Bretton Woods Redux
On November 15 leaders of the world's twenty biggest economies will gather in Washington to discuss a coordinated response to the worst global financial crisis since the Great Depression. President Bush will host the meeting. Although president-elect Obama has declined an invitation, expectations for what pundits have dubbed "Bretton Woods II" are high. The original Bretton Woods established a new international monetary order: a fixed exchange-rate system based on dollar-gold convertibility. But we shouldn't expect a similar breakthrough at the Washington summit.
Let's start with timing. Contrary to mythology, the Bretton Woods accords were not hammered out in a single meeting. Rather they were the culmination of years of arduous bargaining between U.S. Treasury official Harry Dexter White and his British counterpart John Maynard Keynes, the twentieth century's most influential economist. The upcoming Washington meeting, convened in the midst of a global crisis, will not benefit from any such thoughtful preparation, reducing the likelihood of major innovation-and raising the risk that any proposals submitted may be ill-considered. Moreover, Bretton Woods occurred under the auspices of Franklin Roosevelt, a president cruising toward an unprecedented fourth election victory. Next week's summit will be hosted by a lame duck with dismal approval ratings. We should not expect any vigorous U.S. leadership on this agenda until Obama is sworn in.
Second, today's global financial agenda is far more complicated than in the postwar era. In the lead-up to Bretton Woods, White and Keynes had to reach agreement on some fundamental but fairly straightforward matters. These included the rules governing exchange rates, and the role of the dollar as the world's key currency. Today's challenges are far more complex, involving not only the behavior of sovereign states but the role of private companies and esoteric financial instruments. The agenda in Washington may range from how to regulate global financial markets and multinational companies (including banks, rating agencies and hedge funds), to setting new international standards for accounting practices and bank capital reserves, to expanding the IMF's capabilities to conduct early warning and respond to credit crises. Hammering out agreement on these matters will take time.
Third, America's relative economic power and political influence have shrunk dramatically, while other global economic powers have risen. In 1944, the United States occupied a position of unchallenged leadership and was capable, to an astonishing degree, of realizing its preferences. It accounted for almost half of global output, ran massive current-account surpluses, and served as the overwhelming source of global credit. By contrast, the United States is now the world's leading debtor nation, and has seen its global leverage decline significantly. And despite recent European assertiveness, there is no clear successor to assume its mantle of benevolent hegemon, prepared to absorb the costs of maintaining an open world economy. As we move into an era of financial as well as geopolitical "nonpolarity," to borrow Richard Haass's phrase, firm leadership risks giving way to international policy drift.
Indeed, the proliferation of new key players makes constructing a new global financial regime inherently more difficult. It was hard enough to forge wartime agreement between Roosevelt's United States and Churchill's British Empire. It will be far more daunting among a constellation of nations as diverse as the Group of 20, which brings together not only advanced democracies but developing countries like China, Brazil, South Africa and Saudi Arabia.
There is a historical parallel here. After World War II, Harry Truman hoped to create an International Trade Organization to complement the IMF and the World Bank. But it proved impossible to reproduce the success of the Anglo-American financial negotiations in a larger multilateral forum, where America's vision of an open world economy quickly came under siege from countries that preferred to pursue their own national agendas through intervention or protectionism. Today, the G-20 countries appear headed for a similar collision over the rules of the road for global finance. Players like France and Japan may advocate sweeping new global regulations, but these are unlikely to find favor in market-friendly Washington or with sovereignty-minded developing nations like China.
In a larger sense, however, the Bretton Woods accords remain highly relevant, as a symbol of the need to tame the wilder edges of capitalism. The challenge that White and Keynes faced was the same their counterparts confront today: how to strike the right balance between the open markets necessary for economic growth, and the regulations and interventions that are essential to insulate citizens-indeed entire countries-from the wild perturbations of the global economy. In 1944 the prolonged interwar slump and disintegration of the global economy had discredited laissez-faire economics, shattered the free-trade consensus of the gold-standard era, and led both Americans and Europeans to reconsider the responsibility of the state to regulate the domestic and international economy. The Bretton Woods institutions grew out of a consensus on both sides of the Atlantic that a managed multilateral order was needed to ameliorate postwar dislocation, stabilize currencies, ease financial crises, and encourage international investment and development.
Like White and Keynes initially, the statesmen who gather in Washington this weekend represent countries with starkly different philosophies on economic openness versus intervention. Whether the current global crisis will prompt today's leaders to make similar compromises remains to be seen.