Seven-nine years ago, world leaders gathered to discuss, plan and build the world's economic future. Seven hundred thirty delegates from 44 nations allied with the United States met in that country for the 21-day event. History records it as the Bretton Woods Conference. Its impacts manifest still today.
Bretton Woods participants all agreed that the world needed a unifying currency for international trade. They also needed agencies to oversee and regulate global trading practices. As most delegates' countries would need to rebuild after the Second World War, they proposed an institution to distribute reconstruction and development funds.
Today, we know these institutions as the International Monetary Fund (IMF) and the World Bank. The World Bank is, in fact, a group of five different organisations, two of which steer development funds and three that oversee investments. As for the unifying currency for international trade? The US dollar serves in that capacity but recent events make that less of a certainty, going forward.
We need to know why, and what lies beyond a USD-driven global economy. After all, the US dollar is the global reserve currency; which other could take its place? To draw as clear a picture as possible, we need to know:
- the Bretton Woods decisions and how they played out
- the World Bank and IMF's current structures and how they operate
- what these established economic entities might evolve into
- what a future global reserve currency might look like
Many who feel alarmed at the rise of the Chinese Yuan can take a deep breath. The Renminbi (RMB), another name for the Yuan, has no plan to dominate world markets. If the signs are right, the future of global trading is about to get far more impartial and balanced. Read on to find out more.
Bretton Woods Conference Highlights
The fighting was nowhere near finished on July 7 1944, the day the conference kicked off. It must have been a challenge to arrange safe passage for 730 people from various points around the globe as the Second World War raged on. That delegates from as far away as New Zealand and the Soviet Union attended testifies to this initiative's importance.
They didn't convene only to arrange post-war rebuilds and global economic security. Events leading up to the war were, in fact, their primary reason for meeting. During the period between the First and Second World Wars, these nations had revelled in the Roaring Twenties and crashed into the Great Depression. On top of that, trade wars had long been roiling participating nations' economies and they wanted that to stop.
They hoped to agree on a system of international trade and currency that every nation could benefit from and operate within. They needed some agency to help settle trade disputes and establish currency values and exchange rates. And they wanted a way to regulate inflation so that no nation would suffer the hyperinflation that pushed Germany into declaring war.
Bretton Woods delivered Articles of Agreement to establish the IMF to promote stability in financial transactions and exchange rates. Another Article of Agreement outlined the International Bank for Reconstruction and Development or IBRD to speed up reconstruction once the war ended. The IBRD would foster economic development as it lent funds to rebuild infrastructure. The third Article listed recommendations for further global cooperation.
Most people consider the conference's Final Act the most important. It specified a foreign exchange market rate system pinned to the value of gold, in the form of the US dollar. Members pledged convertibility, namely that their currencies will convert for trade-related transactions. Should exchange rates not favour a country's balance of payments, each country could exercise their 10% margin to revise the rates.
For delegates to become IBRD members, they had to become IMF members. And all member countries had to commit to funding and accepting IMF funds. For both institutions, the more capital a nation offered up, the more voting power it got.
It's hard to say whether everyone was keen on that last point. Perhaps they only agreed because it was the only way to move things forward. No matter which way sentiments broke over that point, the agreement put the United States in the economic driver's seat for decades to come. It also set the stage for low-income countries' perpetual lack of global and economic power.
The IMF and World Bank History
The US was the only country not ravaged by war so it made sense to headquarter the World Bank and IMF there. Also, the US put up the most capital so they had the most voting power in all of the institutions' decisions. Traditionally and to this day, the World Bank president is American.
The World Bank had a rocky start. As the war was still ongoing, few countries had any funds to contribute. Also, the Bank's executive director didn't seem to get on with the Bank's president. There was a lot of infighting over leadership and how they should divide responsibilities. They must have worked things out because, soon, they approved funds disbursement under the US's Marshall Plan.
That initiative went into effect in 1947, giving European nations had the needed billions to spend on rebuilding their countries and economies. The IBRD made their first loan to France, rejecting loan applications from Poland and Chile. The loan was for half the amount requested and came with conditions.
Before receiving any funds, French leaders were to submit a budget that prioritised repaying the World Bank over other creditors. Also, the US government's foreign affairs office - the State Department suspected communists in the French government. So the US ordered the French to purge their government offices of anyone suspected of having communist sympathies. Within hours of French officers' compliance, the World Bank approved the loan.
Meanwhile, the IMF was trying to figure out which way to go. While still in the planning stages, British and American Bretton Wood participants couldn't agree on the fund's mission. Economist Maynard Keynes envisioned a money cooperative member states could draw on as needed. Harry White, from the US Treasury Department, wanted the fund to maximise its earning and enforcement capabilities.
The American view mostly won and was incorporated into the Articles of Agreement on those terms. Thus, the IMF works more like a bank that issues loans, collects interest and makes sure payments are made on time. It fostered a system of embedded liberalism that maximised human welfare and economic sovereignty for member nations. This system worked as designed until the US exerted its influence on those global governance institutions.
Global Reserve Currency Challenges
As mentioned earlier, all Bretton Woods delegates agreed to pin their currencies' values to the US dollar because the dollar had gold backing it. But then, in 1971, US President Nixon unilaterally abandoned the 'backed by gold' guarantee, though he didn't rescind the Bretton Woods agreement. Nations' currencies thus remain bound to the US dollar but it remains a fiat currency to this day.
What gives the US dollar its value, then - or, for that matter, any currency? These questions have grown into massive problems; bank failures and the 2008 financial meltdown make them more urgent. The US taking unilateral economic action against a non-compliant nation seems to have made the situation even worse.
A Possible Future for Global Finance and Economy
Finally, we circle back to China and introduce the other members of the BRICS alliance. In 2006, China, Russia, India and Brazil loosely promised to hold a summit while attending a UN Assembly conference. Three years later, those four leaders met to discuss global economics. They talked about the current global governance institutions and how they might band together to plug the gaps in existing systems.
A year later, South Africa came on board and this group, now called BRICS, began to make waves. They established their Development Bank in 2014 and each member country opened a branch in their land. Each nation ponied up an equal sum and pledged to double their investments. And then, they scouted around for projects.
Many see BRICS as an IMF and World Bank challenger but they're only looking at half the picture. Besides development, BRICS is exploring blockchain possibilities and working on a digital currency for international trade. Its value would tie into the global GDP; such a tool would eliminate the need for reserve currencies.
The current system disadvantages poorer nations because they don't have the funds to invest in any reserves. They may not have the resources to meet World Bank and IMF commitments before securing any loans. Other mandates those agencies impose may not suit the borrowing nation's culture or political climate. Those global governance agencies may ask for more than the country has or is willing to give.
By contrast, BRICS doesn't mandate changing government structures or policies as conditions. Nor do they insist on punishing interest payments, and they don't seize assets if a nation can't repay its debts. China, the BRICS alliance's largest economy, has already forgiven millions worth of loans made through its Belt and Road Initiative. There's no reason to believe BRICS will act any differently.
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