What is “Bretton Woods” ? Bretton Woods was one of the most important parts of global monetary policy and United States history. Before the first Bretton Woods, in short, Nations had their own money, Had control of their own supply of money, And a nation’s currency was valued based on the amount of gold they had pegged to their currency. Over time, the United States had the highest gold reserves amongst the other countries due to mining and other deals with other countries. Finally, The US Dollar has become the strongest currency. The Bretton Woods Agreement resulted in countries pegging their currencies to the U.S. dollar. In turn, the dollar was pegged to the price of gold, and the U.S. became dominant in the world economy.
The Implications For Deflation
The global elite, predictably, will not let a crisis go to waste.
Back in 1995, as the golfing world was starting to notice the birth of a superstar, the British golfer Sandy Lyle was asked a question by a journalist. “What do you think of Tiger Woods?” was the query. To which Lyle genuinely replied, “I don’t know, I’ve never played there.”
Bretton Woods, a picturesque resort in the state of New Hampshire, does have a golf course, but it is most famous for the 1944 conference at which the international financial order was decided as World War II drew to a close. The Bretton Woods System of international finance, which created the International Monetary Fund (IMF) at its core, lasted only two and a half decades before it blew up, the death knell being when U.S. President Nixon stopped the convertibility between U.S. dollars and Gold in 1971. Since then, monetary inflation has raged throughout the developed world and beyond, creating the biggest debt bubble in the history of humanity.
But just as the 1944 agreement emerged from a global crisis, there are signs that the current crisis might cause another new world order to be born. This speech last week from Kristalina Georgieva, the current IMF Managing Director, titled “A New Bretton Woods Moment,” could be a clue that once the dust settles from 2020’s health and economic crisis, the powers that be might be thinking about a new way of doing things. What might be considered and what will it mean?
Taking it at face value, one might be inclined to think that the IMF wants to move back to a Bretton Woods type of system. Under that process, exchange rates were fixed as was the U.S. dollar to Gold. But hold on: that system proved to be way too much of a constraint for countries, resulting in its demise and the monetary inflation-fest of the past 50 years, as encapsulated in the chart below, accelerating the trend of currency debasement ever since the Federal Reserve was created in 1913. Would countries like the U.S., hopelessly addicted to money creation and debt, agree to such an inflation straitjacket? I don’t think so. If, incredibly, a system like that was agreed to, perhaps with gold having a link again, monetary deflation would become commonplace as countries could not just print money willy-nilly.
But, as Baldrick used to say to Blackadder, someone might have a cunning plan.
John Maynard Keynes, the celebrated British economist, was one of the main architects of the Bretton Woods System. However, his initial plan was rejected. What he had first wanted was that the IMF simply invents a currency for accounting purposes, and he gave it the name Bancor. The idea was that global economic imbalances could all be smoothed out via individual countries borrowing and lending Bancor via the IMF. Rather than having an inbuilt constraint, though, as the final Bretton Woods Agreement did, Keynes’s plan was that there would always be enough Bancor to grease the wheels of global trade and finance, because the IMF would simply create it out of thin air. Essentially, Keynes wanted a global central bank with the ability to print as much “money” as it wanted.
That might be a neat conclusion to the past 50 years of monetary insanity, but the implications for individual countries are unclear. Taking the broad view, though, should something like Bancor or any other monetary system that involves international co-operation develop, the inevitable loss of control of sovereign central banks will probably point to less monetary inflation, not more. (From a socionomic point of view, the possibility of international co-operation at this juncture if our bearish stock market Elliott wave thesis is correct is a pipe dream, but that’s for another story).
Whatever happens to the global financial architecture in the next few years, it certainly is beginning to feel like major change is coming. Stay tuned to EWI and deflation.com to take advantage of that change.
IMFS “New Bretton Woods Moment 2020”
1. Introduction: ‘A sisterhood and brotherhood of humanity’
I first want to thank Dr. Ernest Kwamina Addison for his excellent remarks and contributions as Chairman of the IMF’s Board of Governors.
Reflecting on the dramatic change in the world over the last year, I paid a visit to the Bretton Woods, New Hampshire, where 44 men signed our Articles of Agreement in 1944. Our founders faced two massive tasks: to deal with the immediate devastation caused by the War; and to lay the foundation for a more peaceful and prosperous postwar world.
At the conclusion of the conference John Maynard Keynes captured the significance of international cooperation as hope for the world. “If we can continue…The brotherhood of man will have become more than a phrase”, he said.
As we look forward to welcoming Andorra as our 190th member, the work of the IMF is testament to the values of cooperation and solidarity on which a sisterhood and brotherhood of humanity is built.
Today we face a new Bretton Woods “moment.” A pandemic that has already cost more than a million lives. An economic calamity that will make the world economy 4.4 % smaller this year and strip an estimated $11 trillion of output by next year.And untold human desperation in the face of huge disruption and rising poverty for the first time in decades.
Once again, we face two massive tasks: to fight the crisis today— and build a better tomorrow.
