Bretton Woods to Brexit Finance & Development, September 2017, Vol. 54, No. 3
The global economic cooperation that has held sway since the end of World War II is challenged by new political forces
The British vote to leave the European Union and the election of Donald Trump as president of the United States have brought a new style of politics—not just in the United Kingdom or the United States, but for the world. The developments of 2016 constitute a major challenge to the liberal international order constructed after the defeat of Nazism in 1945 and strengthened and renewed after the collapse of the Soviet system between 1989 and 1991.
The United States and the United Kingdom were the main architects of the post-1945 order, with the creation of the United Nations systems, but they now appear to be pioneers in the reverse direction—steering an erratic, inconsistent, and domestically controversial course away from multilateralism. Other countries, meanwhile, for various reasons are incapable of assuming that global leadership, and the rest of the world likely would not support a new hegemon in any event.
The postwar system created at the Bretton Woods, New Hampshire, conference in 1944 should be credited with economic growth, a reduction in poverty, and the absence of destructive trade wars. It built a comity that encourages to this day cooperation on issues as diverse as taxation, financial regulation, climate change policy, and terrorism financing.
The central postwar concern was international financial stability. The United States and the newly created International Monetary Fund were at the center of a system that sought to maintain that stability by linking exchange rates to the dollar, with the IMF the arbiter of any changes. But today exchange rates are largely set by market forces; the IMF has morphed into a combination of crisis manager, global economic monitor, and policy consultant; and US dominance may be replaced by new powers, such as China and the European Union, even as domestic political forces seem to be tugging the United States away from international engagement.
What changes are needed to adjust today’s world to the changed geography of economic development, to a transforming geopolitical environment, and to large and potentially unstable financial flows?
In 1944 and 1945 a multilateral liberal world order was built, largely at the initiative of, and in accordance with, the perceived interests of one power: the United States. Forty-four countries were formally present at Bretton Woods, but US and British policymakers steered the negotiations. The essential vision involved multilateralism that benefited everyone. The Soviet Union, which participated in Bretton Woods, did not ratify the agreement, in part because it was suspicious of the American motivation, and in part because it did not want to supply the data that was a requirement of membership in the IMF.
Endless imbalancesHow countries adjust when they spend more on foreign purchases than they earn from abroad was particularly contentious—and the debate about international order was shaped by lessons drawn from the unsuccessful attempt to create a stable order after World War I, when pressure on deficit countries to adjust produced harmful worldwide deflation and then depression. The IMF was devised to prevent currency wars and competitive devaluations, which had been the 1930s’ response to deflation.
Most countries in 1944 and 1945 could reckon that they would import more than they would export for a long time and that the United States would have semipermanent trade surpluses. That’s because the United States was not only a major supplier of food for a world ravaged by war, it was also the only really substantial producer of a wide range of engineering and machine tool products since industrial capacity in Germany and Japan was destroyed. That meant that most countries would have to scramble to come up with enough dollars to buy needed...