The Shocking Truth Behind the Three Transformations of the International Monetary System

Hey there! You know what? The international monetary system has gone through three major shifts. First, the Bretton Woods system fell apart, and the Jamaican system came along. But it’s got its problems – like risky floating exchange rates and the dominance of the US dollar. Then came the G20 after the 2008 crisis. It brought some good changes, but there are still challenges ahead. Geopolitics and stuff are making it tough. But we gotta keep going and find solutions!

The Bretton Woods system, in a broad sense, refers to the international monetary system since the end of World War II and continues to this day. In a narrow sense, it refers to the international monetary system arrangement that only operated from the 1950s to the early 1970s in which the currencies of various countries were pegged to the U.S. dollar and the U.S. dollar was pegged to gold. . From a broad perspective, the Bretton Woods body has experienced three major transformations, each of which has meant major changes in international political and economic relations and has had a profound impact on the world economy.

First transformation: The international monetary system has gone from chaos to governance

The Bretton Woods Conference in the summer of 1944 was convened at the initiative of the United States. Participants included all members of the Anti-Fascist Alliance in World War II and several neutral countries. Its intention was to institutionally end the chaos in the international monetary and financial fields of the 1930s. Provide support for a stable monetary system for the development of the post-war world economy and international trade. The convening of the Bretton Woods Conference established the first transformation of the post-war international monetary system, that is, the international monetary system moved in the direction of transition from chaos to governance, from individual countries to international collective consultation, and from temporary special arrangements to permanent institutional rules. .
The Bretton Woods Conference achieved two major concrete results: First, it established two new types of international financial organizations, the International Monetary Fund and the International Bank for Reconstruction and Development (World Bank). The former is responsible for maintaining the international monetary order and assisting countries in overcoming international financial problems. The latter provides financial support to support short-term fluctuations, and the latter is responsible for development financing and providing policy advice for economic structural adjustment of various countries; secondly, it has established a “dual peg” system between the US dollar and gold and the national currency and the US dollar. This move means joining the international currency IMF members generally implement fixed exchange rates. Both achievements are brand-new things in the world economy and international finance, reflecting major changes and breakthroughs in international financial relations.
At the end of the 19th century and between the two world wars, the gold standard became popular in the international community. Under the gold standard, the comparison of the gold content of the currencies of the two countries is the basis for determining the exchange rate between the two countries. Gold can be freely exported or imported into the country, and a coinage-price flow mechanism is formed during the export and import process, which plays an automatic adjustment role in the exchange rate. However, because the growth rate of gold production is far lower than the growth rate of commodity production, and the uneven distribution of gold stocks among countries, the basis for the circulation of gold coins has been greatly weakened. From the beginning of the global economic depression in the 1930s to the 1940s, many countries successively announced their departure from the gold standard, devalued their currencies, implemented capital flow controls, and established and expanded their own special trade zones. This caused the international monetary system to fall into chaos and seriously Interfering with and hindering the operation of international trade and international finance.
The establishment of the Bretton Woods system established the international financial order after World War II and promoted the unprecedented development of international trade and the interdependence of the global economy. Although the Soviet Union did not join the Bretton Woods system, which affected the global coverage of the system to a certain extent, as countries that became independent after the end of World War II successively joined the system, the global representativeness of the Bretton Woods system was not questioned.

The period from the 1950s to the early 1970s was the period when the universal fixed exchange rate system established by the Bretton Woods system was operating. It was also the golden period of economic recovery and growth for European, American, and Japanese countries after the war. During this period, the average annual growth rate of the per capita gross domestic product (GDP) of each country was between 2% and 3%, and the growth rate of international trade exceeded the growth rate of GDP. At the same time, inflation in each country was slight, and the exchange rate remained basically stable. Since the early 1970s, many emerging market economies in East Asia have enjoyed the benefits brought by the fixed exchange rate system, actively participated in international trade, developed export-oriented economies, and become new highlights of the world economy.

However, the Bretton Woods system had various inherent shortcomings from the beginning. First, the system overemphasizes the importance of fixed exchange rates, and the exchange rate adjustment mechanism lacks sufficient flexibility. The original intention of the Bretton Woods system was actually to establish a “gold standard” that did not require the direct use of gold, the so-called “gold exchange system.” Moreover, member states were only allowed to adjust the gold parity within a limited range. That is, they could only small changes in exchange rate levels. This provision restricted the monetary policies of many member countries at that time, and most of these countries were developed countries, such as the United Kingdom and France. Secondly, the Bretton Woods system was based on the support of a few “key currencies”, namely the US dollar and the British pound before the 1960s. They served as the main tool for international liquidity during this period, replacing the role that gold had played before. Although this arrangement helps world economic growth overcome the constraints caused by insufficient gold supply, it also creates a new problem, the “Triffin Dilemma.” Third, when the Bretton Woods system was first established, it did not fully consider the growth of cross-border financial flows and its challenges to the international monetary system. Before the establishment of the Bretton Woods system, cross-border financial flows were mainly accompanied by international trade and international direct investment. Although arbitrage and speculative cross-border capital flows have long existed among European and American countries, their scale is significantly smaller than that driven by international trade and international direct investment. After entering the 1960s, with the expansion of financial institutions in relevant countries, the growth of cross-border securities investment, and various investment funds participating in more cross-border arbitrage or speculation activities, the scale of cross-border capital flows increased rapidly, which was related to the relationship between international trade and international direct investment has also weakened significantly. In this context, cross-border capital flows have become an important factor affecting the international balance of payments and currency exchange rates of various countries.

