World will continue to make do with the messy legacy of Bretton Woods

Most people think of the international monetary system as an architecturally designed system made in Bretton Woods at the end of the second world war. This may be true for the international financial institutions like the IMF or World Bank, but the existing system is a messy legacy of rules, regulations and foreign exchange systems, and institutions that facilitate trade and payments between countries.

Unlike a national monetary system, where there is one currency issued by the national central bank and national agencies responsible for financial stability, there is currently no global central bank, no global financial regulator and no global ministry of finance. In short, we have global financial markets, but no global mechanism to deal with periodic crises, except through the (sporadic) consensus views of national policymakers.

This was not a problem when the US was the dominant power in the 1950s and 1960s. But this changed when the US dropped the link to gold in 1971. From then on, the international monetary system was largely driven by decisions between the US and Europe, which together owned most of the voting power in the International Monetary Fund. Emerging markets had little say, since they were the major beneficiaries of aid and funding from the IMF and World Bank.

In 1975, the Group of Six came into being, comprising the US, Britain, France, Germany, Japan and Italy. When Canada was added a year later, the G7 accounted for roughly half of world gross domestic product, but in effect ran the global financial system. By 1999, the enlarged G20 accounted for 80 per cent of world GDP.

The international monetary system is not functioning smoothly because decision-making is in the hands of sovereign nations, not global institutions. A unipolar system works as long as the dominant power is stable. This is not necessarily true in a multipolar system, as consensus isn't possible even for obvious decisions because of different national interests.

If we keep thinking about reforming the international monetary system in national terms, can we find a more effective system in promoting global trade and payments and maintaining global financial stability?

For example, the debate over the role of the US dollar and the emergence of the renminbi is seen as a threat to the status quo. This is understandable, but money and finance are not ends in themselves, but the means to an end, which is global prosperity and stability.