We are still living with the consequences.
The improvised, on-the-fly financial system that replaced Bretton Woods after 1971 has failed. The great challenge facing the world leaders gathering for the annual World Bank-International Monetary Fund meetings in Washington this weekend is to figure out what will replace it.
For the past 40 years, capital has moved freely around the globe, with currencies fluctuating according to market forces and countries intervening to affect those flows according to their domestic interests.
It has all proved remarkably prone to financial crises: in northern Europe in the early 1990s, Mexico in 1994, several East Asian nations in 1997, Russia in 1998, Argentina in 2001. And, most disastrously, nearly the entire planet in 2008.
This is no way to run a global economy. But it’s not clear whether there is enough political will to find a new framework, because it would require many countries to sacrifice something dear to them.
A new system could mean limits on the kind of gaps that can arise between what countries produce and what they consume. For the United States, that would mean giving up the gusher of borrowed money that has allowed the country to live beyond its means. For China, it would mean giving up the export-driven approach to growth that has brought hundreds of millions of people out of poverty. In Germany, it would mean living without the high savings levels that comfort its residents, and in Britain, it would mean finding a new economic model that doesn’t rely so much on gigantic banks.
This stuff is hard.
The Bretton Woods system sprung from the legacy of the Great Depression and World War II.
The world leaders who assembled in the White Mountains of New Hampshire — most notably the British economist John Maynard Keynes — understood that the earlier world economic order had gone horribly wrong, and they set out to create a fundamentally different and more resilient system, even when it might mean their own countries would have to give up prerogatives and priorities.
When the panic of 2008 happened, policymakers on all corners of the globe responded in ways that reflected the lessons of the Great Depression and prevented a far worse outcome for the economy. They bailed out banks instead of letting them fail, eased monetary policy rather than tightening it, opened the spigots of fiscal stimulus and avoided any temptation to put in place tariffs to disrupt trade flows.
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