Excerpts from a working paper published by the Peterson Institute for International Economics.

Eighty years ago, negotiators from 44 countries meeting at Bretton Woods, New Hampshire, devised multilateral institutions and rules that they hoped would steer the postwar world economy toward durable peace and prosperity. A key feature of the Bretton Woods rules was a global system of fixed but adjustable dollar exchange rate parities, which the advanced economies abandoned in 1973 after nearly three decades. In many ways, 1973 was a key moment in the transition from the post-World War II world economy to the modern world economy, far beyond the seemingly technical issue of the exchange rate regime. Contrary to forecasts that more variable exchange rates would fragment the international system, as during the period between the world wars, the decades after 1973 saw the world economy reach an unprecedented degree of economic integration. Economic multilateralism adapted and in some respects grew stronger.

Today, a new chapter may have opened. In the wake of financial crises unprecedented since the Great Depression, persistent economic inequality, migratory pressures on Europe and the United States intensifying in the mid-2010s, Brexit, the norm-breaking U.S. Trump administration of 2017-21, the first global pandemic in a century, an accelerating climate crisis, the Russian invasion of Ukraine, and the newest Israel-Gaza war, the world looks to have moved into a distinct era echoing many of the interwar tensions that the post-World War II settlement sought to overcome. And unlike in the 1920s and 1930s when radio first became widely available, modern media display global stresses to everyone visually and in real time and amplify them in a way undreamed of then. How much reversion toward the troubled past is likely, and to what extent will that reversion undermine the global community’s ability to address common challenges, some inconceivable before World War II?

As an economist, I will focus mainly on issues related to commerce and finance, but the nature of the current malaise underscores the inherent inseparability of geopolitics, domestic politics, and economics. The destabilizing potential of this interplay was less salient for parts of the postwar period, especially in the quarter-century or so from the collapse of the Soviet bloc over 1989-91 to the mid-2010s. After that brief belle époque, however, history has indeed returned, with a vengeance.

…The current global landscape, dominated by geopolitical and economic tensions between the United States and China, threatens to undermine coordinated action on common threats—including climate change, pandemics, cyber risks, economic instability, and nuclear proliferation. It may also weaken the precious institutional architecture of international cooperation that was fortuitously established in unique historical circumstances at the end of World War II.  

In its drive to contest U.S. dominance, China is promoting its own vision and leadership aspirations for middle- and lower-income countries, backed up by economic diplomacy and sponsorship of alternative international institutions. Unlike during the Cold War rift between the Americans and the Soviets, however, China’s economic interdependency with high-income U.S.-aligned countries is extensive, raising the costs of conflict for both sides but also creating shared incentives for more cooperative solutions. And, it must be said, almost all other countries, whether in the West or elsewhere, would welcome a pivot from conflict to more constructive competition.