George Cooper: The last thing we need is a Bretton Woods
[George Cooper is a portfolio manager at BlueCrest Capital Management and author of 'The Origin of Financial Crises'.]
On Friday last week the global monetary system came perilously close to systemic failure. Were it not for the bank bail-out packages announced at the weekend we would likely be facing a breakdown in the bank payment systems and an abrupt halt to world trade. We need only look to Iceland, where food shortages are being reported, to understand the devastation that would have followed such an event.
Our politicians have rightly been traumatised by this collapse and are signalling their intent to draw up a new world financial and monetary architecture. The need for a new Bretton Woods system is being discussed, similar to that which operated after the Second World War.
Without doubt, we need a new approach to monetary policy and a greater degree of co-operation between currency blocs. But before leaping back into a reincarnated Bretton Woods framework, we should check our history books. The defining element of the Bretton Woods agreement was a system of fixed exchange rates. In the years immediately after the war, these currency pegs initially worked well, but as the relative trade positions of the major economies diverged, with Japanese and European reindustrialisation, the fixed exchange rates promoted what proved to be unsustainable US deficits. Bretton Woods I ended in ignominious failure in 1971 when President Richard Nixon was forced to abandon the gold peg and devalue the US dollar.
More recently, the arrangement of pegging emerging market currencies to the US dollar has been accurately referred to as the Bretton Woods II framework. This system also promoted the accumulation of unsustainable US deficits through the recycling of trade surpluses back into American dollar-denominated debt. Today's crisis can, in large part, be attributed to America having accumulated an unsustainable debt load thanks to the fixed exchange rates of Bretton Woods II. We do need a new strategy for managing our monetary system, but the last thing we need is a Bretton Woods III with fixed exchange rates.
Before we draw up the new monetary architecture, we should step back and consider what went wrong...
Read entire article at Telegraph (UK)
On Friday last week the global monetary system came perilously close to systemic failure. Were it not for the bank bail-out packages announced at the weekend we would likely be facing a breakdown in the bank payment systems and an abrupt halt to world trade. We need only look to Iceland, where food shortages are being reported, to understand the devastation that would have followed such an event.
Our politicians have rightly been traumatised by this collapse and are signalling their intent to draw up a new world financial and monetary architecture. The need for a new Bretton Woods system is being discussed, similar to that which operated after the Second World War.
Without doubt, we need a new approach to monetary policy and a greater degree of co-operation between currency blocs. But before leaping back into a reincarnated Bretton Woods framework, we should check our history books. The defining element of the Bretton Woods agreement was a system of fixed exchange rates. In the years immediately after the war, these currency pegs initially worked well, but as the relative trade positions of the major economies diverged, with Japanese and European reindustrialisation, the fixed exchange rates promoted what proved to be unsustainable US deficits. Bretton Woods I ended in ignominious failure in 1971 when President Richard Nixon was forced to abandon the gold peg and devalue the US dollar.
More recently, the arrangement of pegging emerging market currencies to the US dollar has been accurately referred to as the Bretton Woods II framework. This system also promoted the accumulation of unsustainable US deficits through the recycling of trade surpluses back into American dollar-denominated debt. Today's crisis can, in large part, be attributed to America having accumulated an unsustainable debt load thanks to the fixed exchange rates of Bretton Woods II. We do need a new strategy for managing our monetary system, but the last thing we need is a Bretton Woods III with fixed exchange rates.
Before we draw up the new monetary architecture, we should step back and consider what went wrong...