Cyclical Global Economic Crisis: Instability in the Post-Bretton

Woods International Monetary Order

Introduction
In the 20th century the world has encountered many setbacks to the economic stability of
individual states and which appear to create disruptions in the fundamental grounding of
the world economy. The dependence of international monetary order on one common
currency, the ‘dollar standard’ as Barry Eichengreen1 names it, has proved to be the
upside as well as the downside in different circumstances encircling the question of
stability of the dollar as a standard currency on the platform of international exchange.
The global economy of the 21st century has emerged through many monetary systems
from the 19th century gold standard to the interwar years of gold exchange standard to the
Bretton Woods System and into what is the unnamed new world order with the fall of
Bretton Woods system since 1970s. This new world order has a legacy of the this long
history of economic cooperation and repeated global monetary imbalances. The issue that
emerges from this long history is the cyclic digression of order into a crisis engulfing the
majority of the world economy still maintaining its cooperative, hegemonic, and open
liberal attitude. The purpose of this retrospection into history is to find out the possibility
of a fundamental reason for a repetitive disarray in the international monetary order with
concomitant conflicting and converging interests of states during the periods of crisis.

Acceptance of a Hegemonic Power for International Monetary Order

Ellen Wood2 extends the idea of obscurity and opacity of the capital-labour relations in
Modern Capitalism to the relations between nation states, whose exchange is capitalist in
nature due to the predominance of the economic, as distinct from direct
’Extra-Economic’ coercion. According to Woods, the extra-economic force, in terms of
political-military-judicial state intervention, is essential for the economic forces to
maintain their coercive action. The integration of the global economic activity with the
indispensable ‘role of the state’ reinstates the relevance of state in the process of
globalization, whether economic or political.
According to Woods the idea of capitalism is subject to the imperatives of competition,
accumulation, and increasing labour productivity. The economy is driven by these
imperatives, working as a whole system on the international competitive platform.
Woods argues on a clear division between the exploitative powers of the capitalist and
coercive powers of the state stating -“Because all economic actors depend on the market
for everything they need, they must meet its requirements in order to survive irrespective
of their own personal needs and wants”.

Drawing this argument to context of the international monetary order using states as
economic actors in a scenario of the world economy an important support for the
economic cooperation in the 20th century arises as an imperative for the working of the
world economy. Also the hegemonic intervention and control in the sustaining a
proposed monetary order for the case of Britain in the gold standard and the US in the
post WWII and even beyond the Bretton Woods system period can be argued as a neutral
exercise of economic coercion and foreign intervention to satisfy the common good of
the world economy.

During the 19th century Gold Standard, Britain played the role of the hegemonic power
over the international monetary policy and control. With a gold exchange standard all
currencies involved had a fixed exchange rate and London emerged as the centre of the
free flowing capital market. Several compromises were sustained by Britain like
increased unemployment due to increase in bank interest rates to curb capital outflows to
maintain a good health of the world economy and its dependence on the British
Capitalism.

Efforts of British Capitalists to restore a exchange standard post-WWI was considered

impervious to all the upheaval in the political and financial arena with the formation of
hostile groups within Europe and aggressive deficits in balance of payments and also the
establishment of exchange controls. After the WWI weaker economies faced extreme
pressures over speculative movements of capital as most countries allowed their
exchange rates relative to other currencies be decided by the foreign exchange market
without a fixed gold parity. The reason behind this fall was the resentment of many
countries against a possible revival of the gold standard and a compromise in the
hegemonic control of British Capitalism over the world economy.

The isolationist attitude of the US towards the stability of the post WWI world economy
had unreasonably pushed the European states to repay the war debts that had been
accumulated to a value far beyond their repaying capability. Many countries used
deflationary measures and still found their currencies heavily undervalued in the foreign
market. While at the same time the US economy saw its currency exchange touched and
its gold reserves intact after the WWI. The US policy of not taking the responsibility of
stabilizing the world economy during the interwar years can be associated with the nature
of its diplomacy towards the European block. A major reason towards the fall of gold
exchange standard was the withdrawal of the European countries from the world
economy. This also paved the way for a national capitalism rising in some countries like
Germany.

Changed character of US in restoring stability on the world economy post-WWII

Barry Eichengreen3 builds an argument about whether the market power possessed by a
hegemon like Britain till 1914 and the US since 1944 causally connect to the stability of
the international monetary system. He states - “ Historical experience suggests that the
hegemon’s willingness to act in a stabilizing capacity at a single point tends to
undermine its continued capacity to do so over time …”

In his analysis of the three different monetary systems he explains the role of a
hegemonic power and its sustainability can be argued on the basis of some fundamental
reasoning.
According to the analysis of Eichengreen, the three major categories considered for
operation of a monetary system and the theory of hegemonic stability are adjustment,
liquidity, and the lender-of -last-resort. Adjustment is method of harmonizing of national
policies and the ability to preserve and regulate the smooth operation of the international
monetary system, using once hegemonic power. The 19th Century hegemonic experience
of the collective European centre relative to the non-European periphery is an example of
a weak hegemonic stability theory. In a weak stability theory the befits of the stability are
accrued exclusively to the powerful. Under Bretton Woods, the hegemonic stability was a
consensus of the players in the international monetary order. A collective circumstantial
acceptance, post WWII, to the dominance of the US in international trade and financial
markets and to the imperative of dollar accumulation as a means of restoring economic
stability.

