Monetary policy

The Spirit of Bretton Woods

Reuters (M)
Mario Draghi (ECB) and Janet Yellin (the Fed) would do much for both their economic areas if they could meet eye to eye. Source: Reuters (M)

At the end of the Second World War, the victorious powers met in Bretton Woods, at a sweeping luxury hotel in the mountains in New Hampshire, and created an order for peaceful cooperation after the war. The summit led to the establishment of the International Monetary Fund and the World Bank.

The stable monetary order that was established in Bretton Woods lasted until the 1970s. Above all, the attendees were motivated by the realization that cooperation in the economic sphere is necessary to prevent the kinds of tensions that had largely contributed to the war.

We need more of the spirit of Bretton Woods today. This doesn’t mean copying the monetary order of the postwar period, but governments and central banks need to work together more closely. The example of the euro zone shows that intensive trade always leads to intensive financial relations. If this is ignored, it will not lead to another European war, but it will result in a crisis. And the example of central banks also shows that monetary policy can no longer be pursued with tunnel vision relative to national economies – acting purely in the interest of those economies.

It is now becoming clear that the US central bank (the Fed) and the European Central Bank (ECB), as well as the Japanese central bank, are finding it very difficult to bring inflation to the desired level of 2 percent. And long-term interest rates remain stubbornly low in the United States, so that the Fed’s efforts to tighten the reins have not been truly successful.

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