Wednesday, November 26, 2014

What Enabled Bretton Woods?

PRINCETON – The proximity of the 70th anniversary of the Bretton Woods conference, which established the World Bank and the International Monetary Fund, to historical anniversaries like the Allied landings in Normandy highlights just how ambitious its organizers were. Indeed, amid considerable tumult, the conference aimed to create a stable international monetary framework that could serve as a cornerstone of a peaceful global order. And it succeeded – at least for a while.

Bretton Woods retains a powerful fascination, with at least three recent books on the subject having achieved considerable commercial success. What makes an event in which a group of mostly men talk about money so intriguing?

Of course, there are some juicy incidentals, such as the dance of John Maynard Keynes’s wife, a Russian ballerina, that kept the US Treasury Secretary awake, and charges of espionage for the Soviet Union against the main American negotiator, Harry Dexter White. But the real drama of the conference lay in the systematic evolution of an institutional structure that underpinned global stability and prosperity for at least three decades.

The institutional vision was linked to a global security system. Indeed, in the original agreement, the five large powers that would be represented permanently on the IMF Executive Board were the United States, the United Kingdom, the Soviet Union, China, and France – the same countries with permanent seats on the United Nations Security Council.

Even within this framework, the negotiations were challenging. So how did 44 disparate powers, each seeking to protect its own national interests, manage to agree on a new global monetary system?

According to Keynes, the key was a process of international deliberation and planning, led by “a single power or like-minded group of powers.” By contrast, a 66-country “pow-wow” like the abortive World Economic Conference, held in London in 1933, could never be expected to produce an agreement. Keynes’s rival, Friedrich Hayek, went further, asserting that a successful, enduring order could not be negotiated at all; it had to be spontaneous.

The experience at Bretton Woods lends significant credence to Keynes’s assessment. While 44 countries were formally represented at Bretton Woods, the UK and especially the US were the dominant players.

In fact, bilateral negotiations have enabled every major success of large-scale financial diplomacy. In the early 1970s, when the fixed exchange-rate regime established at Bretton Woods collapsed, the IMF seemed to have outlived its function. But, by renegotiating the Fund’s Articles of Agreement, the US, seeking greater flexibility, and France, which sought the kind of predictability that the gold standard had provided, were able to revive it.

Later that decade, efforts by France, Germany, and the UK to confer on monetary policy failed miserably. But discussions between France and Germany – which remain the leading voices in debates on European monetary issues – were far more effective. Likewise, in the mid-1980s, when exchange-rate volatility gave rise to calls for protectionist trade measures, the US and Japan found a solution involving exchange-rate stabilization.

Nowadays, international economic diplomacy is centered on the US and China. In recent years, an emerging debate has focused on whether the global economic system of the 2000s – in which export-oriented emerging economies essentially pegged their currencies to the dollar to obtain faster growth and accumulate foreign-exchange reserves at spectacular rates – effectively created a sort of “Bretton Woods II.” Could China and the US formalize such a system, with the renminbi playing a greater role?

The bilateral nature of the negotiations certainly implies that they have a chance. But there was another critical factor underpinning the success of the Bretton Woods conference: the global political and security environment.

For starters, the conference occurred the month after the D-Day landings in Normandy, when the end of World War II seemed far closer than it turned out to be. There were also domestic considerations at work. As US Treasury Secretary Henry Morgenthau, Jr. stated in advance of the conference, “We felt that it was good for the world, good for the nation, and good for the Democratic Party, for us to move.”

In order to achieve an agreement of similar scale and influence, world leaders – especially in the US and China – would need to be under similarly high pressure. A global pact would have to be an urgent necessity, rather than an attractive possibility.

What would convince Chinese leaders that they must rapidly reinforce the open global economy that enabled China’s export-driven economic rise? One such catalyst might be a financial crisis emanating from the country’s risk-laden shadow-banking system. A contest for global leadership might serve that purpose as well. Or perhaps the stimulus will be fear that the world is sliding toward protectionism, with bilateral and regional trade agreements like the Transatlantic Trade and Investment Partnership deepening divisions between their participants and the rest of the world.

Bretton Woods demonstrated that it takes a major crisis to produce a political dynamic of reform. Today’s world, for all of its troubles, is simply not dangerous enough – at least not yet – for the countries at the helm of the global economy.

