Bretton Woods System

8 Key excerpts on "Bretton Woods System"

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  Applied International Economics

  • W. Charles Sawyer, Richard L. Sprinkle(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  gold-exchange standard. In this system, the U.S. dollar was tied to gold but all other currencies were tied to the dollar. In addition, the countries agreed to the creation of a new international monetary institution known as the International Monetary Fund (IMF). In this section, we consider how the Bretton Woods System functioned. Since this system and the IMF are inextricably bound together, we will also consider how the IMF played a key role in the operation of the international monetary system.

  The Bretton Woods System

  The purpose of the Bretton Woods System was twofold. First, countries had a strong desire to return to some form of international monetary system that featured fixed exchange rates. The period after the gold standard from 1914 up to World War II was characterized by exchange rates that were extremely unstable. Given that both business and governments had become used to stable exchange rates, this period of instability was very unsettling. Thus, the first objective of a new international monetary system was to develop some form of fixed exchange rates. The second purpose of the Bretton Woods System was to develop some method that would decouple the link between a balance of payments imbalance and the supply of money. In order to accomplish this objective, it was necessary to reduce the role that gold played in determining a country’s money supply. It became necessary to link currencies to something other than gold. Both of these objectives were satisfied in a rather unique manner.

  First, the price of gold was defined in terms of the U.S. dollar. The U.S. was to maintain the price of gold fixed at $35 per ounce. In addition, the U.S. would stand ready to exchange dollars for gold, or vice versa, at the stated price without restrictions or limitations. This requirement allowed the system to retain at least a small part of the old link to gold. Second, all other currencies were fixed in terms of the U.S. dollar. The Bretton Woods System was essentially a U.S. dollar standard, with the dollar linked to gold. Because all currencies were fixed to the dollar, they also were fixed in relation to one another. The international monetary system seemed ideal in that exchange rates were fixed and governments were now free to pursue a monetary policy consistent with internal balance—in other words, intervention coupled with sterilization. Thus, a country would no longer have to sacrifice internal balance considerations to maintain its external balance.

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  Global Finance and Development

  • David Hudson(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  Bordo and Eichengreen 1993 ).

  Nevertheless, the Bretton Woods regime collapsed in the 1970s. Two points need to be made about the system’s success. First, the actual operation and success of the system was underwritten by the US rather than the IMF and the World Bank, and second, the system had a fatal flaw. Ironically, this flaw arose from the system’s necessary, as it turned out, dependence on the US. This flaw is called the Triffin dilemma.

  Meanwhile, the Bretton Woods institutions – the IMF and World Bank – obviously continue to exist and remain important, though their specific roles have changed and adapted to the new international monetary regime – see Box 4.4 on the IMF.

  Box 4.4 The International Monetary Fund (IMF)

  The IMF was designed to manage and regulate the multilateral Bretton Woods currency system – to maintain stability, ensure that countries current accounts were open and manage the fixed par rates between countries. As part of this the IMF was to serve countries’ needs for short-term borrowing to cover temporary balance of payments deficits. The idea was that, unlike under the gold standard, governments should have more breathing space to turn around their deficits rather than being forced to immediately deflate their economy. However, with the end of the Bretton Woods multilateral system of pegged exchange rates the IMF’s future looked uncertain, despite the fact that it was crucial in legalising the switch to floating exchange rates through the 1978 amendment of its Articles of Agreement. As part of this, the IMF managed to ‘repurpose’ itself to carry out a surveillance role – the IMF increasingly focused on countries’ balance of payments difficulties, but sought to resolve them with orthodox policy advice assuming that they were the consequence of underlying structural problems with countries’ economies. While IMF lending has always come with conditions, introduced in the 1950s, during the neoliberal era conditions became increasingly harsh, intrusive and coercive. The imposition of ‘structural adjustment’ was strengthened and enabled by the emergence of the Third World debt crisis where many developing countries in Latin America and Africa found themselves with structural balance of payments problems and having to borrow from international organisations to cover the shortfalls (see Chapter 6 ). Conditionality was often brutal, damaging and resented, as well as being bad for growth and poverty (Vreeland 2003 , 2007

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  Global Standards of Market Civilization

  • Brett Bowden, Leonard Seabrooke(Authors)
  • 2006(Publication Date)
  • Routledge

    (Publisher)

  The second was the Bretton Woods regime, which most historians generally date as having existed between 1944 and the early 1970s. The Bretton Woods System is seen by many academics as the standard with which to judge all other monetary systems. It is revered largely because its system of fixed but adjustable exchange rates, administered by the International Monetary Fund (IMF), brought stability to the international monetary system after the interwar problems of confidence, liquidity, and adjustment. However, as Barry Eichengreen (1996: 7) points out, the Bretton Woods System is an aberration in the history of exchange rate regimes. It was a product of international negotiation, but, more commonly, monetary agreements have arisen ‘out of the individual choices of countries constrained by the prior decisions of their neighbors and, more generally, by the inheritance of history’.

