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International Political Economy #13
The Bretton Woods II Monetary System
William Kindred Wineco
Indiana University Bloomington
October 15, 2013
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Out with the Old
The original Bretton Woods monetary system was unsustainable if it
was successful.
Trin Dilemma: The dollar-gold link would break if
economies kept growing.
Additionally, domestic politics placed demands on governments.
In the US: low taxes + expanding welfare state.
And international politics was dicult for US to manage as well.
Communist expansionism, esp in Indochina.
By the 1970s the old system was doomed. But what would come next?
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The Shift
The previous macroeconomic system: independent monetary policy and
xed exchange rates.
The previous political system: independent national politics, democratic
political system.
The new macroeconomic system: independent monetary policy and
oating exchange rates.
The new political system: golden straitjacket or global federalism?
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The Politics
Which countries would we expect to pick which politics?
Lets think about comparative advantage:
Capital abundant countries should prefer capital openness.
Capital scarce should prefer capital closedness.
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The Politics
Which countries would we expect to pick which politics?
Lets think about comparative advantage:
Capital abundant countries should prefer capital openness.
Capital scarce should prefer capital closedness.
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Trends in Capital Openness
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More Politics
About what wed expect.
But why have developing countries begun liberalizing?
Partly under pressure from developed countries + institutions
(i.e. IMF). More later.
Partly because of changes in domestic politics:
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The Performance
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The Politics
Increasing independence plus democratization in the post-Cold War era
meant:
Citizens have more political voice.
Citizens tend to be labor more than capital.
When labor is abundant and capital scarce, labor benets
from capital openness.
Hence, more democracy leads to more capital openness: trend is toward
Global Federalism rather than Golden Straitjacket.
Threatened by crises?
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Capital Openness
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Political Openness
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Bretton Woods II
But the previous patterns of interconnectedness didnt just go away.
The system is still organized around the US $ to a signicant extent.
$ is still more than 60% of known reserves.
$ is still involved in about half of foreign exchange
transactions.
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Foreign Exchange
G
G
G
G
G
G
G
G
G
G
G
G
G G
G
G
G
G
G
USD
DEM
FRF
XEU
OthEMS
JPY
Oth
GBP
AUD
CAD
CHF
HKD
KRW SEK
INR
CNY
BRL
ZAR
NZD
1998
G
G
G
G
G
G
G
G
G
G
G
G
G
G
G
USD
EUR
JPY
Oth
GBP
AUD
CAD
CHF
HKD
KRW
SEK
INR
BRL
ZAR
NZD
2001
G
G
G
G
G
G
G
G
G
G
G G
G
G
G
G
USD
EUR
JPY
Oth
GBP
AUD
CAD
CHF
HKD
KRW
SEK INR
CNY
BRL
ZAR
NZD
2004
G
G
G
G
G
G
G
G
G
G
G
G
G
G
G
G
USD
EUR
JPY
Oth
GBP
AUD
CAD
CHF
HKD
KRW
SEK
INR
CNY
BRL
ZAR
NZD
2007
G
G
G
G
G
G
G
G
G
G
G
G
G
G
G
G
USD
EUR
JPY
Oth
GBP
AUD
CAD
CHF
HKD
KRW
SEK
INR
CNY
BRL
ZAR
NZD
2010
G
G
G
G
G
G
G
G
G
G
G
G
G
G
G
G
G G
G
G
G
G
G
G
G
USD
EUR
JPY
Oth
GBP
AUD
CAD
CHF
HKD
KRW
SEK
INR
CNY
BRL
ZAR
NZD
MXN RUB
SGD
TRY
NOK
PLN
TWD
DKK
HUF
2013
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The Exorbitant Privilege Remains
This means the US still benets from the n - 1 condition.
This means the US can have all of capital openness, stable exchange
rates, and monetary independence.
This means the US can have all of economic integration, independent
governance, and democracy.
But it also means that the US can destabilize the system.
And it means that the US must manage capital inows from the rest of
the world.
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