What was the cornerstone of the bretton woods system

US gold stocks were now around half what they had been in In response to the mounting gold crisis, President Johnson attempted to impose a series of restrictions on the outflow of American capital in But the very imposition of these measures led the US banks to discover ways to evade exchange controls.

Their actions laid the foundations for what has now become an international financial system operating outside of the control of any national state or group of central banks. The origins of this new system lie in the emergence of the so-called Eurodollar market in the s. This consisted of initially small amounts of dollars held in the European banks and the European branches of American banks.

So long as the Bretton Woods system operated relatively smoothly, the bulk of these dollars were used to purchase exports from the United States. But towards the end of the s, as the demand for US exports declined relatively, the pool of Eurodollars began to grow. In saying this, these institutions are not perfect.

Their scorecards are not unblemished and they face challenges — a point I've been making to this gathering, and more broadly, f or well over a decade. One example for the IMF is its programs in the midst of the Asian Financial Crisis, which have been picked over in great detail in the intervening years.

Some argue these programs were effective in managing the crisis, others the opposite. But, regardless, that period undoubtedly damaged trust in the IMF within emerging Asia — a distrust that has seen Asia shy away from both accessing and supporting the established IMF safety net, at a cost both to the countries themselves and to the IMF.

This is illustrated by the preference throughout Asia for self-insurance via foreign exchange reserves. The build-up of reserves is imposing high intermediation and transaction costs on their economies, representing a deadweight loss to these countries. It's also distorting global resource allocation. The World Bank, too, is open to criticism: for neglecting the human impact of its programs; and its strong focus on state actors rather than the private sector; while the perception of heavy influence by a small number of powerful nations is, as with the IMF, undermining its credibility with other countries.

Furthermore, the bureaucracy of the World Bank, and the time taken to get projects approved, can dramatically slow the pace of development and reform. In addition to these institution-specific challenges, the rise of the emerging market economies is creating challenges across both institutions. One is that the use of global public sector financing as a tool to influence domestic policy and development strategies is becoming less important as emerging economies have increasingly robust growth and established financial buffers.

Secondly, with the rise of the emerging markets, there's a growing network of regional, bilateral and domestic forums seeking to achieve similar goals to the Bretton Woods institutions. This in part reflects emerging markets' experiences with these institutions in the past—as in the case of the Asian financial safety net mentioned earlier—as well as a simple reflection of the growing economic power of these economies.

As they grow, they're naturally tending towards forums and institutions that reflect their needs and respond to their voices. While these regional and plurilateral institutions have the potential to complement the global institutions, it must also be acknowledged that they have the potential—and at this stage I do believe it is only potential—to undermine the Bretton Woods institutions if those institutions are unable to evolve and adapt.

Given these challenges, how can the IMF and the World Bank adapt to remain relevant and fit for purpose for emerging markets in today's world? Efforts have begun, but ensuring success will require continued and more concerted effort. First and foremost, the Bretton Woods institutions need to adapt to ensure they better represent the global economic landscape as it currently is—not how it was half a century ago. Only when these institutions give their members voices that more closely reflect their relative geoeconomic positions can the institutions be more universally viewed as being legitimate, balanced and effective.

It is for this reason that Treasurer Hockey mentioned to this gathering only a couple of days ago, his deep disappointment that the IMF quota and governance reforms have still not been implemented and that the path forward for ratification is now highly uncertain.

The failure of Congress to deliver these reforms is doubly galling to other countries given the US' strong and aggressive championing of these reforms when they were first proposed. Continued failure on the part of Congress will increasingly see US leadership questioned, and erode countries' commitment to the global architecture which the US has championed over 70 years.

It stresses countries' shared responsibility to ensure that their policies support "strong, sustainable and balanced growth. The implications of these policies for the level and pattern of global growth and the risks to financial stability will be reviewed by finance ministers and governors in preparation for agreement on any common actions by G leaders in Canada and South Korea next year.

There are several reasons why this mutual assessment process has the potential to develop shared understanding and encourage action across a range of countries. There is a clear timetable.

A comprehensive set of policies will be considered. Policy-makers at the highest levels are directly involved, with international financial institutions in a supportive, rather than leading, role. Finally, discussions will take place at the G, where all major economies are present and where China has assumed a very constructive, leadership role. Framework discussions would be complemented by successful implementation of the G financial reform agenda. These reforms, when combined with the peer review process of the Financial Stability Board FSB and external reviews by the IMF, could increase actual and perceived systemic stability and thereby reduce reserve accumulation.

