Bretton Woods II

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21 Aug, 2024

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Bretton Woods II marked the entry of China and other Asian countries into international markets, with many of them vying to become major players in world markets. It represents the existing international monetary system, where the US dollar functions as the reserve currency, and the IMF and World Bank play a crucial role in operating this system efficiently.

The first Bretton Woods System collapsed in the early 1970s, in which most major currencies were linked to the US dollar, which was pegged to gold. It collapsed because of high trade deficits in the US, which resulted in countries losing confidence in the US dollar. A key observation of these systems is global imbalance, as they give the US disproportionate power over the world economy.

What Is Bretton Woods II?

Bretton Woods II highlights the emergence of China and other Asian countries in international markets, pegging their currency to the US dollar and making money via exports.
Michael Dooley, David Folkerts-Landau, and Peter Garber wrote a series of papers on the revived Bretton Woods System, bringing several discussions around this system to the forefront.
The first conference was held in Bretton Woods, New Hampshire, with 44 participating nations pegging their currencies to the US dollar linked to gold reserves.

Bretton Woods II System Explained

Bretton Woods II is the current international monetary system, which developed as a result of the collapse of the Bretton Woods System. The first Bretton Woods Agreement was finalized on July 1, 1944. The conference was organized in Bretton Woods, New Hampshire, US. Hence, the system was named after it. Forty-four countries agreed to peg their currency to the US dollar in this meeting.

Most countries interested in building their export competence followed a floating exchange rate. However, to boost their export operations, they needed foreign direct investments (FDI) to build technological, technical, and managerial expertise. To ensure the reliability of their export strategies, several emerging nations maintained reserves in the form of US dollar-denominated assets.

They used these assets to assure foreign investors of their creditworthiness, reducing the risk of default. Hence, they maintained a current account surplus by pegging their exchange rate to the US currency at an undervalued rate. These undervalued rates meant their products became more affordable in international markets than those sold by countries with higher currency exchange rates.

The rise of China and other Asian economies that pegged their exchange rate to the US dollar and became major players in international markets later has been explored in-depth. Bretton Woods II is considered a revised framework of the first Bretton Woods system popularized by Deutsche Bank economists David Folkerts-Landau and Peter Garber and Cabezon Capital’s Michael Dooley in a collection of papers they wrote. In their observations, they explained how small players like Taiwan, Korea, and Singapore grew, but China reaped the most advantage.

Examples

Let us discuss a few examples in this section for a comprehensive look at the topic.

Example #1

A 2014 article published by Reuters claims that even though Bretton Woods II is considered to have collapsed in 2009, it affected Western workers in 2014 as China and other nations gained prominence in the global economy. Though many believed that the global financial crisis 2008 was the end of this system, it seems to have persisted in international markets.

The article states that the Bretton Woods II will continue to exist in a world where currency exchange rates are undervalued to promote cheap exports and where developing nations gather momentum in terms of attracting FDI.

Example #2

Aviva Investors, a UK-based investment management firm, has expressed the need for a Bretton Woods conference in 2024 to establish a global transition plan to finance projects that can address the adverse impacts of climate change.

Aviva Investors said they look forward to recommending strong changes, with the World Bank and the IMF being the key participants and promoters of this change. Regulators and asset management supervisors will also be onboarded if all goes well. Their key objectives are:

Establishing a net zero transition plan
Prioritizing climate change
Building a renewed global financial infrastructure
Execute climate change mitigation projects by the 80th anniversary of Bretton Woods

Importance

The importance of Bretton Woods II has been discussed in this section.

It acknowledges the entry of developing Asian countries into international markets, specifically China.
It considers the dynamics of exchange rates and notes the economic growth levels countries can accomplish through export-oriented policies.
It led to large current account deficits in the United States.
Bretton Woods II is a revised version of the first conference in which Asian countries played a key role.
It enables countries to modify their policies through floating exchange rates to acclimatize to global economic conditions.
Under the current system, countries undergoing financial crises can seek assistance from the World Bank and the International Monetary Fund (IMF).

End

In this section, we discuss points that likely indicate the end of Bretton Woods II. It must be noted that there is no convergence and consensus yet on whether this system has already ended or is expected to collapse soon.

Those who consider this system to have collapsed or ended believe the financial crisis of 2008 was the prominent cause.
The collapse of trade indicates its end, as protectionism was introduced to boost domestic industries and restrict international trade.
Growing climate change concerns also signal the end of this system, with natural calamities and disasters playing a key role in disrupting the current monetary system.
As digital currencies gain popularity, the existing monetary system might collapse.
The rise of the Euro as an international currency and the expansion of European markets indicate the failure of this system.
The economic slowdown and recessionary phases observed after the 2008 financial crisis indicate an imminent collapse.

Frequently Asked Questions (FAQs)

1. Was the Bretton Woods System successful? Is Bretton Woods II an offshoot of this system?

Bretton Woods saw the rise of many nations in the international market. These countries played no role in the global economy before. The rise of China is the most prominent aspect of Bretton Woods II. Singapore, Taiwan, and other Asian countries also gained importance on the world stage through this system. Yes, it is considered an offshoot of the original Bretton Woods System.

2. Does Bretton Woods II still exist?

Theoretically, Bretton Woods II collapsed after the financial crisis of 2008. However, the involvement of China in world markets, with other developing nations contributing to world trade, supports its presence in the current monetary system. The diminishing value of the US dollar and changing market dynamics also indicate that it still wields power globally.

3. What are the two Bretton Woods II institutions?

The first Bretton Woods conference created two important financial institutions, the World Bank and the International Monetary Fund (IMF). They were built to support countries undergoing financial crises. Currency devaluation was one of the measures recommended to address financial crises. The IMF lends money to fight economic crises, and the World Bank aims to help underdeveloped countries grow. The World Bank was initially called The International Bank for Reconstruction and Development.