Mikhail Khazin: Essay on the fate of the Bretton Woods system


The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference, was the gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, United States, to regulate the international monetary and financial order after the conclusion of World War II. The conference was held in July 1944. Agreements were executed that later established the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF).

November 12, 2015

Mikhail Khazin

Translated by Kristina Rus

The fact that the Bretton Woods financial system is in crisis has already become commonly accepted. However, a more or less clear explanation of what the crisis is about has not been given. In fact, attempts are made to find local problems and overcome them – but such actions do not produce a global effect. Accordingly, it can be assumed that the true root of the crisis has not been found.

This essay is an attempt to find the cause of the global crisis of the Bretton Woods system and analyze the possibility of the preservation or transformation of the system.

I will use the conclusions drawn in the book by A. Kobyakov and M.Khazin “The Sunset of the Dollar Empire and the End of “Pax Americana””, published in Moscow in 2004, as well as other works by its authors, O. Grigoryev and other economists.


The modern economy is an economy of division of labor. Accordingly, the development within the existing economic paradigm – is the deepening of division of labor, which is the basis of the model of development, called the scientific-technical progress (STP). A prerequisite of this process is innovation – the emergence of new products and new technologies for the production of the old. The theory of this model emerged in the XVII century in the works of the first of the mercantilists. Slowing down of the process of division of labor or its halt is perceived in the modern model of the economy as a crisis. Simplification of the division of labor (its degradation), as it has occurred in the USSR in the 1990s, is perceived as an economic disaster.


The deepening division of labor inevitably entails an increase of the risk of producers who have to integrate into more and more complex technological (production) chain. If there are no mechanisms to mitigate these risks, at some point the deepening of division of labor becomes impossible – the system goes into a state of deep crisis. 

Accordingly, within a closed economic system (not interacting with the outside world), the natural deepening of division of labor can only progress until a certain fixed level, after which innovation ceases to pay off, and the scientific-technological progress first slows down and then stops. This thesis was first formulated by Adam Smith in the second half of the XVIII century, then this topic was expanded in the framework of Marxist political economy in the late XIX – early XX by Rose Luxemburg. 

Thus, development within the paradigm of STP is only possible with use of risk mitigation mechanisms for producers. Only three such mechanisms have been invented: producers’ credit (risks are partially transferred to the financial system); expansion of markets (producers’ risk within the original economic system is reduced); and consumer credit. 

Note that only the physical expansion of markets reduces the risk across the entire economic system, first and third method only redistributes it.

Theses formulated above allow you to define the current problems of the Bretton Woods system. As the scope of effective demand in the world is exhausted, a further reduction of risks is virtually impossible. With regard to redistribution of risk, the tools for this have also reached their limit: credit and insurance instruments practically no longer increase producers’ efficiency (including services). Opportunities to stimulate consumption credit have also been practically exhausted, the world is in a severe debt crisis. 

As a consequence, a crisis of falling efficiency of capital has begun in the world, associated with the rapid slowdown in the further deepening of division of labor. Crisis similar to the first (in the 1908-14) and second (1933-41) “Great” depressions, and the crisis of the 1970s. The feature of this type of crisis is the fact that unlike normal cyclical crises it doesn’t have a ‘natural’ resolution – the economy continues to be on the bottom and there is no growth. 

For the financial system it is reflected in the fact that it can not increase its effectiveness in terms of supply of new risk mitigation instruments for producers. All attempts to solve this problem at the level of prudential measures do not lead to a significant positive effect and it is clear from the above – without expanding markets this problem can not be resolved. With regards to the financial system, this means that today it is impossible to solve some of its key challenges. First of all, these is the dollar contradiction, which on the one hand is the national currency of the United States, that is – used to stimulate demand in this country, and on the other – the world’s reserve currency. 

In 1944, the US economy was more than 50% of the global economy, which allowed to balance the situation in the framework of this contradiction, but today this share has declined to about 20% and it becomes difficult to maintain the stability of global currency with the resources of the United States 

This is what US President Obama said in his speech at the UN General Assembly, but his thesis was not heard. Another contradiction – structural imbalances between aggregate private demand and private income. 

In the US today, the real disposable income of households (considering real, rather than the official inflation rate) is at the level of the beginning of the 1960s, the rest of consumption is achieved by reducing savings and the growth of the debt burden (both household and government). 

Rough estimate of this structural gap is about $3 trillion a year, and it is supported by constant debt refinancing on the background of the planned reduction of borrowing costs. In 1980, before the start of “Reaganomics”, the US Federal Reserve discount rate was 19%, by December 2008 it had dropped almost to zero. The coincidence of this date with the beginning of the “acute” stage of the crisis in September of the same year is, of course, no accident.

Another contradiction – the need to use more and more sophisticated financial instruments to reduce the risk of producers has led to dramatic change in the scale of redistribution of comprehensive income in the economy in favor of the financial system. If before World War II, the norm was 5%, by the end of the 1940s this figure rose to 10%, today it exceeds 50%. 

