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Reassessing Bretton Woods, and the Supremacy of the Dollar

Sunday, September 07, 2014
Bretton Woods, N.H. — Seventy years ago, in this tiny White Mountains resort community, the world’s financial gurus gave birth to a new international system, including creation of the World Bank and International Monetary Fund, designed to avert another Great Depression and pave the way for sustained, non-inflationary global growth and stability.

In July 1944, while World War II still raged, 730 delegates from 44 Allied countries showed up at the Mount Washington Hotel via trains through White River Junction from Boston and New York. They stayed for three weeks.

On Wednesday and Thursday, a new generation of international specialists, including a couple of the original attendees’ relatives, gathered at the same sprawling hotel, with its gleaming red roofs set against the Presidential Range, to reassess the results of those 1944 decisions, particularly in light of the catastrophe that wasn’t supposed to happen—the 2008-09 subprime housing mortgage bust and the global financial meltdown, effects of which are still rippling through the world economy.

The conference, sponsored by the Center for Financial Stability, a New York think tank, attracted more than 100 participants — academicians, bankers, financial leaders, government and central bank officials, representatives of the World Bank and IMF, and one expert from Hanover — Robert Aliber, emeritus professor of international finance at the University of Chicago.

Although the venue was the same, much has changed since the original Bretton Woods conclave. In those days, this report would have been pounded out on a manual typewriter, not a computer. China was a feeble, war-torn country, not the world’s No. 2 economy, holding the bulk of United States debt. (However, Chinese representatives at the 1944 meeting were reported to be the biggest tippers, doling out new American quarters to hotel staff and Boy Scouts from Littleton, who volunteered as message carriers.) Economic and financial globalization was a distant phenomenon and the U.S. dollar was king.

The dollar’s status and future as a reserve currency dominated much of last week’s discussion amid concerns that this country and other affluent economies may be caught in an episode of “secular stagnation.” This term, coined by American economist Alvin Hansen in the 1930s, refers to a persistent tendency for a national economy, or a group of them, not only to grow slowly but also fail to fully use productive potential.

“There are signs lately of growing disaffection with the United States dollar,” said Yves-Andre Istel, former vice chairman of Rothschild Inc., a global financial advisory firm. His father was a French delegate to the first Bretton Woods conference. This provoked discussion about causes of the disaffection and possible stronger replacements for the dollar, such as China’s renminbi or an updated version of the IMF’s Special Drawing Rights (known as SDRs, a basket of currencies.)

Ronald McKinnon, professor of international economics at Stanford, suggested that the dollar and renminbi might serve in a dual reserve currency role. However, this was dismissed by Yongding Yu, former member of the monetary policy committee of the People’s Bank of China. He argued that while the renminbi and the Chinese economy are strong, China has yet to develop the kind of sophisticated financial management system essential to support a viable reserve currency. “That will take a very long time,” he said.

Istel emphasized another factor. “Throughout history, strong currencies … reserve currencies, have been associated with countries that have strong military capacity, like the United Kingdom” in the late 19th and early 20th centuries, he said. “That provides a critical element of strength and trust.”

In the end something of a consensus emerged: For the immediate future, the dollar will remain the preferred global reserve currency. Eventually, however, a new mechanism will arise involving the dollar, the euro and currencies of smaller countries like Canada as well as leading emerging economies. No one was willing to predict more precisely what that mechanism might look like.

Aliber, author of several books about financial crises, participated in a panel about how to better anticipate and manage future crises. “A banking crisis is a predictable event rather than an act of god or a random event,” he said in an interview. “Each crisis is (usually) preceded by an economic boom, which is associated with a surge in the indebtedness of a group of borrowers in a country, often in real estate. The trigger for a crisis is an event that leads lenders to become more cautious in extending credit to indebted borrowers.”

Aliber argued that to reduce the likelihood and severity of future banking crises, “international monetary arrangements (should be) redesigned to reflect insights of the last 50 or 70 years. … Although computers now trade currencies with computers, algorithms have not yet been developed to the point where the parties (are able to get a better view of) the end game.” In the case of crises like that of 2008-09, he said, central banks must provide “unlimited liquidity” and governments “need to commit to re-capitalize failing banks.”

The future of the World Bank was discussed in another panel with three former senior officials of that institution, whose president is Jim Yong Kim, former Dartmouth College president. All agreed that the bank must change the way it operates significantly if it is to remain relevant.

“It can no longer be an aid agency to poor countries,” said Nancy Birdsall, now president of the Center for Global Development in Washington, D.C. “It needs to develop more effective instruments to help countries address global problems, such as those arising from accelerated climate change.”

Franco Passacantando, former Italian executive director of the bank and now a board member of the European Investment Bank, agreed.

“To remain relevant, the bank will have to strengthen or rebuild its reputation as the leading development institution since it will no longer enjoy the monopoly it had for many years,” he said.

Now retired, Hanover resident Tom Blinkhorn served as a staff member-manager with the World Bank for 30 years, working on development problems in Africa, India and countries of the former Soviet Union.

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