Earlier this month, IMF Managing Director Kristalina Georgieva referred to the world’s pandemic response as a ‘new Bretton Woods moment’. So what is Bretton Woods?
In the summer of 1944, delegates from 44 allied nations congregated at an opulent hotel in rural New Hampshire to unearth collective solutions for an increasingly globalized economy. Contrived in the midst of the Second World War, the Bretton Woods system forever transformed our international finance system.
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The scoop: the IMF published a statement calling the pandemic recovery plan a ‘new Bretton Woods moment’.
What is Bretton Woods? Bretton Woods was an international conference that took place in 1944 with the goal of preventing another World War by establishing a new international monetary framework.
The legacy of Bretton Woods: Although the agreement no longer serves a purpose in the modern world, its effects are still being felt; there is more negotiation between nations both economically and politically and the global market is more interconnected than ever before.
Lessons for coronavirus, globalization:
1. Make politics people-oriented
Leaders and policy-makers of international organizations are motivated by self-interest and private sector pressure. Likewise, they propose policies that favor private interest and hurt the average worker.
2. Make international finance fair and equal
Loan conditionalities from the IMF are often attached without serious consideration for the interest of the borrowing nation or its citizens. Recommendations by the World Bank and IMF don’t always resolve economic hardships for developing nations.
Bottom line: If this is a new Bretton Woods moment, perhaps we can learn a thing or two about our convoluted past of international do-good. Rather than just hit the reset button, we should consider how poverty alleviation requires more than a paycheck.
Dig deeper → 8 min
The world in New Hampshire, 1944
The atrocities of war left allied government officials no choice but to formulate an international agreement that would theoretically prevent a World War III. Described by Secretary of Treasury Henry Morgenthau as “the creation of a dynamic world community in which the peoples of every nation will be able to realize their potentialities in peace”, the Bretton Woods agreement has had a profound impact on monetary and exchange rate management in the 20th century.
Effectively, the conference mitigated monetary instability and quelled the rising political tension between warring nations. The instability rose from swift expansionary monetary policies enacted to help finance the war.
As the end of the war became realizable, nations started to consider the impacts of a post-war global economy. The international monetary framework endured for nearly thirty years. The new Bretton Woods system established the International Monetary Fund to enforce a set of fixed exchange rates linked to the dollar, the World Bank to make long-term loans, and what would become the World Trade Organization (WTO) to regulate international trade.
Thanks to the persistence of then US President Franklin D Roosevelt and UK Prime Minister Winston Churchill, a more globalized monetary system was created by participating nations. They aimed for post-war prosperity through a mutual, international effort and more practical world economy.
They hoped to create a system that would stop catastrophes like the Great Depression and the World Wars from reoccurring. In turn, they established a ‘new world order’, much like the rhetoric we hear today. But a lot of material was left out of the already ambitious plan. Key recommendations from the conference, specifically those made by famed British economist John Maynard Keynes, saw little to no implementation.
Thirty years after Bretton Woods
‘The golden age of capitalism’ effectively globalized trade in the 1950s and 60s and expanded world output. In 1971, a policy change dubbed the Nixon Shock catapulted the Bretton Woods system. It called for the unilateral cancellation of the direct international convertibility of the United States dollar to gold.
Although the agreement no longer serves a purpose in the modern world, we still feel its impact. There is more negotiation between nations both economically and politically and the global market is more interconnected than ever before.
Some economists were hesitant to push for globalization, insisting that the new world order would create a greater economic inequality. Products of the Bretton Woods system remain highly controversial and criticized. Main criticisms attest that nation members improperly govern the IMF and World Bank. The ‘conditionalities’ imposed on borrower countries vest in self-interest and favor world elites.
Loan conditionalities attach to policy, focusing on the deregulation and privatization of nationalized industries. This goes hand-in-hand with issues that arose during the 2008 financial crisis.
Same story, different day
Corporate-led leaders and policy-makers of international organizations lobby and legislate from self-interest and pressure from the private sector. Subsequently, they propose policies that favor private interest and in turn hurt the average worker. Too often they attach conditionalities without serious consideration for the interest of the borrowing nation or its citizens. Recommendations by the World Bank and IMF evidently are ineffective in resolving economic hardships within developing nations. Nations with less formidable economies are not prioritized.
