New World Order

Bretton Woods is the mountain resort in New Hampshire where in 1944 the Allied nations met--with the U.S. calling almost all the shots--to plan a postwar financial system. The Bretton Woods creations included the International Monetary Fund (IMF), the World Bank and a quarter-century of fixed exchange rates built around a U.S. dollar that was linked to gold. The fixed exchange rates and gold standard unraveled in the 1970s, and ever since we've had a system in which the IMF occasionally steps in to help countries in currency crises (usually imposing harsh terms in the process) but exercises no real control over the global financial system.

After the emerging-market currency collapses of the late 1990s, in which IMF aid wasn't much help, the lesson that emerging economies such as China and India took was that they needed to build up gigantic reserves of U.S. dollars to protect their currencies. To build those reserves, they ran big trade surpluses, which were in turn enabled mainly by record trade deficits in the U.S., which were in turn enabled by massive borrowing from around the world. It was an extremely unbalanced financial ballet, and it has now come crashing to the ground.

In the view of many outside the U.S. (and some within), the only way to limit such excesses is through a bigger, more powerful IMF that can act as a central bank to the world--and knock heads when needed. While everybody agrees that this new IMF needs to be less dominated by the U.S. and Western Europe, things get controversial as soon as you go past voting rights. Should capital flows be restricted? Should there be limits on trade deficits and surpluses? Should the IMF be able to order around even the U.S.? If the answer to any of these questions is yes, global capitalism will have entered a new and dramatically less freewheeling era.

To read Justin Fox's daily take on business and the economy, go to time.com/curiouscapitalist

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