13 June 2012
In February, a researcher deep in the dusty archives of the United States Treasury came across the discovery of a lifetime—the transcript of the United Nations International Monetary and Financial Conference, held in July 1944 at a quiet hotel in Bretton Woods, New Hampshire.
The importance of this discovery should not be understated. The Bretton Woods Conference, as the meeting is commonly referred to now, established the foundations of the modern international financial system; figures of no less importance than John Maynard Keynes and Milton Friedman contributed to debates that continue to echo throughout our economics and public policy today. As the international economic recovery continues to sputter and cough, it seems that a document allowing deeper insights into the formation of the system could not have come at a more opportune time.
Picture the economic environment of July 1944: World War II had barely ended in Europe, but was still raging on in the Pacific. Europe was devastated – infrastructure laid to waste by years of bombing campaigns and a population decimated by two generations of young men falling to two World Wars. After World War I, the global economy had buzzed along for a few years before utterly collapsing into the Great Depression then ultimately led to World War II. World leaders had no intention of letting a repeat performance occur again after 1944.
Hence, as one of its first acts, the United Nations organized 730 delegates from 44 countries to hammer out a solid structure for the world’s economy. Their rationale was that economic ties between countries create ties of dependency and decrease the likelihood of war, and if a state’s economy were to fail, the formation of international institutions to back it up would lessen instability and violence, as had occurred in Weimar Germany.
The agreement that emerged from the conference was several-fold. The United States, essentially the controlling member of the whole meeting, negotiated for the U.S. dollar to replace the gold standard as the world’s reserve currency, while all other currencies would be adjustably pegged to a foreign exchange market rate system. The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (later to become the World Bank) were both born during these talks, and have played crucial roles in the global markets since by providing technical guidance, loans, and a calming hand in international markets.
As the years have progressed, however, cracks have begun to show in the structure that emerged from Bretton Woods. The IMF has come under fire for its failure to choose a president from outside of Europe, a tradition which has been the defacto agreement between Europe and the United States since the organization's inception. The IMF has also been criticized for economically propping up dictators – from Argentina’s military junta to South Africa’s Apartheid regime – that were friend to U.S. and European interests, rather than even-handedly working to promote free trade and democracy; all this occurred while making loans conditional upon Western-imposed and Wall Street-friendly conceptions of economic reorganization. The World Bank, tasked with promoting development in economically stagnating countries, has been criticized by no less than former World Bank President Joseph Stiglitz for promoting free market reform policies that in practice are often harmful to economic development. Then, as the American economy works to rebuild in fits and starts with a weakened dollar, some have called for doing away with the dollar standard and replacing the global base currency with the renminbi.
With all the criticisms and cracks in the system, is it time to consider a new Bretton Woods Agreement? Should our current system be overhauled to reflect the growing influence of the global south, not to mention the economic rise of China?
The Bretton Woods system is battered, yes, but do not count it out yet. Replacing the dollar with the renminbi is not yet feasible, let alone even a good idea. China has been roundly criticized by the international community, particularly the United States, for artificially valuing the renminbi’s exchange rate so as to benefit domestic economic growth. While the IMF and World Bank have been criticized, they have been able to adapt remarkably to changing economic situations, thanks to the negotiations of groups such as the G7 (now the G8). The IMF leadership change just last year saw several qualified candidates from outside the U.S. and Europe; although Christine Lagarde of France was eventually selected, it suggests the institution is quietly evolving. Even a new Bretton Woods agreement would only be able to solve a few of the systemic problems facing us today, if all the nations of the world were truly able to agree on even that much.
The global economy is truly in a state of transition, and while admittedly a reform of the structure will eventually be necessary, now is not the time for such considerations, not until it is apparent that a shift can be made to a stable new structure. Until then the debates and tensions of the International Monetary and Financial Conference will continue to echo throughout our lives.
Photo: Hulton Archive
This article was originally published in the Diplomatic Courier's May/June edition.