Canada will bring to these discussions one of the soundest financial systems in the world and a macroeconomic strategy that contributes to sustainable and balanced global growth. Our economy is one of the most open and our policy response to the crisis has been one of the most aggressive. Starting from the strongest fiscal position in the G-7, Canada's fiscal stimulus this year and next will total 4 per cent of GDP.

Monetary stimulus has been both unprecedented and timely. As a result of these policy actions, the IMF projects that Canadian domestic demand will be the strongest in the G-7 next year.

With a current account that has shifted from a surplus of 2 per cent of GDP in the first quarter of to a deficit of 3 per cent today, Canada is doing its part to rebalance global growth. Consistent with the objectives of the G framework, Canadian policy is guided by transparent and coherent frameworks.

The Government of Canada has announced a fiscal plan to return its budget to broad balance by The cornerstone of the Bank's monetary policy framework is its inflation target, which aims to keep the annual rate of CPI inflation close to 2 per cent. It is in this context that we view the exchange rate. A floating exchange rate is a central element of our monetary policy framework.

It allows Canada to pursue an independent monetary policy appropriate to our own economic circumstances. Although there is no target for the Canadian dollar, the Bank does care why the exchange rate moves and what the potential impact will be on output and inflation.

The challenge for the Bank is to understand the reasons behind currency movements, incorporate those into our assessments of other data, and set a course for monetary policy that works to keep total demand and supply in balance and inflation on target. Recent indicators point to the start of a recovery in Canadian economic activity following three consecutive quarters of sharp contraction. This resumption of growth is supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence.

However, heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures. The current strength in our dollar is expected, over time, to more than fully offset the favourable developments since July. To put it simply, the Bank looks at everything, including the exchange rate, through the prism of achieving our inflation target. For example, we do see a risk that a stronger-than-assumed Canadian dollar, driven by global portfolio movements out of U.

As I mentioned previously, movements in currencies could reflect current challenges in the operation of the international monetary system, which may result in the displacement of adjustment pressures onto a handful of currencies. Whatever happens, the Bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework that we outlined in our April Monetary Policy Report.

If downside risks materialize, the Bank will use that flexibility to the extent required in order to achieve our price stability mandate.

If upside risks materialize, the Bank will also act to achieve our price stability mandate. While the underlying risks to our October economic projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to our inflation projection are tilted slightly to the downside.

To conclude, this crisis was caused in part by failures to meet the same challenges that bedevilled previous international monetary systems. The common lesson of the gold standard, the Bretton Woods system, and the current hybrid system is that it is the adjustment mechanism, not the choice of reserve asset, that ultimately matters. In this regard, any greater use of SDRs might be best suited to encouraging a transition from the current hybrid system to an international monetary system characterized by more flexible exchange rates for all systemic countries.

While surplus countries can delay adjustment, in the end, all nations suffer when the system breaks down. In the current environment, growing strains could spur protectionism, both in trade and finance, or alternatively, raise sanctions. All countries should accept their responsibilities for promoting an open, flexible, and resilient international monetary system. Responsibility means recognizing spillover effects between economies and financial systems and working to mitigate those that could amplify adverse dynamics.

Fundamentally, it means adopting coherent macro policies and allowing real exchange rates to adjust to achieve external balance over time. Indeed, in a world of global capital, all systemically important countries and common economic areas should move towards market-based exchange rates. Bergsten, F. Bordo, M. Bordo and B.

Eichengreen, eds. Chicago: University of Chicago Press. Eichengreen, B. New York: Oxford University Press. Lipsey, R. Foreign Trade and the Balance of Payments, Reinhart, C. There is in fact general agreement that the avoidance of policy mismatches would lead to greater exchange rate stability while the stabilization potential of exchange rate intervention is far lower ; and also general agreement that this outcome would be desirable.

In this way, greater exchange rate stability might be expected to be the outcome of other areas of policy consensus: it is more likely to be achieved in this way than as a consequence of the creation of pre-set commitments by policymakers, which would only represent an open invitation to the testing and second-guessing through market sentiment.

It was not an outcome, however, of any great idealism about international cooperation. One of the enchanting peculiarities of the intellectually divided climate of Bretton Woods was its remarkable and persuasive vision of international harmony despite all the differences in national approaches.

That degree of good will was needed, at that stage, precisely because of the absence of agreement. As the initial enthusiasm waned, as it was bound to do, other considerations became important. First of all, initially the lessons about openness were drawn by some development economists and then accepted more generally. An intellectual consensus, however, is not enough by itself to produce a policy effect.

