Eric Helleiner’s paper, “From Bretton Woods to Global Finance: A World Turned Upside Down,” discussed the major causes of the globalization of financial markets, were surprisingly attributed to the Bretton Woods system that opposed a liberal, international financial order. In addition, Helleiner also expounded how the states played an essential role in the globalization process despite the widely-believed fact that they were not major factors in the global development of financial markets.
In general, the central issues discussed by the author were the actual processes of globalization and how the Bretton Woods system brought about a global process that it never intended to create. His central argument was that the state played three major roles that caused the rise of global financial markets. In addition, he also argued that the Bretton Woods system unknowingly helped the creation of these markets due its system of trade and finances. Before he outlined his arguments, he first discussed the process of the development of the Bretton Woods system.
First was that capitals controls were established to protect the new macroeconomic planning mechanisms from speculative financial movements that could disrupt the equilibrium. Second, due the increase in expenditure, the state was not capable of allowing their citizens and corporations to move funds abroad to avoid being taxed. Third was that the local financial regulatory structures established during the 1930s and 1940s would collapse if the domestic borrowers and savers were given access to the markets of finance abroad.
Lastly, the state had to be protected from “hot money” or illegal transactions and financial flows that were caused by political motives and moves towards legislation. Meaning to say, under the Bretton Woods system, access to international or foreign markets were limited during that time because it did not benefit the state as much as it did the foreign markets. In addition, the system also believed that a liberal financial order was not compatible with system of exchange rates and liberal trading system that were considered as highly stable.
Speculative or uncertain financial flows were one of the major causes of disturbances in foreign exchange rates. In trade, capital movements threatened to force painful and adverse adjustments on the current account which was less flexible and as a result would raise the demands for protectionist measures. In other words, financial liberalism was sacrificed in order to pave the way for a liberal trading order and stable exchange rate that were vital to the growth and development of a country.
However, the Bretton Woods system was significantly changed after the globalization of financial markets. Helleiner noted that that the post possible causes of the emergence of global financial markets were market pressure and the significant advancements in technology. In terms of technology, the various advancements and creation of highly sophisticated devices made moving money around the world much easier and less costly. In terms of market however, Helleiner noted five causes.
These included: the restoration of the market confidence and the assurance that international financial transactions were safe; the swift expansion in the demand for international services in the market which happened alongside the growth of multinational corporations; the OPEC states’ deposition of major surplus funds in international banking markets; the beginning of floating exchange rates which prompted markets to diversify their assets; and the last was that conservative local markets pressured the financial operators to the international stage in order to keep up with the rising competition in the domestic markets.
Although Helleiner did not discount the roles that technology and market pressure played in the globalization process, he also argued that the states also played key roles. These roles are: the states’ failure to implement effective controls, its liberalization activities, and the prevention of major financial crisis. He noted that during that time, when the U. S.
rejected abolished the Bretton Woods system of capital controls and created a liberal financial order, European countries and Japan, failed to implement control measures that would counteract America’s new stance due to the major costs it entailed. As a result, most countries also adopted a more liberal financial order similar to the U. S. The states’ second role, which was the liberalization of the market, Helleiner argued, involved the enabling of domestic banks and corporations to operate offshore or internationally.
This eventually disrupted the fixed and controlled exchange rates that were established by the Bretton Woods system. Lastly, Helleiner claimed that the states prevention of major financial crises, such as the United States rescue of the Franklin National Bank in 1974 and Mexican debt in1982, eventually paved the way for countries, which were regulated by the Bretton Woods system of capital controls, to embrace a more liberal financial system in order to avert a crisis.
In short, Helleiner vividly illustrated how the Bretton Woods system contributed to its own undowing. In general, all of the author’s points were very true as Helleiner made use of actual historical events to substantiate his claims. While the Bretton Woods system of capital controls was effective during that time, it only had temporary effects. Today, the market is too diverse and too flexible to be controlled by a single regulating system.
Moreover, I also believe the fact that the states, due to their dependency on international financial flows during that time, unknowingly played crucial roles in the globalization of financial markets, which eventually resulted in a free market that is being enjoyed by most parts of the world today. In addition, I also believe that international trade and globalization are essential factors in the growth and development of any country because it involves penetrating markets all over the world.
In short, the Bretton Woods system can be considered truly obsolete and should never be implemented again especially today as the global market is highly volatile and is subject to various changes. The placement of capital controls under the Bretton Woods system also means limiting the capabilities of the market, which would prove to be disadvantageous in the future. References Helleiner, E. (2007). From Bretton Woods to Global Finance: A World Turned
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