Book Review: Global Imbalances and the Lessons of Bretton Woods

By Marek Dabrowski The U.S. economy's rapidly growing trade and current account deficits (2003-2007) and systematic weakening of the dollar against the Euro and other currencies raised several concerns about its future as the global reserve currency. The global financial crisis of 2007-2009, while reinforcing the U.S. dollar's role as the most liquid and in demand currency (especially during periods of increased risk aversion) triggered a political debate on how the future global reserve currency system should be shaped. Skeptics of the U.S.'s enduring economic and political power proposed a new global reserve currency. This idea was presented, among others, by the Governor of the People's Bank of China, the Government of the Russian Federation, and even elaborated in detail by the so-called Stiglitz Commission. Although changes in the global reserve currency system are possible they will not happen rapidly. Even if they do take place, they will be driven by market rather than political choices 1 .

SSRN Electronic Journal, 2000

This paper investigates the U.S. dollar's role as the international currency of choice as a key contributing factor in critical global developments that led to the crisis of 2007-09, and considers the future role of the dollar as the global economy emerges from that crisis. It is argued that the dollar is likely to retain its hegemonic status for a few more decades, but that U.S. spending powered by public rather than private debt would provide a more sustainable motor for global growth. In the process, the "Bretton Woods II" regime depicted by Dooley, Folkerts-Landau, and Garber (2003) as sustainable despite featuring persistent U.S. current account deficits may turn into a "Bretton Woods III" regime that sees U.S. fiscal policy and public debt as "minding the store" in maintaining U.S. and global growth.

2011

Many have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People’s Republic of China is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances.

This article aims to analyze the process that is leading the dollar to its end as a world currency due to the lack of confidence caused by the lack of currency ballast, the decline of the US economy, the possibility of the explosion of the US public debt bubble and, also, for the political use of the dollar as a weapon to impose the political will of the American government, aiming at maintaining its hegemony at the global level. The dollar may be replaced by a world currency (SDR - Special Drawing Rights: a currency created by the International Monetary Fund used for payments between countries), the gold standard or a digital currency, such as the digital Yuan, which is being implemented in China.

Many have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This matter is settled by arguing that the global imbalances acted as a "handmaiden" to the 2008 financial crisis. One way to reduce global imbalances is to reform the international monetary system and reduce the role of the US dollar as a reserve currency. Robert Triffin was one of those critical of this "exorbitant" privilege granted to the US, which makes it both a system maker and privilege taker. The Triffin Dilemma captures the fundamental instability that underlies the dollar reserve system. However, there are major obstacles to this proposal. Some analysts including Triffin cited the US security umbrella as the primary reason the US and its major allies would want to retain the role of the dollar in global trade and finance despite the underlying inequities in the system. This is related to the imbalance in global governance which is largely US-centric. The imbalance in global governance is also reflected in the dominance of the US financial system brought about by the "first-mover advantage". Because of the inertia brought about by the imbalance in global governance, economic arguments to reform the international monetary system are likely to be trumped by political reality. The paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People's Republic of China (PRC) is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances.

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The aim of this thesis is to analyze and evaluate the dominance of the dollar and its sustainability in the international monetary system in the light of recent literature and relevant statistical data. Considering the determinants of an international currency,this thesis focuses on the linkages of the dominance of the dollar with the challenge of the euro as an alternative international currency, the current account deficit of the U.S. and foreign exchange reserve accumulation and reserve diversification decision of foreign central banks. The analysis on these determinants indicates that the U.S.dollar is facing many challenges and may face further challenges in sustaining its dominance as an international currency. Given the significance of the U.S. economy and dominance of the dollar as an international currency, the findings of this study indicate that although the euro has not much potential to surpass the dollar as an international currency in the short-term, it is more likely for the international monetary system to witness the existence of multiple international currencies and decline in the degree of the dominance of the dollar in the 21st century.

This year marks the 70 th anniversary of the epoch-making Bretton Woods institution. The breakdown of its crafted quasi-gold standard took place in crucial events which include America's unilateral suspension of the dollar's gold convertibility and a transition from a state-led to a market-oriented economy. Against the backdrop of continued global monetary disorder, for the first time in history, a national fiat currency replaced gold which once was the world's major reserve asset. This effectively renders the dollar as the de facto reserve currency. However, the principal flaw inherent in the dollarcentred world manifests itself in an increasing incidence of credit-induced crises which imperils global economic stability. This essay will discuss why the dollar has gained dominance and how it has affected and shaped the global economy. Its challenges will also be examined. Lastly, the trajectory of reforming the international monetary architecture will be evaluated.

Brookings Papers on Economic Activity, 1974

The Current and Future Role of t he Dollar. How Much Symmetry? ON AUGUST 15, 1971, the postwar international monetary system established in 1944 at Bretton Woods was brought to an end by the United States' formal termination of an undertaking that had in fact been largely inoperative for some time: its commitment under the Articles of Agreement of the International Monetary Fund to maintain the parity of the dollar by converting dollar balances held by foreign official institutions into gold at a fixed price on demand. Roughly a year later, at the September 1972 annual meeting of the Board of Governors of the International Monetary Fund, the Secretary of the Treasury put forth a proposal for a reformed international monetary system. In place of a system in which the dollar occupied a unique position, the U.S. proposal envisaged one characterized by far greater symmetry among all currencies. Such symmetry, or legal equality of rights and responsibilities, was also envisioned at Bretton Woods, but in practice the system functioned very differently indeed. A careful survey of recent developments suggests that the quest for symmetry is likely to prove as chimerical today as it did thirty years ago, and that in a viable international monetary system the dollar and the United States are almost certain to continue to play special roles. 1. See Charles P. Kindleberger, The World in Depression, 1929-1939 (University of California Press, 1973). THE DOLLAR IN THE BRETTON WOODS SYSTEM The Articles of Agreement of the International Monetary Fund reflect two basic principles: that of collective or cooperative responsibility for the operation of the international monetary system and, after a transition period, that of legal symmetry or equality in the rights and obligations of the member countries. But the rules of the system were far from automatic or self-enforcing; in the amount of discretionary decisionmaking power ostensibly ceded to the IMF, the system envisaged at Bretton Woods came closer than any previous arrangement to invoking the principle of adherence to the judgments of an international institution. Among those whose views were rejected at Bretton Woods were the proponents of a "key currency" system, who took the Tripartite Agreement of 1936 as their model.2 And yet, from the very beginning, the Bretton Woods system drifted away from its original concept of equality toward reliance on a single key currency, the U.S. dollar. During the first decade or so after Bretton Woods, it was the United States, rather than the IMF, that made the bulk of loans to member countries experiencing balance-ofpayments difficulties. And it was the United States, rather than the Fund, that took the lead in urging other countries to adopt policies to stabilize their payments positions, including the substantial devaluations of the currencies of most major industrialized countries against the dollar in 1949. The asymmetrical role of the dollar in the Bretton Woods system developed in several different dimensions. Because it was backed by the world's largest and strongest economy and because it was, until 1958, the only major currency that enjoyed market convertibility, the dollar served as the major international vehicle, or transaction, currency, even in transactions involving no American resident. Second, under the Articles of Agreement all countries were to maintain the value of their currencies within a stated range of parity, but the United States undertook to discharge this obligation 2.