  Finally, the period since 1973 has been the era of floating exchange rates. Floating rates did exist in the 1920s — before the inception of the gold exchange standard and after its demise in the 1930s — but they were a transitory affair and it is only in the last thirty years that floating rates have become widespread globally. It is true that there have been a variety of regional currency arrangements since 1973 (e.g. the European Monetary System), attempts made to fix the currency of small nations to larger states (e.g. the African Financial Community) and a recent attempt to introduce a single global currency and global central bank by 2024, but these are of second-order importance.

  This chapter assesses how private and public agents have imposed civility in international monetary relations over the last 150 years. It explores why the ‘market solutions’ of the Gold Standard were replaced by a belief after 1944 that national governments should work with a supra-national institution (the IMF) to bring civility to the IMS. Under the Bretton Woods framework, co-operation between members was desirable in order to stabilize exchange rates, to regulate capital flows, and to guarantee that international obligations did not override domestic policy objectives. Due to a combination of factors, the tenets of Bretton Woods were challenged by the early 1970s but the introduction of floating exchange rates in 1973 did not

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  Economics of the International Financial System

  • Sukumar Nandi(Author)
  • 2017(Publication Date)
  • Routledge India

    (Publisher)

  The gold exchange standard was destined to be a failure as it suffered from a number of defects. First, the use of two reserve currencies — sterling and USD — was creating problems as there was an absence of leadership as a hegemonic power unlike the earlier period when Britain shouldered the role. Second, there was little cooperation among the key members — Britain, France and the US. Two strong members, i.e., France and the US, were reluctant to follow the rules of the game. They created deflationary pressures in the world by persistent sterilization of their balance of payment surpluses. The system could not bear it and ultimately it collapsed with the Great Depression. But by that time it had transmitted deflation and depression across the world (Eichengreen, 1989; Friedman and Schwartz, 1963; Temin, 1989).

  5.3  The Bretton Woods International Monetary System

  With the end of World War II, the victors assembled at Bretton Woods, New Hampshire, US, to build up the World Monetary System, which came to be known as Bretton Woods International Monetary System (BWIMS). The principal objectives were to remove the ills from the financial system and to create a stable world monetary order. For this several measures were adopted. First, the floating exchange rate system was stopped. Second, the gold exchange standard was scrapped as it was thought to be responsible for the international transmission of deflation in the early 1930s due to its vulnerability to the problems of adjustment, liquidity and confidence. Third, the new system sought to stop the beggar-thy-neighbour devaluation, trade restrictions, exchange controls and bilateralism prevalent after 1933.

  A group of economists led by J.M. Keynes, E.N. White and Ragnar Nurkse argued for an adjustable peg system, which was expected to combine the good features of stability of the exchange rate under the fixed-exchange-rate gold standard, on the one hand, and the monetary and fiscal independence under the flexible-exchange-rate standard, on the other. The coordination role of an international monetary agency was also planned. The latter was supposed to have considerable control over domestic financial policy of the members. But the two sides had differences over minor details. The Keynes plan contained more domestic policy autonomy than the White plan, and the latter put more emphasis on exchange rate stability. While both the teams — the British and the American — were not in favour of a rule-based system, the British team was primarily interested in preventing the deflation of the 1930s, and it attributed that partly to the deflationary monetary policies of the US and partly to the constraints of the gold standard rules. Thus the British team was in favour of an expansionary system.

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  Principles of International Finance

  • Daniel R. Kane(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Reconstruction of the international monetary system began even before the end of the Second World War. Draft proposals submitted by Harry Dexter White of the US Treasury and John Maynard Keynes of the UK Treasury culminated in the Bretton Woods conference of 1944 which ushered in a new era of international monetary co-operation and led to the establishment of the International Monetary Fund.

  These attempts to improve international monetary co-operation formally recognised that countries are financially interdependent and that there was an urgent need to harmonise national economic policies. They represented an important step towards avoiding the exchange rate chaos which had characterised the 1930s and which, through competitive devaluations and the export of unemployment, had served to spread economic instability internationally.

  The IMF, which was to oversee the operation of the proposed system of fixed exchange rates, was conceived as an international fund, although subsequently it came to function as a world central bank. Its major provisions, which were to provide a framework for almost 30 years of comparative economic stability, were to: (i) promote international monetary co-operation and development; (ii) facilitate the growth of international trade; (iii) promote exchange rate stability; (iv) reduce the magnitude and duration of payments imbalances.

  These provisions were to be effected by: (i) the establishment of par values and the maintenance of individual currencies within 1 per cent of declared par values — requirements which, in practice, evolved into the ‘gold exchange standard’;

  (ii) fund approval for any exchange rate realignments which cumulatively exceeded 10 per cent of declared par values but which were necessary to correct fundamental balance of payments disequilibrium;

  (iii) the provision of gold and convertible currencies to finance transitory or cyclical current account deficits.

  The immediate task facing the international community in 1945, however, was post-war reconstruction and development. The war had destroyed much of Europe’s economic fabric and had left European countries dependent on the US for imports but without the means to pay for them. Rapid European recovery, therefore, seemed unlikely without US assistance.