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    1. CommentedYoshimichi Moriyama

      Keynes was a great philosopher and economist. He saw and thought beyond his own natinality. He understood the importance of international cooperation. But, as I understand, he saw the danger of going too far beyond national and political needs. The grand schemes that far extend over them can be dangerous. What we call international rules are very often the rules that serve a particular country's interests and that, special economic interrets of a particular group of that country.

      The sanguine expectation that Prof. Lombardi seems to place on China for international coordination and cooperation exhibits, I feel. a too naive and facile idea, a characteristic which comes from liberalism of people of the West; it can be a defect if indiscriminately applied or if thought to be indiscriminately aspired to everywhere in the world.

      China is historically a society that could be put together, the danger of disintegration staved off, only with an enourmously despotic, authoritarian political power. The ruling elites have possessed and excercised an enormously gigantic and cold-blooded power. Finance, namely controlling the renminbi, is the most effective and indispensable method for social management together with propaganda in school and heavily armed police for social order. "Open global economy" is a good meal for everyone but it is poison for Chinese leaders.

    2. CommentedSimon Winchester

      Simon Winchester, University of New England, Australia.
      An interesting take on China, worth consideration, though I must take a different position.
      The call for a freely traded RMB might better be seen as a political move by the Western neoliberal economies to reduce China's growing economic, and, by inference, regional political power. An open Chinese economy, and indeed challenge to the power of its elites, as facilitated by a freely traded currency is not in China's (or elites) short or medium term interests. The membership of WTO removed many of China's internal mechanisms to protect its development model. Its currency manipulation is all that it has left to protect this model.
      I believe we must look at the core rationale behind calls for freer currency markets. For China, it just does not make sense - not yet. Though it must stimulate domestic demand for the next stage of its development, its coercive currency regime remains a key plank in its ongoing development. The neoliberal call for relaxation just does not hold water in a political analysis.
      In closing, I pose a questions: would a freely traded RMB benefit the US people or the Wall Street-Treasury Complex? The answer to this may give rise to the central objectives of Western interest in the RMB.

    3. CommentedNathan Weatherdon

      Well it would be silly to create a crisis in hopes that it will stimulate the solution.

      But perhaps fear of a declining role (on the part of the US) and an interest in buying trust with regard to peaceful intentions (on the part of China) is sufficient to bring them together to iron out something in advance of the crisis which would force they immediate, but most likely highly suboptimal, solution.

    4. CommentedTrissia Wijaya

      "What enabled Bretton Woods" is very comprehensive one where Harold James considers security and political dimension along with financial and monetary issue. Frankly speaking about China, for nowsaday global economy, ren-minbi power could not be underestimated - exactly how depreciation or appreciation of renminbi affect world trade much.

    5. CommentedHarry Blutstein

      While the US and UK were like-minded in supporting a liberal economic order, there were also major differences between the two major negotiators - John Maynard Keynes and Harry Dexter White - each reflecting the interests of their country.

      The US used its dominant position to railroad many of the excellent suggestions made by Keynes, which had they been implemented, would have seen the world's economy in better shape than it is. Instead, the US secured what it saw as the privileges that came with being the world's only hegemon, by making the US dollar the world's reserve currency, with almost no obligations on how it should conduct itself. Starting in the 1960s, the US abused this privilege, running up unfunded deficits to pay for its Great Society welfare programs and the Vietnam War, which led to the Nixon Shock in which the US unilaterally abandoned the gold standard, which was the only brake on its pursuit of irresponsible economic policies.

      The world might have been quite different had Keynes prevailed in his call for the creation of an international currency, which he called the Banco, a credible alternative to relying on the US dollar as the world's reserve currency. He also suggested an adjustment scheme, in which the IMF would not only support countries with temporary deficits, but also penalize countries that had built up significant surpluses, so that the world's economy would remain in balance. As the largest creditor country, the US vetoed that idea. He also wanted controls on speculative capital, and while the final agreement included some controls, they were watered down at the behest of large US banks.

      Therefore, not only did Bretton Woods herald in the liberal economic order, but it also provided special privileges to the major hegemon at the time, often overriding the out-going hegemon. As such, it represented the changing of the guard, which in the first time in history was done peacefully. For Great Britain, this was simply a case of realpolitik. If there is any chance of a new Bretton Woods, it will require the current hegemon, which is still the US, to make way (and grant concessions to) the new economic superpowers like China and possibly India and Brazil. What is the chance of that happening peacefully?