South-Western College Publishing - Economics  
Prescriptions for Global Ills
Subject International Financial System
Topic International Finance
Key Words Bretton Woods Agreement, Capital Controls, Currency Fluctuations
News Story

Calls for a new global financial system echo from many corners. It is claimed that the global financial crises of recent years are signals that the Bretton Woods system that has ruled the world economy for 50 years is broken. Over the last few months there have been studies, commissions, forums, and analyses that have developed proposals for a new system. Perhaps the only thing all of these reports have in common is the belief that the old system is in need of fixing.

One proposal being pushed by many European countries calls for an early warning system for financial crises. The idea is that the International Monetary Fund (IMF) would broadcast its reviews of member countries to the world in enough time for them to react. The problem with this proposal is the IMF sometimes forecasts a crisis that does not emerge or reports that an economy is healthy when it is not.

Some experts who view the cause of the global crises as the rapid withdrawal of capital, call for capital controls-either limits, or taxes, on investment funds in small nations. The problem with this approach is that when countries impose controls, owners of capital seek other places for their investments.

The IMF has suggested that countries become prequalified for aid - sort of like having a credit line at your bank. Then, should a crisis arise, the IMF can provide funding very quickly. It is thought that having this additional security might avoid a financial crisis. The one time that this was tried in Brazil, it did not work. Other proposals include "target zones" for currency fluctuations, forcing banks to provide additional financial support to countries where the have placed loans, and having the IMF play the role of international policeman - making sure that countries are in compliance with international rules and regulations.

There is one other alternative - to stick with the present system. There are those who argue that crises are healthy in that each crisis makers markets function more efficiently.

(Updated April 1, 1999)

1. What are the essential features of the Bretton Woods Agreement?
2. What are some of the factors that have caused the demise of the Bretton Woods Agreement?
3. How would a managed float system work?
Source David E. Sanger, "It's a Global Mess. What's a World to Do?", The New York Times, February 28, 1999.

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