallels between the Third Reich and a German-led eurozone imposing a new iron rule on Greece. This didn’t help my job of making friends in Berlin, especially in the ultra-austere Federal Ministry of Finance.

Convinced that it was essential to emphasize that our government was not drawing any parallels between Nazi Germany and today’s Federal Republic, I scripted the following text, which became part of my statement in the joint press conference with Dr Schäuble. It was meant as an olive branch.

As finance minister, in a government facing emergency circumstances caused by a savage debt-deflationary crisis, I feel that the German nation is the one that can understand us Greeks better than anyone else. No one understands better than the people of this land how a severely depressed economy, combined with ritual national humiliation and unending hopelessness, can hatch the serpent’s egg within one’s society. When I return home tonight, I shall find myself in a parliament in which the third-largest party is a Nazi one.

When our prime minister laid a wreath at an iconic memorial site in Athens immediately after his swearing-in, that was an act of defiance against the resurgence of Nazism. Germany can be proud of the fact that Nazism has been eradicated here. But it is one of history’s cruel ironies that Nazism is rearing its ugly head in Greece, a country that put up such a fine struggle against it.

We need the people of Germany to help us in the struggle against misanthropy. We need our friends in this country to remain steadfast in Europe’s postwar project; that is, never again to allow a 1930s-like depression to divide proud European nations. We shall do our duty in this regard. And I am convinced that so will our European partners.

Call it naivety, but I confess I expected a positive response to my short speech. Instead there was a deafening silence. The next day the German press was lambasting me for daring to mention the Nazis in the Federal Ministry of Finance, while much of the Greek press was celebrating me for having called Dr Schäuble a Nazi. Reading these divergent reactions back in Athens, I allowed myself a brief moment of despair.

Incensed by Europe’s introversion and the ease with which we turned against each other, and in a bid to let off some steam, I decided to blame it all on another Greek: Aesop. For his simplistic fable was evidently casting a long shadow over the truth, turning one proud European nation against another. Under his influence, partners became foes, almost every European risked ending up a loser, and the only winners were the racists lurking in the shadows and those who had never made their peace with European democracy. This book provides another narrative in the hope that it can do the opposite.

1
And the Weak Suffer What They Must

My philosophy is that all foreigners are out to screw us and it’s our job to screw them first.

John Connally¹

It was midsummer at Camp David, the president of the USA’s country retreat, when Richard Nixon’s treasury secretary and former governor of Texas John Connally convinced his president to unleash the infamous Nixon Shock upon Europe’s unsuspecting political leaders. At the end of a crucial weekend of consultations with key advisers, President Nixon decided to make a startling announcement on live television: the global monetary system, which America had designed and been nurturing since the end of the war, was to be dismantled in one fell swoop.² The calendar read Sunday, 15 August 1971.

A few hours after the president’s televised address, exactly at the stroke of midnight, a military transport plane took off from Andrews Air Force Base heading for Europe. On board, Paul Volcker, Connally’s under-secretary, was intent on confronting European finance ministers already on the verge of a collective nervous breakdown.³ Meanwhile, Connally himself was preparing an address to the nation before flying to Europe to tell a gathering of uppity European prime ministers, chancellors and presidents that it was game over. Washington was intent on pulling the plug from the global financial system it had engineered in 1944 and had been protecting lovingly ever since.

While Volcker dealt with European finance ministers and bankers in London and in Paris, trying to steady their nerves, Connally was conveying, up close and personally, a blunter message to their bosses. In effect, what he was saying was: Gentlemen, for years you have been disparaging our stewardship of the postwar global financial system – the one we created to help you rise from ashes of your own making. You felt at liberty to violate its spirit and its rules. You assumed we would continue, Atlas-like, to prop it up whatever the cost and despite your insults and acts of sabotage. But you were wrong! On Sunday President Nixon severed the lifeline between our dollar and your currencies.⁴ Let’s see how this will work for you! My hunch is that your currencies will resemble lifeboats jettisoned from the good ship USS Dollar, buffeted by high seas they were never designed for, crashing into each other and generally failing to chart their own course.⁵

