financial crisis - Gordon Brown - Nicolas Sarkozy

Bretton Woods, the sequel

Friday 31 October 2008

French President Nicolas Sarkozy, US President George Bush, and the EU have talked about a do-over of the Bretton Woods Agreement of 1944. FRANCE 24 answers the most frequently asked questions as to what this means.

French President Nicolas Sarkozy, British Prime Minister Gordon Brown, and other world leaders have said that the world needs another Bretton Woods Agreement. What do they mean?

On September 25, French President Nicolas Sarkozy announced, "We want to build the beginning of a new financial world as they did in Bretton Woods." Brown, German Chancellor Angela Merkel, and Italian Prime Minister Silvio Berlusconi came to agree, and the EU as a whole got behind the idea. Sarkozy proposed a deadline for “the end of November” for such an agreement to be ironed out.

Leaders of the world's richest nations and biggest emerging economies are set to gather in Washington on November 15 for an unprecedented summit on tackling the global financial crisis. Their aim is to discuss a new international financial architecture.

The leaders are not necessarily in consensus, however, as to whether a “Bretton Woods II” means returning to the principles of the old one, or overhauling the old one in favour of a new one. ECB President Jean-Claude Trichet took the former view, saying in a speech delivered in New York, "Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline.” Sarkozy, by contrast, has called for an overhaul. He reportedly said in an interview, “We cannot continue to manage a 21st century economy with 20th century tools.”

The Bretton Woods agreement, signed in 1944, in the final stages of the Second World War, by 44 Allied nations, gave rise to the International Monetary Fund and ultimately to the World Bank. Its name derives from the area of New Hampshire in which the meeting was held.

Professor Geoffrey Wood of the Cass Business School at City University in London told FRANCE 24 that a Bretton Woods II was a bad idea. “It’s the wrong time. It’s never a good idea to design something in a crisis.” Why, then, would the world leaders almost unanimously support a global restructuring? “It just makes them feel important,” he said.

How is the Bretton Woods Agreement different from all the other pacts that arose after the Second World War?

Bretton Woods was one of several global clean-up jobs (such as the Marshall Plan) that arose after the Second World War. It had a “never again” sort of design, intended to avoid not only another Great Depression, but also another war. Its founder Cordell Hull, the US Secretary of State at the time, was convinced that the Second World War arose directly out of economic disparities. He later explained his rationale in his memoirs: “if we could get a freer flow of trade… so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.”

Hull was awarded the Nobel Peace Prize in 1944.

Who took part in the Bretton Woods Agreement?

It was like the fiscal equivalent of a peace treaty, except that it was for the 44 Allied nations only. It did not include Axis countries – Italy, Germany, Japan – though these nations did later take part in the International Monetary Fund and the World Bank. It did, however, include the Soviet Union and other members of the Eastern bloc, which later created complications as the latter nations removed themselves from capitalism.

What is the legacy of the Bretton Woods Agreement?

The IMF and World Bank still exist. The rest of the agreement, however, which involved fixing currencies, fell apart: In brief, the US was responsible. The Bretton Woods agreement had been drawn up at a time when the US dollar was the world’s only real stable currency. All Bretton Woods nation currencies were pegged to the dollar. The dollar, in turn, was at the time pegged to the gold standard, meaning that the value of the dollar was directly linked to the value of gold. By the transitive property, all Bretton Woods signatory nations were also pegged to gold.

As nations developed, however, the dollar ceased to be the world’s unique stable currency.

The final nail in the coffin came in 1971. During the Vietnam War, the US wanted to print up extra money to finance the military. Under the gold standard, this would have been impossible. Under the administration of US president Richard Nixon, the dollar came off the gold standard, leaving most other nations to unpeg their currencies.

The world leaders are talking about creating a system of international finance restructuring. Is this what we need?

Some have suggested that the IMF should reinvent itself as an international financial regulatory organization.

Professor Geoffrey Wood does not feel this is the case. “If anything, [the IMF] should contract,” he says. “It should do research and give advice. It does give good advice now, but its advice is taken too seriously because it has to lend.”

According to Wood, there was only one voice of reason among the world leaders when it came to discussing an international finance agreement: French President Nicolas Sarkozy. “All banks have a lead supervisor, almost invariably located in the country where the bank is headquartered. Sarkozy said, suppose a German bank has a big subsidiary in France. Would the Germans cough up to provide money to keep this going? To do this, you would need a prior agreement, and those are never binding. But everyone else said no.”