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The

System


Setting ECONOMIC SITUATION OF THE WORLD -By 1926 all nations had returned to the Gold Standard -Sparked international deflation competition; hitting peak in 1929 -Great Depression -World Economic Conference, held in London in 1933, collapsed due to disputes -WWII sparked economic growth once again -Fear for what would happen after the end of the War -Desire to avoid another economic collapse

PLANNING -Mid 1941, discussion began regarding postwar monetary reconstruction by the Treasuries of the U.K. and U.S.


Conference JULY 1944 IN BRETTON WOODS, NEW HAMPSHIRE -43 Nations to the Conference table Allied Nations + Neutral Nations -Purpose was to help promote the growth of international trade and the stability of international payments. The overall aim was to restore multilateral trade and payments and open competition after a long era of disruptions characterized by autarky, bilateral arrangements, and mercantilism.1

“We, the delegates of this Conference, Mr. President, have been trying to accomplish something very difficult to accomplish.[…] It has been our task to find a common measure, a common standard, a common rule acceptable to each and not irksome to any.” -John Maynard Keynes at Bretton Woods -Two rival approaches between Harry Dexter White of the U.S. Treasury and John Maynard Keynes of the U.K. Treasury

1Boughton,

James M., “American in the Shodows”: Harry Dexter White and the Design of the International Monetary Fund”, IMF Working Paper


HARRY DEXTER WHITE (United States) ~Bank for Reconstruction ~International Stabilization Fund ~Fixed-But-Adjustable Monetary Standard ~Limited International Liquidity ~Removal of all exchange, capital, and trade restrictions

JOHN MAYNARD KEYNES (United Kingdom) ~Bank for Reconstruction ~International Stabilization Fund ~Sovereignty Over Exchange Rates ~Unlimited International Liquidity ~Exchange/Trade Restrictions ~Ability to create currency “bancor”


Outcomes ADJUSTABLE PEG SYSTEM Members must declare a par value (aka “peg”) for their national money and maintain exchange rate fluctuations within maximum margins of ± 1% parity (aka a “band”). Essentially fixed exchange rates and only adjusted under certain conditions of “fundamental disequilibrium”.

INTERNATIONAL GOLD EXCHANGE STANDARD The Dollar is precisely $35 per ounce of Gold and all other currencies must adjust.

CURRENT ACCOUNT CONVERTIBILITY Regulation forbidding discriminatory currency practices or exchange regulation.

INTERNATIONAL INSTITUTIONS FOR MONETARY REGULATION International Monetary Fund International Bank for Reconstruction and Development


Outcomes FEATURES OF INTERNATIONAL GOLD STANDARD Gold stands as an assurance of an adequate supply of monetary reserves. Set that $35/oz. All other currencies would require time to adjust and convert.

“It set up a system of international liquidity that would consist primarily of national stocks of gold or currencies convertible, directly of indirectly into gold.” -Cohen, Benjamin J., “BrettonWoods System”

At the time, the U.S. Gold reserves retained around three quarters of all central bank gold in the world. All members were assigned quotas that need to be paid into the new Fund by 25% gold, or currency comparable ($), and 75% in home currency.


Outcomes ADJUSTABLE PEG SYSTEM Members must declare a par value (aka “peg”) for their national money and maintain exchange rate fluctuations within maximum margins of ± 1% parity (aka a “band”). Essentially fixed exchange rates and only adjusted under certain conditions of “fundamental disequilibrium”.

INTERNATIONAL GOLD EXCHANGE STANDARD The Dollar is precisely $35 per ounce of Gold and all other currencies must adjust.

CURRENT ACCOUNT CONVERTIBILITY Regulation forbidding discriminatory currency practices or exchange regulation.

INTERNATIONAL INSTITUTIONS FOR MONETARY REGULATION International Monetary Fund International Bank for Reconstruction and Development


Outcomes FEATURES OF CURRENT ACCOUNT CONVERTIBILITY Binding framework of regulations to remove exchange controls that had been put in place during the devaluation wars of the 1930s. Two Exceptions 1) Extended only to current international transactions. So that governments were to refrain from regulations of purchases and currency sales in trade of goods and services.. However, they were not obligated to refrain from regulation of capital-account transactions. 2) Convertibility Rules could be deferred if a member was in a ‘transitional period’ after the war. ie. Germany


Outcomes ADJUSTABLE PEG SYSTEM Members must declare a par value (aka “peg”) for their national money and maintain exchange rate fluctuations within maximum margins of ± 1% parity (aka a “band”). Essentially fixed exchange rates and only adjusted under certain conditions of “fundamental disequilibrium”.

