Why the world needs a Bretton Woods 2.0
- As Bretton Woods institutions falter, nations like China are pushing for reform that reflects the global reality amid challenges such as debt distress and climate change
- While the most likely scenario is marginal changes to the international monetary system, multilateral collaboration should not be underestimated
The Bretton Woods system turns 80 in July. Many agree that its moorings are buckling. Its institutions are increasingly unable to manage global economic crises as its founding powers adjust to the rise of China and India while the entanglements of interdependence multiply and geostrategic tensions thwart cooperation.
Throughout the decade before the meeting in New Hampshire, delegates had witnessed unfathomable tragedies, both human and economic. Wall Street had crashed. Fascism had risen as international cooperation collapsed. More people had died than in any other war before. These events made a compelling case for a radically different approach to peace and prosperity.
The prevailing view at Bretton Woods rejected the laissez-faire argument that free markets automatically provide full employment. It was believed that public institutions must intervene in difficult times. Delegates established two institutions to support an open global economy and institutionalise multilateral cooperation.
Rules and conventions would influence member-countries’ economic policies. As the world’s largest creditor nation, the United States insisted on a fixed but adjustable system anchored by the dollar pegged to gold.
The system of freely convertible currencies didn’t start until 1958. It collapsed in 1971 when then-US President Richard Nixon, confronting inflation, ended the convertibility of dollars into gold. Confidence in the US currency had waned as dollars piled up overseas amid the US’ soaring balance-of-payments deficit. Additionally, the dollar’s privileged role was no longer be accepted by countries such as France.
China’s delegation, the second largest after the US, supported both institutions. Soon after delegates completed their work, the country became engulfed in a bloody civil war. The People’s Republic of China did not join the Bretton Woods institutions until 1980.
Meanwhile, the world economy has grown more over the past 80 years than it has in the previous 750. Ironically, while the world generally gained in terms of consumption, the US was the big loser with consumption shrinking by around 4.5 per cent. International trade, representing less than 20 per cent of global GDP in the 1940s, now exceeds 60 per cent. The gap between poor and rich nations has narrowed somewhat, albeit unevenly.
Over time, the Bretton Woods institutions have changed. Membership grew. New institutions emerged. The IMF and World Bank became fragmented and their work contained in silos that made it confusing for countries to figure out which door to knock on. An event in April sponsored by the Bretton Woods Committee underscored how we’ve reached an inflection point and need a 2.0 structure to confront a vast array of challenges unforeseen in 1944.
China already has some successes. Its currency joined IMF reserves in 2016. It has also expanded bilateral aid, export credit and bilateral currency swap arrangements to trading partners, such as Argentina which needed to repay IMF loans. However, there is a lack of consensus on whether Beijing is willing to significantly challenge the Bretton Woods institutions.
James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC