Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing

Will Calls for a "New Global Financial Order" Result in a Second Bretton Woods and the End of U.S. Dominance?

By Jason Simpkins
Associate Editor
Money Morning

The leaders of 20 of the world’s most developed nations, the G20, will convene in Washington D.C. on Nov. 15 for an emergency financial summit considered by many to be the 21st century version of the Bretton Woods initiative of 1944. This will be the first chance for European leaders – many of whom blame the current financial contagion on U.S. free market capitalism run – to press for an overhaul of a global financial system the United States has dominated for more than 60 years.

The summit will “seek agreement on principles of reform needed to avoid a repetition of the problems and assure global prosperity in the future,” U.S. President George W. Bush, European Commission President Jose Manuel Barroso and French President Nicolas Sarkozy said in a joint statement.

However, Barroso was more explicit – and less diplomatic – earlier this week when he said that  “we need a new global financial order."

President Sarkozy has also expressed his desire for a more dramatic remaking of the current financial system, which he says “has distanced itself from the most fundamental values of capitalism.” It was the French president who earlier this week pressed President Bush to call a summit of the G8 and include the developing nations of India and China.

Sarkozy, over the past week, outlined some of the broad principles of reform he hopes to achieve. Specifically he argued that “no bank that works with government money should be allowed to work with tax havens” such as the Cayman Islands. He also raised the issue of curbing executive pay.

No financial institution should escape regulation,” the French president said, referring to hedge funds and private equity firms. And the world’s most prominent credit agencies –
dominated by such U.S. institutions as Moody’s Corp. (MCO), Fitch Ratings Inc., and Standard & Poor’s – should have their role in the global credit market reduced after their “scandalous” behavior.

Sarkozy isn’t alone either. The European Union (EU) is also on board with tougher regulations on hedge funds, limits on executive pay, and new rules for credit rating agencies. And British Prime Minister Gordon Brown, who has been instrumental in pushing for reform, has called for 30 cross-border "colleges of supervisors" to be established by the end of the year to monitor the activities of the world’s 30 biggest banks.

Indeed, the recent rash of criticism from leading politicians is indicative of the prevailing sentiment in Europe that the failure of U.S.-style free market capitalism is most to blame for the credit crisis that has put the world economy at risk of a recession. For Sarkozy, Brown and others, reform will not end with increased oversight of financial institutions but extend to the fabric of the global financial system, as well as the U.S. dominance that lies at its heart.

“Europe wants it. Europe demands it. Europe will get it,” Sarkozy said in reference to global financial reform last Saturday.

And while President Bush has insisted that the United States will seek to preserve the foundations of democratic capitalism – a commitment to free markets, free enterprise, and free trade,” Sarkozy has branded the lax regulation that has become the hallmark of the U.S. economic philosophy as a “betrayal of the spirit of capitalism.”

To Europe, the capital excess that is behind the global financial meltdown epitomizes the behavior of an America that has essentially squandered its role as the standard bearer of global finance.

“We cannot continue accepting the increasing deficit of the world power,” Sarkozy said. “Americans for three decades have been living over their limits.”

Bretton Woods – Then and Now

In 1944, the United Nations Monetary and Financial Conference – a collection of 740 delegates from 44 Allied nations – convened in Bretton Woods, N.H. The goals were to prevent a repeat of the Great Depression and facilitate the reconstruction of Europe following World War II.

After three weeks of deliberation, delegates agreed to a number of principles that established the rules for commercial relations among the world's major industrial states and served as the foundation for today’s financial system. To this day, that complex plan is known as the “Bretton Woods system of monetary management.”

The nations participating agreed to fix their exchange rates to the dollar. The dollar was, in turn, fixed to gold at a value of $35 per ounce of gold bullion.  The conference also led to the formation of the Bank for Reconstruction and Development, the General Agreement on Tariffs and Trade, and the International Monetary Fund (IMF).

The Bretton Woods system met its demise in 1971 when U.S. President Richard M. Nixon severed the link between the dollar and gold. Most major world economies now float their currencies. However, such Bretton Woods institutions as the Bank for Reconstruction and Development and the General Agreement on Tariffs and Trade (GATT) live on in the form of the World Bank and the World Trade Organization (WTO), respectively. The IMF, meanwhile, is currently negotiating broad-based bailouts for Iceland, Ukraine, Hungary, and Pakistan.