And in a sentence still resonating across Europe today, Connally summed it all up succinctly, painfully, brutally: ‘Gentlemen, the dollar is our currency. And from now on, it is your problem!’⁶

Europe’s leaders realized immediately the gravity of their situation but responded with a sequence of knee-jerk reactions that led them from one error to the next, culminating forty years later in Europe’s current circumstances. In 2010 Europe came face to face with the consequences of these forty years of accumulated mistakes (see Chapters 2, 3 and 4). The crisis of its common currency was due to failures traceable to the events of 1971, when Europe was jettisoned from the so-called dollar zone by Nixon, Connally and Volcker.⁷ The comedy of errors with which European leaders responded to the post-2010 euro crisis (see Chapters 5 and 6) is also attributable to Europe’s clumsy reaction to the Nixon Shock.

A long time coming

Nixon had not acceded to Connally’s crude philosophy lightly. Nor was Connally’s philosophy as crude as he loved to make it sound. The postwar global financial system that Nixon’s midsummer announcement assigned to the dustbin of history had been creaking like a doomed hull whose inevitable sinking threatened to bring down with it America’s postwar hegemony.

Lyndon B. Johnson, Nixon’s immediate predecessor in the White House, and Connally’s fellow Texan and political mentor, had also understood that the American-designed postwar financial system could not continue.⁸ In a discussion he had in 1966 with Francis Bator, his deputy national security adviser, President Johnson was adamant that he was ready to end it by severing the link between the dollar and the value of gold, on which that global system depended: ‘I will not deflate the American economy, screw up my foreign policy by gutting aid or pulling troops out, or go protectionist just so we can continue to pay out gold to the French at $35 an ounce.’⁹ Distracted, however, by his Great Society programmes, his intensification of the Vietnam War and his reluctance to destroy a global system that President Franklin Roosevelt’s administration (the so-called New Dealers) had put together two decades earlier, Johnson allowed it to chug along.¹⁰

Nixon too, once in the White House, tried to delay the inevitable. Even though his squabbling team of policymakers were increasingly coming to the view that the global monetary system was broken, their warnings alone would not have sufficed to convince Nixon to unleash his shock (and John Connally) upon the befuddled Europeans. In fact, as we shall see, it took several aggressive moves by the French, the Germans and the British between 1968 and the summer of 1971 to free Nixon’s hand. These were foolhardy challenges to America’s management of global capitalism that gave Connally and ‘that goddam Volcker’¹¹ the opportunity to impress upon the president that there was no alternative: he had to ditch the international monetary system known as Bretton Woods and he had to dump Europe along with it.

Could things have turned out differently? By 1971 everyone knew that the Bretton Woods postwar global financial system had been undermined by powerful economic forces beyond the control of either the United States or Europe. But instead of seeking to reform a faltering system by negotiation, Europe’s leaders overplayed a weak hand against a bold hegemon. They would now have to suffer the consequences. And suffer them Europe did. In fact, Europe is still suffering them from Dublin to Athens and from Lisbon to Helsinki.

A simple idea for a stricken Europe

The financial system that President Nixon terminated in 1971 was born in July 1944 in the conference rooms of the Mount Washington Hotel in the New Hampshire town of Bretton Woods. The pristine setting could not have been more at odds with developments forged of blood and steel in Europe and the Pacific.

D-Day had preceded the Bretton Woods conference by only three weeks, its dreadful toll not yet digested by thousands of grieving families, the majority of them American. During the conference itself the Red Army liberated Minsk at great human cost, the US Air Force bombed Tokyo heavily for the first time since 1942, Siena fell to Algerian troops under General Charles de Gaulle’s command and V-1 rockets pounded London mercilessly. On 20 July, the day before the conference was successfully completed, Claus von Stauffenberg led the conspiracy to assassinate Adolf Hitler at his bunker in Rastenburg. Even though the conspirators failed, the writing was on the wall. July 1944 was undoubtedly the right time for the Allies to begin planning the postwar order of things.

With their heads full of the conflict and considerable uncertainty about their own positions in that postwar order, the delegates from the forty Allied nations attending the conference hammered out an impressive financial deal in the space of three weeks. In anticipation of the guns falling silent in Europe, and before the Soviet Union had emerged as the dragon to be slain, the New Dealers in power in the USA understood that America was about to inherit the historic role of remaking global capitalism in its own image.

