Celebrations surrounding the 70th anniversary of the Bretton Woods agreements that created the IMF and the World Bank are low key affairs. It does not help that the U.S. Congress has failed to ratify the most recent agreement to expand the IMF, required to make World Bank resources (tied to IMF borrowing quotas) grow as well.
Transcripts of the 1944 conference held at the Mount Washington Hotel in New Hampshire have been discovered and published. Observers have long recognized the significance of what transpired when the American delegation led by Harry White debated the British delegation led by John Maynard Keynes. New work by Canadian political economist Eric Heilleiner shows that the conference organized by the wartime allies (the United Nations before the UN was created) had a wider focus than was commonly understood, and included significant contributions from more than the U.S. and U.K.
Undoubtedly, the first step in establishing postwar U.S. hegemonic leadership was the scuttling of the Keynes plan at Bretton Woods. A banking arrangement Keynes called an international clearings union where countries with international surpluses would automatically lend them to deficit countries — the U.S. would have been the lender — was opposed by the U.S. and its allies.
As it turned out, in the years after the war, the U.S. provided bilaterally over $12 billion in Marshall Plan loans to Europe, far more in dollars than was envisaged by the Keynes plan.
As a result of Bretton Woods, a U.S. dollar based foreign exchange market system emerged. Individuals and companies would trade their national currencies for U.S. dollars, and then use their dollars to make international payments. It was not until 1958 that the European countries accepted to make their currencies convertible through foreign exchange markets, activating IMF lending.
The role of the World Bank was simple: sell bonds on Wall St. to absorb the surplus funds accumulating in the U.S. banking system; then lend the money to Europe for rebuilding infrastructure damaged during the war. If American firms got many of the building contracts so much the better.
At about the same time as the 70th anniversary of Bretton Woods, the BRICS (Brazil, Russia, India, China, South Africa) were putting the finishing touches on two new international financial institutions they decided to create just over one year ago.
The New Development Bank conceived for infrastructure lending begins with capital pledges from the five founding members of $50 billion, increasing to $100 billion by 2017. A short-term lending facility, the Contigency Reserve Arrangement to fend off speculative attacks against the BRICS from hedge funds, shadow banks, and others is also to come into existence. This will be a welcome development for Russia facing G7 country boycotts instigated to limit its access to financial markets.
By 2014 the U.S. had been running huge deficits in international accounts for over three decades. Other nations have been accumulating dollars in foreign exchange reserves. China is the champion with an accumulated surplus of over $3 trillion !
China has already been putting its excess dollars to work around the world, lending for infrastructure projects at attractive rates (priced below market rates) through its state owned banks. Chinese companies follow the loans building dams, roads, railroads, ports, and football stadiums in Africa, Latin America, Asia, or Europe.
The New Development Bank is now set up to do what the World Bank has failed to do: borrow Chinese surpluses and lend to deficit countries other than the U.S. for infrastructure.The financial power of the BRICS Bank resides in its ability to use its paid-in and callable capital as security to borrow on world markets. A New Development Bank bond will be considered “risk free” by financial markets because the resources of the BRICS countries lie behind the pledge to pay interest, and redeem the bond at maturity.
The BRICS Bank founding documents only mention dollars (and establish English as the working language). The Bank could also issue bonds denominated in Special Drawing Rights, the international currency unit of the IMF; or indeed in the Chinese currency unit; or create an international unit of its own. Needless to say currency decisions made by its Board of Governors, Directors, and President will be watched closely around the world.
The Bank and the Contingency Reserve Arrangement both provide for additional members to join. Given the unwillingness of the U.S. Congress to implement decisions made by the G20 to expand IMF and World Bank resources, it would make sense for Canada along with other middle power countries to consider membership in the new institutions. Moving away from an international system where the richest country in the world, the U.S., is also the biggest borrower from the rest of the world is an objective worth pursuing outside the IMF and World Bank.
Duncan Cameron is the president of rabble.ca and writes a weekly column on politics and current affairs.
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