Eighty years of the Bretton Woods system: from "inclusiveness" to "self-interest"
Although the Bretton Woods system in the strict sense has ceased after the "Nixon shock", the international institutions established during the Bretton Woods system continue to operate and play a role on a larger scale, and the important position of the US dollar in the international monetary system remains the same. However, the Bretton Woods system after the transition can no longer restrain the behavior of the U.S. government, and has lost the meaning of an inclusive international cooperation mechanism, and has shifted more in the direction of "self-interest". With the rise of developing and emerging market countries, calls for reform of the international monetary system have intensified.
Special thanks to Li Xiao, outstanding professor of "Kuang Yaming Scholars" of Jilin University, for planning and participating in the writing of the cover topic of this issue. Here is the first article: "The Shaping and Influence of the Bretton Woods System on the Post-war World Order".
—Editor's note
The establishment of the Bretton Woods system in 1944 was a milestone event in the history of the development of the international monetary system. As an important part of the post-World War II global political and economic order, the Bretton Woods system has had a profound impact on the development of world economy and politics. However, since the "Nixon Shock" in 1971, the dollar system based on the "Jamaica Agreement" has enabled the United States to abdicate its responsibilities and obligations under the Bretton Woods system while having the hegemony of the dollar, resulting in global multilateralism no longer being inclusive and aggravating the instability of global economic and financial development.
President Roosevelt and other US leaders believe that building an inclusive global multilateral system is of great significance to eliminating trade protectionism, eradicating the economic soil of fascism and militarism, and safeguarding world peace. The picture shows Germany devastated by World War II.
Based on the vision of building inclusive multilateralism after World War II
From July 1 to 22, 1944, the United Nations Monetary and Financial Conference, attended by representatives of 44 countries, was held at the Mount Washington Hotel in Bretton Woods, a resort town in New Hampshire, USA. At this meeting, the participating countries (mainly the United States and the United Kingdom) negotiated the "International Monetary Fund Agreement" modeled on the "White Plan" of the United States. Under this agreement, the International Monetary Fund (IMF) and the World Bank were formally established in 1945. Later, the international monetary system based on it became known as the Bretton Woods System.
The main elements of the Bretton Woods system include three aspects:
First of all, the "double peg" system of pegging the US dollar to gold and other currencies pegging to the US dollar will be implemented. According to the IMF Agreement, the US dollar becomes the world's main international currency and reserve asset at the official price of 35 US dollars to 1 ounce of gold, and other national currencies are pegged to the US dollar according to their respective gold content (gold parity). As an important measure for the adjustment of international liquidity, the "double linkage" system makes up for the contradiction between the shortage of precious metals under the traditional gold standard system and international trade and the expansion of the world economy. Since the United States promised to allow member countries to exchange dollars for gold at the official price of gold, so that the dollar was on an equal footing with gold, the Bretton Woods system was essentially a gold exchange standard with the dollar as the basic reserve currency (bank bills could not be exchanged for gold and gold coins in China, but only for foreign exchange).
Second, a fixed exchange rate system is introduced, that is, the currencies of member countries are determined to be compared with the US dollar according to the parity of gold. By pegging to the US dollar, the exchange rates between member countries are fixed to each other and generally can only fluctuate within a range of 1% above or below parity; In order to ensure exchange rate stability, countries are obliged to intervene in the foreign exchange market, and the exchange rate level can only be adjusted with the approval of the IMF when there is a fundamental imbalance in a country's balance of payments.
Finally, the Balance of Payments Adjustment Mechanism under the IMF framework is based on the currency convertibility of current account transactions, and the IMF can monitor the operation of the monetary system and provide medium-term loans to countries that are temporarily in deficit. Member States must not restrict the payment of current accounts or impose discriminatory monetary policy measures, and must gradually reduce and eliminate exchange controls; In the event of a "fundamental imbalance" in a member country, the system allows the member to change its exchange rate arrangements (parity levels) with the consent of the IMF.
The first two parts of the system reflect the fundamental belief that the gold standard is conducive to promoting investment and trade and enhancing human well-being in the eighteenth century, especially since the nineteenth century, while drawing the bitter lessons of the Great Depression and beggar-thy-neighbor protectionism caused by the absence of rules between the two world wars. The "adjustable fixed exchange rate system", which can be adjusted after negotiation as stipulated in Part III, draws on the lessons of the traditional gold standard, which caused countries to sacrifice internal equilibrium in order to maintain external equilibrium, which in turn creates many socio-economic and political contradictions, and allows countries to protect their own economies and the interests of vulnerable groups through exchange rate adjustment under certain conditions.
