Yves here. I have some small quibbles with this otherwise fine post.
The first is that, as Keynes stressed, the problem with past international monetary systems like the gold standard was that there was no punishment for countries that engaged in mercantilist strategies and ran trade surpluses. Countries have strong incentives to do so because they effectively steal demand, and thus jobs, from their trade partners. The US has been willing to accommodate this desire because it saw ways to get geopolitical advantage from this situation. Second is that the US has been explicit about trying to make the world safer for US banks and later investment banks. Among other things, it was seen as a way to promote US multinationals. Believe it or not, globalization was supposed to be a force for peace. See this tweetstorm.
Note also that Carmen Reinhart and Ken Rogoff had a simpler explanation: they looked at 800 years of financial crises and concluded that higher levels of international capital flows lead to more frequent and severe financial crises. And before you blame that on trade deals, keep in mind that the Bank of International Settlements found that the ratio of money movements related to securities transactions has exploded. In the runup to the crisis, international capital flows were over 60 times the level of trade.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development and Anis Chowdhury, former Professor of Economics, University of Western Sydney, who held various senior United Nations positions in New York and Bangkok. Originally published at Inter Press Service
International currency and financial crises have become more frequent since the 1990s, and with good reason. But the contributory factors are neither simple nor straightforward. Such financial crises have, in turn, contributed to more frequent economic difficulties for the economies affected, as evident following the 2008-2009 financial crisis and the ensuing Great Recession still evident almost a decade later.
Why International Coordination?
Why is global co-ordination so necessary? There are two main reasons. One big problem before the Second World War was the contractionary macroeconomic consequences of the “gold standard.”
In 1944, before the end of the Second World War, President Franklin Delano Roosevelt convened the United Nations Conference on Monetary and Financial Affairs – better known as the Bretton Woods Conference – even before the UN itself was set up the following year in San Francisco. After almost a month, the conference established the framework for the post-war international monetary and financial system, including the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), or World Bank.
To be sure, the Bretton Woods system reflected sometimes poor compromises made among the negotiating government representatives. Nevertheless, it served post-war reconstruction and early post-colonial development reasonably well until 1971.
In September of that year, the Nixon Administration in the US – burdened with mounting inflation and unsustainable budget deficits, partly due to the costly Vietnam War – unilaterally withdrew from its core commitment to ensure full US dollar convertibility to gold at the agreed rate. Thus, the unilateral US action did not involve a transition from the Bretton Woods system to any coherent, internationally agreed alternative.
Birth of a “Non-System”
The pre-1971 post-Second World War period has often been referred to as a Golden Age, a period of rapid reconstruction, growth and employment expansion after the devastation of the Second World War. It was also a period of development and structural transformation in many developing countries.
All this came to an end when coordination and multilateralism collapsed following President Nixon’s decision to renege on 1944 US commitments at Bretton Woods which became the basis for the post-war international monetary system.
The leading international monetary economist of the post-war period, Robert Triffin, described the post-1971 arrangements as amounting to a “non-system.” Now, with the international monetary system essentially the cumulative outcome of various, sometimes contradictory and ad hoc responses to new challenges, the need for coordination is all the more urgent.
A strong case for co-ordination has long been made by the United Nations. For example, soon after the global financial crisis exploded in late 2008, the 2009 mid-year update of the UN’s World Economic Situation and Prospects showed how better coordinated and more equitable fiscal stimuli would have benefited all parties – developed countries, developing countries, transition economies and, most of all, the least developed countries.
Anarchy and Fragility
Since the collapse of the Bretton Woods system in 1971, a small handful of currencies – especially the US dollar, the international favourite by far – have been held by others as reserve currencies. This has allowed the issuers of these currencies – especially the US – to run massive trade deficits, contributing to unsustainable global imbalances in savings and consumption.
A second underlying cause of international financial crises has been the ascendance, transformation and hegemony of the financial sector – termed “financialization” – over the past three to four decades. Partly as a consequence, many decision-makers are now often more concerned with short-term financial indicators than other key economic indicators, often presuming that the former reflect the latter despite the lack of such evidence.
A third factor has been growing “financial fragility,” partly due to the global financial “non-system” in place since the collapse of the Bretton Woods system. Referring to this “non-system” as an international financial “architecture” is really insulting to architects. The lack of coherence and coordination has been exacerbated by financial deregulation, liberalization and globalization over the past three decades.
Finance Calling the Shots
The growing and spreading subordination of the real economy to finance in recent decades is a fundamental part of the problem. While finance is indeed a very important, if not an essential handmaiden for the functioning of the real economy, the subordination of the real economy to finance has transformed macro-financial dynamics, with unproductive, contractionary, even dangerous consequences.
So, to address the root causes of crises, much better, including more appropriate regulation of the financial system is needed to ensure consistently counter-cyclical macro-financial institutions, instruments and policies, and to subordinate the financial sector to the real economy.
The 2008 financial crisis has catalyzed many debates on these issues – some old, some new – for instance, between Keynesian/Minskyian economists and their opponents; between Anglo-American and continental European worldviews; and between the global North and South. Any sustainable solution will clearly require much better international cooperation and co-ordination.
Hence, almost a decade since the 2008 global financial crisis began, there is no shared political commitment to much needed international financial reforms. It took fifteen years from the beginning of the Great Depression, a world war and Roosevelt’s extraordinary leadership before the world was able to reform the international financial system in 1944. But sadly, there is no Roosevelt for our times.