Rethinking Bretton Woods | Tue, Nov 30, 2010
The Seoul Summit, held in November 11-12, 2010, gave only a very timid nod to the reform of the international monetary system, this article argues. There can be little doubt that the unique confluence of forces in 2011 and the years to follow represents the most favorable political environment to reexamine and set the basis for a renewed monetary system that the world has seen in the last 40 years. Whether those favorable factors will be enough to actually yield tangible reform, remains to be seen.
The Seoul Summit, held in November 11-12, 2010, gave only a very timid nod to the reform of the international monetary system.
Given the amount of attention that so-called “currency wars” received in the lead up to the Summit, and the known fact that the government of France, which will host both the G8 and G20 Summits next year, has decided to make reform of the monetary system its number one priority, one would have expected otherwise. In fact, these were just the most recent events in a long string that started when the Governor of the Chinese Central Bank, Mr. Zhou, made a speech on the subject in March 2009. Since then, among other things, a Commission of Experts chaired by economics Nobel Prize winner Joseph Stiglitz recommended significant reforms, a World Conference held at the UN did the same, and reputed private sector researchers and think tanks have ventured their own reform proposals, such as McKinsey Global Institute or Goldman Sachs.
Even in the country that issues the main reserve currency there seems to be a growing perception that such role does no longer entail unqualified benefits –if it ever has. The reactions to the US decision to launch a second round of quantitative easing vividly illustrate the conundrums that a country whose currency is used as main reserve and trading asset is bound to face. The Fed’s decision triggered complaints from all corners of the world. The well-justified fear is that the finance being injected in the system will find its way to emerging markets –where yields are higher-- and commodity assets. Countries with large stocks of US dollar reserves fear the devaluation of the currency that will affect the purchasing power of their reserves. But, let us face it, taking the opposite route would have earned the US an equal or worse backlash. For, with the European Union out of the business of providing demand, due to the – forced or voluntary –austerity measures, the burden of stimulating the global economy falls even more strongly on the US. So, had not the US done what it did, or had it chosen an austerity route, the contractionary effects would have been devastating for the rest of the world.
It is true that seeing this as a Manichean choice between doing or not doing quantitative easing is not fair to the richness of tools that the US government has at its disposal. A fiscal stimulus would have been more advisable. Measures to raise the real incomes of low- and average-income households via salary increases and cash transfers would be a more genuine way to generate demand. Or, as James Galbraith advised recently, a combination of public investment and private debt restructuring of household debts to increase the purchasing power of individuals. Even the QE2 that is being done, but accompanied by capital controls on outflows, would be a better way. But these other, more sensible avenues, are closed for political and ideological reasons.
Now, the conundrum the US faces is in line with what Triffin had predicted for the issuer of the currency that acts as primary reserve asset. Should a different monetary system be in place, there would be more choices open to all actors.
Anyway, one could not tell any of this from the laconic language in the Summit Document:
“Our goal is to build a more stable and resilient international monetary system. While the international monetary system has proved resilient, tensions and vulnerabilities are clearly apparent. We agreed to explore ways to further improve the international monetary system to ensure systemic stability in the global economy. We asked the IMF to deepen its work on all aspects of the international monetary system, including capital flow volatility. We look forward to reviewing further analysis and proposals over the next year.”
The work that the G20 is telling the IMF to deepen is work carried this year, in a paper discussed by the Board during the summer. In that paper the IMF tabled a number of proposals from both the demand and the supply angle of reserves. But, while the movement was encouraging, the paper had very little in terms of signaling a way forward.
In its conclusions the paper reports that “The current system has serious imperfections that feed and facilitate policies – of reserves accumulation and reserves creation – that are ultimately unsustainable and, until they are reversed, expose the system to risks and shocks that a reformed system could minimize.” At the same time it states that “it may well be that further exploration of alternatives lead to the conclusion that the current system, imperfect as it is, is the constrained optimum.“
This comes at the end of a paper that is highly descriptive and that covers pretty much all possible options, at least generically. On one extreme, the views of those who consider that the current monetary system is in no need for reform. On the other, the paper addresses the option of a fundamental overhaul, in the form of establishing a “Sui generis Global Currency” which the paper calls, in honor to Keynes, the bancor. Furthermore, it should be recalled this paper came in response to a request that did not look so different than the one made in Seoul.
Unfortunately, the discussion held at the Board, as publicly reported, did not yield much more direction than the paper. For instance, there does not seem to be consensus among the Directors about the shortcomings and the need for reform. Some Directors are reported as recognizing that “The unprecedented buildup of international reserves in recent years, with its concentration in a narrow set of currencies—though partly reflecting policy choices—points to systemic imperfections, such as the absence of automatic adjustment to imbalances, asymmetric adjustment to shocks, and uneven availability of international liquidity.” Others are reported as not seeing serious shortcomings in the currency system. If there is one thing the Directors did agree on was that the option of the Sui Generis Global Currency was “highly unrealistic at this stage, requiring considerably more debate on its merits and feasibility.”
This may mean little progress can be expected towards a renewal of the monetary system, in spite of the building pressure for action. It is possible this is, conversely, merely a indication of limitations inherent to the setting where the discussion was taking place.
There can be little doubt that the unique confluence of forces in 2011 and the years to follow represents the most favorable political environment to reexamine and set the basis for a renewed monetary system that the world has seen in the last 40 years. Whether those favorable factors will be enough to actually yield tangible reform, though, remains to be seen.
 Galbraith, James K. 2010. On the Economics of Deficits, in American Prospects Magazine, November 2010 Issue.
 Griffith Jones, Stephanie and Kevin Gallagher 2010. How the US Could Fix its QE2 Problem. The Guardian. November 18.
 A previous IMF Staff paper on the issue, not for Board discussion, had been prepared last year, and was the subject of our December 14,2009 update (commentary available at http://www.coc.org/node/6628).
 IMF 2010. Reserve Accumulation and International Monetary Stability. April 13.
 Ib., 28.
 Ib., 28.
 At the World Bank/ IMF Annual Meetings the IMFC called on the Fund to “study the policy options to promote long-term stability and the proper functioning of the international monetary system.” IMFC Communique of April 24, 2010.
 IMF 2010. IMF Discusses Reserves Accumulation and International Monetary Stability. Public Information Notice (PIN) No. 10/72. June 4.