Academic economists, for instance, have consistently pointed out the economic losses inherent in trade protectionism, and for much of the last two centuries there has been something approaching a theoretical unanimity on this issue. That fact did not stop governments in the late nineteenth century, or more disastrously in the s and s, or again after the s, from taking up protectionist measures. Rather, the world was battered into the new consensus by the repeated shocks experienced over the past two and a half decades.

Indeed, perhaps paradoxically, it was those societies that were most exposed to the external shocks and that did not attempt to cushion themselves through accommodating monetary or fiscal steps that learned most quickly the lessons about the gains to be derived from openness. This was one of the features of the successes of the East Asian experience, where economies dependent almost entirely on imported energy found themselves very vulnerable in the s.

On the other hand, societies that attempted to isolate themselves often found that they were hit by a shock magnified as a consequence of delay. In addition, countries learned from the experiences of others.

Often the experience of a particular national crisis was required to drive home the lessons already learned in other contexts: in Germany after , in Spain in , in Korea in , in the United Kingdom in , in France in , in the United States in , in Mexico in and , in India in and , or in the almost permanent crisis of Soviet-style economies in the s.

Some commentators have come to the conclusion that we need to experience a crisis in order to adjust our views. The modern economy, according to one dramatic analogy, is a giant plodding forward while always looking backward.

It is only when the giant trips that he gets a glimpse of the future as he stumbles. An easier way of coming to terms with changes is to learn from the experience of others.

We might try to equip the backward-looking giant with a system of lenses and mirrors, so that he knows what other giants are doing and can see a better way forward.

Providing these reflective glasses is part of the surveillance function. One of the most important developments of the postwar era, and one which became more intensive during the course of the s, has been the internationalization of the learning process. Ideas and knowledge have become an international commodity. The success of export-oriented industrialization in Asia demonstrated to Latin American economists and policymakers the drawbacks of import substitution strategies.

East European states in learned from the successes of German adjustment programs in , of the East Asian newly industrializing economies in dealing with the oil crises, and of the adjustment of Chile or Mexico after the debt crisis. The experience of the first reformers in Poland, the Czech Republic, and Hungary, in turn may serve as a pattern for later reform initiatives in formerly centrally planned economies.

One of the major contributions of surveillance to the development of the international economy has been an institutionalized mechanism for sharing and learning. Surveillance allows the dissemination of economic information including advice on successful strategies as well as examples to be avoided of unsuccessful strategies.

It also provides a mechanism through which states can influence the other actors in the system: through the transfer of information, and through discussions in the context of multilateral surveillance. In the past, a major channel for the supply of this information was through governments and through technocratic discussions among high-level officials; this will undoubtedly continue to be the case to a considerable extent in the future.

The opening of many societies, and the increased importance of public discussion, also requires an increasing openness about information and about economic prescriptions; and this new openness too has been one of the features of the maturing of the surveillance process. As a result of the demand for surveillance, it has developed into a continual process. The periodic Article IV consultations are the basis of biannual World Economic Outlook exercises involving the gathering, synthesis, discussion, and reporting and transmission of information.

These exercises are as a result continually in motion; in addition, there are regular and more frequent sessions of the IMF Executive Board devoted to development in world markets.

This is the consequence of the emergence of capital markets, which make it impossible for the international system to police and control national policies, as it had done until the s. It is this development that makes it increasingly inappropriate for the Fund to be used in the manner of the s and s, as a scapegoat or political lightning rod for weak governments frightened about the loss of political popularity. An important part of any economic reform process lies in explaining why it is desirable and what the benefits will be; and this cannot simply be done by pointing at an outside institution.

Such openness is a necessary consequence of their accountability. But the role of international institutions also will reflect the possibility of a collective dysfunction of the private sector and the need to deal with the consequences of potential breakdowns. The financial function of the Fund is as a supplier of liquidity to countries with inadequate access to the market because of market failures: sometimes a failure of the international market such as in the generalized crisis of confidence brought by the international debt crisis of , where the Fund had to step in to marshall the market ; sometimes a weakness or inadequacy of domestic markets of the kind that characterizes many low-income countries.

In the case of the latter, there is poor or no access to capital markets. In these circumstances, the Fund operates as a gateway to the international financial system. The contribution that is made by international institutions is both immediate and longer term.