Like the General Agreement on Tariffs and Trade (GATT), the establishment of the Bretton Woods system was the result of a series of negative impacts on international relations caused by the world order and the gold standard system in the 20~40s of the 20th century, which was about to ascend to the throne of world hegemony. The historical lessons of the victorious powers forcing the defeated countries to sign the Treaty of Versailles after the end of World War I, as well as the chaos in international monetary relations and their political and economic consequences during the interwar period, led to a deep-rooted logic among American leaders: currency chaos and competitive devaluation gave rise to beggar-thy-neighbor economic nationalist policies, which in turn gave rise to dictatorial autocratic regimes, which led to the outbreak of world war and undermined world peace. President Roosevelt's vision of an inclusive multilateralist world order after World War II was based on a profound reflection on the lessons of these histories. The leaders of the United States at that time clearly understood the political implications of the international monetary issue itself, that is, building a global multilateral financial and trading system, eliminating trade protectionism, and giving the defeated countries and other backward developing countries the opportunity for economic growth, which were of great significance for eradicating the economic soil of fascism and militarism and safeguarding world peace. The Bretton Woods system encourages countries to engage in free trade with minimal threat to domestic socio-economic stability or with little damage to resource allocation efficiency; If a country has a large balance-of-payments deficit, the IMF can finance it and monitor exchange rate adjustments when necessary. This means that countries do not have to correct balance-of-payments imbalances by restricting imports or erecting trade barriers. Under the auspices of this inclusive mechanism of international cooperation, the Keynesian state intervention policy was largely unaffected by exchange rate stability and led to the competitive nationalist economic policies of the 1930s and their consequences.
On April 16, 2024, the 2024 Spring Annual Meetings of the International Monetary Fund and the World Bank were held in Washington, D.C., the capital of the United States. Pictured is the IMF building.
Internal contradictions have kept its operation in turmoil
The impact of the Bretton Woods system on the post-war world order is mainly reflected in five aspects:
First, the United States succeeded Britain as the new world hegemon. There are two characteristics worth paying attention to in this process: first, the Bretton Woods system makes the US dollar at the core of the international monetary system and an important support for US hegemony; Second, the United States succeeded Britain as the world hegemon, which is clearly different from the previous hegemonic succession, or in other words, it has changed the law of the previous hegemonic succession, that is, the two are not strategically hostile but cooperative, and the transfer of power between them is not determined by the outcome of the war, but is achieved through a series of negotiations and rule arrangements based on the change of strength.
Second, it eliminated the zero-sum game of vicious competition in currencies and trade among major countries after the First World War, and promoted the recovery and development of the post-war world economy by building a global inclusive multilateralism economic system represented by the IMF, the World Bank and the GATT "troika", and provided a favorable environment for defeated countries and other post-developing countries to integrate into the international community and achieve economic growth.
Third, it has made the United States the first major country in the history of international relations to maintain its hegemonic status on the basis of its great power and rely on many international institutional arrangements. According to Susan Strange, a well-known British scholar of international relations, the Bretton Woods system enables the United States to have international power beyond the traditional "linkage power" - the power to force other adversaries to do what they do not want to do, and construct a new kind of "structural power" - power implemented by constructing a framework of relations between countries, between countries and people, and between states and enterprises.
Fourth, the status of money and finance in the modern world system has been unprecedentedly enhanced: international monetary power has surpassed traditional resource power such as territory, population, and economic scale, and has become an important power for hegemons to dominate the world and control the flow of global resources. In the words of Robert Gilpin, a well-known American political economist, "the strengthening of the role of the international monetary system in modern world affairs is a real revolution in world politics."
Fifth, although the Soviet Union sent representatives to the Bretton Woods Conference, it ultimately failed to join the system, mainly because the Soviet Union feared that joining the system would be subject to financial control by the United States; On the other hand, it is also because the United States believes that the free market economy and the self-sufficient closed economic system under the global inclusive multilateralism economic system are inherently conflicting, so it refuses to compete with the Soviet Union as an economic choice in the same system. In any case, the Soviet Union's failure to join the Bretton Woods system meant the economic decoupling between the two camps after the war, forming the so-called "two parallel markets", which played an important role in the formation and strengthening of the Cold War pattern.
The official operation of the Bretton Woods system was made possible in December 1958 after the currencies of the major European countries became convertible. Since the beginning of the Bretton Woods system, a series of internal contradictions have kept it in a state of turmoil. Traditional international economics textbooks generally believe that the core dilemma of the Bretton Woods system lies in the "Triffin problem", that is, under the "double peg" system, countries need to hold a certain amount of dollars in order to maintain the stability of the exchange rate, and the United States must export dollars to the world through the balance of payments deficit, but the long-term large-scale balance of payments deficit will trigger a crisis of confidence in the international community in the dollar, leading to a large-scale exchange of gold, resulting in the unstable status of the dollar as an international reserve currency. In fact, the Bretton Woods system in the strict sense collapsed in just 13 years (1958~1971), and its roots must be explored from the perspective of international political economy. In other words, the various types of gold standards are institutional arrangements with a political function, which limits the ability of governments to respond to their own economies and forces them to abandon the use of the most effective policy tools to regulate economic operations.
