Bretton Woods Era Research Articles

Zombie International Currency: The Pound Sterling 1945–1971

This paper examines the international role of sterling during the Bretton Woods era and argues that it was not a competitor to the U.S. dollar. I construct a novel dataset to measure the reserve role of sterling in Europe and sterling area countries. The postwar reserve role of sterling was limited to the sterling area and was artificial as this area was built as a captive market. I document how British authorities imposed exchange controls, commercial threats, and economic sanctions on sterling area countries to compel them to keep their foreign exchange reserves in sterling.

Sovereign currency and long-term interest rates in advanced economies from 1879 to 2016

ABSTRACT This paper explores the effects of government debts and deficits on long-term interest rates under different international monetary systems from the perspective of monetary sovereignty. The findings of this paper confirm conventional accounts of financial crowding-out and the adverse impact of growing public debt on interest rates among countries under the classical Gold Standard period (1879–1913) and non-sovereign countries under the recent fiat system (1973–2016). By contrast, countries in the Bretton Woods era (1959–1970) and sovereign countries in the contemporary post-Bretton Woods era (1973–2016) do not exhibit such positive debt-interest rates relationships while still showing crowding-out but with much less magnitude. Overall, the results support the Modern Money Theory (MMT) view that the consequence of monetary sovereignty from 1879 to 2016 is to remove, or greatly attenuate, the impact of default risk, fiscal balance, and bond vigilantes on the interest rate.

Fiscal policy and the twin deficits: structural changes matter

AbstractThis paper empirically and theoretically investigates the relationship between budget balances and external balances, the so-called twin deficit hypothesis. Using the US post-World War II data, I estimate a time-varying structural vector autoregressive model to evaluate the effects of structural breaks on this relationship. The empirical results reveal that the relationship is significantly time varying: (1) an increase in government spending and the consequent budget deficits tend to cause trade deficits in the Bretton Woods era; (2) in contrast, an increase in government spending tends to induce trade surpluses in the post-Bretton Woods era; and (3) with the exceptions of the 1980s and 2010s, government spending shocks cause trade deficits under a floating exchange regime. Using the open economy New Keynesian model with rule-of-thumb consumers, I find that a shift in exchange rate regimes helps in understanding empirical results (1) and (2). Moreover, slowly adjusted taxes inform our comprehension of exceptions in the 1980s, whereas zero lower bound aids our explanation of exceptions in the 2010s.

How Powerful Is Unannounced, Sterilized Foreign Exchange Intervention?

AbstractThough most central banks actively intervene on the foreign exchange market, the literature offers mixed evidence on their effectiveness: particularly for unannounced interventions. We use new, declassified data from the archives of the Bank of England and the institutional features of the Bretton Woods Era to estimate the effects of intervention on the exchange rate. We find that a purchase of pounds equivalent to 1% of the money supply causes a statistically significant, 4–5 basis point appreciation in the pound.

Theorizing dollar hegemony: the political economic foundations of exorbitant privilege

This paper explores dollar hegemony, emphasizing that it is a fundamentally political economic phenomenon. Dollar hegemony rests on the economic, military, and international political power of the US and is manifested through market forces. The paper argues that there have been two eras of dollar hegemony which were marked by different models. Dollar hegemony 1.0 corresponded to the Bretton Woods era (1946–1971). Dollar hegemony 2.0 corresponds to the Neoliberal era (1980–today). The 1970s were an in-between decade of dollar distress during which dollar hegemony was reseeded. The deep foundation of both models is US power, but the two models have completely different economic operating systems. Dollar hegemony 1.0 rested on the trade and manufacturing dominance of the US after World War II. Dollar hegemony 2.0 rests on the Neoliberal reconstruction of the US and global economies which have made the US the center of global capitalism and the most attractive place to hold capital. It is a financial model and intrinsically connected to Neoliberalism. Consideration of dollar hegemony leads to two further questions. One is whether there is a better way of organizing the world monetary order, which is associated with a debate about the possibility of a new Bretton Woods. The other is: what is the future of dollar hegemony?

