BNY Mellon: Bretton Woods By Accident
BNY Mellon: Bretton Woods By Accident
By Simon Derrick, Chief Currency Strategist, BNY Mellon
- Drive for a new Bretton Woods conference at the end of the last decade came to nothing
- Nevertheless, stability and low volatility has emerged over past few years. Even currency rhetoric focuses on stability
- End of Bretton Woods and difficulties with European currency systems highlights that stability is rarely sustainable
The period from late 2008 through until early 2011 saw growing calls for what then UK PM Gordon Brown called “a new Bretton Woods”.
Probably the highest profile comments came from French President Nicolas Sarkozy. In his opening address to the World Economic Forum in early 2010 he argued: “The prosperity of the post-war era owed a great deal to Bretton Woods, to its rules and its institutions. That is exactly what we need today; we need a new Bretton Woods.”
Similarly, in 2008 ECB President Trichet told the Economic Club of New York: "Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline…..It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline….If we don't have discipline, then we are putting into question the functioning of the market economies and the functioning of our financial market.”
He added: “The explosion of the first Bretton Woods in a way could be interpreted as a rejection of discipline.”
There was nothing surprising about European officials and politicians talking about the need to reestablish some form of Bretton Woods-like system.
Indeed, it’s arguable the European Monetary System (established in 1979) came about as a direct reaction to the final collapse of Bretton Woods back in February 1973 (the Exchange Rate Mechanism superseded the European “currency snake” introduced in 1972).
There was also some evidence that this went a little way beyond public rhetoric. In October 2010 the FT reported that France and China had been in talks for the past year over “heightened coordination of exchange rates”. However, all this came to nothing.
Eight years on, however, it could be argued that something with echoes of Bretton Woods has emerged without anyone actually noticing.
What is certainly true is that one month realized volatility in USD/JPY is pushing right at the bottom of the post-1978 range while, more broadly, the same measure for the USD Index is showing every sign of heading back towards the lows of a few years ago. Moreover, there seems to be little in the way of criticism of the monetary policy settings (in Japan and, arguably, elsewhere) that have led to this state of affairs.
Even the language being used around currency matters feels oddly Bretton Woods-like. The Bloomberg story that emerged on Tuesday around the US/China trade negotiations talked of US officials looking for a pledge of CNY “stability” from Beijing, rather than a promise to refrain from currency manipulation.
While this might seem just a matter of semantics, it’s surprising when it’s remembered how much pressure was brought to bear upon China a decade and a half ago to abandon the CNY’s peg to the USD.
In the end Bretton Woods fell apart due to the need of the US to fund its Great Society programs as well as rising military spending. Equally, each attempt since 1972 by European nations to manage their currencies fell apart due the obvious problem of attempting to manage the system without an underlying fiscal union.
Even the EUR came within moments of losing a member back in the summer of 2015. That’s as good a reminder as any that the current calm won’t last forever.