World Economy
Reforming the Bretton Woods System: The Main Ways

In 1944, the Bretton Woods System was de facto created by two states (the United States and Britain), which at that time had the authority and resources to impose their will on four dozen states that were guided by them during the world war. Today there is no state or group of countries on the planet capable of imposing its will on the entire world community. A new or radically reformed Bretton Woods, of course, should take into account the opinion of all the states of the planet, regardless of their size. The solution of such a problem through negotiations will last for many years, while the likelihood of success will be minimal, writes Valdai Club expert Stanislav Tkachenko.

In his speech at the SPIEF-2022 on June 16, 2022, Alexei Miller, the head of Gazprom, repeated several times: “The Bretton Woods-2 system is fading before our eyes.” He called this process fundamental, classifying it as one of the main drivers guiding the development of modern world energy and the entire global economy into an unknown future. Can we consider this position an exaggeration?

The Bretton Woods system arose at the final stage of the Second World War (1944) as a result of negotiations between 44 states, led by the United States and Britain. The purpose of its creation was to prevent future fatal mistakes in the management of trade and finance, like those made in most countries in the 1930s, which paved the way for the Great Depression and the most destructive war in human history. The two key Bretton Woods institutions were the International Monetary Fund (mission — currency stability and convertibility) and the World Bank (assistance in the reconstruction of war-torn states, as well as assistance to countries embarking on the path of decolonization).

It is unlikely that in the second half of the last century there were international institutions studied by experts from various scientific disciplines in more detail than the IMF and the World Bank with their numerous subsidiaries. The history of the Bretton Woods System can be split into two stages. The first period (1945 — early 1970s) was characterised by a rigid fixing of the price of gold in US dollars and fixed (but open to change in an emergency), US dollar exchange rates for other currencies. This period also coincides with the most acute phase of the Cold War and a period of unprecedented rates of economic growth throughout the world, including in all MENA countries.

The second period (from the beginning of the 1970s to the present), which Miller calls “Bretton Woods-2”, was characterised by the US refusal to convert dollars for gold at the official rate and the introduction of a free float regime, in which the exchange rates of all national currencies were determined by the market. In 1973, through the efforts of Henry Kissinger, the United States concluded a secret deal with Saudi Arabia, according to which oil prices continued to be fixed and sold only in dollars, which the whole world had to buy from the United States in order to pay for oil purchased from OPEC countries. In response, Washington agreed to the placement of petrodollars in American banks in unlimited volumes and their free investment in the US economy, as well as the provision of American security guarantees to the oil-producing states of the Persian Gulf (deployment of large military bases in the region). Thus, oil replaced gold as a kind of security for US dollars, guaranteeing a stable and ever-increasing demand for US currency as the world economy grew.

The first period of the history of the Bretton Woods System lasted a quarter of a century, and the second lasted twice as long. The stability of the system of petrodollars and the regime of free floating of currencies was ensured by the events that unfolded in the 1980s, as well as financial globalisation. The latter increased the demand for US dollars, as well as the triumphant end of the Cold War for the United States. This led to the “unipolar moment”, when Washington’s opponents in the international arena disappeared for a short period. However, the decline in the competitiveness of the US economy, the rapid growth of the Asian states, the difficulties in the war on international terrorism, as well as the growing confrontation with China and Russia at the beginning of the new century, made the subject of the inevitable dismantling of Bretton Woods 2 extremely popular. This issue has been discussed especially acutely during periods of turmoil in world markets. Thus, in the midst of the global financial crisis that began in 2007, French President Nicolas Sarkozy in October 2008 called for the dissolution of the Bretton Woods institutions and the creation of something new and more effective in their place. However, after the crisis was overcome, this call, like many others, was forgotten. Today we are witnessing another wave of interest in reforming Bretton Woods 2, and perhaps this time it will be possible to move from words to deeds.

Let us single out several main approaches that dominate the modern discussion about reforming Bretton Woods 2.

Bretton Woods at 75
Alan W. Cafruny
One lesson from Bretton Woods is the historically close association of hegemony with international monetary stability, a thesis that, not surprisingly, has been virtually axiomatic among U.S. scholars ever since the early 1970s. Notwithstanding the rhetoric, post-war cooperation was based on U.S. power and preferences.

Technocratic approach

Its supporters, representing the structures of the UN and other international organizations, believe that the system should be preserved, correcting only the forms of organisation of work and adapting the system management structure to modern realities. They recognise the situation as abnormal when the US and China, which are approximately equal in their economic power, have different rights when making decisions in the current Bretton Woods system: 16 percent for the US versus 6 percent for China. Also criticised is the position in which the G7 countries, which account for about 30 percent of world production, have more than 40 percent of the vote in the IMF. Technocrats also acknowledge that the distribution of leadership positions in the structures of the Bretton Woods System along national lines (the IMF is headed by a representative of Western Europe, and the World Bank by an American) should also be reconsidered. They call for an increase in the influence of developing economies in the structures of the modern Bretton Woods System. Additionally, they argue that when making decisions, the principle of “double majority” that has gained popularity in the European Union be used, as it takes into account not only the number of states voting in support of a particular decision, but also the number of people living in them. In our opinion, the changes proposed by the technocrats in the system should be recognised as insignificant, since they do not affect the mission of the modern Bretton Woods System and do not challenge its dominance by the United States.