We know what action must be taken right now. A durable economic recovery is only possible if we beat the pandemic. Health measures must remain a priority—I urge you to support production and distribution of effective therapies and vaccines to ensure that all countries have access.
I also urge you to continue support for workers and businesses until a durable exit from the health crisis.
We have seen global fiscal actions of $12 trillion. Major central banks have expanded balance sheets by $7.5 trillion. These synchronized measures have prevented the destructive macro-financial feedback we saw in previous crises.
But almost all countries are still hurting, especially emerging market and developing economies. And while the global banking system entered the crisis with high capital and liquidity buffers, there is a weak tail of banks in many in emerging markets. We must take measures to prevent the build-up of financial risks over the medium term.
We face what I have called a Long Ascent for the global economy: a climb that will be difficult, uneven, uncertain—and prone to setbacks.
But it is a climb up. And we will have a chance to address some persistent problems — low productivity, slow growth, high inequalities, a looming climate crisis. We can do better than build back the pre-pandemic world – we can build forward to a world that is more resilient, sustainable, and inclusive.
We must seize thisnew Bretton Woods moment.
2. Building Forward: Three Imperatives
How? I see three imperatives:
First, the right economic policies. What was true at Bretton Woods remains true today. Prudent macroeconomic policies and strong institutions are critical for growth, jobs, and improved living standards.
One size does not fit all—policies must be tailored to individual country needs. Support remains essential for some time—withdrawing it too early risks grave and unwarranted economic harm. The stage of the crisis will determine the appropriate shape of this support, generally broader early on and more targeted as countries begin to recover.
Strong medium-term frameworks for monetary, fiscal and financial policies, as well as reforms to boost trade, competitiveness and productivity can help create confidence for policy action now while building much-needed resilience for the future.
That includes keeping a careful watch on risks presented by elevated public debt. We expect 2021 debt levels to go up significantly – to around 125 percent of GDP in advanced economies, 65 percent of GDP in emerging markets; and 50 percent of GDP in low-income countries.
The Fund is providing debt relief to its poorest members and, with the World Bank, we support extension by the G20 of the Debt Service Suspension Initiative.
Beyond this, where debt is unsustainable, it should be restructured without delay. We should move towards greater debt transparency and enhanced creditor coordination. I am encouraged by G20 discussions on a Common framework for Sovereign Debt Resolution as well as on our call for improving the architecture for sovereign debt resolution, including private sector participation.
We are there for our member countries—supporting their policies.
And policies must be for people —my second imperative.
To reap the full benefits of sound economic policy, we must invest more in people. That means protecting the vulnerable. It also means boosting human and physical capital to underpin growth and resilience.
COVID19 has underscored the importance of strong health systems.
Rising inequality and rapid technological change demand strong education and training systems—to increase opportunity and reduce disparities.
Accelerating gender equality can be a global game-changer. For the most unequal countries, closing the gender gap could increase GDP by an average of 35 percent.
And investing in our young people is investing in our future. They need access to health and education, and also access to the internet—because that gives them access to the digital economy – so critical for growth and development in the future.
Expanding internet access in Sub Saharan Africa by 10 percent of the population could increase real per capita GDP growth by as much as 4 percentage points.
Digitalization also helps with financial inclusion as a powerful tool to help overcome poverty.
Just as the pandemic has shown that we can no longer ignore health precautions, we can no longer afford to ignore climate change—my third imperative.
We focus on climate change because it is macro-critical, posing profound threats to growth and prosperity. It is also people-critical and planet-critical.
In the last decade, direct damage from climate-related disasters adds up to around $1.3 trillion. If we don’t like this health crisis, we will not like the climate crisis one iota.
Our research shows that, with the right mix of green investment and higher carbon prices, we can steer toward zero emissions by 2050 and help create millions of new jobs.
We have an historic opportunity to build a greener world—also a more prosperous and job-rich one. With low interest rates, the right investments today can yield a quadruple dividend tomorrow: avert future losses, spur economic gains, save lives and deliver social and environmental benefits for everyone.
3. The IMF’s Role
At the Fund, we are working tirelessly to support a durable recovery— and a resilient future as countries adapt to structural transformations brought on by climate change, digital acceleration and the rise of the knowledge economy.
Since the pandemic began, we have committed over $100 billion—and we still have substantial resources from our $1 trillion in lending capacity.
We will continue to pay special attention to the urgent needs of emerging markets and low-income countries—especially small and fragile states, helping them to pay doctors and nurses and protect the most vulnerable people and parts of their economies.
Our unprecedented action was only possible thanks to our members’ generous support. The doubling of the New Arrangements to Borrow and a new round of bilateral borrowing arrangements preserves this financial firepower. Members have also stepped up with essential contributions to our Catastrophe Containment – and Relief and Poverty Reduction and Growth—Trusts.
This has allowed us to support our low-income members with debt relief and to triple our concessional lending. We are engaging with members to further boost our concessional lending capacity adapt our lending toolkit and increase support for capacity development.
IMF staff, working day and night, have been magnificent in this crisis. My sincere thanks to them and my Management team.
My deep appreciation also to our Executive Directors – they have been there every step of the way over the past six months.