At the conference’s opening ceremony, on 1 July 1944, President Roosevelt declared his administration’s abandonment of any remnants of American isolationism. ‘The economic health of every country,’ he announced, ‘is a proper matter of concern to all its neighbours, near and far.’ Clearly, the United States, the only country that came out of the war (save perhaps for inconsequential Switzerland) with its monetary system intact, its industry booming and with a healthy trade surplus, was intent on taking a war-torn world under its wing.

One of the casualties of the European war was money. Nazi-affiliated regimes in occupied countries had printed so much of the local currencies to support the Axis war effort that the money in Europeans’ pockets was not even worth the paper it had been printed on. And even in countries that had escaped occupation, such as Britain, the cost of the war and the collapse of trade had led to a combination of government indebtedness and value destruction that rendered the currency worthless – at least in the arena of international trade. In short, the greenback was the only currency left standing and capable of lubricating world trade.

Washington understood that its first task, once the German armies had been defeated, was to remonetize Europe. This was of course easier said than done. With Europe’s gold either spent or stolen, its factories and infrastructure in ruins, hordes of refugees roaming its highways and byways, the concentration camps still reeking with the stench of humanity’s unspeakable cruelty, Europe needed much more than freshly minted paper money. Something had to give value to the new notes. It was not perhaps surprising that the ‘something’ the New Dealers came up with was none other than their own dollar. America was about to share its greenback with the European countries sheltering, at war’s end, under its geopolitical umbrella. In practice this entailed new European currencies backed by dollars at a fixed rate, meaning that a certain number of Deutsche Marks, French francs, British pounds, even Greek drachmas, would be worth a prespecified, constant number of dollars. It was this dollar guarantee that would instantly impart global value to Europe’s new money.

Would this not risk debasing the dollar? If the dollar was to be the anchor for the new European currencies, what would underpin the dollar’s own value? Tapping into a long tradition of tying paper money to precious metals that no alchemist could fake, the answer was that America would guarantee a fixed exchange rate, and full convertibility, between the dollar and the gold that it held in a bunker under the New York Federal Reserve building, as well as in Fort Knox.

It was a simple idea for a simpler world. The holder of a given number of dollars (thirty-five was the figure finally chosen) was to be offered the unqualified claim to an ounce of gold owned by the United States, regardless of the holder’s nationality or location on the planet. Equally, the holder of another amount of each of Europe’s new currencies would be guaranteed a given amount of dollars, which would in turn guarantee access to America’s gold. In essence, gold-backed greenbacks became the guarantors of the currencies within a new global financial structure that has gone down in history as the Bretton Woods system.

A disciple to trump the master

In the Bretton Woods negotiations President Franklin D. Roosevelt was represented by Harry Dexter White, an economist who had entered public service on the coat-tails of Roosevelt’s New Deal.¹² New Dealers like White had cut their teeth in the 1930s, following the collapse of unfettered financial markets in 1929 and the ensuing Great Depression. Their ambition was to counter deprivation and hopelessness by beefing up the federal government’s existing institutions and creating new ones that would make another 1929 impossible. Bretton Woods offered White the opportunity to project the New Deal onto a global canvas. His brief for the conference was nothing less than to design from scratch a stable, viable, worldwide financial system for the postwar era, at the same time staving off those Europeans whom Washington was expecting to attempt to skew the new system in their favour.

White’s economics had been influenced heavily in the 1930s by the writings of Cambridge economist John Maynard Keynes. In a delicious twist of fate, the one European he had to face down at Bretton Woods was none other than John Maynard Keynes himself, dispatched to Bretton Woods by Winston Churchill’s wartime national unity government to represent Europe’s last, and fading, empire.¹³

Keynes had it all planned well before he even arrived in America. He brought with him a razor-sharp perception of global capitalism’s ways, a unique grasp of the economic forces that had caused the Great Depression, a splendid plan to refashion global finance and, last but not least, a poet’s way with words and a novelist’s talent for narrative.¹⁴ The only person at the Bretton Woods conference who could deny him the crowning glory of putting his stamp on the new global system was his American disciple Harry Dexter White. And this is precisely what White did.

