The Greatest Boom in History
Between 1945 and 1973, the Western world experienced unprecedented growth: European GDP per capita doubled or tripled; Japan went from rubble to the second-largest economy; unemployment was low; inflation was moderate. It was the Golden Age of Capitalism — and understanding why it ended matters as much as why it began.
Bretton Woods (1944): the postwar monetary architecture replaced gold with a dollar-gold peg. The US dollar was convertible to gold at 35 dollars per ounce; all other currencies pegged to the dollar. This gave the world fixed but adjustable exchange rates, the stability of gold without its rigidity.
The IMF managed balance-of-payments crises; the World Bank financed development; the GATT (later WTO) liberalised trade. These institutions were explicitly designed to prevent a repeat of the 1930s: no tariff wars, no competitive devaluations, no gold-standard deflation.
Catch-up growth (convergence): countries devastated by war had enormous scope to adopt technologies already proven in the US. Solow-model logic: low capital stock → high marginal return to investment → fast growth. Western Europe and Japan were not inventing the frontier — they were importing it, which is faster.
The mixed economy: governments managed demand (Keynesian fiscal policy), built welfare states (social insurance, public health, education), and sometimes owned key industries (nationalisation). The political bargain: capital got stable demand and social peace; labour got rising wages and security.
Why it ended: the Bretton Woods system cracked under its own success. As Europe and Japan recovered, the US trade surplus vanished; dollars accumulated abroad; confidence in the dollar-gold peg eroded. In 1971, Nixon suspended gold convertibility — Bretton Woods collapsed. Then came the oil shocks (1973, 1979), and the Golden Age was over.
The Golden Age was not a natural state — it was the product of specific conditions: catch-up potential, cheap energy, institutional stability, and a social contract that is easier to build when the pie is growing fast.
The Golden Age recipe
| Ingredient | Contribution |
|---|---|
| Bretton Woods | Stable exchange rates without gold's rigidity |
| Reconstruction + catch-up | Europe and Japan adopting the US frontier |
| Cheap oil | Energy costs falling through the boom |
| Social bargain | Wages tracking productivity, high demand |
Common pitfall: Projecting the Golden Age forward as normal. Much of its growth was one-off catch-up — rebuilding and copying the frontier is fast; pushing the frontier itself is slow. When catch-up completed, growth had to slow.