A New Bretton Woods for the New Millennium?

David Aikman

The global financial crisis, now into its second month as a factor in everyone’s consciousness, has done more than change the dynamics of the current U.S. presidential election. In the U.S. it has shifted the balance, even if only slightly, to Senator Barack Obama. This is because Democratic politicians are generally associated with big government, and many Americans at a time of national financial anxiety instinctively feel that the best thing that can bail them out of trouble is government. But globally, there may be a far more important tectonic shift taking place. This is the sense that global economic leadership may now be transferring itself to the European Union, the 27-member economic confederation of European states.

Europe has emerged from the crisis as the big player on the global financial block. Its economic emergency guarantee to the continent’s banks—$2.25 trillion—dwarfed the $700 billion that the U.S. Treasury Department asked of Congress a few weeks ago. More significantly, French president Nicholas Sarkozy, whose country holds the chairmanship of the EU’s Council of Ministers until the end of the year, has not only been the most active international leader addressing the crisis, he has also been the most outspoken. After a two-day meeting of EU leaders in Europe, Sarkozy made it plain that a major reorganization of the entire global financial way of conducting itself was now necessary. “We do not have the right to miss this opportunity to reconstructing our system of finance in the 21st century,” he said.

Having made that statement, he and EU Commissioner Jose Manuel Barroso of Spain departed for the U.S. and a weekend conference with President Bush at Camp David. Just to underline Europe’s new assertiveness, Barroso told reporters, “Europe is leading a global response” to the crisis. The White House tried to back away, with President Bush indicating before the meeting with Sarkozy and Barroso that he didn’t favor any imminent Bretton Woods-style international financial meeting. But as the meeting ended on Saturday, the U.S. had caved in: President Bush said he would host the conference. It may take place as early as in December, after the U.S. election. Sarkozy very much wants the president-elect, whoever he is, to attend.

The notion of a global conference of the world’s rich nations coming together to decide new rules for international trade and finance inevitably calls to mind Bretton Woods. That meeting of delegates from 44 allied nations in New Hampshire in July 1944 led to the formation of the World Bank and the International Monetary Fund and the basic rules for international trade. At the time, the U.S. called almost all the shots in the global financial community, since it was the only country to emerge from World War II with enormous prosperity (it held half the world’s reserves). By insisting on repayment in gold from debtor European nations it was able to dominate the world’s gold reserves. The dollar was pegged to gold and became the global reserve currency for the next two and a half decades.

LBJ’s insistence on waging simultaneously the Vietnam War and the War on Poverty without a significant increase in taxes led both to the first U.S. deficit in the twentieth century and to a flight from the U.S. dollar. In 1971, without consulting the State Department or any foreign power, President Nixon unilaterally took the U.S. dollar off the gold standard in an effort to reduce the flight. It didn’t work, but revaluations of major currencies at the end of 1971 at least removed the uncertainties of international trade caused by Nixon’s slap in the face to dollar-gold convertibility. It’s hard to remember today that dollar-gold convertibility had been a cornerstone of Bretton Woods, because none of the planners wanted to see a repetition of the currency battles of the 1930s in the wake of the Great Depression.

Any twenty-first century Bretton Woods would have to take account of vast changes in the relative economic power of the world’s nations. No one could have conceived in 1944 of the emergence of China as the world’s number-one manufacturing nation, or as the world’s wealthiest nation in terms of reserves. Few could have imagined that the GDP of the 27-member European Union (total population 494 million) would be of the order of $16 trillion, higher than the U.S.’s figure of $13 trillion. As for India and Brazil, rising economic superpowers, at Bretton Woods in 1944 India was still a British colony and Brazil was nowhere on the map of global economic powers.

The real difference between any twenty-first century Bretton Woods and the original one will be the drastic relative global economic decline of the U.S.. Even though all of the 44 original Bretton Woods delegations favored liberal capitalism (the Soviet Union declined to participate), it was a capitalism of Anglo-American design, with minimal government intervention. Today, France is leading the charge for a new global financial structure, and the French have always favored a tighter government hand on the economy. Listen to President Sarkozy late last week: “Together we need to rebuild a capitalism that is more respectful to man, more respectful to the planet, more respectful to future generations, and be finished with a capitalism obsessed by the frantic search for short-term profit.” Message to Washington: the days of hotshot Wall Street tycoons cowboying toxic loan packages into the international financial arena are gone forever. Nor is the lecturing limited to the French. Britain’s Prime Minister Gordon Brown, the former Chancellor of the Exchequer who is credited with engineering the British bank bailout that became a model for the European Union, said that he wanted the world’s thirty biggest financial institutions to be monitored by some new international financial entity.

The coincidence of the current global economic collapse with the end of a two-term U.S. administration that has been unpopular at home and abroad is unfortunate from the point of view of the U.S.’s ability to influence the twenty-first century Bretton Woods discussions. It is perhaps fortunate, however, that Europe’s current leader, Nicholas Sarkozy, genuinely likes America and apparently wishes this country well.

Though the U.S. has been chastened by the sub-prime mortgage and subsequent liquidity meltdown, capitalism will certainly survive. After all, it is about as natural as human nature itself. It remains the best system for creating and distributing wealth that the world has ever devised. After all, even the countries that a few decades ago were touting socialism have now adopted it. But a little humility about the way it is practiced, a little more common-sense prudence by its American practitioners, no matter how talented they are, might not be a bad thing.  

Dr. Aikman, a Senior Fellow of the Trinity Forum, was for many years senior correspondent for Time.

1 Responses (comments are closed) • Columns, David Aikman, Business, Global Culture, Leadership, Tue 21 Oct 2008