No More Bretton Woods

On November 15^th, leaders of the world’s largest economies will gather in Washington, D.C., to discuss the ongoing international financial crisis. Figures such as Britain’s Prime Minister Gordon Brown view the summit as an opportunity to reform international financial structures and perhaps create new ones. He and others have spoken of a “new Bretton Woods”—the 1944 international meeting that sought to design an international financial structure for a post-war world.

Today, relatively little is left of the original Bretton Woods. Many of its provisions concerning exchange rates and currencies, for instance, were gradually abandoned. Bretton Woods’ most prominent institutional legacies are the IMF and the World Bank. For different reasons, neither is especially liked by developed or developing countries. In recent years, both have struggled to define their missions. The World Bank has additionally been dogged by allegations of ignoring or even facilitating corruption in developing nations, not to mention criticisms that, more than most bureaucracies, the primary objective of many of its staff seems to be institutional self-preservation.

The contemporary financial crisis has demonstrated, however, that the basic impulse for Bretton Woods-like solutions to international economic problems is alive and well. Some national leaders, for instance, have echoed (probably unconsciously) John Maynard Keynes’s call at Bretton Woods for a “world central bank”. More generally, there is a strong push, especially from Western European governments, for the creation of more intergovernmental planning and bargaining mechanisms as the means to impose a new international regulatory order upon national banking and financial systems.

But is this ‘top-down’ approach really the best way to address the financial crisis over the long term? One prominent twentieth-century figure who would have vehemently disagreed was the German economist Wilhelm Röpke (1899-1966).

An outspoken opponent of Communism and National Socialism, Röpke publicly denounced the new Nazi regime in February 1933. He was subsequently dismissed from his academic position and departed into exile. In later years, Röpke was an increasingly fierce critic of Keynesianism at a time when questioning Keynesian ideas was deeply unpopular. But Röpke is perhaps best known for being one of the intellectual architects of Germany’s 1948 economic reforms. Achieved against the opposition of the German left, many German conservatives, as well as the Allied Military Occupation authorities, these market-liberalizing reforms took West Germany from ruin to riches in just over ten years.

Röpke first achieved international attention as a result of his contributions to business-cycle theory in the 1920s and 1930s. Less well-known is that Röpke was one of the few economic liberals to write extensively on international political economy. Throughout his many writings on this subject, we find an approach that raises profound questions about the wisdom of top-down strategies for reforming the world’s financial architecture.

The sources of Röpke’s thinking about these matters were twofold. The first are insights derived from Scottish Enlightenment luminaries. Book IV of Adam Smith’s Wealth of Nations, for instance, is devoted to questions of international economy. The second are medieval and early-modern commercial practitioners and natural law theorists addressing questions of commercial law.

The problem with “top-down” approaches to international economic problems, Röpke held, is that they usually fail to grapple with the roots of economic disorder. Invariably, these are—as Adam Smith observed—found at the national and local level. The tariffs, for example, which lock developing countries out from some of the world’s biggest markets are implemented by national governments (or, in the EU’s case, via common agreement by member-states), usually after intense lobbying from domestic industries seeking protection from the disciplines of international competition. Likewise the woes of Michigan’s car industry are largely attributable to decades of Michigan executives bowing to the seemingly-insatiable demands of Michigan-based unions. Meanwhile, car companies employing non-union workers in states such as Tennessee and Kentucky are flourishing and paying their employees well.

Looking at today’s financial crisis, we now know that much of it has been driven by failed domestic economic policies. Congressionally mandated housing policies forcing banks to allocate fixed percentages of their loan portfolios to particular income groups helped to facilitate the Fannie Mae and Freddie Mac debacle. Also contributing to the American housing bubble’s implosion was the Federal Reserve’s maintenance of low domestic interest rates for far too long.

