The cause of the crisis was identified in Bretton Woods

Mervyn King in his recent speech (this speech has been quite popular in media as King discusses Bank of England move to buy corporate bonds in this, see this):

It is also clear that at the heart of the crisis was the problem identified but not solved at Bretton Woods – the need to impose symmetric obligations on countries that run persistent current account surpluses and not just on countries that run deficits. From that failure stemmed a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis any of us can recall.

This is quite interesting. Bretoon Woods led to the formation of  many key institutions (World Bank, IMF, GATT) and was a result of collapse in the world economy post world wars and economies needed an international monetary and payment system after collapse of gold standard. However, am not clear with the connection King is making here. As far as I remember it was US that was running surpluses then and transferred the same to the deficit economies (mainly war torn European economies). I guess, all the deficit economies to receive the funds had certain conditions but the same did not apply to the US.  If it was identified why wan’t it solved?

What is the linkage to this crisis? On the highest macro-level it is the global imbalances (see this paper; wrote it exactly an year ago) which are sort of correcting (though capital still flowing to US, I am not sure whether they would correct completely). These imbalances have been created by US importing capital and Emerging Economies (and Middle East) exporting the same. Now, what should have been the “symmetric obligation” which King refers to. Should there have been restrictions (self imposed or imposed by the imporing economies??) on emerging economies?  And since he calls for symmetric obligation it seems asymmetric obligation was in place (just like post Bretton Woods) on importing economies (developed – US, UK etc.) But what were they?

I am quite perplexed and it will be interesting to read political economy literature on Bretton Woods to get some clarity. Anybody has come across any useful papers?

One Response to “The cause of the crisis was identified in Bretton Woods”

  1. Emily Ng Says:

    During the wartime planning that led to Bretton Woods, Keynes was very keen on the idea of obligations on creditor (surplus) as well as debtor (deficit) countries. This is clear from Markwell’s account of Keynes’s proposals (reference: Donald Markwell (2006), “John Maynard Keynes and International Relations – Economic Paths to War and Peace”, Oxford, page 241). Keynes believed this would put “expansionist pressure on world trade”, or at least neutralise contractionist pressures. I suggest that you start with Markwell’s account in his chapter “Anglo-American Cooperation for Internationalism: Keynes’s Second World War Vasion for a Post-war World”, and maybe then proceed to the other sources he cites?

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