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  Struggling with Success

  Challenges Facing the International Economy

  • Anne O Krueger(Author)
  • 2012(Publication Date)
  • WSPC

    (Publisher)

  of the pillars of the postwar international economy consisted of four functional institutions. The fourth, which never came to fruition, was an organization to oversee and stabilize prices of primary commodities through the operation of buffer stocks. This plan was gradually abandoned as the other three international institutions were negotiated, although the Havana Charter contained provisions for the International Trade Organization to undertake activities geared to commodity price stabilization. 10 Events leading to the Bank and the Fund. Discussions for international monetary arrangements culminated in the Bretton Woods conference of 1944, with participation by representatives of 45 countries. 11 Although it seems clear from all accounts that it was agreed that there would be three international institutions — to oversee trade arrangements, 12 the international monetary system, and to supplement private long term capital flows — only the International Monetary Fund and the IBRD Articles were drawn up and approved at Bretton Woods. Proposals for the international monetary facility were considerably more controversial between the Americans and the British. 13 As is well known, Keynes initially proposed an international bank-money, called “bancor”. The proposal focussed upon increasing world liquidity, and assumed that exchange controls and quantitative restrictions would persist in the international economy. The clearing union would be one in which members had virtually automatic drawing rights (like overdrafts), up to some specified limit. This proposal was firmly grounded in the Keynesian view of a world in which secular stagnation would be the chief problem and the solution would involve measures to stimulate demand

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  A New Deal for the World

  • Elizabeth Borgwardt(Author)
  • 2007(Publication Date)
  • Harvard University Press

    (Publisher)

  PART II

  BRETTON WOODS, JULY 1944

  There is a curious notion that the protection of national interests and the development of international cooperation are conflicting philosophies—that somehow or other men of different nations cannot work together without sacrificing the interests of their particular nations . . . We have found on the contrary that the only genuine safeguard for our national interests lies in international cooperation.

  US Treasury Secretary Henry Morgenthau, Jr., remarks at theclosing banquet of the Bretton Woods Conference Passage contains an image

  CHAPTER 3

  THE PERILS OF ECONOMIC PLANNING

  Dean Acheson could sense disaster looming. The American assistant secretary of state for economic affairs was preparing to serve as the State Department’s chief representative at the upcoming inter-Allied conference on international financial institutions, to be held at Bretton Woods, New Hampshire, in June and July of 1944. The 730 delegates from 44 countries were meeting to refine blueprints for “a rule-based postwar financial order”—an international monetary fund to stabilize and manage currency exchange rates, and an international bank to finance large-scale reconstruction and development projects.1

  The basic idea was to devise a mechanism for the free convertibility of currencies, rather than allowing weaker currencies to coalesce into mutually exclusive trading blocs around stronger currencies, as had happened in the 1930s. As with other institutions for the postwar world, the Depression-derived watchword was “stability”; freer trade, freely convertible currencies, and reconstruction projects that were not unduly hamstrung by crippling wartime debts were to be the economic ingredients for a more prosperous and stable international system.

  Acheson was worried because he could see the outlines of a classic Senate imbroglio taking shape. Treasury Secretary Henry Morgenthau, Jr., who chaired the international financial conference, was planning to assemble a delegation that would be predisposed to favor his own multilateralist designs. And he intended to bypass the ranking Republican on the Senate Banking and Currency Committee, Charles Tobey of New Hampshire, a well-known isolationist, in favor of the next most senior Republican, John Danaher of Connecticut.2

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  Hegemonic Globalisation

  U.S. Centrality and Global Strategy in the Emerging World Order

  • Thanh Duong(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  vis-à-vis its allies in Western Europe and East Asia. Calleo depicts that 'thanks to economic strain and mismanagement, relative decline has begun to turn absolute' (1988: 32). He then blames the weakening of American hegemony on the partially coercive actions that were manifest in American unilateralist reassertion. In this perspective, the United States was manipulating the world economy during the 1970s and 1980s in order to compensate for its own internal economic disorder and decline. It is, as Susan Strange argued, that the international disorder has been the result of the U.S. exploiting its position 'for its own particular ends rather than for the general welfare' (1988: 96).

  The ‘Liberals’ Rejection of the Declinist School

  Like their realist counterpart, many liberal scholars also belonged to the 'declinist' school. And like the realist diversity, there were many liberals that rejected the declinist assumptions. First, they contend that even with the collapse of the Bretton Wood system, the United States had still by far the largest economic power resources than any other country, and it continues to possess such capabilities. In fact, the end of the fixed exchange rate system was 'a world restored – with the U.S. still pre-eminent if not pre-dominant' (C. Wolf, 12 May 1988: 22). Liberals argue that the U.S. had freed itself from obligations that were of no benefit to the United States. By breaking out of the fixed exchange rate system in 1971, the United States has had greater freedom to manoeuvre in a market oriented world, rather than being burdened by the controls of the Bretton Woods System. By breaking away from the fixed exchange rate system, the United States returned to its principle economic goals of minimal intervention and economic efficiency.

  Peter Gowan (1999), in an insightful study of U.S. power, argue that the break up of the Bretton Wood system 'was part of a strategy for restoring the dominance of U.S . . . the liberation was, over the longer term, an illusion. It was more like a trap [for other states ]'

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