And analysts aren’t confident that the upcoming round of dialogue will produce the “very large and very radical changes,” that British Prime Minister Gordon Brown has called for and Sarkozy has seconded.

The original Bretton Woods conference took years of coordination and planning. It was also a three-week gathering of the world’s foremost economists, including John Maynard Keynes – not an impromptu political salon for world leaders to pontificate on the obvious shortcomings of the current financial system. And as the IMF’s continued intervention in many struggling world economies illustrates, many of the old Bretton Woods Institutions still have value.

Things like this that produce real results for the world are planned years in advance,” Edwin M. Truman, who was an assistant secretary of the Treasury under U.S. President Bill Clinton, told The New York Times. “The notion that you’re going to have something come out of this in three months is probably naïve.”

The timing of the conference is also precarious, as it will come just 11 days after a new U.S. president is elected and just a few days before President Bush takes his last official trip abroad. The U.S. president will be joining an annual summit of Asian-Pacific leaders in Peru.

The meeting is being planned in such haste that the White House was not yet certain where it will actually be held. And with so many nations participating – not to mention a lame duck U.S. president – it unlikely the November summit will achieve anything substantive.

Still, there remains the hope that at least a framework of discussion – and perhaps even an outline for reform – can be established.

Instead the leaders who attend will be challenged to “agree on a common set of principles for reform,” White House Press Secretary Dana Perino told The Times. It will then be up to financial experts “to put meat on the bones when it comes to fleshing out the principles.”

News and Related Story Links:

Join the conversation. Click here to jump to comments…

  1. huffinmuffin | October 24, 2008

    This agrees with conspiracy theory that the banks create problems that force us closer to centralized world government. All of the finacial downturns have served the international bankers who are above a certain level. The biggest internationals are effectively "shorting" the global economy. A very bold move, a huge financial gambit. They are the ones who need to regulated, not us.

  2. Valued Customer | October 25, 2008

    I cannot imagine a more dismal prospect than that of George W. Bush, during the nadir of a global financial crisis widely perceived as springing from his loins, mere days before his utterly disparaged and infamous presidency finally ends, standing for the American people at a summit meeting intended to replace Bretton Woods.

  3. Morrison Bonpasse | October 25, 2008

    Hopefully the calls for a "New Financial Order" WILL result in a Second Bretton Woods. The most important goal of the 1944 Bretton Woods conference was global monetary stability and pegging the U.S. dollar to gold and other currencies to the dollar was the chosen method. Monetary and currency stability is the primary goal of the International Monetary Fund. However, gold is no longer used as a monetary source of value and the currencies of the world float on the market.
    The upcoming 15 November conference should begin the world's long path to a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union, by initiating research and planning for that goal.
    The world need not move from one country's or one region's currency to another as THE #1 currency, but should transition to a Single Global Currency. The success of the euro shows that monetary union is the best way to ensure monetary stability. If 16 countries can use the same currency, why not 192? The only problem with the euro's stability is that it exists in a multicurrency world.
    The Single Global Currency Assn. promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference. That's only 16 years away. The Assn's website is http://www.singleglobalcurrency.org. See, also, my book, "The Single Global Currency – Common Cents for the World."

  4. Mary Ann Gordon | October 26, 2008

    I am a volunteer historical tour guide at the Mount Washington Hotel – in Bretton Woods. This hotel was where the conference was held.
    The hotel is still there -including all the rooms the conference was held in.
    In the past two months I have noticed on each tour that people literally start shouting out "have a new Bretton Woods conference". These are people who are going on a historic tour -and usually not given to shouting. None of them know each other, and they are usually from different countries.

    The symbolism of having a new conference at this very hotel- would mean an incredible amount – to so many people.
    This is the place where we stabilised the world economy once before.
    Please don't have a new "Bretton Woods" in the glaring media light of Washington or New York, and certainly not a one-day conference.
    The very reasons that the first Bretton Woods was successful was because it was held in the quiet, thoughtful, secure place that is the essence of Bretton Woods and the Mount Washington Hotel.

Trackbacks

  1. […] Will Calls for a “New Global Financial Order” Result in a Second … The European Union (EU) is also on board with tougher regulations on hedge funds, limits on executive pay, and new rules for credit rating agencies. And British Prime Minister Gordon Brown, who has been instrumental in pushing for … […]

Leave a Reply

Your email address will not be published. Required fields are marked *


Some HTML is OK