Return to Bretton Woods

By Ed ORourke

Created Feb 18 2009 - 17:17

While few predicted the financial meltdown, many have been predicting the current financial system’s demise for years. One such prediction was in One World, Ready or Not: The Manic Logic of Global Capitalism by William Greider. Another was Dark Ages America: The Final Phase of Empire by Morris Berman.

Both authors point to the Bretton Woods Agreement and adherence to it in the 1945-1971 period as a golden age. There is no other 26 year period that comes close to production levels, productivity rates, high employment and fairer income distribution attained in this period.

In July, 1944, delegates from 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference. Their goal was to establish a sound postwar financial system that avoid another depression, encourage trade and investment and make it easy for governments to pursue full employment and social welfare policies.

Delegates looked to British economist John Maynard Keynes for guidance in building a financial model in the postwar war world. Keynes’ major insight was that psychological factors rather than economic factors drove the market. Unrelated to economic data waves of optimism and pessimism swept the financial markets. There was no self-adjusting mechanism that moderated these temperament swings. In the 1920s and 1930s, speculators made bundles from these oscillations.

The Bretton Woods Agreement created a system that, within a narrow range (+1% or -1%, the adjustable peg), fixed exchange rates and place controls on capital mobility. The Agreement created a modified gold standard with the US dollar as the system’s basis. The United States would buy and sell gold at $35 per ounce. The Agreement linked the dollar to gold and all other currencies to the dollar. The United States could adjust the dollar to gold but not to any other currency

Inflationary pressures from the Vietnam War moved President Nixon to break the Bretton Woods Agreement on August 15, 1971 when he devalued the dollar by 10% and made it inconvertible with gold.

The post Bretton Woods system has no defense against speculation or destabilizing fads. In recent times, the world has seen economic crises that would not have happened in a Bretton Woods arrangement: The Mexican meltdown, 1994-1995, the Asian financial crises, 1997-1998, Brazil and Russia in 1998, Argentina in 2000, Venezuela in 2002 and our current worldwide meltdown that started in 2008.

I am looking for a return to Bretton Woods framework, a world with fixed exchange rates with a tiny allowance, plus or minus one percent for deviation. Since the dollar is no longer suitable to be the leading currency, the new agreement will be different that the old one.

The new system will feature a Tobin Tax, named after the late James Tobin, Nobel Prize winner, professor at Yale University. He proposed charging a tiny transaction tax on all foreign currency and financial exchanges. The tax would discourage short-term trading and its destabilizing effect on country currencies and restore national macroeconomic controls over currency fluctuations. Some money collected would go to national budgets and the rest would go to an international development fund. Since the world wide volume for foreign exchange and the financial markets is was about $2 trillion per day (before the meltdown), this projected tax would raise much for humanitarian projects such as a second Marshall Plan for the world’s poor. I have read that only about 10% of the daily volume pertains to goods and services. The rest is speculation. If this is true, the current daily volume would drop like a rock.

The time has past for seeing the government as enemy. Except for a few diehard free market fundamentalists who still call for tax cuts for the rich as a solution, people are looking for a new financial arrangement that will foster high employment, transparency, poverty abolition, more equitable income distribution and environmentally friendly vehicles, energy and buildings.

Ed O’Rourke, a former Houston, Texas resident, now lives in Medellin, Colombia.

Main Sources:

William Greider, One World, Ready or Not: The Manic Logic of Global Capitalism, Simon and Schuster, 1997, pages 250-257.

Morris Berman, Dark Ages America: The Final Phase of Empire, W.W. Norton & Company, 2006, pages 50-59.

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