Rethinking the International Monetary System: Do We Need a Bretton Woods II?

Alex AndersonThis blog post is the third  in a series of posts that come from students of our capitalism and democracy undergraduate course. As part of the course, students were asked to write about an issue pertaining to the political economy of distribution. The best blog posts have been selected to provide an opportunity to exceptional young scholars at UCD to contribute to the debate on the future of European and global economic governance, and to promote the insightful scholarship being undertaken at UCD to a wider public audience. 

When one begins to conceptualize the current international monetary system various key phrases, institutions and historical contexts come to mind i.e. the International Political Economy, the IMF, World Bank, Gold Exchange, World Trade negotiations, Financial Crisis, G20 summits, BRICS, Monetary policy, the Eurozone, autonomy and so forth.

It is by no means surprising that the international monetary system has, over time, progressed and expanded beyond state control and boundaries. Factors contributing to this expansion were advancements in technology, increased interconnectedness of global economic and financial systems, and state decisions to “liberalize credit creation, financial markets …..from social, political, and environmental constraints” (Pettifor, 2008).

It is in response to these change, since the early 1970’s, that has enabled the international monetary system to evolve into a complex, intertwined spider web of rules, norms and institutions. All of these institutions govern the relationships, mechanisms, and stabilities of our global currencies and flows of capital. But is this current international monetary system enough to tackle contemporary political and economic problems?

One could argue that the evolutionary expansion of our present monetary system has led to today’s financial crises, and most alarmingly, as American economist Joseph Stiglitz points out, an “increase in the concentration of income and wealth” (Stiglitz, 2012). These inequalities are no longer confined to the boundaries of the State. They are global, broadly speaking. Neo-liberal policies, initiatives and free market orientated state policy making (i.e. economic deregulation, financial deregulation, free trade agreements etc), have allowed global capitalist markets to flow freely and evolve clear of any democratic and political constraints they were subject to in the past.

A key figure who strongly favored free market liberalization was the American economist, Milton Friedman. Friedman argued passionately in favor of free market ideas and actively advocated the downsizing of the interventionist role of the state in capital markets. While evidently these entrepreneurial policies were adopted with some levels of optimism 40 odd years ago, one cannot deny that these fundamentalist approaches are now be hugely discredited in light of the recent international financial crisis.

Globalization effect

The so called ‘globalization’ effect of an integrated capitalist free market has not had the desired ‘everyone benefits’ outcome. The financial sector that once “acted as a servant to the economy has instead became its master. The tail wagged the dog” (Pettifor, 2014). The market is free of constraint and constantly fixated and focused on maximizing short term outputs and profit. This, in turn, results in high levels of widespread instability, speculation, volatility and the increased probability of financial meltdown.

It is with this that the calls for a Bretton Woods 2 system emerged following the 2008 financial crises. Widespread realizations by states, their institutions and most importantly their citizens. Realizations that free market forces were simply too volatile and too speculative to remain unharnessed.

The revival of a Bretton Woods II system would induce more or less the same principles as it did before, only this time creating a new international currency. That is, it would not use the currently unstable and declining US dollar as a global reserve. This new international currency would also then be tied to another entity other than gold. This process will be explained below.

The main step in reviving a Bretton Woods system would be the establishment of a global “independent” central bank. This independent international institution would be backed by a creation of a new currency that is possibly composed of the world’s major currencies. In other words, an “international reserve asset” (International Monetary Fund, 2014). This global reserve currency is based on the same concept as the Special Drawing Rights (SDR) created in the late 1960’s (International Monetary Fund, 2014).

Like the SDRs, in order for this to work, the new currency would require markets to be deeply denominated in SDR/new international currency assets. This global central bank would then also be a lender of last resort and have the necessary capabilities of managing and placing obligations of states to “achieve balances of trade” (Pettifor, 2014). This institution is often referred to as the “Keynesian information clearing agency” (Pettifor, 2014) which would act on a fixed exchange rate system like the original Bretton Woods system did originally.

The crucial steps to make this possible would be re-empowering the state with policy controls over monetary policies, including the reintroduction of capital controls. Thus, giving back to the democratic state, control over market functionality, and in turn, limiting the heightened market volatility that exists. This re-empowerment would also give democratic control to restrain capital from flooding emergent markets, and limiting further risk of financial crises. Emergent states could then control the accumulation of foreign exchange reserves, which evidently cripples their domestic and the global economy. Emergent states currently lend US dollars to developed countries (e.g. the United States) at close to 0% interest rates who in turn loan it back to them at really high interest rates, creating substantial global inequalities.

Reserve holdings

 

 

 

 

 

 

 

 

Why does this matter?

The reasons I have argued for the introduction of an independent international central bank, as well as reintroductions of capital controls and state empowerments over the market, is for two main reasons.

The first is because of what Stiglitz points out in that the top 1% are still increasing their concentration of wealth (Stiglitz, 2012). This is not only a significant problem in terms of wealth and income inequality, but also in terms of political democracy.  For example, political contributions from the top 1% allow them unrestrained “free speech” and input into US policy. Because of the rights to free speech within the US constitution, these contributions are actually interpreted and deemed legitimate by the courts. But these contributions buy them political policy influence over taxation and essentially anything that would protect their interests, wealth, and position within society.

The second reason however, is the current international monetary system. The dollar is used in the majority of international exchanges and reserves, even though it only accounts for less than ¼ of global GDP. How does this negatively effect the global economy? The US dollar is being used as foreign exchange reserves by emergent states. In the past 10 years THIS amounted to almost 2/3rds of global reserves. Not only is the dollar going where it is not needed, but where it is also not wanted. Emergent economies will find more benefits trading in their own currencies and attracting inward investment opportunities. The reason so many emergent states have these exchange reserves in dollars is due to US market liquidity policies. As long as the US dollar based reserve system is applied internationally, the more unstable the global economy will remain.

Overall one can strongly argue that international capital mobility results in concentrated inequalities in wealth and capital ownership, declining democracy, and a dysfunctional international political economy centered around a declining US dollar. This could be changed through the re-introduction of a Bretton woods II system, state re-empowerment, an independent international central bank and a new global reserve currency. In order to rebalance the inequalities of wealth, one must first change the financial system. This can only be done through reclaiming structural power and control over the capitalist free market.

Alex Anderson is a New Zealand born student studying a Single Subject Major in Politics and International Relations at the University College of Dublin. This blog post is a part of his course work during his ‘Capitalism and Democracy’ module undertaken in Semester 1 of 2014.

 Bibliography

International Monetary Fund (2014) International Monetary Fund: Special Drawing Rights. Available at: http://www.imf.org/external/np/exr/facts/sdr.HTM (Accessed 21st October 2014)

Pettifor, A. (2008) A New Bretton Woods: Economies of Scale. Available at: http://www.globalresearch.ca/a-new-bretton-woods/10756 (Accessed 21st October 2014)

 Stiglitz, J. (2012) Stiglitz: Income Inequality Bad for Economy. Available at: http://economistsview.typepad.com/economistsview/2012/03/stiglitz-income-inequality-bad-for-economy.html (accessed 21st October 2014)

 

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