Friday, January 29, 2010

Bretton Woods: back to the future?

Gillian Tett in the Financial Times, on President Sarkozy's speech to Davos:

"Perhaps the most arresting “soundbite” was a call for a resurrection of the Bretton Woods global currency accord. “The prosperity of the postwar era owed much to Bretton Woods ... we need a new Bretton Woods,” Mr Sarkozy declared, in a speech that prompted a large part of the Davos audience to rise to their feet with wild applause. “We cannot preach free trade and also tolerate monetary dumping.”

It is amazing, isn't it, how ideas regarded as barking mad just a couple of years ago have become respectable. Even The Economist, that cheerleader for free financial markets, has mused in recent months about the future possibility of widespread capital controls and fixed exchange rates.

The "Bretton Woods" era for the quarter-odd century after the Second World War was the period when the world economy - both developed and developing countries, and in aggregate - grew faster and for longer than at any extended period of time since. And note that in those years capital flows were relatively tightly controlled (and, as an aside, tax rates were generally far higher in many countries.) We aren't necessarily saying that capital controls or high taxes caused these stellar growth rates, just that the conventional view of recent decades that anything that frees capital flows is automatically a good thing is clearly foolish. And in the past decade, plenty of academic evidence has emerged pointing to the dangers of willy-nilly-financial liberalisation.

Capital controls are not something that TJN specifically advocates - it's not a core issue for us. But we watch this new mood with great interest.

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