The Legacy of Bretton Woods

CIGI Conference, Waterloo, Ontario June 9-10 2006

The “par value” exchange rate system designed in 1944 ended long ago, but the legacy of Bretton Woods  persists in the International Monetary Fund, particularly in its core surveillance function.   From the beginning, political struggle has shaped its evolution.  Its trajectory, especially after 1973, signaled a continuing attempt by the Fund’s most powerful member-states to find the golden mean in a globalizing economy between binding monetary rules and unbridled national discretion.   Principled intentions and ambiguous consequences have been its hallmarks, ever since a process of formal multilateral consultations on exchange rate matters gave it birth.   That it remains the subject of tough criticism, sharp debate, and regular reform efforts, even as memories of the original rules and purposes of the par value system fade, suggests the endurance of the normative quest begun at Bretton Woods. As my friend David Andrews argues in a book we are working on, the “binding agent” at Bretton Woods was an “overriding commitment to the establishment, and later the maintenance, of a cooperative international monetary order consistent with two goals:   a maximum degree of national policy autonomy and a massive expansion of international trade.” The experience of competitive currency depreciation during the inter-war period had left the strong impression that such an order entailed the development of consensual rules to guide the re-opening of national payments systems and an institutional mechanism to monitor those rules and encourage monetary cooperation.   In the first section of the first article in the IMF’s founding document, its member states agreed  “to promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration.”   Upon this base developed what would become the core mandate and mission of the Fund.

Like an academic department comprised of tenured colleagues who do not necessarily all enjoy one another’s company but who soon come to realize that some minimal level of compromise is in their personal interest, the actual process of monetary collaboration in the Bretton Woods order depended on the existence, but not always the effectiveness, of an administrative entity. Like a department chair, the Fund’s own autonomy would be limited, both constitutionally and in evolving practice. It would, stand for certain principles. It would have privileged access to knowledge that could not always be fully shared. And it would have to be endowed with the legitimate authority to mediate and adjudicate, with the technical ability at best to forestall and at least to manage crises, and, in principle if not in always in practice, with the capacity to sanction. In a world of integrating markets and still-sovereign polities, the Fund’s delegated authority would have to be clear and universally applicable even if its actual power would remain ambiguous and variably applied. In this light, the historical discontinuity between what preceded the 1944 Bretton Woods agreement and subsequent practice remains sharp, sharper in a fundamental sense than the 1973 break in the par value exchange rate system.

Despite persistent external criticism concerning the scope, terms, and effectiveness of the Fund’s main role in the monetary system, member states have never moved to abolish it. To the contrary, formal reviews have been undertaken regularly since 1977, and the conclusion is nearly always the same: Fund surveillance remains central and should be enhanced and reformed.

Heightened attention both inside and outside the Fund has lately also been given to increasing the transparency of the surveillance process, heightening the candor of Fund advice, and (sometimes by the same critic in the same breath) encouraging humility among Fund management and staff. In truth, such ‘enhancements’ would typify the modest incrementalism that has characterized the evolution of Fund surveillance from the beginning. Member-states and critics always seem to want more from the Fund, what they mean by that is often contradictory, and no one is fully prepared to endow this or any other intergovernmental institution with the actual supranational power necessary to match the most ambitious aspirations for its legal authority.

Prominent voices have recently reiterated Keynes’ famous admonition that the Fund must be less in the business of banking and more in the business of “ruthless truth-telling,” that it had to become an “independent umpire” articulating and “policing” the “rules of the game.” Such advocacy is well-intended, even if ironic considering its source in key G7 central banks, but far from novel. The more serious challenge to Fund surveillance is the gathering erosion of normative solidarity represented by a proliferation of regional competitors and alternative forums with selective memberships and weak or non-existent secretariats.

After the emergence of the euro, European members understandably shifted their attention away from Washington toward Frankfurt, even as they demonstrated little interest in reducing their formal stakes in an IMF seeking ways to reform its internal governance. More recently, key East and Southeast Asian states indicated serious interest in constructing a regional system for voluntary consultations, technical assistance, and temporary financing. Parallel efforts in Africa and Latin America periodically gain and lose momentum. Ted Truman, in his new book on the subject, asks the key question: “Can the global monetary system function effectively with more than one set of understandings, conventions, and rules, for example about the trade-off between financing and adjustment or about the ultimate goals of capital account liberalization?”

At this moment, and hardly for the first time, the Fund seems to be going through an identity crisis. What should give us all pause to reflect is the following statement made last June at a BIS conference: “Under its rules, the IMF has responsibility for the exchange rate system and for preventing countries from using undervalued exchange rates to promote domestic employment objectives. Current policies in many Asian countries surely call for more effort by the IMF to enforce this rule. On the other hand, Asian countries are surely correct when they claim that the US national saving rate is a cause of imbalances. And US policymakers are correct when they claim that slow growth in Europe and Japan are part of the problem. Each is correct. That’s why a multilateral solution to put the world economy on a more stable path is both desirable and probably necessary.”

The speaker was none other than Allan Meltzer, the same conservative critic who wanted sharply to curtain the role of the

Fund just a few short years ago. The aspirations and the frustrations of Bretton Woods live on. QED.

Excerpted from: “IMF Surveillance and the Legacy of Bretton Woods,” in Bretton Woods Revisited, edited by David Andrews, under review.

- Louis Pauly, University of Toronto

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