Wed, May 22, 2019
Joerg Bibow is Professor of Economics at Skidmore College and a Research Associate at the Levy Institute at Bard College. His research focuses on central banking and financial systems and the effects of monetary policy on economic performance, especially the monetary policies of the Bundesbank and the European Central Bank. This blog post is a submission to the Bretton Woods@75 initiative: a global dialogue to honor 75 years of economic progress and to revitalize the spirit of Bretton Woods now and for the future.
Trade relations are at the center of adversarial conduct today. As referee and safeguard of an order that features equal rights and obligations for all its members, the WTO is the pillar of the Bretton Woods architecture most under attack. It is widely ignored that trade relations are intricately intertwined with monetary and financial relations. While the global trade order is somewhat equitable, the international order of money and finance is hegemonic in practice if not by design.
The core-periphery relationship in global money and finance features the U.S. dollar as the king of currencies and U.S. finance as the foremost global powerhouse. This stark asymmetry in monetary and financial relations between the US and the rest of the world was at display in the global crisis: U.S. finance was at the very center of that crisis, but the U.S. dollar “safe haven” appreciated, and the U.S. authorities were free to implement expansionary macroeconomic policies. Peripheral countries routinely experience the very opposite under acute crisis conditions, even crises that largely owe to external events. In response to their heightened vulnerabilities under globalized finance, securing competitiveness and accumulating huge U.S. dollar reserves have become policy priorities across the periphery. Having lost their freedom to apply macroeconomic policies in line with domestic conditions, this ability to accumulate dollar reserves is a defense that provides the periphery with some protection against global factors otherwise beyond their control.
For the core, on the other hand, hegemony in monetary and financial relations comes with both upsides and downsides. Freedom to apply macroeconomic policies is one key benefit. Another benefit is the ability to fund the acquisition of high-yielding foreign assets with low-yielding reserve assets. These benefits are not necessarily spread equitably across the U.S. and among U.S. constituencies. Nor are the downsides, which are primarily felt in traded-goods industries competing under a notoriously overvalued currency. Globalization has indeed been a factor behind rising inequalities in the U.S. – but in more complex ways than is usually acknowledged.
Rising inequalities are behind the rise in U.S. populism and nationalism, which, in turn, inspires the “America first” adversarial approach to trade relations that appears to aim at (bilaterally) balancing U.S. merchandise trade. Trade is only one side of the global U.S. dollar coin, finance the other. The periphery’s rational response to U.S. trade protectionism is financial protectionism and reduced dependency on the U.S. dollar. Exclusively focusing on trade relations while ignoring the financial side in international relations will likely result in more conflict and further erosion of the global Bretton Woods order.
An alternative Bretton Woods design was proposed by the British side, masterminded by John Maynard Keynes. Key to Keynes’ alternative design was the idea of creating a symmetric global monetary order that had no hegemon, no national currency that also serves as international money. Instead, a new global currency (“bancor”) was to provide the common anchor for national currency pegs. The IMF would provide bancor liquidity to bridge over any temporary trade imbalances. But to rule out persistent (multilateral) trade imbalances, a common set of rules would apply to all members alike designed to assure symmetric adjustment of both surplus and deficit countries. Rule-based exchange rate adjustments rather than discretionary tariffs would be the primary tool to maintain global balance. Finance was to be national rather than international in this alternative global economic order. The rule-based global monetary order was to be paired up with the containment rather than liberalization of global finance. This containment was seen as crucial for enabling all members to apply macroeconomic policies to stabilize their economies. Greater macroeconomic policy space also enlarges members’ scope for policies targeting more inclusive growth.
In this alternative global economic order, no hegemon would enjoy the benefits that the current global monetary and financial order bestow on the U.S. But the U.S. would also no longer suffer the downsides – yielding the poisonous fruits of populism and nationalism. Distributional outcomes would be different even without any changes to internal policies. As a rich country, failure to apply suitable internal policies is a political choice, anyway.
Instead of getting stuck on the current confrontational path, leaders need to revert to a course of constructive reform and explore alternatives. Has globalization gone too far in undermining nations’ capacity to meet first-order national social and economic challenges and priorities? If so, Keynes’ vision of 75 years ago delineates a viable alternative – an alternative that seems far superior to the current path of adversarial nationalistic pursuits.