• 107328  Infos
The '''Bretton Woods system''' of international economic management established the rules for commercial and financial relations among the major industrial states The Bretton Woods system was the first example of a fully negotiated monetary order in world history intended to govern monetary relations among independent nation-states
Preparing to rebuild global capitalism as World War II was still raging 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel situated in the New Hampshire resort town of Bretton Woods for the United Nations Monetary and Financial Conference The delegates deliberated upon and finally signed the Bretton Woods Agreement during the first three weeks of July 1944
Setting up a system of rules institutions and procedures to regulate the international political economy the planners at Bretton Woods established the International for Reconstruction and Development] (later divided into the World Bank and Bank for International Settlements) and the International Monetary Fund These organizations became operational in 1946 after a sufficient number of countries had ratified the agreement
The chief features of the Bretton Woods system were first an obligation for each country to maintain the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold; and secondly the provision by the IMF of finance to bridge temporary payments imbalances In face of increasing strain the system eventually collapsed in 1971 following the United States' suspension of convertibility from dollars to gold
Until the early-1970s the Bretton Woods system was effective in controlling conflict and in achieving the common goals of the leading states that had created it, especially the United States

The origins of the Bretton Woods system

The political bases for the Bretton Woods system are to be found in the confluence of several key conditions: the shared experiences of the Great Depression the concentration of power in a small number of states and the presence of a dominant power willing and able to assume a leadership role

The experiences of the Great Depression

A high level of agreement among the powerful on the goals and means of international economic management facilitated the decisions reached by the Bretton Woods Conference The foundation of that agreement was a shared belief in capitalism Although the developed countries differed somewhat in the type of capitalism they preferred for their national economies (France for example preferred greater planning and state intervention whereas the United States favored relatively limited state intervention); all nevertheless relied primarily on market mechanisms and on private ownership
Yet it is their similarities rather than their differences that appear most striking All the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons
The experience of the Great Depression when proliferation of exchange controls and trade barriers led to economic disaster was fresh on the minds of public officials The planners at Bretton Woods hoped to avoid a repeat of the debacle of the 1930s when exchange controls undermined the international payments system that was the basis for world trade The "beggar thy neighbor" policies of 1930s governments—using currency devaluations to increase the competitiveness of a country's export products in order to reduce balance of payments deficits—worsened national deflationary spirals which resulted in plummeting national incomes shrinking demand mass unemployment and a overall decline in world trade Trade in the 1930s became largely restricted to currency blocs (groups of nations that use an equivalent currency such as the "Pound Sterling Bloc" of the British Empire) These blocs retarded the international flow of capital and foreign investment opportunities Although this strategy tended to increase government revenues in the short-run it dramatically worsened the situation in the medium and longer-run
Thus for the international economy planners at Bretton Woods all favored a liberal system one that relied primarily on the market with the minimum of barriers to the flow of private trade and capital Although they disagreed on the specific implementation of this liberal system all agreed on an open system

"Economic security"

Also based on experience of interwar years US planners developed a concept of economic security—that a liberal international economic system would enhance the possibilities of postwar peace One of those who saw such a security link was Cordell Hull the US secretary of state from 1933 to 19441 Hull believed that the fundamental causes of the two world wars lay in economic discrimination and trade warfare Specifically he had in mind the trade and exchange controls (bilateral arrangements) of Nazi Germany and the imperial preference system practiced by Britain (by which members or former members of the British Empire were accorded special trade status) Hull argued that
unhampered trade dovetailed with peace; high tariffs trade barriers and unfair economic competition with war if we could get a freer flow of trade freer in the sense of fewer discriminations and obstructions so that one country would not be deadly jealous of another and the living standards of all countries might rise thereby eliminating the economic dissatisfaction that breeds war we might have a reasonable chance of lasting peace2

Governmental intervention

The developed countries also agreed that the liberal international economic system required governmental intervention In the aftermath of the Great Depression public management of the economy had emerged as a primary activity of governments in the developed states Employment stability and growth were now important subjects of public policy In turn the role of government in the national economy had become associated with the assumption by the state of the responsibility for assuring of its citizens a degree of economic well-being The welfare state grew out of the Great Depression which created a popular demand for governmental intervention in the economy and out of the theoretical contributions of the Keynesian school of economics which asserted the need for governmental intervention to maintain adequate levels of employment
At the international level these ideas also evolved from the experience of the 1930s The priority of national goals independent national action in the interwar period and the failure to perceive that those national goals could not be realized without some form of international collaboration resulted in "beggar-thy-neighbor" policies such as high tariffs and competitive devaluations contributed to economic breakdown domestic political instability and international war The lesson learned was that as New Dealer Harry Dexter White the principal architect of the Bretton Woods system put it:
the absence of a high degree of economic collaboration among the leading nations will inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale3