The counterargument upholds that without these global institutions, international trade would be diminished. Plus, the world’s standard of living would drop correspondingly. However, if these organizations exist for the benefit of the people, they are not acting as such.
As Morgenthau hailed in 1944, we need to see globalization as an opportunity to develop a “dynamic world community” in which every nation can prosper.
If the WTO and IMF are swayed by the world elites, they are fundamentally suppressing the voices of citizens. Nations will be unable to “realize their potentialities in peace”. The COVID-19 pandemic, putting 100 million people at risk of extreme poverty, proves that.
Legacy of Bretton Woods
As “Neither exchange rate stability nor purchasing power stability guarantees the other”, the new system dramatically changed U.S. currency in the 50s and 60s. The Bretton Woods system, from the three major organizations it formed, affected currency exchange rates and purchasing power across the world in the post-war era.
Research shows that between 1945 and 1972, the American dollar lost almost three fourths of its domestic purchasing power. During the high Bretton Woods period, there was an outstanding amount of dollars held by the rest of the world. This eventually had a negative impact on U.S. currency.
The U.S. Federal Reserve did not hold enough gold to match the gyre of dollars circulating throughout the world. The process spread gold from its 60% concentration in its US home to the depleted central banks of the European states. The fixed exchange rate conflicted with the world’s confidence in the USD. These two competing factors created a foundation of economic instability that tracked through the golden age.
Marshall Aid, in addition to growing military expenditures overseas with emergence of Vietnam and the Cold War, enhanced the expansionary system and provided stability between 1949 and 1969. The Marshall Plan (European Recovery Program) was an American initiative to aid Western Europe, in which the United States gave over $12 billion (approximately $105 billion in current dollar value in economic support to help rebuild Western European economies after the end of World War II. Consequently, the price of gold rose in outside markets, forcing European nations to use their USD redemption clause and convert their USD holdings into U.S. gold.
A more stabilized global monetary system
The Bretton Woods system was able to effectively stabilize a delicate monetary system and organize global institutions that could execute and implement policies for an increasingly globalized economy. However, the system was unsustainable and disadvantageous for the United States economy. ‘The golden age’ essentially was a product of the insecurity of European currencies following the war and the political intervention that tied their economies to the USD asset.
It successfully halted devaluation after wartime monetary expansion and The United States of America became the world financier, but at the cost of its purchasing power. The market inevitably lost confidence in the U.S. dollar like other currencies in the late sixties and early seventies, and the system collapsed. The years of the Bretton Woods agreement highlighted the complexity of pursuing free and unfettered trade while also permitting nations to value individual policy goals.
Making the most of this new Bretton Woods moment
Here we are in 2020. $12 trillion spent globally on damage control. Expanded balance sheets by $7.5 trillion from major central banks. $11 trillion lost in global output. And a long climb up is ahead to get back to where we were.
You may have heard the term “Build Back Better” if you live in the United States, Australia, Canada, United Kingdom, Germany, New Zealand… that’s because each country has a major political leader or candidate saying it. I’m sure there are more countries on that list. Time Magazine echoed the words of the World Economic Forum calling for a “Great Reset”, a plan to rebuild a global society smarter in the post-covid era.
So beyond a globalist pipe dream, what does it all mean?
By calling it a ‘new Bretton Woods’, the IMF Director is telling us that a major international conference is required to make new institutions, new policies, new frameworks, that lead to a more peaceful and prosperous global society. Bretton Woods built a monetary system to standardize currency, but it arguably failed to achieve many of its humanitarian goals.
2020 needs to build a monetary system that alleviates trillions of dollars in debt. Back in 1944, currency was linked to gold. Today, fiat currencies have become the standard. Where does that leave abstract debt? It’s simple: major economies print trillions of dollars more because they can and it’s politically convenient.
If this is a new Bretton Woods moment, perhaps we can learn a thing or two about our convoluted past of international do-good. Rather than just hit the reset button, we should consider how poverty alleviation requires more than a paycheck.