Maintenance of liquidity in the global market in the post WWII period was a major
contribution of the US towards a two decade long monetary order without much
disruptions. In the absence of US, or more specifically the Financial Institutions like IMF,
the liquidity crisis would have sustained in the world economy for a long period possibly
resulting in another depression like that of the 1930s. The same period saw the US
surplus grow due to increased demand for US goods creating the famous ‘dollar
shortage’.

He also focuses on the ‘lender-of-last-resort‘, or the willingness of the hegemonic power

to come to rescue in times of sever liquidity shortage which otherwise would take the
face of a major credit crisis. Eichengreen puts the crisis of 1931 as a clear example of an
undermined confidence in the exchange currency of the time, the sterling. The balance of
trade was weakened with reduced foreign demand for British Exports and the growing
budget deficit of the British government. Even in the post-WWII period, there were
confirmed instances when the hegemonic power discounted freely, providing
countercyclical lending, and maintaining an open market. But the argument built by
Eichengreen here is that to become the lender-of-last-resort the leading economic power
should by far exceed in financial capacity than all its rivals. He points out the inadequacy
of Britain in the 1870s and the US in 1960s to do so and therefore that they had to resort
to a cooperative lending system.

The reason behind US abandoning the postwar early support for the restrictive Bretton
Woods system, as Ruggie4 mentions is as the compromise of ‘embedded liberal
framework‘, was the strategic change in the position of the US in global economy, both
in terms of trade and finance. After the 1970s the major shift in the US International
Policy was due to its transformation from a creditor to a debtor economy. Even with
many corrective measures taken by the US policy makers to adjust the problems of large
dollar surplus with foreign countries and making gold conversion unimpressive in 1968 it
became evident that the foreign dollar reserves could not have been settled with the US
gold reserves.

Another major reason for a shift of policy for the US was the fact that majority of states
had their individual reasons to back a global financial order with each state serving its
own purpose, inturn accepting the continued US hegemony over capital markets. Post
Bretton Woods the hegemonic position of the US in trade may have been declining, but
the US retained a dominant position in the financial order well into the 1980s because of
the relative attractiveness of the US financial markets, the preeminence of the US
financial institutions and the dollar in global markets, and the relative size of the US
economy. Like the Japanese economic crisis with a market crash in 1987 threatened the
US financial stability but was withstood by financial liberalization steps taken by the
Japanese government under US pressure.5

New International Monetary Order since the fall of Bretton Woods

At an international macroeconomic level, the countries depend on the dollar as a
monetary anchor for economic policies and price levels.6 With the Bretton Woods
System, the European countries fixed their exchange rate for long period against the
dollar, and what seems now is an attempt to indefinitely fix a narrow band of currency
exchange value against the dollar by many Asian countries like China, Japan, and India.
Virtually all prices of the primary goods and services produced by the Asian and some
Latin American countries are set in dollars in the international market. This comprises the
major reason for the unofficial dollar parities maintained by these countries to prevent
major fluctuations in prices and explains the regular state intervention in the open market
to ensure the smooth running of the domestic economy in the global market.
As Hudson7 argues for the contemporary financial instability lies in the fact that post
1970s the individual economies, in the process of development, have been entangled in
the intergovernmental negotiations and diplomacy in different ways. Hudson articulates
that the problems faced by the world with ever rising US deficit has disrupted the
international monetary order repeatedly. Post-Cold War and in a postindustrial
emergence of the US economy insists on a foreign supply for consumer goods and
investment goods. In the instability of the financial condition of the world economy, the
foreign economies sustain the US stock market and the real estate bubble, producing
capital gains and asset price inflation, even as the US economy is severely exposed to a
possible recession. His interpretation of the world economy can be well supported by the
recent event of subprime lending crisis in the US mortgage market, inflicting a wave of
instability in almost all major capital markets around the world .

The unreasonability of such a system of a hegemonic US economy running its own

interests through its deficit controlled, dollar based, combined political and economic
drive to create a regulatory mechanism which allows to sustain this inherent instability of
the global market economy can be addressed by the unavailability of any alternatives to
this condition of the contemporary world economy. If foreign economies had to be
financially independent, they would have to define their own regulatory mechanisms
which in the face of a common currency and entangled export led growth is roughly
impractical to achieve. The process of shift and emergence of this new international
monetary order has made itself irreversible due to interdependencies and a historical
reliance on the US hegemonic status which leaves it to intervene, even when in its own
interest, to realign the factors of imbalance and disruption in the monetary system and
create a temporary stability in the world economy.

References:
1. Hegemonic Stability Theories of the International Monetary System, Barry
Eichengreen
2. Introduction; Empire of the Capital, Ellen Wood
3. Hegemonic Stability Theories of the International Monetary System, Barry
Eichengreen
4. International Regimes, Transactions and Change: Embedded Liberalism in Post War
Economic Order, John Gerard Ruggie
5. Introduction; States and the Remergence of Global Finance, Eric Helleiner
6. The Fallacy of the Revised Bretton Woods Hypothesis: Why Today’s
System is Unsustainable and Suggestions for a Replacement, Thomas I. Palley [2006]
7. Introduction; Superimperialism, Michael Hudson