A CHALLENGE TO BRETTON WOODS NOSTALGIA
- 30 Mar 2016
Returning to the Bretton Woods system of managing the global economy would not guarantee a solution to reserve accumulation and global imbalances; nor would it guarantee more autonomy for national economies. These are among the conclusions of new research that challenges nostalgia for the Bretton Woods period, a time when capital flows were controlled and when countries seemed isolated from global shocks and did not fear competitive devaluations.
In a study to be presented at the Economic History Society’s 2016 annual conference in Cambridge, Eric Monnet and Damien Puy show that:
First, gold was still at the centre of the system, and a fundamental confidence problem prevented the Bretton Woods system from working as a genuine dollar standard and led to over-accumulation of foreign reserves.
Second, there is no evidence that countries were more isolated from the world business cycle during the Bretton Woods period than during the subsequent period of globalisation.
At each international summit on economic or monetary affairs, it is common to hear the conclusion that ‘we need a new Bretton Woods!’ In the wake of the recent financial crisis, Bretton Woods nostalgia broke out again: our turbulent globalised world seems so unstable compared with the Bretton Woods system.
But what do we really know about the Bretton Woods system? This research emphasises the specificities and malfunctioning of the post-war monetary system and then challenges the Bretton Woods nostalgia.
Surprisingly, economic history research on the functioning and the macroeconomics of Bretton Woods is extremely scarce. Nothing significant has been published on the matter since a 1994 book (edited by Michael Bordo and Barry Eichengreen) celebrating the fiftieth anniversary of the Bretton Woods conference. We know much more about the politics and diplomatic issues than about the economics.
In this new study based on newly collected macro data, the researchers undertake a systematic investigation of the macroeconomics of the Bretton Woods system, from 1950 to 1973. Two important conclusions particularly stand out and challenge the current perceived view of Bretton Woods.
First, they show that contrary to what the standard economic literature assumes, the accumulation of foreign reserves during the Bretton Woods system was not purely trade-based. Domestic financial development as well as mercantilist motives influenced positively the level of reserves, and especially gold accumulation.
These results have current policy implications since they show that even before financial globalisation, when capital controls were still a common practice, countries over-accumulated reserves for other motives than current account balances. The results also suggest that there was a strong confidence problem in the dollar. Thus, a return to the design of the Bretton Woods system would not guarantee a solution to reserve accumulation and global imbalances.
Second, the researchers study the co-movement of business cycles in a sample of 20 advanced and emerging economies from 1950 to 2015, and find that co-movement between countries was not lower under Bretton Woods. This piece of evidence contradicts the view that capital controls from the 1950s to the 1970s were sufficient to isolate countries from international shocks and business cycle.
Again, the straightforward policy implication is that a return to the Bretton Woods world would not guarantee more autonomy for national economies.
Foreign Reserves and International Adjustments under the Bretton Woods System: A Reappraisal
Eric Monnet (Bank of France) and Damien Puy (International Monetary Fund)
Corresponding author: Eric Monnet, Bank of France, email@example.com;