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How the United States replaced Britain as the world's dominant power: the two wars that bankrupted Britain, Bretton Woods and the dollar, the Suez humiliation of 1956, and the 1971 Nixon Shock.
How the United States replaced Britain as the world's dominant power: the two wars that bankrupted Britain, Bretton Woods and the dollar, the Suez humiliation of 1956, and the 1971 Nixon Shock.
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After the defeat of Napoleon, Britain emerged as the world's leading naval, financial, and industrial power, opening a century of relative peace among the great powers that historians call the Pax Britannica. British sea power secured trade routes across the globe and made London the hub of world commerce.
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Vast resources, a large market, and heavy investment made the United States a leading industrial power. Steel, railways, oil, and machinery grew on an enormous scale.
By the late nineteenth century the major trading nations pegged their currencies to gold, and the system ran through London, where the pound sterling served as the world's main reserve and settlement currency. The Bank of England and the City financed much of global trade, giving Britain financial influence far beyond its size.
Parliament passed the Naval Defence Act, formally committing Britain to keep a fleet at least equal to the next two largest navies combined. The policy defined British sea supremacy but grew steadily more expensive as other powers built modern battleships.
Britain needed nearly three years and almost half a million troops to defeat the two small Boer republics in South Africa, at a cost of more than two hundred million pounds. The struggle shocked opinion at home and abroad and exposed the growing gap between imperial commitments and British strength that Kennedy and other historians describe as overstretch.
To pay for the First World War, Britain borrowed heavily in the United States, with the bank J.P. Morgan acting as its purchasing agent for American munitions and supplies. The world's greatest creditor nation was becoming a debtor, and Adam Tooze argues in The Deluge that this dependence quietly shifted financial power across the Atlantic.
The United States declared war on Germany and began lending directly to Britain and France on a vast scale, replacing the private loans that had funded the Allied war effort. American money and manpower helped decide the war and left the European victors owing large war debts to Washington.
With British cash reserves nearly exhausted, Congress passed the Lend-Lease Act, letting the United States supply arms and goods without immediate payment. The aid kept Britain fighting, but Washington first pressed Britain to spend down its dollar reserves and sell overseas assets, and it used its leverage to push for opening the closed markets of the British Empire.
To buy American supplies before Lend-Lease, Britain sold off large parts of its foreign investment portfolio, including the forced sale of the American Viscose company at a low price. The dismantling of the overseas assets built up over a century stripped Britain of the invisible earnings that had long balanced its books.
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John Maynard Keynes, leading the British delegation, proposed an International Clearing Union and a neutral reserve unit he called bancor to spread the burden of adjustment between creditors and debtors. The American negotiator Harry Dexter White rejected the plan in favor of a dollar-centered system, and the United States, holding most of the world's gold and capital, got the design it wanted.
Delegates from forty-four nations met in New Hampshire and agreed to a postwar monetary system fixing currencies to the US dollar, which was in turn tied to gold at thirty-five dollars an ounce. The dollar, not sterling, became the anchor of world finance, a direct measure of America's new economic dominance.
The Bretton Woods conference established the International Monetary Fund to manage exchange rates and the World Bank to fund reconstruction and development. Both were headquartered in Washington and weighted toward American voting power, embedding US influence in the machinery of global finance.
At the end of the Second World War the United States produced roughly half of the world's manufactured goods, held about two-thirds of the world's gold reserves, and accounted for around a third of world output. Its homeland was undamaged while the other great powers were exhausted or in ruins, a concentration of economic power without precedent in modern history.
With Lend-Lease abruptly cut off at the end of the war, a near-bankrupt Britain negotiated a loan of roughly 3.75 billion dollars from the United States. The terms required Britain to make the pound freely convertible, a condition that triggered a sterling crisis in 1947 and underlined how far the balance of power had shifted. Correlli Barnett cites the episode as evidence of Britain's postwar illusions about its own strength.