The surveillance exercise is intended in these as well as in the other cases to make markets function more effectively. In a perfectly functioning world, there would be no need of the Fund as a financial institution, because the reserves of confidence built up would be sufficient to make impossible the outbreak of panics or crises. It is scarcely necessary to point out that this world does not at present exist, and is not likely to be created in the immediate future.

Since the relatively recent rise of the consensus, calls for a new Bretton Woods, or for a new redesigning of the international monetary system, have become much more narrowly focused, and not simply on grounds of practical difficulties in the way of achieving a far-reaching revision. One of the reasons for the greater degree of realism about the international system is a greater measure of success in its operation.

The increasingly widespread adoption of policies based on the consensus, especially in many developing countries since the mids, has led to results in the form of higher growth. In only one year since did growth in developing countries fall below 3.

The willingness to see expanded trade as an engine for growth resulted in the successful completion of the GATT Uruguay Round, with the extension of GATT principles to textiles and intellectual property, and in the agreement to establish the WTO.

At this stage, the reader may feel some hesitation. Obviously not all intellectual differences over economics are solved, not are they likely to be. The single world economy may not be necessarily intellectually or theoretically appealing to every observer. Politicians, decision makers, businessmen, bankers do not always feel themselves to be part of a single universally applicable system. They are often eager to castigate the modem consensus as too short term, too chaotic, too liberal, and sometimes also as too Anglo-Saxon.

They complain that excessive liberalization may make impossible a steady policy approach. Some observers occasionally present the East Asian success story as less a victory of liberal economics than an outcome of a tradition of economic planning. In particular in countries where past attempts at planning have failed, often dramatically, institutions or individuals with a historic commitment to the planning approach have tried to draw the lesson from rapidly growing newly industrializing economies that policy directives may work better than a market.

Some Japanese observers have made the claim that the strength of the Japanese economy derives from a dirigiste approach that may make the Japanese experience particularly relevant to the problems of formerly centrally planned economies. In addition, the argument may not simply be about economic efficiency.

It should also be concerned with a wider arena, and with more fundamental human problems. How can the demands of justice be reconciled with those of international economic stability and growth? What is the nature of the trade-off between justice and growth?

No international order can survive for very long if it is widely perceived to be fundamentally unjust. Within national economies, policy reforms aimed at preventing the pauperization of the unskilled may in the longer run best be directed to generally raising skill levels.

The same principles will be true internationally: a world in which a large number of very poor countries continue to be very poor is also a world that unnecessarily limits opportunities. Combating poverty is as a consequence an essential task of the international community if it wishes to create a stable system.

It should also be a part of the program design of international institutions such as the IMF which has indeed paid more attention to these issues over the course of the s. The crucial element in this strategy is the design of social safety nets, to prevent the immiserization of those displaced in the course of an economic restructuring. In the absence of such nets, it is often impossible to gather sufficient support for a radical market-based economic reform. An additional political dimension may mean that the creation of an adequate support system is blocked by vested interests attempting for their own ends to stymie the process of economic reform and liberalization.

This struggle for justice needs to be conducted within the general framework of a system that offers incentives for alteration and improvement, rather than working through restraints and coercion. Attempting to deal with injustice in the past has too frequently involved the imposition by authorities of restraints that produced perverse and perhaps unintended consequences and that led to greater injustices.

Penal taxation as a way of redistributing wealth and income, or intervention in price-setting in order to determine the allocation of resources between different sectors of the economy has too often produced a system of disincentives, which only the exceptionally ingenious or politically well-connected can work out how to avoid. Liberalizing is frequently a part of any effective campaign against poverty. On the other hand, it is not enough by itself. A participation of richer countries in the exercise of creating incentives is unavoidable.

This may involve specific transfers for particular projects; or a more radical and far-ranging approach to the disincentives created by the presence of large external debt. The chances of dealing with poverty through investment in broadly based education, in health, and in infrastructure, all involve creating better opportunities for larger numbers of people.

Such an approach is not only compatible with increased international openness; it is an indispensable part of such an opening.

Finally, even a theoretical consensus may not have hard policy consequences. Many countries continue to say one thing while doing something completely different. Although there may be a new intellectual orthodoxy, practical interests continue to push politics in a different direction.

For a variety of reasons, countries experience pressures—political, social, demographic—that make it hard for their governments to return to fiscal balance. As a consequence, many governments throughout the world engage in largescale dissaving. Many industrial countries have accumulated large and unfunded liabilities to a future in which their populations will age rapidly.

