Barely was WWII over that the US sought to underwrite its new-found political might through a changed world economic system. This year marks the 70th anniversary of the Bretton Woods Conference, a milestone in modern economic history.

The US was eager not to have a repeat of what happened after WWI, which led to the Great Depression and the outbreak of a second world war. A master plan was needed to help create a stable and prosperous global economy.

The US offered to guarantee the convertibility of its dollars to gold at a fixed rate. This meant that the US Treasury would become de facto banker to the world.

The emerging superpower insisted also on the setting up of the necessary institutions to ensure the smooth functioning of the international monetary system. This included the International Monetary Fund, what was to become the World Bank, and the General Agreement on Trade and Tariffs (now the World Trade Organisation).

Great Britain was the big loser at Bretton Woods. Initially, it tried to block the US plan. However, it soon realised that its ‘empire-dependent’ economy was no longer sustainable and would have to be overhauled. By contrast, the US had emerged as the leading creditor nation and, at the time, held about 80 per cent of the world’s monetary gold stock.

The Soviets at first went along with the plan in the hope that this would make it easier for them secure cheap finance from the US. When they realised that the Americans had other ideas, they opted out to set up a rival economic system.

To contain the emerging Soviet threat, the US had little option but to finance Germany, the arch-enemy, to rebuild its economy through the Marshall Aid Plan.

The new monetary system enabled the US to determine global liquidity by just printing money. US corporations grew to dominate the world through foreign direct investment and sourcing of ‘cheap’ energy and raw materials. They invested part of their ‘economic surplus’ into technological development and innovation. The new system worked well for some 20 years.

It was becoming obvious there were too many dollars around the globe to permit the US government to honour its commitment to exchange the dollar into gold. By 1971, President Richard Nixon had no option but to terminate the arrangement, ending the era of fixed exchange rates .

The bipolar global political system that emerged after WWII collapsed with the disbanding of the Soviet Union. The West had won and the institutions created at Bretton Woods became primary proponents of neo-liberalism. There emerged the belief that the ‘invisible hand’ works also at the global level and there is no need for governance of ‘global’ issues.

Each country can manage its economy without bothering about the impact on other countries as long as it promotes trade liberalisation and deregulation.

Globalisation has changed the world, increasing the need for effective global institutions

Reality proves otherwise. The monetary system remains plagued by high exchange rate volatility, persistent large external imbalances, competitive devaluations and significant international reserve accumulation. One financial crisis has followed another: Mexico, East Asia, Russia, Brazil, Argentina and the EU were among the more conspicuous ones.

These crises made it evident that the IMF is not adequately financed. Four years back, President Barack Obama sensibly promoted a plan to strengthen the IMF by redistributing its shareholding and voting power. An agreement was reached to reallocate six per cent of quotas from developed countries to the BRICS countries to reflect their new-found economic power. Unfortunately, US Congress blocked the agreement, reviving criticism of the US hegemony over the Bretton Woods institutions.

Today, financially, China is what the US was in the mid-1940s as it has emerged as the dominant global creditor nation. China is leading the emerging economies to develop an alternative system to Bretton Woods.

This month, the BRICS launched a $100-billion New Development Bank to finance infrastructure and development projects across the developing world with a focus on job creation and poverty alleviation. The Contingent Reserve Arrangement was also set up to cushion against prospective disruptions in global capital markets. Is history repeating itself?

Obama realises that the US is no longer able to rule the world on its own. It is a pity that he has failed to master the support of Congress. The centre of global gravity is gradually returning to the Asia-Pacific region. The intricate networks of trade, finance, people and confidence channels have brought about a world where a country’s economic policies and conditions impact significantly on other countries.

Globalisation has changed the world, increasing, and not decreasing, the need for effective global institutions.

With a membership of 188 countries, the IMF brings together the broadest possible spectrum of states, perspectives and approaches. Such a diversity means that the organisation is uniquely placed to assess global risks and policies in a way which simply cannot be replicated at a regional or any other level. It would indeed be a pity if, rather than restructuring this institution, the world should end up with a number of rival institutions.

Politicians and policymakers in the developed countries need to acknowledge emerging global scenarios and be prepared to allow the Bretton Woods institutions to change their current practices and mindsets.

The lessons learnt since Bretton Woods should provide the foundation for a new world economic order. It would be a step backwards for humanity to resort to solutions that create barriers, rather than bridges, between nations.

fms18@onvol.net

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