President Truman asked Congress to aid Greece and Turkey and pledged American support for free peoples resisting subjugation, taking over a security role Britain had told Washington it could no longer afford. The speech launched the policy of containment and marked the United States stepping into the global leadership Britain was giving up.
The National Security Act reorganized the American government for a permanent global role, creating the National Security Council, the Central Intelligence Agency, and a unified military establishment that became the Department of Defense. These institutions gave Washington the standing machinery to project power worldwide in peacetime.
The 1947 attempt to make the pound convertible under the American loan collapsed within weeks as holders rushed to swap sterling for dollars, forcing Britain to suspend convertibility. The crisis showed that sterling could no longer function as a global reserve currency on its own, leaving the dollar without a rival.
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The United States pours billions of dollars into rebuilding war-torn Western Europe under the Marshall Plan, first proposed by Secretary of State George Marshall in 1947. Washington framed it as recovery aid; it also bound Western economies to the American orbit and was rejected by Stalin for the Soviet bloc. The plan drew the economic line of the Cold War.
The United States, Canada, and ten European nations signed the North Atlantic Treaty, pledging that an attack on one would be treated as an attack on all. It was the first peacetime military alliance the United States had joined, confirming that Washington, not London, now underwrote Western security.
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Gamal Abdel Nasser announces the nationalization of the Suez Canal Company in a speech in Alexandria, defying Britain and France. The act makes him the hero of pan-Arab nationalism at its peak.
Then, in July 1956, Nasser challenged the legacies of colonialism by nationalizing the Suez Canal Company, the corporation created by the British and the French to run the Middle East’s man-made maritime trade route.Legacy of Ashes: The History of the CIA
In collusion with Israel, which attacked Egypt first, Britain and France bombed Egyptian targets and landed troops around Port Said to seize the canal zone. Militarily the operation succeeded on the ground, but it was launched without American backing and against a wave of international condemnation.
President Eisenhower, furious at not being consulted, refused to support the pound as it came under heavy selling pressure and blocked Britain's access to emergency IMF funds unless it agreed to withdraw. Facing a run on sterling and a fuel crisis, Britain accepted a ceasefire and pulled out, the clearest single demonstration that real power had passed to the United States.
Prime Minister Anthony Eden, his health broken and his authority shattered by the Suez humiliation, resigned in January 1957. The debacle punctured British claims to independent great-power status and is widely seen as a trigger for the rapid winding down of the empire over the following decade.
As dollars piled up abroad through American spending, trade, and overseas bases, foreign holders increasingly claimed gold in exchange, draining US reserves. Central banks set up the London Gold Pool in 1961 to hold the price at thirty-five dollars an ounce, but it collapsed under the pressure in 1968, exposing the strain in the Bretton Woods system.
Facing a devaluation of the pound and mounting costs, the government of Harold Wilson announced that Britain would pull its military forces back from major bases east of Suez, in the Persian Gulf and Southeast Asia, by the early 1970s. It was an official admission that Britain could no longer afford to police the wider world, a role increasingly filled by the United States.
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In August 1971, after France demanded conversion of its dollars into gold, the United States suspended the convertibility of dollars into gold, collapsing the fixed exchange rate system and sending the dollar sharply lower.
Consequently, in August 1971, in what is often called the “Nixon shock,” the United States had to suspend the convertibility of dollars into gold. The fixed exchange rate system collapsed and the U.S. dollar fell sharply on world markets.Princes of the Yen
An attempt to patch the fixed-rate system with the Smithsonian Agreement of December 1971 failed within two years, and the major currencies began to float freely against the dollar. The change confirmed the end of the postwar monetary order and gave the United States, as issuer of the dominant currency, unusual freedom in managing its economy.
After the 1973 oil shock, the United States and Saudi Arabia reached understandings under which oil continued to be priced and sold in dollars, and oil-exporting states recycled their surpluses into American assets. This arrangement kept the world demanding dollars for trade and reserves even after the link to gold was gone, entrenching American financial power on a new basis.
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