The ease of international capital movements certainly meant that the effects of the American mortgage crisis were felt internationally. The causes, however, had nothing to do with open capital markets per se. Many of the causes lay in mistaken American domestic policies, not to mention the choices by thousands of American borrowers to apply for (and American lenders to extend) loans which never had any realistic chance of being paid.

Just as he believed domestic economic problems required domestic solutions, so too did Röpke argue that international economic order is best achieved “at home”. Britain’s unilateral economic liberalization in the 19^th century, he noted, was central to the emergence of the world’s first global economy—not a series of intergovernmental meetings or decisions by international organizations. Likewise, Röpke underlined that currency convertibility was finally achieved in Western Europe in 1958 not as result of Bretton Woods, but rather because West Germany’s unilateral economic liberalization was voluntarily replicated, albeit to different degrees, by other nation-states.

Though by no means a Machiavellian cynic, Röpke observed that national governments are not averse to simply disassociating themselves from economic policies set by supranational and international institutions when it suits them. A contemporary example is the manner in which French governments routinely defy EU competition rules or budgetary requirements whenever they believe such obligations unduly restricts their ability to pursue dirigiste policies.

Röpke’s aversion to international top-down approaches to resolving economic problems was by no means dogmatic. He expressed favorable views of the GATT (now the World Trade Organization) because its size remained small and its trade liberalization brief was clear and narrow. Generally, however, Röpke stressed that almost all international governmental organizations eventually became dysfunctional, highly politicized, and hyper-bureaucratic, not to mention captured by interest groups pursing their own agendas.

But surely, it might be asked, we need rules to govern the workings of the international economy?

Röpke certainly agreed with the need for rules. He observed, however, that international law successfully developed and embodied norms, laws and conditions that brought order to international economic and financial transactions for centuries, without requiring the creation of large numbers of permanent international institutions.

The roots of these international rules and moral norms, Röpke observed, were to be found in the Res publica Christiana of the Middle Ages which gradually developed into a more secularized order public international. Its commercial aspects first achieved expression in the Lex mercatoria, a medieval body of commercial laws devised by merchants and lawyers. The Lex mercatoria was, Röpke notes, derived from reflection on commercial practice as well as the demands of natural law.

Over time, the Lex mercatoria’s precepts were absorbed into common and civil law. France’s Code commercial of 1807, for example, essentially codified the Lex mercatoria’s treatment of contracts. In this way, the Lex mercatoria laid the foundations for contemporary features of international commercial law, ranging from the treatment of trademarks to insolvency issues. It also helped generate formal treatments of related subjects, such as Hugo Grotius’s 1609 Mare Liberum (commissioned by a subsidiary of the Dutch East India Company) that even today constitutes a major basis for international maritime law.

The advantage of this approach, Röpke states, is that it allows the regulatory framework governing international economic relations to respond gradually over time to changes in global economic transactions. A ‘bottom-up’ strategy is certainly slower than that embodied by Bretton Woods. But it also militates against attempts to radically alter the rules governing international economic and financial transactions in response to a particular crisis. This is not always a bad thing. Rules and institutions designed to respond to a specific economic problem of the near past are generally not very good at anticipating or responding to future crises. That is precisely why decisions made at Bretton Woods, designed to address the wreckage of the Great Depression and World War II, have limited relevance to today’s financial crisis.

Some might object that Röpke’s reflections upon ordering international economic relations seem naïve today in light of the global economy’s sheer complexity. But this complexity only raises questions about the wisdom of entrusting the international economy’s governance to new or reformed international organizations that, given the size and speed of modern economic transactions, will be simply incapable of keeping track of everything occurring.

It’s unlikely, of course, that many governments today will pay heed to suggestions made by a long-dead economist. The pressures to be seen to “do something” are probably too great. Still, Röpke reminds us that there is an alternative to the top-down strategy likely to be implemented in forthcoming months. Moreover, to cite Röpke himself, “The outlook is bad . . . if nations strive after international order while at home they continue to pursue a policy contrary to what is required for it.”