Why the World Monetary System Needs a New Set of Rules
How revamping outdated financial, trade, and development agreements could help fight climate change, inequity, populism—even future pandemics
Activists protested with cardboard cutouts of world leaders, including President Joe Biden and Prime Minister Boris Johnson of the United Kingdom, during the World Bank/International Monetary Fund Annual Meeting in October 2021. In a new book, BU global policy expert Kevin P. Gallagher calls for massive updates to institutions like these so they can better withstand the problems of the 21st century. Photo by Jose Luis Magana/AP Photo
Why the World Monetary System Needs a New Set of Rules
How revamping outdated financial, trade, and development agreements could help fight climate change, inequity, populism—even future pandemics
“We are now faced with the fact that tomorrow is today. We are confronted with the fierce urgency of now. In this unfolding conundrum of life and history, there is such a thing as being too late.” Those were the words of Martin Luther King, Jr. (GRS’55, Hon.’59) in 1967 as he called for an end to the Vietnam War, and for lasting global peace and justice. They’re also the opening words of Kevin P. Gallagher’s new book, The Case for a New Bretton Woods, in which he argues the need to overhaul antiquated global economic systems that he says are fueling poverty, inequality, and climate change.
“From a scientific perspective, there is the same fierce urgency in the way Dr. Martin Luther King talked about civil rights back then,” says Gallagher, director of Boston University’s Global Development Policy Center.
It’s time, he says, for the world to come together to build new global economic rules, in the same way it did toward the end of World War II in Bretton Woods, N.H., In 1944, a group of more than 700 delegates from 44 countries congregated at Bretton Woods, a ski and recreation area in the White Mountain National Forest, to establish an international system of finance, trade, and development principles, and—they hoped—bring economic prosperity. They met for about three weeks, resulting in new trade rules and the establishment of global financial institutions, such as the World Bank and the International Monetary Fund.
“They created a whole international economic order that worked pretty well until the 1980s,” Gallagher says. Now, the world is faced with challenges that did not exist in the 1940s, from climate change to global trade wars to a coronavirus pandemic, all occurring on a scale the Bretton Woods attendees couldn’t have imagined. Gallagher and coauthor Richard Kozul-Wright, director of the Division on Globalization and Development Strategies at the United Nations, want a future that protects people from these threats.
“Inequality, instability, and climate crisis is a triple crisis that could lead to war or worse if we don’t act now on these issues,” says Gallagher. The book—clocking in at a manageable 142 pages, considering the vast changes it calls for—offers a number of key recommendations for sweeping reforms, including redirecting trade rules toward low-carbon investments, equitably supporting massive green industrialization, and promoting a more prosperous, sustainable world economy for the 21st century.
“We need another moment like Bretton Woods,” says Gallagher, a Frederick S. Pardee School of Global Studies professor of global development policy. “The 21st century needs a moment with that same spirit to reboot the architecture to be fit for the purpose of today.”
The Brink spoke to Gallagher about his vision for a new Bretton Woods and why he thinks major reforms are necessary now more than ever.
Q&A
with Kevin Gallagher
The Brink: What happened during the Bretton Woods conference in 1944?
Gallagher: In short, these [world leaders] met up in Bretton Woods, N.H., and in just a couple of weeks they created whole regimes: an exchange rate regime, a financial crisis regime, a development regime, and the seeds of a trading system. If you think of that in 2022—a bunch of world leaders coming together just for a couple of weeks and creating a whole set of institutions—I don’t think many folks would believe it happened then or could happen now. It’s a magical moment in history.
They created a whole international economic order that worked pretty well until the 1980s, when it started to break down to the point where these institutions can’t live up to their purpose and need fundamental reform, not just tinkering in different policy areas. [A Bretton Woods–era convening] might seem impossible today, but we are arguing that we have to have that kind of moment, because it’s almost equally impossible to face the consequences of not having any action.
The Brink: Why did the economic order they created break down?
Gallagher: Mostly from the power of large firms in many industrialized countries. The system didn’t maintain the level of steering toward employment and development the way it was intended in 1944. And the reason is largely because of deregulation of financial and trade markets in the biggest economies, and these things just got too big for the system to remain in lockstep.
The Brink: In what ways do the Bretton Woods–era agreements need to be reimagined?
Gallagher: We have different challenges than in 1944. We have 7.5 billion people, and things like climate change. The original system was built to make global financial markets stable so there wouldn’t be a financial crisis—the shadow of the Great Depression was hanging over them at that point, and World War II wasn’t over yet, so they were thinking about how poverty, inequality, and economic strife played a role in triggering war. And, it was intended to set up investment for developing nations, more employment, and to maintain a balanced trading system. But a lot of that has broken down in this century. We had one major financial crisis in 2008, and 2020 was even worse than the Depression for many countries. And it’s clear that institutions haven’t been able to keep up with today’s development needs—we saw so many developing countries that didn’t have the healthcare systems to withstand such a massive pandemic and aren’t able to mobilize money for the kinds of things people need to prosper. Trade wars between the United States and China are the most talked about, but just about every country has thrown out their trading rules, possibly because the treaties were getting it wrong. The system is also failing in mobilizing the kind of financing needed to transition to a low-carbon global economy.
The Brink: How can a new Bretton Woods protect us against climate change?
Gallagher: The climate crisis is fundamentally a global problem. We need the rules of the world economy to be wired toward our climate goals. There’s a real mismatch between where the financial system is going and where investment is needed to change our global energy systems. Also, there’s a need to rewire our trading system: should there be free trade so it’s really, really cheap to move oil and coal around the world, but high tariffs for solar and wind? That’s the way it is right now. Fossil fuels and pollution-intensive industries are largely subsidized and have free trade, which puts renewables at a disadvantage, so we need to turn that upside down and create a system that favors the kind of things that we want for a good society.
The Brink: How are you hoping the book helps bring the world up to speed from 1944?
Gallagher: As academics, we’ve done this research, we’ve observed this system, and we felt like it was our job to take that evidence-based research and say it’s time to start that conversation, because no one has really called for a whole reboot. Some leaders have called for it here and there, but we wanted to put the blueprint together and start a global conversation about the need to really get this stuff right. We might have another pandemic some day, we might have another global financial crisis, and we’re in the middle of the climate crisis, so we’ve all come to realize that this system is not preventing these crises.
This book is not a critique, it is a call for action. We fundamentally understand as economists that these are the roles that international institutions have to play. We need them now more than we did in 1944, and they need to be up to the scale of the problems. We know we have to think forward and get a new set of principles that are fit for the 21st century, and rewire the system to make sure our economy is geared toward meeting our social goals in a way that can bring broad prosperity, and prevent the climate crisis, inequality, populism, and create financial stability.
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