The International Monetary System and the Call for a “new Bretton Woods” System

The International Monetary System and the call for a “New Bretton Woods” System

Desirae C. Linton-Guapi

National University

Economics 602

May 27, 2015

        During the mid-20th century, the Bretton Woods system established and governed monetary relations between independent nation-states. However, by the late 1960s, the value of the dollar from the gold standard depreciated and trade deficits increased drastically leading the United States economy into a Post-Bretton Woods system. Since the global economic and financial crisis of 2007-2009, policymakers have debated that the global imbalances were the result of the failure of the international monetary system. The desire for a new and reformed system intensified as the capacity of the international monetary system was being questioned. Many are calling for a “New Bretton Woods” and for the International Monetary Fund and World Bank to be revamped to meet current demands. The question being addressed throughout this paper is whether or not a “New Bretton Woods” monetary system will help sustain economic growth and resolve symbiotic imbalances.

        Prior to the 1970s, the Bretton Woods system was the standard for international economies as countries maintained fixed exchange rates between their respective currency and the dollar. Countries experiencing a balance of payments deficit or surplus would buy or sell their own currencies restoring equilibrium. The end of the Bretton Woods system is credited to Nixon administration as the Vietnam War led to hyperinflation and trade and budget deficits (New York Times). The International Monetary System was then developed to establish rules and institutions, agreed upon by international countries, which define the foreign exchange rate, international trade, and the reallocation of capital. This allows nation-states to operate an orderly payment system successfully ensuring liquidity without inflation and global imbalances (Astrow, 2012). However, the international monetary system has proven to be inadequate in maintaining currency purchasing power and a steady inflation rate. With the spread of globalization, there are new emerging markets and the establishment of a “New Bretton Woods” system would maintain free trade and capital flow.

        The Bretton Woods conference established the International Monetary Fund (IMF) and the World Bank. The IMF maintained stability in the financial system by providing loans to countries that had trouble maintaining a balance of payments (Kennedy, 2010). The World Bank provided long term loans to assist in creating needed capital to developing countries. Exchange rates were fixed in order to free international trade and fund post World War II reconstruction. The Bretton Woods system stopped the manipulation of foreign trade, restrictive markets and depression. This established the United States as the dominant power of the post-war era making the U.S. dollar, in relation to gold, the world’s key currency. However, things didn’t last long as the United States economy was suffering from stagflation and the demand for the dollar increased while its relative value against gold decreased (Amadeo, 2014). The Bretton Woods system ended as the price for gold increased drastically in the free market and President Nixon’s plan to deflate the value of the dollar failed.

        Today the United States and European countries, under the current international monetary system, are still trying to uplift themselves from the economic crisis that began in 2007. The spread of globalization has established the periphery of the emerging markets in Asia (Eichengreen, 2006). The enormous imbalance of payments of the United States and deflation in the value of the dollar under the current monetary system has many economist believing this was the major cause of the recession. Economists, such as Michael Dooley and David Folkerts-Landau, describe that a “New Bretton Woods” system would redesign the interdependency of nation-states economies. It would maintain the ideologies of globalization and free trade but reform the current system and the problems with capital flow. French President Nicolas Sarkozy states that a reduction in exchange rate volatility, global capital flows, and world trade imbalances would be the aim of a new monetary system called G20 (Astrow, 2012). Despite the international agreement for a change in the current international monetary system, no progress has been made (Giles, 2009). Progress may not have been made to revert back to a gold standard Bretton Woods system because political leadership understands that reverting back to an older system in an age of new found growth and technology may not be beneficial.