‘Toward a Global Social Contract for Trade’ - a Rawlsian approach to Blockchain Systems Design and Responsible Trade Facilitation in the New Bretton Woods era

Imminent changes to the international monetary system alongside a shift toward more egalitarian principles of justice in commercial contracts for trade are now taking place. Such changes however do not sufficiently account for circumstances of hardship, or black-swan events such as COVID-19, whereby the relative losers of trading arrangements should continue to receive outcomes which are not only efficient, but also fair and resilient. We argue that the ‘Society-in-the-Loop’ (SITL) social contract paradigm, in conjunction with the use of Strategic Responsible Innovation Management (StRIM), can together provide a solution for improving distributive justice in trade. Through collaboration with a locally based trade facilitation company, we describe the innovation-planning phase of a blockchain smart contract solution based on Derek Leben's idea of a ‘Rawlsian Algorithm’ (2017). It is demonstrated how this can be used to strengthen the algorithmic fairness of commercial contract implementation in accordance with existing ISO 20022 standards. Since currently no formal design framework exists for modeling blockchain oriented software (BOS), an agile development approach is adopted which takes account of the substantial difference between traditional software development and smart contracts. This method involves the construction of UML Use Case, Sequence, and Class diagrams, with a view to blockchain specificities. Evaluation and feedback from the company is also considered.

Monetary Policy Cooperation/Coordination and Global Financial Crises in Historical Perspective

The Covid 19 pandemic spawned a global liquidity crisis in March 2020. The global liquidity crisis was alleviated by the Federal Reserve and other advanced country central banks cooperating by extending the swap lines they developed in the Global Financial Crisis 2007–2008. Central bank cooperation in 2020 evolved from a two-century history across several monetary regimes that is surveyed in this paper. I find that in monetary regimes which are rules-based cooperation was most successful. International currency swaps developed to manage exchange rates during the Bretton Woods era have evolved into the leading tool to manage international liquidity crises. The swap network can be viewed as a step in the direction of a global financial safety net.

Financial subordination and uneven financialization in 21st century Africa

AbstractThe financialization debate has not paid enough attention to the African continent. The continent’s populations and governments have found creative ways of dealing with the capitalist world market and political power relations since decolonization in the late 1950s. However, several forms of structural dependence and subordination persist. We ask in this article how the global process of financialization has unfolded across the continent and what it means for relations of dependence. We understand financialization as the global expansion of financial practices, and, in particular, the financial sector, that followed the end of the Bretton Woods era. We consider to what extent it has occurred at all in the four case study countries of Mauritius, Nigeria, Zambia, and South Africa. The empirical analysis of aggregate country data shows that financialization is, at best, an uneven and patchy process on the continent, not a general structural shift in the way capital accumulation is organized. Rather, where financialization occurred, it appears to have diversified the relations of dependence that states, corporations, and populations have found themselves in.

Investigating De Facto and De Jure Exchange Rate Regimes

Exchange rate regimes have evolved a lot of the years, specifically the past century, right from the Gold standard to the Bretton Woods era that led to the creation of the International Monetary Fund (IMF) and Post Bretton Woods periods that have seen the emergence of currency unions and a whole range of hybrid and more sophisticated exchange rate regimes. This evolution has led to the emergence of de jure and de facto exchange rate regimes. This discrepancy can be very misleading and pervasive for monetary policy and stability. In this paper, we combine an empirical econometric approach to develop an algorithm that will classify the de facto regimes that countries are practising by modelling exchange rate bands and the behaviour of a particular currency towards an anchor. The sample is representative of the globe. We believe the algorithm performs well and may be adopted by monetary authorities and international bodies like the International Monetary Fund.

The BRICS’s Bank, Institutional Framework, and Other Current Limitations

:Based on Polanyi’s concepts of embeddedness, disembeddedness, and the double movement, the aim of this article is to show that the new development bank (NDB) established by Brazil, Russia, India, China, and South Africa (grouped as BRICS) lacks an institutional context to spur growth and development, similar to the growth that occurred during the Bretton Woods era. First, I examine some of the BRICS’s strengths, such as growth rates, share of world GDP (gross domestic product), and the level international reserves as a percent of the world total. Second, I outline the BRICS’s and other Third World countries’ need for financing. I maintain that the main flaw in the BRICS’s bank is that it follows market rationality in obtaining and granting resources, and that China (the most important member of the BRICS) is still dependent on the G7’s economies. Finally, I remark that as long as the NDB follows market fundamentals, it will be less likely to achieve growth.

