State Emissary, November 2017. Issue 1 2017 Edition | Page 37

SM |DEVELOPMENT
membership in the IMF.
Endless imbalances
How countries adjust when they spend more on
foreign purchases than they earn from abroad was
particularly contentious—and the debate about
international order was shaped by lessons drawn
from the unsuccessful attempt to create a stable order
after World War I, when pressure on deficit countries
to adjust produced harmful worldwide deflation and
then depression. The IMF was devised to prevent
currency wars and competitive devaluations, which
had been the 1930s’ response to deflation.
Most countries in 1944 and 1945 could reckon that
they would import more than they would export for a
long time and that the United States would have
semipermanent trade surpluses. That’s because the
United States was not only a major supplier of food for
a world ravaged by war, it was also the only really
substantial producer of a wide range of engineering
and machine tool products since industrial capacity
in Germany and Japan was destroyed. That meant
that most countries would have to scramble to come
up with enough dollars to buy needed imports.
The grand compromise reached by delegates to
Bretton Woods appeared evenhanded: a country
could be deemed to have a “scarce currency”—the US
dollar—and the United States would accept full
responsibility if there was a “fundamental
disequilibrium.” Other countries would then be
allowed to impose trade and exchange restrictions to
reduce exports from the country with the currency
that was misaligned.
But in practice, the voting arrangements of the new
IMF gave the United States the power to block a
hostile decision as to whether dollars were in
fundamental disequilibrium or “scarce” when other
countries couldn’t get enough of them. Moreover, by
the 1960s, the feared US surpluses had disappeared,
and even before that so had worries about new
permanent and pernicious world deflation. That’s
because the United States recycled its surpluses
through military expenditures and foreign direct
investment, which allowed much of the rest of the
world to catch up.
Overall, the first 25 years after Bretton Woods were
generally benign: US-inspired multilateralism helped
everyone. There was growth, stability, and catch-up.
In the Bretton Woods period, all countries grew. In
the late 1990s, in the new era of globalization, there
was a dramatic catch-up by emerging market
economies.
In France, the postwar decades are usually called the
30 years of glory. But 30 is an exaggeration. Things
looked shaky by the late 1960s for the global financial
system. The mechanism of generally fixed but
adjustable exchange rates collapsed between 1971 and
1973. The world experienced an inflationary surge
with unstable capital flows, and democracy and
political stability were threatened.
New issues for multilateralism
Multilateralism was inventive, though, in dealing
with the new issues. The leading industrial countries
in 1975 (France, Germany, Italy, Japan, United
Kingdom, United States) convened at Rambouillet,
France. It was the ancestor of modern Group of Seven
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