Sunday, March 13, 2011

The Significance of Bretton Woods

One of the reasons I think the dismantling of Bretton Woods and consequent neo-liberalism have been so destructive is because from what I can see Bretton Woods was in fact established to prevent the kinds of deteriorating economic conditions that have been observed world wide since the mid 70's. Predictive capacity is the mark of a good scientific theory. Noam Chomsky explains the insights of John Maynard Keynes, one of the core framers of the Bretton Woods system.

After World War II, the victors established a global economic order, the Bretton Woods system: Britain was represented by John Maynard Keynes, the US by Harry Dexter White. A core principle was constraints on capital. Governments were permitted to control capital flight, a principle that still is in the IMF rules, though ignored. And currencies were regulated within a narrow band. The motives were twofold. The first was economic: Keynes and White believed that these measures would stimulate economic growth and trade. The second was sociopolitical: both understood that unless governments are able to regulate capital, they will not be able to carry out social democratic (welfare state) measures. These had enormous support among populations that had been radicalized by the Great Depression and the anti-fascist war (World War II).

The basis for the sociopolitical motive is straightforward. Free capital movement establishes what international economists have called a "virtual parliament" of investors and lenders, who carry out a "moment-by-moment referendum" on government policies. The "virtual parliaments" can "vote" against these policies if it considers them irrational: enacted for the benefit of people, rather than profit for concentrated private power. They can "vote" by capital flight, attacks on currencies, and other devices offered by financial liberalization. Keynes considered the most important achievement of Bretton Woods to be establishment of the right of governments to restrict capital movement.

Keynes regarded speculation as destructive. His basic insight is well described by Indian economist Prabhat Patnaik, at the UN conference of October 30 on the global financial crisis. Patnaik explains that Keynes "had located the fundamental defect of the free market system in its incapacity to distinguish between `speculation' and `enterprise.' Hence, it had a tendency to be dominated by speculators, interested not in the long-term yield on assets but only in the short-term appreciation in asset values. Their whims and caprices, causing sharp swings in asset prices, determined the magnitude of productive investment and, therefore, the level of aggregate demand, employment and output in the economy. The real lives of millions of people were determined by the whims of 'a bunch of speculators' under the free market system." The replacement of governmental "demand management" by "bubble booms" created by speculators is a prime cause of the current financial crisis, Patnaik argues plausibly, supporting Keynes's analysis.

The whole interview is worth a read.

1 comment:

sierra said...


"Domestic monetarists," following Milton Friedman, proposed that the Federal Reserve regulate the quantity of bank reserves and the money stock. Many "supply-siders" advising then-Rep. Jack Kemp, R-N.Y., proposed instead to make the value of a paper dollar equal by law and convertible into a weight of gold, as it was for most of the 200-plus years of U.S. history.

But "global monetarists," following Robert Mundell, advocated at least a temporary return to the 1944 Bretton Woods gold-exchange system, while others heeded Jacques Rueff's warning that only restoring a multilateral gold standard without foreign exchange reserves would be effective.

On June 29, 1984, Jack Kemp introduced H.R. 5986, the Gold Standard Act of 1984, which would have defined the dollar as a fixed weight of gold, restored gold convertibility of Federal Reserve notes and deposits, and provided for gold coinage.