Does the world need a new global financial system? Crisis renewed demand

Dr. Salem Al Sheikh

It is also said that knowing the past of things gives you the ability to assess their present … and that’s where I start.

The Second World War is about to be decided in favor of the Allies, its fate becomes clear day by day, what is supposed to be after that is no longer thought of as such. Europe was almost completely destroyed, its infrastructure, most of its political systems, and the most devastating was especially its economic … financial system.

In fact, the financial system that had been established for long periods during the nineteenth century on the basis of gold and a fixed exchange rate, the First World War (1914-1918) came and destabilized it and undermined that stability that lasted for decades, as the warring nations finance their war needs by squeezing money in large quantities Large, abandoning the necessary cover of gold, to find itself after the war far from the gold standard that the world has met in its financial actions.

Some countries tried to return to the gold standard after the war, but the period between the first and second wars (1919-1939) witnessed many major crises that prevented it, the worst of which was perhaps the crisis that plagued Germany during seen the twenties. , which was characterized by massive inflation and economic stagnation, when It was followed by the global economic crisis known as the Great Depression, which began in 1929 and continued in some countries until the late 1930s, when stock markets collapsed, factories stopped , GDP has declined. , and people left in long queues for food in both Europe and America.

The world stepped into the snare of a second world war … until it fell into it.

The Second World War (1939-1945) wiped out what was left of the First World War, during which many economic facts in Europe and the world changed, and the need for a new global financial system became more urgent.

Today is July 1, 1944, and when it was in the Bretton Woods of New Hampshire, the small state in the far northeastern United States, not far from the American capital of business and finance, New York City, the Allies met— now they realized it was The last shots in the world war before it was decided in their favor – to plan a new financial system for the world.The attendees included delegations from a number of countries that numbered more than forty, but the most important of them was the British team armed with the past and history of the pound sterling in international trade, and led by the great economist John Keynes (John Maynard Keynes), and the American team who held the future in his hands and the big winner of the war, led by Harvard graduate economist Harry Dexter White.

The idea of ​​returning to the old gold base system was not on the table at the time, as the world moves towards trade liberalization, maximizing growth and production, and the gold base forms a constraint that hinders this liberalization that requires an abundance of cash which can not cover the available gold, and there was no one among the participating countries who had a plan for a new global project With the exception of the British delegation represented by the “Keynes proposal”, and the American team who submitted their proposal. , “White”.

Keynes was of the opinion that it is not possible to build a new global financial system based on the local currency of a country, but rather there should be a global currency managed by a global bank, and therefore he proposed one called the “International Clearing Union”, and suggested that this bank issue its own currency and call it Banker (Bancor), and set up a system whereby countries could exchange their own currencies for this currency and vice versa, at fixed exchange rates, where offsetting between countries takes place using this global currency.

He also proposed a system – using Banker’s currency – to resolve any imbalances in the global trade balance; To ensure that no country falls prey to a large global debt at the expense of other countries, collect annual surpluses from trade, so the design of this system pushes rich and poor countries – equally – to not have surpluses or deficits in their trade balance to build up.

Keynes’ proposal was convincing to most delegates, but the U.S. delegation thought differently, and it was enough that his proposal was not taken seriously.

It was clearly the impact of American power on this meeting, America the biggest winner of World War II, and it is the rising economic power at a time when the sun of the British Empire is waning, so the dollar should be the British pound replaced, but this time with a force it deserved international organizations, and the authority American.

The British proposal withdrew in the face of US pressure.White was strict about any proposal that hampered his project, and the Britton Wood Treaty was signed in July on most of what was put forward in the US proposal.

A new global financial system has been born. This system approved the peg of all currencies to the US dollar and the dollar at a fixed price to gold, which made the dollar better than all currencies, and it encouraged countries to buy it around it as a reserve that they could exchange for gold whenever they wanted.

The proposal did not provide a solution to address the imbalances that may occur in the trade balance between countries, and the debt that may result from those imbalances, but left the solution to this issue to the debtor countries to do so according to their available policies. to address. , unaware that it is difficult for countries falling into the debt trap to generate debt a trade surplus, and even proposed the establishment of an international stability fund, which would later become the International Monetary Fund, which is widely regarded as the cause of successive global crises, and this disagreement over the role of the Fund, the accusation that it incites crises, and proposes solutions – and sometimes imposes them on the debtor state – weakens the economy, exacerbating its problems of debt repayment and trade imbalance.

A number of economists and historians believe that ignoring Keynes’ innovative proposals missed the world’s equitable economic stability between the countries of the world, and that White and those with him on the American team sought limited political and economic gains. to achieve what may not exceed America. to the countries of the world participating in this new system, but as someone commented In response to The Economist, who wrote at the time, “that the world will bitterly regret the rejection of Keynes’ arguments,” is the world does not regret. something it forgot.

Perhaps the best-known stance taken against the new system was that taken by Yale University professor of Belgian-American economist Robert Triffin when he said, “This system was born deformed, it was born doomed to fail.” Keynes saw that the conversion of the dollar into a global currency used as a reserve currency would make America a debtor country, suffering from the largest current account deficit in the world, and therefore it is difficult to to build a global financial system based on the currency of a debtor country, which is difficult for it to balance between its domestic need for currency, and between the global need for its local currency, and it was later known as the Triffin- dilemma.

It turns out that Traven was right in this, as America changed in the wake of the signing of the Burton Wood agreement from a creditor country to a debtor country whose government debt today exceeds $ 30 billion, and it could have been disastrous for America has, as Traven sees, but U.S. economists and politicians bet on their power to reverse any action that could harm the U.S. economy, and their authority in the new international organizations, and they also realized that protecting the dollar a global task would be rather than a pure American burden, since the world keeps the dollar as cash reserves and it is not in its interest to lose it, and therefore not The collapse of the American economy is easy, no matter how much debt it has not accumulated.

Since the new world order and the world went through successive financial and economic crises, America has, in the decades since the signing of the agreement, pushed large numbers of dollars to finance its foreign wars and to buy foreign assets, which has not enabled it do not have. to fulfill its commitment to the right of states to transfer their reserves from dollars to gold, which prompted US President Richard Nixon (1969-1974) in 1973 to stop exchanging dollars for gold for a series of measures known as the Nixon shock, to be the last takeoff not followed by a return to the gold-linked port.

Many financial and economic crises have since taken place in all the continents of the world, the most severe of which were in Asia, Africa and some Latin American countries. Then came the global economic crisis (2007-2008), in which most of the world’s countries participating in the global economic network have been exposed On the one hand, a fragile and politicized global financial system in favor of the world’s great powers, and leaning on large economies plagued by structural imbalances that could one day leave the entire system overthrow.

Perhaps the Russian-Ukrainian crisis today, and the subsequent sanctions imposed by America and some Western European countries that use the dollar weapon, and some of the weapons and tools of the global financial system, and Russia’s ability – to the other side – to restore the veto over any resolution intended to be issued by the Security Council The question arises about the need to change the new global financial system, with all its global institutions, financial policies and instruments, exchange systems and monetary reserves.

And I ended the conversation with what Professor of Economics and International Monetary Fund Adviser Graham Bird said in the winter of 2014 in one of the halls of Clermont University: The world knows the existence of structural imbalances in the global financial system, and its need for radical reform, but in every crisis he says that our priority now is to get the system out of the crisis If that happens, the world will say what is the need to change a system that is in able to emerge from crises.

Salem Al-Sheikh – Director of the National Competitiveness Office at the Ministry of Economy

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