The prevailing view at Bretton Woods rejected the laissez-faire argument that free markets automatically provide full employment. It was believed that public institutions must intervene in difficult times. Delegates established two institutions to support an open global economy and institutionalise multilateral cooperation.
One of them, the International Monetary Fund, would ensure exchange-rate stability and avoid beggar-thy-neighbor currency devaluations, which contributed to the Great Depression. Balance-of-payments financing – lending reserve currencies to lower deficits – would help countries avoid devaluation, curtail capital outflows and cushion the impact of fiscal adjustments.
Rules and conventions would influence member-countries’ economic policies. As the world’s largest creditor nation, the United States insisted on a fixed but adjustable system anchored by the dollar pegged to gold.
A vendor in cash-strapped Sri Lanka holds bank notes while working at a market in Colombo on March 20, 2023, as the IMF approves a US$2.9 billion bailout. Photo: AFP
The system of freely convertible currencies didn’t start until 1958. It collapsed in 1971 when then-US President Richard Nixon, confronting inflation, ended the convertibility of dollars into gold. Confidence in the US currency had waned as dollars piled up overseas amid the US’ soaring balance-of-payments deficit. Additionally, the dollar’s privileged role was no longer be accepted by countries such as France .
The other institution, the International Bank for Reconstruction and Development, later known as the World Bank Group, was to invest in countries’ postwar economic development through loans at market and concessional rates. These investments would entice private investors to follow. The bank’s technical expertise would guide the deployment of capital.
China’s delegation, the second largest after the US, supported both institutions. Soon after delegates completed their work, the country became engulfed in a bloody civil war. The People’s Republic of China did not join the Bretton Woods institutions until 1980.
Then People’s Bank of China governor Yi Gang and Central Bank of Chile president Rosanna Costa chat at the spring meetings of the IMF and World Bank in Washington on April 14, 2023. Photo: Bloomberg
Meanwhile, the world economy has grown more over the past 80 years than it has in the previous 750. Ironically, while the world generally gained in terms of consumption, the US was the big loser with consumption shrinking by around 4.5 per cent. International trade, representing less than 20 per cent of global GDP in the 1940s, now exceeds 60 per cent. The gap between poor and rich nations has narrowed somewhat, albeit unevenly.
Yet, catastrophes couldn’t be prevented. The global financial crisis from 2007 to 2008 showed just how much financial markets worldwide are deeply intertwined, a phenomenon underscoring the need for multilateral systems.
Over time, the Bretton Woods institutions have changed. Membership grew. New institutions emerged. The IMF and World Bank became fragmented and their work contained in silos that made it confusing for countries to figure out which door to knock on. An event in April sponsored by the Bretton Woods Committee underscored how we’ve reached an inflection point and need a 2.0 structure to confront a vast array of challenges unforeseen in 1944.
There are a number of pressing tasks to accomplish: infusing massive amounts of capital to help countries tap renewable energy, mitigate climate change, address humanitarian needs and alleviate widespread debt distress; addressing threats to financial stability from cyberattacks; creating more efficient, nimble and effective institutions; and enabling greater representation for Gulf states, China, India and the larger Global South in governing the World Bank and IMF. Africa wants a larger role to reflect the world’s dependence on the continent, as Kenyan President William Ruto has argued.
For China, a reallocation of voting rights is a high priority, a move the US does not support. China’s share of votes in the IMF is about 6 per cent, one-third its weight as the world’s second largest economy. China has been campaigning to change the world financial system; Vice-Premier Liu Guozhong highlighted the need for reform during the G77 meeting in January. Other countries, similarly situated, agree. Not matching a country’s vote to its economic clout discourages engagement. The IMF aims to develop new approaches by June 2025.
China already has some successes. Its currency joined IMF reserves in 2016. It has also expanded bilateral aid, export credit and bilateral currency swap arrangements to trading partners, such as Argentina which needed to repay IMF loans. However, there is a lack of consensus on whether Beijing is willing to significantly challenge the Bretton Woods institutions.
Brazilian President Lula Inacio Lula da Silva has declared he will propose reforms at the G20 summit in Rio de Janeiro from November 18 to 19, but elections earlier that month illustrate just how hard the path will be. By then, Americans will have chosen between two candidates offering radically different views.
The past 80 years shows fundamental change only comes when a crisis hits. Barring that, marginal changes are the most likely scenario as the West turns inward and embraces industrial policies to enhance national security. That said, we should never underestimate the power of collaboration in achieving a common good.
James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC
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