In a world unsettled by populism and downturn, the leaders of the 20th century are up against the same problems as in 1944.
75 years ago, from 1st to 22nd July 1944, the Bretton Woods Conference brought together 44 allied countries, whilst war was still being fiercely waged in Europe and in the Pacific. Its aim was to prepare for a peace based on a stable economic and monetary order that would not make the same mistakes that had been made in 1918. It was a question of getting rid of the gold standard for good and preventing such economic disasters as had been seen in the 1930s when deflation and protectionism had combined to destroy international trade and payments.
There were two opposing points of view. John Maynard Keynes, for reasons of principle and because of the much-deteriorated financial situation of the United Kingdom, proposed unsuccessfully to rebuild the world monetary system based on Bancor, an international currency defined by a basket of currencies. Harry Dexter White, representing the USA, which then accounted for half of the world’s production and possessed two-thirds of all gold reserves, convinced the conference of dollar supremacy: the gold exchange standard made the dollar the pivot of the new structure for international payments. The conference also saw the creation of the IMF – to prevent disequilibrium in balances of payments – and the IRBD – forerunner of the World Bank – to steer reconstruction and development. Apart from these decisions, the Bretton Woods Conference marked a turning point by recognizing that international cooperation and economic development were preconditions for any long-lasting peace.
The Bretton Woods monetary system disappeared on 15th August 1971 when Richard Nixon decided to suspend the dollar’s convertibility to gold. This brought about floating exchange rates, officialized in the Jamaica Accords in January 1976. It had become intolerable, firstly because of inflation linked to the uncontrolled issue of dollars by the USA in order to finance the Marshall Plan, the Korean and Vietnam wars and European investments by American multinationals; and secondly because of recurrent adjustment problems in balances of payments that devaluations could not resolve.
And yet the spirit of Bretton Woods lived on. The currency snake (created in 1972) and the euro (launched on 1st January 1999) took up the same ambition to stabilize European currencies within a single market. New multilateral institutions were created, like the IMF, which specialized in dealing with sovereign debt crises in developing countries between 1995 and 2003 (in Mexico, Brazil, Asia, Russia, Argentina, Turkey…) and, since 2008, has been concerned with developed countries, particularly because of the euro crisis which led it to play a decisive role in rescuing Greece. The last institution to be created was the WTO in 1995. Above all, international cooperation was decisive in handling the 2008 crash which gave birth to the G20: it prevented the world from falling into a deflationary spiral like the one in the 1930s and, initially, to limit any resort to protectionism.
Even if the Bretton Woods Agreement was applied in a very different way from the original outlines, it has shown exceptional results. It provided the framework for post-war reconstruction and the Trente Glorieuses [a term used in France for the thirty years of prosperity between 1949 and 1979] in developed countries and helped them for almost 80 years to avoid any crash of capitalism equal to that of 1929. Overall, per capita income increased fourfold whilst the world population tripled and the percentage of people living in extreme poverty – i.e. with a monthly income of less than two dollars a day – was drastically reduced from 75% to 10%.
Bretton Woods’ multilateral system also helped deal with the 2008 crash and meant that, ten years later, the global economy showed a return to a 3% growth rate and full employment, with an unemployment rate down to 5% of the working population. However, the multilateral system has become one of the main victims. It was only possible to rescue the world’s financial system at the expense of unsettling the middle classes in developed countries and causing a major crisis in democracy. The populist shock wave has meant the strong resurgence of nationalism and protectionism, notably in the USA where Donald Trump has undertaken to dismantle the 1945 world order, symbolized by Bretton Woods. At the same time, China has developed an authoritarian model as an alternative to democracy and is attempting to export this model by means of the New Silk Roads and by building a post-Western world. This has its embodiment in institutions that aim to compete with the IMP and the World Bank, such as the Asian Infrastructure Investment Bank.
The trade and technology war launched by the USA, to which China has responded with a lock-out, is leading to a new Cold War and de-globalization. This rationale of confrontation and fragmentation decreases growth, of which the first sign is a fall in international trade – the most dynamic component of growth – and increased financial and geopolitical risks. It makes a forthcoming financial crisis more probable and limits the possibility of using any coordinated strategy to contain it. This is exactly the configuration that caused the tragedy of the 1930s.
Therefore, our 21st century leaders are up against the same issues that were discussed at the Bretton Woods Conference, but on a much wider and more complex scale. How can one stabilize economies, finance and currencies in a world where capitalism has become global and in which the West has lost its monopoly of management? How can one deal with the systemic risks and take care of humanity’s common assets such as the environment, financial stability, the infrastructure of the the Internet network and population movements?
In an era when history is world history, there is no peace without sustainable development and there is no sustainable development without peace. In order to stabilize a complex world that is interdependent and connected, and where there are strong ecological pressures, we have to build a world order that gives the emerging nations their rightful place and asserts the principle of cooperation between nations. No nation, not even the USA or China, can claim to remain an island entire of itself. In order to meet the challenges of the 21st century, we should take heed of the words of Henry Morgenthau, Secretary of State to the Treasury, who said in his closing address to the Bretton Woods Conference on 22nd July 1944: “We have come to recognize that the wisest and most effective way to protect our national interests is through international cooperation.”
(Column published in Le Point, 25th July 2019)