In the 1960s, several European and American countries increasingly felt the tremendous pressure to maintain a fixed exchange rate system and insufficient gold reserves or foreign exchange reserves, and they all sought countermeasures. The International Monetary Fund has launched three major repair measures within its framework: one is to establish a “gold pool”, the other is to establish a “General Arrangement of Borrowing”, and the third is to establish a “Special Drawing Rights”.
The “Gold Pool” was established in 1961 by the United States and several European countries. The purpose is to intervene in the gold market and maintain the stability of gold prices through the consistent actions of the central banks of each participating country. The specific method is to sell gold when the price of gold rises and the price of gold falls. time to buy gold. However, after the mid-1960s, the market price of gold showed a trend of “rising but not falling”, and the gold reserves in the gold warehouse became increasingly scarce, and finally had to close its doors in 1968.
The General Arrangement for Borrowing, also created in the early 1960s, aims to help the International Monetary Fund obtain loans from outside the General Fund quota to meet the borrowing needs of participating countries in the General Arrangement when it lacks or may lack funds. , or influence the foreign exchange market to curb currency speculation and financial crises. In the early days, it was only funded by a dozen “rich countries”, and later it was joined by oil-exporting countries in the Middle East. This is a mechanism for replenishing funds. Although it is useful, it is difficult to get rid of the limitations of the scale of funds.

The “Special Drawing Rights” established in 1969 was an important innovation. The Special Drawing Rights is a reserve asset and unit of account created by the International Monetary Fund, also known as “paper gold.” It is a right to use funds allocated by the IMF to member states. When a member state has a balance of payments deficit, it can use it to exchange for foreign exchange from other member states designated by the IMF to repay the balance of payments deficit or repay IMF loans. It can also be used as an international reserve like gold and freely convertible currencies. This mechanism is equivalent to expanding the IMF’s original quota system and its funding scale. In the 1970s, SDR funds grew faster than ordinary quotas and became an important supplement to international liquidity within the framework of the International Monetary Fund. However, its limitations are also very obvious. First, its total size is still limited; second, it is not a substitute for the U.S. dollar or other important international currencies, and the U.S. dollar has always been the most important component currency of the Special Drawing Rights; third, its use is limited to official settlements between countries. It does not apply to cross-border payments and settlements in the private sector of various countries.

The second transformation: The establishment of the “Jamaican System”

The accumulation of internal contradictions in the Bretton Woods system eventually led to the collapse of the aforementioned “double peg” system. In August 1971, U.S. President Nixon announced the suspension of the United States’ gold exchange with foreign governments, which was known as the “Nixon Shock” in history. This move not only caused an immediate devaluation of the U.S. dollar, but also had a severe impact on the entire international financial market, with currencies of many countries devaluing or floating one after another. After the “Nixon Shock” occurred, the International Monetary Fund took the lead in arranging a number of international policy consultations. In January 1976, the “Interim Committee” composed of more than 30 countries held a meeting in Jamaica and reached an agreement, deciding to amend the Charter of the International Monetary Fund, abolish the gold parity of each country’s currency, recognize the legitimacy of floating exchange rates, and allow each country to adjust its own Adjust the exchange rate and at the same time accept the IMF’s supervision of exchange rate affairs. This agreement is known as the “Jamaica Agreement”.
After the “Jamaica Agreement” was reached, people referred to the international monetary system formed on this basis as the “post-Bretton Woods system”, “Bretton Woods system version 2” or the “Jamaica system”. From an ex post facto perspective, the international monetary system established after the “Nixon Shock” was actually the second transformation of the postwar international monetary system. The key points of this transformation are: first, countries gain the autonomy to choose exchange rate systems; second, gold no longer serves as a payment tool for official settlements (“gold demonetization”); third, reserve currencies are diversified, and the U.S. dollar cannot theoretically Secondly, it has its special status in the golden period of the Bretton Woods system; fourthly, as more developing countries join the system and the dollar assets of oil-exporting countries grow rapidly, the International Monetary Fund begins to pay attention to developing countries and The focus of work shifts to developing countries.
Objectively speaking, since the 1970s, the Bretton Woods system established in the early post-war period has not completely “collapsed” due to the “Nixon shock”. What has collapsed is only the fixed exchange rate system in the system, including the International Monetary Fund. The Bretton Woods institutions, including the World Bank and the World Bank, continue to operate and play an active role on a larger scale. Although countries have the right to determine exchange rates, they must accept external supervision. The “international legal” status of the US dollar has declined, but its market status has not. is rising. Therefore, it is reasonable to regard the international monetary system established after the “Nixon shock” in the 1970s as a transformation of the Bretton Woods system (the postwar international monetary order).