Keynes’s proposal was brimming with intellectual power; White was overflowing with the power vested in him by America’s economic and military might. Keynes advocated a global system that could stabilize capitalism for a fabulously long time; White’s brief was to push through a system consistent with the United States’ new-found strength but viable only as long as America remained the surplus nation extraordinaire. It was surely inevitable that the two men would clash and that White would prevail, even if Keynes succeeded in persuading his adversary on every theoretical point.

And so it was that, in July 1944, with D-Day fresh in the background, with Allied troops advancing in both Europe and the Pacific and with the rest of the world in America’s debt, Keynes returned to London a defeated man, refusing to discuss in any detail either the agreement that had ultimately been imposed by the American side or his own plan, which White had trashed in the Mount Washington Hotel. Shortly afterwards Keynes put his remaining energies into another negotiation with Washington’s New Dealers, at a conference in Savannah, Georgia, this time in a bid to convince them to write down Britain’s gargantuan wartime loans. It did not go well. During the negotiation, which Keynes described as ‘hell’, he had his first heart attack. Soon after his return to England, at the age of sixty-two, another heart attack ended his life.

The Melians’ reply

Forty years later, in 1988, while looking through Keynes’s papers and books at King’s College, Cambridge, I noticed a copy of Thucydides’ Peloponnesian War in the original ancient Greek. I took it out and quickly browsed through its pages. There it was, underlined in pencil, the famous passage in which the powerful Athenian generals explained to the helpless Melians why ‘rights’ are only pertinent ‘between equals in power’ and, for this reason, they were about ‘to do as they pleased with them’. It was because ‘the strong actually do what they can and the weak suffer what they must’.¹⁵

These words were ringing in my head during the spring of 2015 as I faced Greece’s lenders and their unwavering commitment to crush our government. Keynes’s head, I am certain, must also have been ringing with these words at Bretton Woods. I wonder, however, if he was tempted, as I was, to address his adversaries with a version of a line from the Melians, who in a bid to save themselves attempted to appeal to the Athenians’ self-interest:

Then in our view (since you force us to base our arguments on self-interest, rather than on what is proper) it is useful that you should not destroy a principle that is to the general good – namely that those who find themselves in the clutches of misfortune should … be allowed to thrive beyond the limits set by the precise calculation of their power. And this is a principle which does not affect you less, since your own fall would be visited by the most terrible vengeance, watched by the whole world.¹⁶

In the case of the arrogant Athenians, these words surely resonated years later when their mortal enemies the Spartans scaled the walls of Athens intent on destruction. After the Great War, Keynes had used a logic similar to the Melians’ argument to warn the victorious Allies that the vengeful terms they had imposed on Germany at Versailles were a boomerang that would come back to strike at the foundation of their own interests¹⁷ – which is of course what happened after the Versailles Treaty engendered an economic crisis in Germany that brought Adolf Hitler to power. Perhaps the Melians’ words also reflect how the surviving New Dealers felt in the mid-1960s when the Bretton Woods system that White had forced through against Keynes’s better judgement began to unravel. But by then it was too late to do much about it. Bretton Woods was at the end of its tether, and the Nixon Shock simply demonstrates the ruthless efficiency with which American officials come to terms with new unpleasant realities, in sharp contrast to their European counterparts, who will hang on to failed projects for as long as possible.

When it came, the Nixon Shock saw to it that America, unlike Athens, would continue to enjoy the trappings of uncontested hegemony – at least till 2008. That was in essence what John Connally had proposed to his president: screw them before they screw us! Europe and Japan were consequently badly screwed,¹⁸ but so was the political project of the New Dealers, who had pushed aside Keynes’s proposals in 1944. Indeed, after 1965 the New Dealers and their successors lost every domestic battle they fought against the resurgent Republicans. Their abject failure to revive the spirit of the New Deal, even under Democrat presidents who may have wanted to resuscitate it (such as Jimmy Carter, Bill Clinton and Barack Obama), can arguably be traced to their dismissal of Keynes’s proposals back in 1944.¹⁹

Fair-weather recycling

Keynes’s proposal was internationalist and multilateral to the core. It was historically informed (by the Wall Street crash of 1929) and theoretically buttressed by a thought obvious to everyone except most professional economists: global capitalism differs fundamentally from Robinson Crusoe’s solitary economy.

