Rethinking Bretton Woods – Looking Back to Approach the Future (1/3)
Why rethink Bretton Woods?
Through a series of three articles, the ambitions and buildings of Bretton Woods of 1944 (the US dollar as the world reserve currency, the IMF and the World Bank) are assessed through the prism of six distinct global trends: the doctrine of free market, dollarization of the market, globalization, the paradox of health and quality of life, polarization and the absence of a paradigm centered on nature. The observations will serve as the basis for a Rethinking of Bretton Woods conference, after COP26, in 2022.
This is the first article. You can find the second and third article here.
The Bretton Woods Conference of 1944 will be remembered as marking the transition of global and financial power from a declining British empire to an emerging American empire. Battles were still raging on several continents when 730 delegates from 44 countries, including Russia and China, gathered at a hotel in the Green Mountains of New Hampshire. They aimed to outline the contours of the new world financial order.
Against the backdrop of colossal human losses, human misery and bombarded industrial regions, the conference delivered three main buildings. Backed by the status of the United States’ primary creditor, the United States dollar has been accepted as the world’s reserve currency. The reserve currency status was accompanied by permanent convertibility of gold at a fixed exchange rate. John Maynard Keynes had proposed an alternative supranational currency, the Bancor. However, the US delegation quickly swept multilateral construction off the negotiating table. Second, the World Bank was created to meet the structural capital needs of developing countries. Finally, the International Monetary Fund (IMF) was created as a clearinghouse to monitor and smooth the capital flows triggered by imbalances in trade accounts between different member countries.
The main takeaway from the Bretton Woods conference was a rules-based multilateral financial order. The US dollar as the dominant anchor currency provided the solid foundation for the new financial order. It was an international financial structure shaped by and in the best interests of the winner of World War II. It was then.
What has happened since the ambitions of Bretton Woods and the buildings it shaped and helped to establish?
Over the past 75 years, several trends have called into question the ambitions and results of the Bretton Woods conference, notably the remit of the World Bank and the IMF. The emergence of six distinct global trends, the free market doctrine, the dollarization of the international market, globalization, the health and quality of life paradox, polarization and the absence of a nature-centered paradigm have been intrusive and often destructive. They all thoroughly tested the foundations and limits of the new financial contours.
One evening in August 1971, the rules-based order took its first shock when President Nixon announced the end of gold standard convertibility in the face of the escalating burden of the war in Vietnam. This declaration paved the way for global fossil fuel-based growth enabled by the money creation duopoly of commercial banks with central banks. This growth path has not been hampered by any monetary or regulatory constraints, with the exception of the Dodd-Frank provisions (see below). More shakes would follow, each with a different level of intensity and impact. However, each time it has eroded the ambition and strength of the magnanimous locals at Bretton Woods.
Free market doctrine
The first trend was the ardent belief in the free market narrative, embodied by Nobel Laureate Milton Friedman and the Chicago School of Economics. A plethora of think tanks, such as the Heritage Foundation and the Cato Institute, provided additional intellectual support and impetus. Friedman and the Chicago School argued that lukewarm government policy should be favored over brutal government intervention. It was an engaging tale given the government institutions and poorly run businesses after WWII. These neoliberal economic principles were institutionalized under the political reigns of Reagan in the United States and Thatcher in the United Kingdom in the early 1980s. Privatization, reduced welfare plans, weakened unions, investments in infrastructure and subsidies for the oil and gas, tax cuts, military campaigns (Gulf Wars I & II (US), Falklands (UK)), militarization of police forces and accommodative monetary measures policies were among the political and economic instruments signature. Central banks were urged to aim for a neutral monetary policy, supported by long-term economic growth and moderate expansion of the money supply. Some of the policies were simply continued under Democratic rule in the United States. Chicago School economists, backed by 13 other Nobel Prizes, have surprisingly little focus on leverage. Their disregard of the money creation capacity of commercial banks was puzzling. Unbridled leverage had accelerated the number and frequency of financial crises, especially since the demise of the gold standard in 1971. To name a few, there has been the savings debacle. and loans to the United States in the early 1980s, the Mexican debt crisis of 1982, the Black Monday action. Stock market crash in 1987, the Japanese asset bubble in the late 1980s, the Asian crises of 1997 and the Russian crises of 1998 and, in the same year, the collapse of the Long Term Capital Management hedge fund. The Chicago school remains academically very enigmatic about the nature of a crisis and the role of leverage. The narrow focus on the short term, exemplified by the revered quarterly reporting cycle, short-term capital account flows and now high-frequency trading, and by implication the obscuring of intergenerational consequences, create cycles of expansion. and recession more and more frequent.
The solid financial footing sought by Bretton Woods delegates is hard to find today. A major crack in the Bretton Woods edifice is the total debt of $ 280 trillion (2020) for governments, businesses and households, representing 250% of GDP.
The liberal dynamic was further characterized by deep industrial and financial deregulation. By failing to pursue antitrust provisions, the food, banking, fossil fuel, tech and semiconductor industries have reached disruptive levels of concentration, jeopardizing competitive prices, resilient supply chains, and privacy. robust data (the allure of free apps). Financial deregulation has reached its peak. with the repeal of the Glass-Steagall Act of 1933 by the Clinton administration in 1999. The Gramm-Leach-Bliley Act allowed commercial banks to merge with investment banks. The capacity for money creation has been left free to merge with complex risk-taking activities (capital markets, derivatives and securitization). A singular focus on profits coupled with an accommodating monetary policy fueled the incongruous mix of activities. Managerial inexperience and a lack of keen eye for risk management only made matters worse. The 2008 financial crisis was a perfect storm waiting to happen. The emerging leveraged ground wave has triggered the unruly undercurrents. The levies broke with the promulgation of the infamous law almost a decade earlier. This led to the Occupy Wall Street movement, bringing social inequality to the fore with the invention of the “one percent”. Thomas Piketty provided the academic causal relationship by establishing that rates of capital growth were always more important than rates of economic growth in developing countries.
The common thread running through every financial crisis was the need for government intervention and taxpayer dollars to bail out failing incumbents. The post-2008 period saw the introduction of a non-traditional central bank monetary policy tool in the form of quantitative easing (QE). It is a policy that allows a central bank to print money freely. It was also an essential complement to the new Dodd-Frank regulation, which significantly reduced the money creation capacity of banks by imposing formidable liquidity and solvency frameworks. The crisis also saw the emergence of Bitcoin. Digital and trustless global payment methods prevent a financial institution from executing payments on a global scale. Bitcoin, despite its carbon footprint, is also competing for a place as an alternative asset to fiat currencies.
The QE instrument was taken back from the market to absorb the shocks of the global Covid-19 pandemic.
As a direct result, the four largest central banks, the Federal Reserve, the European Central Bank, the People’s Bank of China and the Bank of Japan, now have more than $ 30 trillion in balance sheet assets. This statistic makes several central banks the sole market maker and price maker for government bonds and sometimes even the main one for corporate bonds. He overturned the neoliberal approach, but more importantly, he replaced one of the concrete pillars of the already fragile Bretton Woods rally with a total outstanding of $ 280 trillion, into a pillar of clay. The weaker pillar will find it difficult to respond to the issue of intergenerational justice.
This is the end of the first article. You can find the second and third article here.