Financial Volatility and Economic Growth

We investigate the causal impact of financial risk on economic growth, using a panel spanning 150 years and 74 countries. Persistent low risk encourages risky investments that ultimately augment growth but at the cost of building up of vulnerabilities in the economy and thus has a boom-to-bust effect on growth: an initial increase followed by a reversal in two years. Persistent global low risk has a more pronounced effect on growth than local risk, highlighting the relative importance of the global risk environment. While the U.S. financial markets are important, their effects on risk appetite globally are still limited. The impact of low risk is the strongest after the Bretton Woods era, for developing countries, and for countries experiencing high credit growth. Finally, long-lasting low volatility affects growth amid its notable impact on capital flows, investment, and lending quality.

Reducing Public Debt: The Experience of Advanced Economies over the Last 70 Years

This paper investigates the episodes of public debt reduction in advanced economies since the Second World War. We find 30 episodes of large reductions in the public debt-to-GDP ratio. Four main approaches succeeded in lowering the debt ratio. First, after the end of WWII, high and unexpected inflation eroded a large share of public debt. Second, during the Bretton Woods era, a mix of financial repression, high economic growth and moderate inflation helped reducing public debt. Third, since the 1980s, several advanced economies followed orthodox fiscal adjustments, namely improving their primary balance by reducing expenditure and/or raising taxes. The fourth approach (debt restructuring) was implemented only in one case: Greece in 2011-12. One key finding of our paper is that debt reduction has never been achieved by relaxing fiscal policy (cutting taxes or increasing expenditure), hoping that this would set in motion a growth process sufficiently strong to lower the debt ratio (the so-called “denominator approach” which has recently become fashionable in some countries, including Italy). The empirical evidence of the last 70 years suggests that running a sufficiently strong primary surplus is the only viable option to reduce public debt ratio nowadays, particularly in countries that are part of the euro area.

Evolution of the IMF Economic Policy in the Bretton Woods Era

The 2008 global financial crisis raised the expectations for the International Monetary Fund (IMF/the Fund) and instigated a call for a New Bretton Woods. In this paper, I review the Bretton Woods monetary system and the role of the IMF to suggest new insights into its role in the postwar international economic scene and discuss its future prospects. The IMF has been described as a useless agent for the U.S. during the Bretton Woods Era, and hence its role has been understudied. I challenge this conventional view by examining several of the Fund’s key documents. Based on the archival records, various facts will be presented regarding the Fund’s policymaking efforts.

Presidential Cycles in the USA and the Dollar-Pound Exchange Rate: Evidence from Over Two Centuries

In this paper, we analyze the impact of the U.S. presidential cycles on the dollar relative to the British pound over the longest possible monthly period of 1791:01 to 2018:10, based on GJR (or threshold generalized autoregressive conditional heteroscedasticity (GARCH)) model. The usage of over two centuries of data controls for sample selection bias, while a GJR model accommodates for omitted variable bias. We find that over the entire sample period, the Democratic regime has indeed depreciated the dollar relative to the pound. However, during the post Bretton Woods era, the depreciation of the dollar is not statistically significant under the Democratic presidents.

Tax revenues and the fiscal cost of trade liberalization, 1792–2006

This article examines the impact of trade liberalization on government revenues. Using a new dataset on tax revenues for 130 countries between 1792 and 2006, we identify ninety-nine episodes of trade liberalization defined as a large fall in trade tax revenues not accompanied by a decrease in trade. Seven took place before World War One, seven in the interwar period, eighteen in the Bretton Woods period and the remainder after 1970. We examine the extent to which countries were able to recover the tax revenues lost by liberalizing trade by using other sources of revenue. We find that historical (pre-1970) trade liberalization episodes were unlikely to be accompanied by decreases in tax revenues, especially during the Bretton Woods era. In the recent period however, over 40% of the developing countries in our sample experience a fall in total tax revenues that lasts more than ten years after an episode of trade liberalization. Overall, trade liberalization led to larger and longer-lived declines in tax revenues in developing countries since 1970 than in today’s rich countries in the 19th and 20th centuries. Results are similar when we consider government expenditures, suggesting decreases in trade tax revenues negatively affect governments’ capacity to provide public services in many developing countries.