Liberal approach

During the period when Christine Lagarde held the post of Managing Director of the IMF (2011-2019), an attempt was made to widely introduce issues of the liberal agenda into the activities of the Bretton Woods institutions. During this period, gender equality, sustainable development, the fight against climate change and socio-economic inequality in all its manifestations were recognised as new priorities in the work of the Bretton Woods System.

Liberals today call for the system to be reformed to create a new system of macroeconomic management at the global level. The elements of this would be: 1) effective mechanisms for the consultation, implementation and supervision of macroeconomic policy at the national level, 2) the creation of mechanisms for providing financial assistance at the initial stage of crises, and not at a time when they showed their destructive power; 3) the creation of a system for repayment by states of their debt obligations, similar to that used in the bankruptcy of private companies; 4) the standardization of prudential standards for financial risk management, as well as banking supervision and financial reporting. In essence, this is about replacing the Washington Consensus policy, which has caused a wave of sharp criticism, with the even more liberal policy of the Wall Street Consensus, which implies an increased role of private finance and the market instruments they use in providing assistance to developing countries.

Neo-Marxist approach

Supporters of this approach sharply criticise the structures of the Bretton Woods System for their adherence to the ultra-liberal “Washington Consensus” and the practice of “conditionality”, i. e. putting forward political conditions when issuing credit to the countries of the Global South. They call on the IMF and the World Bank to return to Keynesianism on a global scale; to redistribute the incomes of the countries of the North in favour of working people and the poorest citizens of developing countries. Among the proposed practical recommendations, we highlight the following: 1) transforming the IMF into a full-fledged World Central Bank that issues a global currency and ensures its stable exchange rate against national currencies; 2) transformation of the World Bank into a fund that will withdraw excess profits from the richest countries on the planet (USA, Japan, Germany, the Persian Gulf countries) and redistribute them among the countries of the Global South to achieve development goals; 3) the creation of a fundamentally new International Trade Organisation to replace the WTO, which will not follow the lead of developed countries, helping them protect their domestic markets with non-protectionist policies, and in practice achieves the opening of the markets of the countries of the North to goods from the poorest countries of the planet. In modern conditions, these proposals look completely unrealistic, but this does not stop the neo-Marxists.

Construction of a parallel “Anti-Bretton Woods”

This approach, from our point of view, has not yet been formalised, but over time, China, Russia, and with them other BRICS states as an international forum with claims to certain functions of an intergovernmental organisation are increasingly inclined towards establishing it. For more than a decade, the BRICS countries have been growing in numbers and in key economic indicators; the countries’ leaders have expressed their readiness to accept the largest economies of Latin America, the Middle East, Southeast Asia and the CIS into their ranks. The essence of this approach lies in the desire not to destroy Bretton Woods system, but to build in parallel with it a system of institutions with similar functions, but closed to the United States and its satellites from among the G7 member countries. To date, an analogue of the IMF (Pool of Conditional Foreign Exchange Reserves) has already been formed and an extensive network of development assistance institutions is being formed (the New Development Bank, the Asian Infrastructure Investment Bank, as well as loans as part of China’s One Belt, One Road initiative).

Beijing, as well as Moscow, is well aware that in the long run, cooperation with Washington within the framework of multilateral institutions becomes impossible.

Our “crumbling world” is in dire need of a minimum degree of stability in this transitional period of its history. Therefore, the reproduction by the BRICS countries, as a new pole of the political and economic architecture of the planet, of individual elements of the Bretton Woods System, which proved to be quite good during the Cold War, is both a reasonable step and long overdue.

In conclusion, we note that it is always easier to create a new system from scratch than to repair an existing one. The system is almost 80 years old, and has enjoyed a glorious chapter of history, so there are not many politicians in the world who can take the initiative to destroy the old Bretton Woods and build a new one atop its ruins. We also know from the history of the last century that it is easier to create a system that unites only allies than a global system in which it is necessary to find a balance of interests among all parties. Therefore, the idea of ​​uniting the United States, China and Russia within the framework of an innovative global financial and development management system looks like an incredible utopia.

In 1944, the Bretton Woods System was de facto created by two states (the United States and Britain), which at that time had the authority and resources to impose their will on four dozen states that were guided by them during the world war. Today there is no state or group of countries on the planet capable of imposing its will on the entire world community. A new or radically reformed Bretton Woods, of course, should take into account the opinion of all the states of the planet, regardless of their size. The solution of such a problem through negotiations will last for many years, while the likelihood of success will be minimal.

Turn-of-the-century globalisation has undermined the economic power and political influence of national governments, without simultaneously creating effective structures of international cooperation and supranational governance. They must be able to withstand turmoil in the commodity and financial markets, as well as the threats of illegal migration, international crime, drug trafficking, weapons and counterfeit goods. The main task of the new Bretton Woods is to solve the development problems faced by the states of the Global South. If a global format for its solution within the framework of the UN and the current institutions of the Bretton Woods is not found, space will open up for more local, but at the same time more egalitarian structures formed by the BRICS and other centres of the emerging multipolar system.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.