In addition, whatever the theoretical attractions of an open economy, there are many interest and pressure groups that push in the opposite direction. Often the losers in a move to openness have an acute sense of their losses, while the potential beneficiaries cannot clearly perceive the extent of gains that lie in the future and whose distribution is not clear. In these circuitistances, international institutions that reinforce the lessons of the international consensus can play a valuable role in countering the harmful influence of specific pressure groups.

These and other partial reactions against internationalization and the emerging economic policy consensus may be inevitable. Policymakers may talk and talk about trade openness, the limitation of fiscal deficits, and decontrol of prices, but often in practice they find it difficult to act on these fine principles. They will invariably be pushed by a wide variety of domestic interests that often see strong particular gains from not being open.

The result of such pressure may be beneficial to the powerful and articulate, but carry an overall cost for the society. One result of the consensus, however, is that it can be invoked as a justification for a policy that can deliver higher overall gains.

As a result, few now any longer see a fundamental opposition between the requirements of the international system and the priorities of the national economy. Even more significantly, many have begun to see the international order, and international debate, discussion, and surveillance, as valuable allies against the ascendancy of particular political and economic interests. The provision of global surveillance raises some questions about the links between international organizations and their spheres of action.

There ate several institutions dealing with some aspect of international economic, and particularly monetary, cooperation. The key issues in the future will be:. One of the central developments of the postwar period has been the dramatic growth in private sector markets. Liquidity is no longer expected to be supplied by international institutions. The problem of regulation has not disappeared, however; the international character of finance requires a cross-national cooperation of regulatory authorities.

How will it be managed in the future? If for the past twenty years, the most crucial bilateral institutional relationship of the IMF was with the World Bank across 19th Street in Washington, a major theme of the next twenty years will be contacts between Washington and Basle.

As lending takes place more and more across national frontiers, involving different national regulatory authorities, and in the case of financial crises major international adjustment problems, an international lender of last resort has become more essential as part of the world monetary system. The debt crisis of demonstrated the way in which such a need brought the IMF and the private financial sector together. The evolution of a longer time horizon, and the degree of access of industrial and even many middle-income countries to private markets, has brought the World Bank and the IMF closer together in dealing with the problems of poorer countries.

Their functions remain separate, in that the IMF is primarily a monetary and not a development institution; but effective institutionalized cooperation between the two is needed if there is not to be a widespread rejection of the Bretton Woods twins on the part of their members, clients, and owners.

There is a need for a stable policy framework among the members of the international financial system. In the recent past, this has been the task of the G Reasons have been set out above for thinking that this might better be tackled by a genuinely universal institution, and within the framework of the IMF. To this classical trinity of considerations in an international financial system should be added a fourth:.

It has repeatedly been demonstrated that trade liberalization is one of the most important components of effective and sustained economic reform and adjustment. The world faces an institutional choice between an order in which these aspects of surveillance are fragmented and treated in separation, with a smaller IMF Figure or, preferably, one in which the elements of surveillance are more effectively coordinated, with a stronger IMF Figure The case for greater coordination between international institutions rests on the substantial extent of the linkages that exist between different global economic problems.

Issues such as interest rate levels, macro-economic orientation, debt problems, and capital flows cannot be treated adequately in isolation from each other. A long run historical view can help in providing a useful antidote to two common errors in policy formulation. The world and its leaders tend to lurch dangerously between two opposite poles: either an exaggerated belief in the intractability of problems or an overconfidence as to their solubility.

At some times almost all the experts, politicians, and media agreed that the horizon was clear, with no problems or dangers in sight. These overextreme answers to the question of whether and how the problems of the international system might be solved have been formulated regularly, with regard to a whole range of issues.

Hubris and despair chase each other in quick succession, as contemporary opinion swings between optimism and an incapacitating pessimism. Whether the question at stake was recovery from the interwar Great Depression, the reconstruction of Europe and East Asia after the war, the monetary inflation of the late s, the oil price shocks of the s, the debt crisis of the s, the structural problems of sub-Saharan Africa, or the transition from centrally planned economies, all provoked extremes, sometimes of confidence, and sometimes of self-doubt.

The task of international institutions, and of the surveillance process, is to ensure that both are avoided and that problems are analyzed, understood, and then tackled. Alexander , Sidney S. Artis , Michael J. Artus , Jacques R. Aschinger , F. Attali , Jacques , Verbatim, Vol. Bacha , Edmar Lisboa , and Carlos F. Helleiner Toronto : University of Toronto Press , Bank for International Settlements , Annual Report , various issues. Bates , Robert H.

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