INTERNATIONAL GOLD EXCHANGE STANDARD The Dollar is precisely $35 per ounce of Gold and all other currencies must adjust.

CURRENT ACCOUNT CONVERTIBILITY Regulation forbidding discriminatory currency practices or exchange regulation.

INTERNATIONAL INSTITUTIONS FOR MONETARY REGULATION International Monetary Fund International Bank for Reconstruction and Development (World Bank)


Outcomes INTERNATIONAL MONETARY FUND (IMF) Signed on Dec. 27, 1945 and began operations on March 1, 1947 Began with participating countries Serves as a global monitoring agency: Supervises, consults, and collaborates on monetary problems. Facilitates world trade expansion Ensures exchange rate stability Member states in “disequilibrium” use IMF financial resources for correction. Operations: Quota subscription (25% gold/standard currency, 75% home currency) Largest quotas get largest portion of power. Fund is at the IMF’s disposal to grant loans to member countries. 3-5 years a country must begin to pay back. Began with $8.8 billion U.S. contributed $2.9 billion for voting power


Outcomes INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Ratified 27 Dec. 1945 Original mission to finance reconstruction of nations after WWII Funded by member states contributions Loan Institution: For governments and public enterprises with a sovereign guarantee of repayment General Conditions for repayment must be agreed to For development of nations in transition from wartime to peaceful economies Lent $497 million for postwar reconstruction Becomes the World Bank


Implications

Hegemony: “the economic, ideological or cultureal power exerted by a dominant group over other groups. -Samuel Huntington, “The Third Wave”

UNITED STATES AS GLOBAL HEGEMON -Almost all of the Outcomes of Bretton Woods were the U.S. Preferences ~Bank for Reconstruction ~International Stabilization Fund ~Fixed-But-Adjustable Monetary Standard ~Limited International Liquidity ~Removal of all exchange, capital, and trade restrictions

✓ ✓ ✓ ✓ ✓

-All exchange rates were essentially tied to the dollar as a reserve currency and lender of last resort. This was key to limiting fear and speculative pressure because it established a hegemonic global financial centre.2 -A relatively open market was created for imports of foreign goods. -U.S. was largest donor and therefore largest vote in the institutions. -Long-term loans and grants through the IMF and IBRD (along with the Marshall Plan and New York capital market). -Liberal lending in crisis time. -Countries began to purchase dollars and pay in dollars to stabilize currency.


Flaws & Failures THE TRIFFIN DILEMMA -Robert Triffin, Gold and the Dollar Crisis, 1960 The gold exchange is fundamentally flawed by reliance on convertibility of the dollar into gold. World is relying on American deficits in order to avoid a liquidity shortage. -By 1950’s the gold standard was diminishing and the dollar became the primary form of international liquidity. -Pure Dollar Standard 1968-1973

RIGID EXCHANGE RATES -The deficit of the U.S. cause major problems with Europe and Japan markets. U.S. wanted them to revalue their currencies because of trade discrimination, but Europe and Japan wanted the U.S. to correct their deficit. -1971 U.S. unpegged the dollar to gold rate -1973 marked the beginning of the floating exchange rate against the dollar. End of the Bretton Woods System -


Current Day INSTITUTIONS -International Monetary Fund Special Drawing Rights -World Bank Group -World Trade Organization -International Finance Corporation

WORK To encourage open markets and trade, to expand globalization to all parts of the world, and to increase international economic cooperation.

“In the United States, there remains a deep-seated ambivalence toward multilateral engagement. To the world’s most powerful nation, a unilateral approach can sometimes look appealing. A considerable gap also remains in the American public’s understanding of multilateral institutions and issues. This gap must be bridged if Congress is to meet the international commitments of the United States.” -Bretton Woods Committee, “Why Our Work Is Important”


Lessons Learned BRETTON WOODS SYSTEM -First major internationally articulated regime that created a multilateral monetary system and monitoring organization. -Evidence of the role that power plays in shaping international design -The assumed power of the U.S. seems to affirm the need for hegemony to preserve economic order3 -Destabilizing impact of balance of payments neglect

LASTING EFFECTS -International monetary coordination -Multilateral regime with power over nations


For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still.� -John Maynard Keynes

The Bretton Woods System  

A history of the Bretton Woods system.