Since the end of the 50s of the 20th century, under the increasingly harsh Cold War situation, the core issue that has plagued the four US administrations has been how to solve the balance of payments imbalance and the outflow of gold without jeopardizing the United States' political and military commitments around the world. The primary goal of U.S. foreign economic policy during this period was to find a way to control the balance of payments deficit and curb the outflow of gold. But the problem is that because gold is pegged to the US dollar, the economic policies used to solve the balance of payments problem and alleviate the loss of gold are mostly in conflict with the goals of US foreign policy, strategy and domestic economic policy, which has always been a "sword of Damocles" hanging high, making the US feel "helpless and vulnerable". Therefore, since the beginning of the 60s of the 20th century, the United States has tried to get rid of this "sense of vulnerability" through different tools and channels, such as the "gold treasury", "general borrowing arrangement", "special drawing rights", etc. In this sense, President Nixon's major breach of contract on August 15, 1971, by announcing the closure of the "golden window" and the end of the dollar-gold exchange, thus prompting the collapse of the Bretton Woods system (known as the "Nixon Shock"), was the result of a long-planned political choice. Because of this, its impact on contemporary international relations and the world order is particularly enormous.
The dollar system has exacerbated the instability of global economic and financial developments
After the collapse of the Bretton Woods system, after five years of international coordination and communication, IMF members finally signed the Jamaica Agreement in January 1976. The agreement confirms the legalization of the floating exchange rate regime and allows members to adjust their own exchange rates. The international monetary system, which is based on the Jamaica Agreement, is known as the "Jamaican system", the "post-Bretton Woods system", also known as the "dollar system". The reason why this system is called the dollar system refers to the fact that the system plays a key currency function by the US dollar, which cannot be exchanged with gold, that is, the US dollar occupies a dominant position in international trade, investment and pricing and settlement, occupies a leading position in the world's official reserves and financial assets, and occupies a core position in the global credit turnover system. The formation and development of the dollar system has a very important impact on the contemporary world order, which is mainly reflected in three aspects.
First, the dollar system allows the United States to inherit existing power and gain new monetary power, while "legitimately" relinquishing its responsibilities and obligations under the Bretton Woods system. Although the collapse of the Bretton Woods system was seen by many as an important sign of the decline of the dollar's international status and even the loss of its hegemony, the dollar's dominance in the international monetary system remained the same for the next half century. More importantly, while getting rid of the fixed exchange rate under the Bretton Woods system and the official exchange rate of gold (obligation), the US dollar not only inherited or even strengthened the existing power, but also added new market-based structural power. With the support of the vitality of U.S. scientific and technological innovation and the protection of the strong military force of the United States, and with the help of a highly developed financial market with breadth and depth, the system has formed a control over global capital, and to a large extent determines the scale and direction of international capital flows, and affects the direction of global monetary policy. In this sense, the structural power of the dollar system as a super-financial (invisible) empire far exceeds the breadth and depth of control over the world by established territorial empires throughout history.
Second, the collapse of the Bretton Woods system was accompanied not only by the traditional Triffin problem, but also by constraints on the behavior of the US government. Because of this, since the 1970s, the United States has changed from an "inclusive hegemon" to a "self-interested hegemon", resulting in a global multilateralism system that is becoming less inclusive and more exclusive. Just as the new postwar globalization was the result of President Roosevelt's political choice of inclusive multilateralism, today's "global fragmentation" – the disagreement between the world's largest and second-largest economies about what constitutes free trade, and the two are not moving in opposite directions but on a divergent path of development – is also a product of America's political choice. In this sense, the 70s and 90s of the twentieth century were an important watershed moment in the transition of the contemporary world order, although the emergence of international political and economic consequences was lagging behind and led to a disregard for their far-reaching implications.
Third, the inherent instability of the expansion of financial capital affects the global economy, financial stability and sustainable development. The classic Bretton Woods system collapsed after 13 years of operation, which cannot be explained only by economic theory, and its essence is a political choice made by the US government because it is unwilling to abide by the rules, that is, the United States has changed the "creditor logic" that mankind has long adhered to in foreign financial relations, which takes the interests of creditors as the core, and urges debtors to cut back and work hard to repay debts, into "debtor logic" - takes the interests of debtors as the core, and blames and demands creditors to take necessary actions if they do not repay their debts. President Carter's so-called "locomotive strategy" in 1977, in which the blame for balance-of-payments imbalances was placed on surplus countries Germany and Japan, and forced them to use fiscal expansion to ensure balance-of-payments or avoid the expansion of imbalances.
The impact of changes in the financial logic of the United States in foreign relations on the world order is prominently manifested in the aggravation of the instability of global economic and financial development, such as the Latin American debt crisis that broke out in the early 80s of the last century, the Asian financial crisis in the late 90s, and the global economic crisis in 2008. The change in the financial logic of the United States means that the monetary policy of the Federal Reserve has also undergone tremendous changes, making the United States make up for the balance of payments from the "earning money" in the 50~60s of the last century, to the "borrowing money" in the 70~90s, and more developed to the "printing money" today. The impact of this adjustment on the global economic and financial development is enormous. The world of the future is destined to be full of greater uncertainty and even turmoil.
The author is a distinguished professor of "Kuang Yaming Scholar" of Jilin University
Honorary President of Guangzhou Business School
This article was published in the 13th issue of "World Knowledge" in 2024
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