75 years of Bretton Woods: Time for a change

When the 730 delegates from all 44 countries fighting the Nazis and Imperial Japanese forces in World War II — the “Allied Nations” — met at the Mount Washington Hotel in Bretton Woods, N.H., on July 1, 1944, they were tasked with creating the post-war international financial infrastructure. The International Bank for Reconstruction and Development (the World Bank) and the International Monetary Fund (IMF) were founded to undergird future global economic relations.  

Transparency was the mantra. Germany under Adolf Hitler had kept two sets of books for his national treasury — one that he showed the victors of World War I concerning reparation payments and one that he hid from them through which Germany was remilitarizing. The Allies wanted to avoid the dangers of economic nationalism that Hitler promoted. His government had engaged in fraudulent national bookkeeping. The Allies wanted to ensure that there would be openness in international finance going forward. 

Economic relations had to be undertaken in concert, not through beggar-thy-neighbor policies.  After all, the devaluation of the German Reichsmark and the rampant inflation that followed was in large part a driving force in bringing Hitler to power.  

The financial order that emerged that summer was based on international economic cooperation and open markets. Economic nationalism was to be relegated to history. The IMF was tasked to promote stability of exchange rates and financial flows across national borders. The World Bank was designed to provide loans to build infrastructure, particularly to aid Europe as it emerged from the ashes of war, to assist in development and to ferment growth.    

But three-quarters of a century is a long time to keep the same institutions doing the same things when the vagaries of globalization, with its free flow of capital, reduced barriers to trade and harmonization of customs and banking procedures have made a few people very wealthy and stunted equity growth, saddled developing economies with unsustainable debt and hampered progress for future generations in the developing world.    

Added to that is the onset of new financial instruments such as distributed ledgers, cryptocurrencies and blockchain technology — all challenges to sovereignty, fiat currencies and national economic stability. Bitcoin, Ethereum and the many digital assets emerging out of regulatory sandboxes around permissive jurisdictions all over the globe move across international boundaries without the need for traditional intermediaries such as banks, insurance companies and brokerage firms. There is little transparency and much obfuscation of assets to avoid law enforcement officials, financial services regulators and national tax authorities.

Likewise, the China Development Bank and aggressive investment policies such as Xi Jinping’s Belt and Road Initiative have provided new challenges for the dominance of the Bretton Woods institutions in providing stability for the international economy. Little that the People’s Republic of China does is open for all to see.  

Ditto for the world of international banking. With an estimated 8 percent of the world’s wealth illegally unreported and 10 percent of global domestic product hidden in tax havens, governments need to intensify efforts to pierce the banking secrecy laws of some countries.  Arms dealers, drug traffickers and those institutions and professionals tasked with hiding these ill-gotten gains need to be held to account. At the very least, they should pay taxes.  

It is time to reset international banking relationships and provide rules for new forms of finance such as cryptocurrencies. At Bretton Woods 75 years ago, the world was still being ravaged by the horrors of war, but it was clear that fascism was in retreat. Today, with economic nationalism again rearing its ugly head, and the ongoing challenges to national economies such as cryptocurrency and criminal organizations influencing governments, the IMF and World Bank should work on updating their respective missions. The next five years will bring much change, let alone the next 75.  

James Cooper is a professor of law at California Western School of Law where he teaches international trade law and directs the International Legal Studies Program. He has advised governments on disruptive technologies and blockchain companies on regulatory matters.