What this means is that a closed, autarkic (meaning self-sufficient) economy, like that of Robinson Crusoe in literature or perhaps North Korea today, may be poor, solitary and undemocratic, but at least it is free of problems caused by other economies, by external deficits or surpluses.²⁰ In contrast, all modern economies have relations with others and can expect that these relations will almost all be asymmetrical. Think Greece in relation to Germany, Arizona in relation to neighbouring California, northern England and Wales in relation to the Greater London area or indeed the United States in relation to China – all imbalances with impressive staying power. Imbalances, in short, are the norm, never the exception.

In 1944 Keynes conceded that, in view of Europe’s frightful state, there was no alternative to a regime of fixed exchange rates relying extensively on the dollar. However, while dollarizing Europe would solve one problem, a dollar-backed fixed-exchange-rate system would, he predicted, cause trade imbalances to grow with ultimately terrible effects first upon the deficit countries and then upon everyone else. His logic as to why fixed exchange rates would beget instability in a world of persistent surpluses and deficits was rooted directly in the events leading to the Great Depression, which the New Dealers understood so well, and it went as follows.

Just as one person’s debt is another’s asset, one nation’s deficit is another’s surplus. In an asymmetrical world the money that surplus economies amass from selling more stuff to deficit economies than they buy from them accumulates in their banks, but these banks are then tempted to lend much of it back to the deficit countries or regions, where interest rates are always higher because money is so much scarcer. In this way, banks help maintain some semblance of balance during the good times. If an exchange rate seems likely to remain stable or even the same, banks will tend to lend more to the deficit country in question, unworried by the prospect of a devaluation further down the line that might make it hard for debtors in the deficit country to repay them. Bankers, in this sense, are fair-weather surplus recyclers. They profit from taking a chunk of the surplus money from the surplus nations and recycling it in the deficit nations.

But if the exchange rate is fixed, the banks go berserk, transferring mountains of money to the deficit regions as long as the storm clouds are absent, the skies are blue and the financial waters calm. Their credit line allows those in deficit to keep buying more and more stuff from the surplus economies, which thrive on a spree of exports. Import-export businesses grow fatter everywhere, incomes boom in surplus and deficit countries alike, confidence in the financial system swells, the surpluses get larger and the deficits deeper.

As long as the fair financial weather continues, fair-weather surplus recycling endures. But it cannot endure for ever. With the certainty and abruptness that a pile of sand will collapse once the critical grain is added on top of it, vendor-financed trade will always go into sudden, violent spasm. No one can predict when but only fools doubt that it must. The equivalent of the critical grain of sand is one container full of imported goodies that goes unclaimed by an insolvent importer, or one loan that is defaulted upon by some over-leveraged real estate developer. It takes just one such bankruptcy in a deficit country to start a whirlpool of panic among surplus nations’ banks.

Suddenly, confident globetrotting bankers turn into jelly. Lax lending turns to no lending at all. In the deficit regions importers, developers, governments and city councils which have grown dependent on the banks are hung out to dry. House prices collapse, public works are abandoned, office buildings turn into ghostly towers, shops are boarded up, incomes disappear and governments announce austerity. In no time bankers are left holding ‘nonperforming loans’ the size of the Himalayas. Panic reaches a deafening climax and Keynes’s inimitable words resonate once more: ‘As soon as a storm rises,’ bankers behave like a ‘fair-weather sailor’ who ‘abandons the boat which might carry him to safety by his haste to push his neighbour off and himself in’.²¹

It is the destiny of fair-weather surplus recycling to prompt a crash and occasion a complete halt to all recycling. This is what happened in 1929. It is also what has been happening since 2008 in Europe.

BY THE SAME AUTHOR

Preface: The Red Blanket

1
And the Weak Suffer What They Must

BY THE SAME AUTHOR

Preface: The Red Blanket

1And the Weak Suffer What They Must

1
And the Weak Suffer What They Must