Why Rethinking of Bretton Woods?
Through a series of three articles, the 1944 Bretton Woods ambitions and edifices (US dollar as the global reserve currency, the IMF and the Worldbank) are assessed through the lens of six distinctive global trends: the free market doctrine, the dollarization of the international market, globalization, the health and quality of life paradox, polarization, and the absence of a nature-centric paradigm. The observations will serve as a base for a Rethinking of Bretton Woods conference, post COP26, in 2022.
Polarization is the fourth trend under review.
When the Bretton Woods conference convened, there were two main power blocks demarcated by what Churchill later identified in 1946 as “[f]rom Stettin in the Baltic to Trieste in the Adriatic; an Iron Curtain has descended across the Continent.” But the Western and Soviet Union blocks, respectively through NATO and the Warsaw pact organizations, each had their allied members in tow. The conference allowed for a rule-based financial order outcome, with the USD as the anchor currency imposed on a bi-polar global power base.
The world has since become intensively more polarized. A rule-based approach is making way more and more way for the law of power.
On the international scene, there is the open trade war between the US and China, Brexit, the emerging questioning of the US’ unconditional support of NATO, as well as the concurrent withdrawal intent from international intervention, and the buffet-style approach to the Paris 2015 climate treaty commitments. On domestic fronts, there is the Gilets Jaunes group in France, the quickly acquiring broad groundswell Extinction Rebellion movement in the UK, the use of global brutal police force against minorities and environmental protesters, and the list continues to grow.
These evolving conditions make it far more challenging to reach swift and multilateral agreements on societal, environmental, and financial challenges, which are probably larger in size now than at the time of the Bretton Woods conference.
Absence of A Nature-Centric Paradigm
The last trend was the absence of a nature-centric approach both in policymaking and finance. At the time Milton Friedman started his neo-liberal economic advocacy, the 1972 Club of Rome report, Limits to Growth, was released. The report fundamentally questioned the emerging model of unlimited material growth, the incessant depletion of natural resources, and ensuing impetuous consumerism. The report remained iconic for its brazen title but was never embraced by a broader government, corporate or popular movement. The Limits to Growth observations were preceded by Rachel Carson’s Silent Spring disclosures in 1962. Carson, an ecologist, reported how US bird populations were dying because of the widespread use of the synthetic pesticide DDT (dichlorodiphenyltrichloroethane). Her findings have contributed to the creation of the EPA (Environmental Protection Agency) in 1970 and the introduction of the Clean Air Act (1970) and the Water Act (1972). These were, along with the 1987 Montreal Protocol to protect the stratospheric ozone layer, the few successful environmental mitigation responses. Earth Day, launched in 1970 and the full gamut of UN-sponsored Conference of Parties, starting with Rio (1992) over Kyoto Protocol (1997) all the way to Paris (2015), backed by several IPCC (Intergovernmental Panel on Climate Change) reports, have not made one single dent in the global Greenhouse Gas emissions tally or the CO2 content ppm in the atmosphere.
How could it be otherwise in the face of staunch deregulation, an unethical oil and gas lobby force, and an international banking system incapable of pricing for (carbon engendered) externalities? Sharpe, Miller and Markowitz became Nobel laureates for their work on the Capital Asset Pricing Model in 1990. The model is used to calibrate the cost of equity for a firm, which is a critical input into the share price valuation and fairness opinion used in M&A transactions. An intricate model using observable market and risk data is, however, fully agnostic about a firm’s carbon footprint. Today, capital allocation by banks, equity investment by asset managers, and underwriting activity by investment banks are still happening on Wall Street and the City without any adjustment for a corporation’s contribution to climate risk.
The environment was never evoked during Bretton Woods. Today, however, there is a total release of 54 Gigaton of CO2 emission equivalent greenhouses gases annually. The CO2 atmospheric reading stands at 413 CO2 ppm, compared to 300 CO2 ppm in the early 1950s. UN Secretary-General Gutierrez calls the latest IPCC Climate Report ‘Code Red for Humanity’ on the back of ‘Irrefutable’ evidence of human influence on the warming of the planet.
Whilst the 1944 conference heralded the global power shift from the British Empire to the nascent American Empire, a new Bretton Woods convention might herald the transition from an oil and gas driven monetary aggregate system to a nature-centric and astute finite carbon reserve management framework.
The Bretton Woods delegates yearned, after years of war, for stable economic development both in industrialized and emerging nations. Additionally, they were striving for improved welfare, expanded public health support, and free trade expansion, all embedded in a dependable international financial system.
Today a six-headed crisis, triggered by a public health pandemic, climate change, biodiversity loss, social injustice, loss of trust in institutions and international trade and financial market’s instability, looms large over the structural foundations of Bretton Woods. There was no way that the 1944 delegates could anticipate this crisis.
But now the time has come, 75 years later, for system change and a fundamental paradigm shift in economic thinking, guided by a new moral compass. Rethinking Bretton Woods will look at the contours of a new institutional framework to be organized post COP26 in 2022.
The thinking will center, with participation from and focus on the Southern Hemisphere, around the design of a new economic paradigm, along with modified governance and ethical compass to create a new monetary architecture. The ensuing monetary policies should offer incentives to redirect capital to different crisis pain points, including initiatives to accelerate 2050 net-zero carbon objectives through crisis solution aligned price discovery.
The emerging economic and monetary regenerative economy would be nature-centric, herald a fair, inclusive, and healing stewardship of limited natural capital resources, generating augmented sustainable societal health.