Income distribution and the balance of payments: a formal reconstruction of some Argentinian structuralist contributions Part I: Technical dependency

In this two-part paper, we explore the interaction between income distribution and the balance of payments, by assessing the contributions of three Argentinian exponents of the Latin American Structuralist School: Oscar Braun, Marcelo Diamand and Adolfo Canitrot. With this aim, we introduce a two-sector model inspired by the classical tradition. Part I of the article examines the implications for prices and quantities of the phenomenon of ‘technical dependency’. That is, the inelastic demand for imported inputs observed in peripheral economies, a true constraint to growth during the Bretton Woods era. We leave until Part II of the paper the assessment of the implications of ‘financial dependency’, namely the influence exerted on the profit rate of peripheral economies by the international profit rate.

Enhanced Special Drawing Rights: How China Could Contribute to a Reformed International Monetary Architecture

AbstractSince the end of the Bretton Woods era, the world has operated on a de facto system of free‐floating exchange rates, with the US dollar as the dominant international currency. The system, characterized by large pro‐cyclical capital flows and chronic imbalances, is inherently unstable, and has contributed to repeated crises, recessions and geopolitical tensions. One potentially “least‐difficult” line of reform would be to allow the evolution of a multi‐currency system, underpinned by an expanded role for Special Drawing Rights (SDRs). Attempts to promote wider use of the SDR have foundered on the liquidity premium. However, for Chinese corporations and institutions, at present restricted in their capital account activities, the SDR liquidity premium would appear less daunting. The Chinese authorities could provide policy encouragement for the use of SDRs by their institutions. This initiative, supported by China's Special Administrative Region Hong Kong, would kick‐start an international SDR ecosystem, and encourage even broader use of SDRs, to the benefit of international monetary stability.

The Great Escape: The Multinational Trade Deficit in Historical Perspective

:During the Bretton Woods era, the debate surrounding U.S. export sales versus U.S. multinational production focused primarily on the maintenance of pegged exchange rates and labor’s concern over the export of jobs. The collapse of Bretton Woods gave at least the hope that a decline in the dollar would expand exports and limit imports. Yet, the forty-year secular decline in the dollar has been one with a secular expansion of U.S. trade deficits. The older concerns of U.S. multinational sales competing with U.S. exports retain a current relevance. They help explain the unending nature of U.S. trade deficits.

DOCTRINAL DEVELOPMENTS IN INTERNATIONAL MONEY: THE QUESTION OF CURRENCY INTERNATIONALIZATION FROM BRETTON WOODS TO THE 1970S

In the Bretton Woods era the controversy over cross-border use of national monies turned on how to create ‘symmetries’ and avoid significant ‘asymmetries’ in the way national currencies shared specific international currency functions. We examine the twentieth-century work of prominent economists on the nature, choice, and functions of international currencies. Prescriptive approaches to international currency formation are considered, beginning with the discussion of the Bretton Woods plans, followed by doctrinal developments stimulated by the collapse of the Bretton Woods system. Why are those developments instructive, given recent revisitation of the currency internationalization question in modern international monetary thought and policy? The modern revival of this question resembles a rehabilitation and restatement of earlier controversies, though it underestimates the gradual encroachment of the idea of international currency competition. This idea came to dominate other doctrines from the 1970s; it accommodates the ongoing adaptation of national currencies to the full range of international currency functions.

Federal Reserve Policy in an International Context

In the postcrisis period, some foreign policymakers accused the Federal Reserve of engaging in “currency wars” and inadvertently creating “financial spillovers,” arguing that these were especially consequential given the dominant role of the U.S. dollar in international trade and finance. This lecture analyzes these critiques, and argues: (1) little support exists, either theoretical or empirical, for the currency wars claim; (2) the United States and its trading partners should use nonmonetary tools for dealing with spillovers; and (3) the benefits of the dollar standard to the United States and the world are considerably more symmetric than in the Bretton Woods era.