George Rebane

Before this year is out most of the world will come to America to sort out the current financial crisis, and attempt to put in place a worldwide financial structure to replace the Bretton Woods agreement that was fashioned before the end of WW2 by 44 participating countries.  We have lived under (in?) Bretton Woods for over sixty years, and now it may be time to rethink how worldwide finances will operate in the age of globalization and seemingly irresistible ideologies (e.g. Islamic terror and climate change).

Students of history may be a little rusty on Bretton Woods, and many others have never heard of it.  George Friedman and Peter Zeihan of Stratfor have written a compact review of that agreement, and its influence and importance since 1944 – ‘The United States, Europe and Bretton Woods II’.  This is important reading for anyone who wants to understand some of the monumental changes that we and the world are facing in the coming years.  The following is an excerpt from the Friedman and Zeihan piece.

What the September financial crisis has shown is not that the basic financial system has changed, but what happens when the guarantor of the financial system itself undergoes a crisis. When the economic bubble in Japan — the world’s second-largest economy — burst in 1990-1991, it did not infect the rest of the world. Neither did the East Asian crisis in 1997, nor the ruble crisis of 1998. A crisis in France or the United Kingdom would similarly remain a local one. But a crisis in the U.S. economy becomes global. The fundamental reality of Bretton Woods remains unchanged: The U.S. economy remains the largest, and dysfunctions there affect the world. That is the reality of the international system, and that is ultimately what the French call for a new Bretton Woods is about.

There has been talk of a meeting at which the United States gives up its place as the world’s reserve currency and primacy of the economic system. That is not what this meeting will be about, and certainly not what the French are after. The use of the dollar as world reserve currency is not based on an aggrandizing fiat, but the reality that the dollar alone has a global presence and trust. The euro, after all, is only a decade old, and is not backed either by sovereign taxing powers or by a central bank with vast authority. The European Central Bank (ECB) certainly steadies the European financial system, but it is the sovereign countries that define economic policies. As we have seen in the recent crisis, the ECB actually lacks the authority to regulate Europe’s banks. Relying on a currency that is not in the hands of a sovereign taxing power, but dependent on the political will of (so far) 15 countries with very different interests, does not make for a reliable reserve currency.

The Europeans are not looking to challenge the reality of American power, they are looking to increase the degree to which the rest of the world can influence the dynamics of the American economy, with an eye toward limiting the ability of the Americans to accidentally destabilize the international financial system again. The French in particular look at the current crisis as the result of a failure in the U.S. regulatory system.