Fifty years on: what the Bretton Woods System can teach us about global macroeconomic policy-making

This paper first describes the Bretton Woods system: its origin, what it was meant to achieve, and why it collapsed. We then describe the emergence of the global non-system in which inflation targeting has replaced full-employment Keynesianism and floating exchange rates have replaced the Bretton Woods set-up of fixed but adjustable exchange rates. We describe how the Bretton Woods system set about achieving the three objectives laid down for a well-functioning international economic system by John Maynard Keynes: full employment without inflation, sustainable current account balances between countries, and a sustainable flow of international financial capital—on the understanding that an open trading regime is also fostered. Because the global non-system is now very different from the Bretton Woods system, Keynes’s objectives now need to be achieved in a very different manner. Looking forward, this non-system faces a number of longer-term challenges. Important adjustment issues will arise in relation to the global demographic transition; the potential long-term slowdown in productivity growth; and the rise in investment in renewable sources of energy which will be necessary to help ensure that the world is able to move towards zero emissions of carbon by 2050. We also discuss important policy issues in relation to the flows of international capital to emerging market economies, and the likely need for a sovereign debt reconstruction mechanism. We then go on to consider two significant structural changes to the world—the emergence of the European Monetary Union and the rise of China. A final section of the paper considers the importance of leadership in this global non-system.