Global Imbalances and the Lessons of Bretton Woods

An influential school of thought views the current international monetary and financial system as Bretton Woods reborn. Today, like 40 years ago, the international monetary system is composed of a core, which has the exorbitant privilege of issuing the currency used as international reserves, and a periphery, which is committed to export led growth based on the maintenance of an undervalued exchange rate. Then as now there is the same old core, the United States, but a new periphery, Asia. This view suggests that the current pattern of international settlements can be maintained indefinitely. In particular, there is no reason why the dollar must fall, since there is no need for balance of payments adjustment, and since the Asian countries will resist appreciation of their currencies of the greenback. In this paper I argue that this image of a new Bretton Woods System confuses the incentives that confront individual countries with those that confront groups of countries. It also overlooks important ways in which the world has changed since 1960. This alternative model suggests that if there indeed exists something resembling the Bretton Woods System, it does not have long to run.