Bretton Woods II?

Nov 02, 2008 Features / Columnists, Ravi Dev

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A few weeks ago, as we surveyed the spreading world recession precipitated by the meltdown in the financial architecture of the US and, to a lesser extent, Europe, we wondered whether there would be a new Bretton Woods convened or a new Keynes arising to address the crisis (For a new Keynes). Bretton Woods, of course, was the venue of the meeting of world powers held in the U.S. in 1945 as WWII was winding down, to propose a mechanism for global finance that would address the breakdown that led to the Great Depression of the 1930’s. Keynes was the pre-eminent economist of the time, who received a standing ovation at the end of the conference, in acknowledgement of his intellectual contributions. Bretton Woods produced a fixed exchange rate mechanism based on the convertibility of dollars into gold at US$35 an ounce, the IMF and the World Bank.
Responding to similar sentiments from President Sarkozy of France and PM Brown of Britain, President Bush has sent out invitations to nineteen other world leaders to meet in Washington on November 15 to discuss the crisis. More specifically, it was said that the “leaders will review progress being made to address the current financial crisis, advance a common understanding of its causes, and, in order to avoid a repetition, agree on a common set of principles for reform of the regulatory and institutional regimes for the world’s financial sector.
In an expanded world of almost two hundred independent nations, however, fears have already been expressed that a meeting of just twenty, even though including the major economic powerhouses, might not be willing to grapple with the real underlying economic logjams and rather will resort, with the usual concessions, to raw political power. The fact that President Bush and the European leaders have studiously ignored efforts of the UN to initiate such a wider meeting and an already scheduled UN Financing for Development meeting of world leaders at Doha November 29 – December 2, gives credence to such a view.
So what can we expect from the grandiosely labelled “Bretton Woods II” later this month? We do not believe that any initiative that really deals frontally with the seismic systemic changes underlying the present meltdown will be rolled out. The financial crises of the seventies, eighties and especially that of 1997-1998 all led to calls for a new Bretton Woods but all resulted in palliatives, which were not even observed in the breach by the dominant countries. Power prevailed then and it will prevail again. For instance, the so-called “Asian Crisis” at the end of the 90s, (they call it the “IMF Crisis” – and that tells another story) precipitated calls for banking reforms that included strong regulatory supervision. Yet in the U.S., financial regulation and supervision were tossed through the windows and in the free for all, financial institutions went into an orgy of speculation and leveraging that is now threatening to bring the entire world on its knees.
But even though Bretton Woods is now extolled with nostalgia that is manifested in calls for its reincarnation, we must remember that the regime it unleashed failed in 1971, when the U.S. announced the cancellation of the free convertibility of gold for dollars. That failure was ultimately the result of the U.S. refusing to accept Keynes’ suggestion for a supra-global financial regulatory institution, rather than the U.S. dominated IMF and World Bank that issued. Power trumped intellect then and it will trump it again on November 15th.
There are some who see a crucial role for China, with its US$2 trillion of reserves and infinite factories in November. There is a parallel being drawn, on one hand, between the ailing Britain and its sterling currency of 1945 and the U.S. with its dollar today, and on the other hand between the new China with its unbelievable reserves and the U.S. with its trillion dollar annual deficit today. But there are at least two flaws with this analogy. Firstly, even if China were to feel confident enough to flex its economic muscle as the U.S. did in 1945 at the first Bretton Woods, we would simply be repeating the dangers of placing all the world’s financial eggs in a basket supported by a small conclave of powers and in the end dominated by one. Such an arrangement will inevitably lead to further meltdowns as the essential supervisory powers of the new regime are applied asymmetrically: there is the old conundrum of “who will guard the guardians?”
Secondly, the U.S. today is not in the position of Britain of 1945. While the war in Iraq may have lasted longer than WWII, the U.S. still has immense capital, military and political reach. For one, there is the reality of all the Gulf States, protected by U.S. power, demanding payment for their oil that lubricates the world’s economy, in U.S. dollars. The dollar will not be displaced as easily as the sterling was at this time.
What will most likely emerge out of the mid November meetings will be pressures for China to allow its currency to fall in value. Compensating proposals to broaden the representation on the boards of the IMF and World Bank to include China and some of the new powerhouses will be offered. This will mean a dilution of primarily Europe’s role in these institutions and it is still up in the air as to whether they will go along. China will not seek to rock the world’s financial boat too much by challenging the U.S. frontally at this point since it is not in its interest to destroy its primary market – not to mention the value of its reserves. However, it has already initiated moves to expand its internal markets and developing other alternative markets, especially in the developing world. Look for the challenge later, as the world turns.
So we will not have any changing of the guards a la Bretton Woods I and this may not be such a bad thing. The rest of the world has an opportunity to strengthen wider multilateral initiatives such as the one at Doha at the end of the month and the one that will be proposed by the task force set up by the UN and headed by Professor Joseph Stiglitz a week ago.

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