The 1980s and 1990s were a period of rapid growth for developing countries and emerging market economies, and also a period of profound changes in the world economy and international financial landscape. During this period, some developing countries and emerging market economies encountered foreign debt crises and financial crises from time to time. Prominent examples include the Latin American debt crisis from 1982 to 1984, the Mexican financial crisis in 1994, and the East Asian financial crisis from 1997 to 1998. The international The IMF played a leading role in responding to the financial crisis in emerging market economies, highlighting the importance of the post-transformation Bretton Woods system. However, the transformed Bretton Woods system still has inherent contradictions and shortcomings. First of all, since the second half of the 1970s, after many countries switched to floating exchange rate systems, the International Monetary Fund and many developed economic countries believe that floating exchange rates are the key to solving many economic problems, thus ignoring the highly prosperous financial markets of developed countries. Risks and problems inherent in the financial system. Secondly, although the US dollar no longer has a special legal status, it continues to enjoy the status of “one currency alone” in the international currency market. As a result, from the 1970s to the first decade of the 21st century, the international monetary system China’s reserve currency diversification goal is far from being achieved. Against this background, the expansion and contraction of international capital liquidity is still largely affected by the adjustment of domestic monetary policy in the United States, and the original “Triffin Dilemma” has manifested itself in a new form. Third, after entering the 21st century, the status of developing countries as a whole in the world economy has increased significantly. However, the governance structure under the Bretton Woods system failed to fully reflect this change. Many developing countries and emerging market economies have strongly There are calls for reforming the international financial governance structure and giving them more voice and voting rights. However, due to constraints from various factors, the reform of the governance structure of institutions and organizations under the Bretton Woods system has been progressing slowly.

The third transformation: The establishment and operation of the G20

The outbreak of the international financial crisis in 2008 became a catalyst for another transformation of the international monetary system. After the “Nixon Shock” occurred in the early 1970s, the International Monetary Fund established the “Committee of Twenty” (C-20) within its framework, which was composed of developed countries that held large shares in the International Monetary Fund. and developing countries, aiming to explore the reform of the international monetary system. However, due to excessive differences of opinion, the committee failed to reach an agreement and was later replaced by an “interim committee” composed of more participating countries. After the international financial crisis broke out in 2008, the United States initiated the “Twenty Summit”, which gave birth to the Group of Twenty (G20). The G20 holds regular summits and ministerial meetings to put forward policy recommendations on macroeconomic policy coordination, international monetary and financial supervision, and governance structure reform, which has effectively promoted the recovery of the world economy and the resolution of international financial risks after the international financial crisis. The G20 mechanism has absorbed the most influential countries and international economic organizations in the global economy in the 21st century. The number of developing countries and emerging market countries is about the same as that of developed countries, reflecting the Demands for reform of the governance structure of international organizations. The establishment and operation of the G20 marked the third transformation of the postwar international monetary system.
The main results of the third transformation are: first, in the G20 mechanism, developing countries and developed countries have achieved basically equal status, and the regular consultation mechanism of the G20 has become an influential factor in the policy decisions of the Bretton Woods institutions. As an important factor, the international financial governance structure has undergone major adjustments after the formation of the G20; secondly, driven by the G20, the International Monetary Fund and other relevant international financial institutions, international monetary and financial supervision has been carried out It has made major adjustments and included important financial institutions in developed and emerging market countries into its “macro-prudential management” framework, thereby breaking through the limitations of traditional “macro-management”; third, it has taken a new step in promoting the diversification of reserve currencies. The pace, that is, the International Monetary Fund decided that the RMB has become one of the constituent currencies of the Special Drawing Rights since 2016, alongside the US dollar, the euro, the Japanese yen and the British pound. This is both for the international monetary system and the RMB itself. , are all leaps and bounds of historic significance. In the years since the outbreak of the international financial crisis in 2008, the world economy has maintained a relatively stable recovery and growth, which from one aspect shows the positive role of the third transformation of the post-war international monetary system.
However, in recent years, the reform, development and continued transformation of the international monetary system have obviously been adversely affected by many new factors, including the increase in international geopolitical conflicts and frictions, the reduced willingness of some countries to reform, and the emergence of new imbalances in world economic growth. etc. Facing the new environment and new situation, the international community needs to learn from historical lessons, actively seek new consensus, strive to strengthen communication and policy coordination, and avoid the chaos of the 1930s in the international monetary system again.

error: Content is protected !!