It is clear that in principle it is no longer possible to increase it, and the economy in which more than half of the earnings are withdrawn from the production circuit (I repeat – we are talking about not only the production of goods, but services consumed by the end user) to an intermediary, can not raise its effectiveness.

 There are other, less fundamental contradictions, but it is evident from he above that it is impossible to solve the problems of the financial system by purely financial methods – the crisis is of a general economic character.

At the same time, the experience of the past, approximately 40-45 years, when the Keynesian methods of management have been replaced by monetary methods, makes it impossible for governments to go beyond the purely financial management: not one of the existing officials remembers what it is. 

At least in the developed countries, but in Russia is not yet the case.

The final conclusion from the above: the crisis of the Bretton Woods financial system is associated not so much with the internal mechanisms of the system, but with the external. Hence the fundamental conclusion – the reform of the Bretton Woods system will unlikely solve the present crisis. 

However, the above discussion shows how to, at least theoretically, offset some of the internal contradictions of the Bretton Woods system. It is very likely that it can allow to increase its safety net and prolong the current situation, perhaps for decades. First of all – it is the division of the function of national and international currency. 

Note that a similar attempt was made in 2011 under the “central bank of central banks” project, but after “the case of Strauss-Kahn,” the project has been closed. 

Note that if we consider historical analogy, the “central bank of central banks” was a clear analogue of the Fed, but not on a national scale, but across the entire Bretton Woods system. But what has been done in 1910-13, has failed this time around. In fact, this failed attempt just shows that purely financial methods no longer work: a rational attempt to reform the management of global  finances, moreover, a reform, which already 100 years ago proved to be effective, has not passed for purely political reasons.

Another option to rescue the situation is a write-off of part of the accumulated debt. It is impossible to pay back, real disposable incomes do not generate the necessary scale of cash flow and the need for its maintenance seriously hampers the ability of economic growth. There are several different options for debt relief: write off the debts of corporations so that they can afford to lower prices; write off personal debts to stimulate the real purchasing power and improve its structure; and finally, restructure debts for several decades, which in regards to inflation process, is not much different from a total write-off. 

The problem is that most of the assets in today’s economy are financial assets and such proposal not only requires a fundamental change in the entire financial infrastructure, but also the closure of most of today’s financial institutions with the deprivation of their beneficiaries and owners of the vast majority of income and assets. 

Clearly, these people who, in many ways, control the current political system, will never allow such an option. While the preservation of the financial infrastructure in its present form in the long term is still impossible. Thus, we see that the Bretton Woods system, created to stimulate the economic expansion of the dollar system after the World War II, has reached its natural limit. In theory it can still be reformed to extend its duration, however, the required actions are faced with purely political hurdles. 

As a consequence, I believe that it is impractical to preserve the Bretton Woods system in its present form – because the effects of measures in the medium term could lead to extremely negative consequences. However, we can talk about creating a kind of a new system based on the ideas of Bretton Woods. The essence of this system can be described as follows. 

The Bretton Woods system includes not only the well-known institutions – the IMF, World Bank and WTO, but also an emission center – the US Federal Reserve. With the inherent contradiction between the function of national and international currency. For this reason, in order to revive the global financial system based on Bretton Woods principles, it is necessary to move from the mono-currency system to the multi-currency system (exchange zones). 

Such a shift would solve several problems at once. First, it will remove the burden on the issuing currency – the scale of the new emission centers within the framework of the limited regional systems of division of labor would be greater than the current scale of the US economy in the world (and comparable to its role in the late 1940s). 

Secondly, the new currencies (except Euro) practically have no debt problems. As a consequence, thirdly, there are no political problems associated with the accumulation of financial assets. Moreover, considering the aggregate private demand, which was actively stimulated in the past decade by dollar emission (both credit and money) will fall sharply, the problem of the collapse of a unified system of division of labor will still be on the agenda. So the creation of regional systems (as, for example, in the first half of the twentieth century) will still be required. The only question is how to make the process manageable and thus less painful.


Thus, it seems to me that the optimal structure of the global economy and finance is as follows. It consists of several regional systems of division of labor (currency zones) built within themselves on the Bretton Woods principles. The principle of free trade will not apply to the trade cooperation between the zones, in this sense WTO will cease to exist. Offhand there could be about 6-7 such systems (Anglo-Saxon world with the dollar; the Latin American region with South Africa; Western Europe and West Africa with the euro; India, China and Southeast Asia with the yuan; the Eurasian zone with the ruble).

At the same time, while the inter-zone trade will still exist (although on a smaller scale than now), an umbrella structure is necessary. Since the emission principle is strongly compromised, the inter-zone trade (more precisely, the parity of zone currencies) can be linked to gold, and the control of the inter-zone interaction can be assumed by another international institution. 

Such a model would not only significantly reduce the contradictions of the present system, but will also give the world at least several decades to develop new tools for economic development. Otherwise, we run the risk of falling into a series of crises similar to the fall of 2008, which will be more frequent and will bury all the economic achievements of the last decades.

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