To ensure economic stability and political peace states agreed to cooperate to regulate the international economic system The pillar of the US vision of the postwar world was free trade Free trade involved lowering tariffs and among other things a balance of trade favorable to the capitalist system
Thus the more developed market economies agreed to the US vision of postwar international economic management which was to be designed to create and maintain an effective international monetary system and foster the reduction of barriers to trade and capital flows

US hegemony

International economic management relied on the dominant power to lead the system The concentration of power facilitated management by confining the number of actors whose agreement was necessary to establish rules institutions and procedures and to carry out management within the agreed system That leader was of course the United States As the world's foremost economic and political power the United States was clearly in a position to assume the responsibility of leadership
The United States had emerged from the Second World War as the strongest economy in the world experiencing rapid industrial growth and capital accumulation The US had remained untouched by the ravages of World War II and had built a thriving manufacturing industry and grown wealthy selling weapons and lending money to the other combatants; in fact US industrial production in 1945 was more than double that of annual production between the prewar years of 1935 and 1939 In contrast Europe and Japan were militarily and economically shattered
As the Bretton Woods Conference convened the relative advantages of the US economy were undeniable and overwhelming The US held a majority of world investment capital manufacturing production and exports In 1945 the US produced half the world's coal two-thirds of the oil and more than half of the electricity The US was able to produce great quantities of ships airplanes land vehicles armaments machine tools chemical products and so on. Reinforcing the initial advantage—and assuring the US unmistakable leadership in the capitalist world—the US held 80 percent of the world's gold reserves and had not only a powerful army but also the atomic bomb
As the world's greatest industrial power and one of the few nations unravaged by the war the US stood to gain more than any other country from the opening of the entire world to unfettered trade The United States would have a global market for its exports and it would have unrestricted access to vital raw materials
The United States was not only able it was also willing to assume this leadership role Although the US had more gold more manufacturing capacity and more military power than the rest of the world put together US capitalism could not survive without markets and allies William Clayton the assistant secretary of state for economic affairs was among myriad US policymakers who summed up this point: "We need markets—big markets—around the world in which to buy and sell"
There had been many predictions that peace would bring a return of depression and unemployment as war production ceased and returning soldiers flooded the labor market Compounding the economic difficulties was a sharp rise in labor unrest Determined to avoid another economic catastrophe like that of the 1930s US President Franklin D. Roosevelt saw the creation of the postwar order as a way to ensure continuing US prosperity

The Atlantic Charter

Throughout the war the United States envisaged a postwar economic order in which the US could penetrate markets that had been previously closed to other currency trading blocs as well as to open up opportunities for foreign investments for US corporations by removing restrictions on the international flow of capital
The Atlantic Charter drafted during President Roosevelt's August 1941 meeting with British Prime Minister Winston Churchill on a ship in the North Atlantic was the most notable precursor to the Bretton Woods Conference Like Woodrow Wilson before him whose "Fourteen Points" had outlined US aims in the aftermath of the First World War Roosevelt set forth a range of ambitious goals for the postwar world even before the US had entered the Second World War The Atlantic Charter affirmed the right of all nations to equal access to trade and raw materials Moreover the charter called for freedom of the seas (a principal US foreign policy aim since France and Britain had first threatened US shipping in the 1790s) the disarmament of aggressors and the "establishment of a wider and permanent system of general security"
As the war drew to a close the Bretton Woods Conference was the culmination of some two and a half years of planning for postwar reconstruction by the Treasuries of the US and the UK. US representatives studied with their British counterparts the reconstitution of what had been lacking between the two world wars: a system of international payments that would allow trade to be conducted without fear of sudden currency depreciation or wild fluctuations in exchange rates—ailments that had nearly paralyzed world capitalism during the Great Depression
Without a strong European market for US goods and services most policymakers believed the US economy would be unable to sustain the prosperity it had achieved during the war In addition US unions had only grudgingly accepted government-imposed restraints on their demand during the war but they were willing to wait no longer particularly as inflation cut into the existing wage scales with painful force (By the end of 1945 there had already been major strikes in the automobile electrical and steel industries)
Financier and self-appointed adviser to presidents and congressmen Bernard Baruch summed up the spirit of Bretton Wood in early 1945: if we can "stop subsidization of labor and sweated competition in the export markets" as well as prevent rebuilding of war machines "oh boy oh boy what long term prosperity we will have"4 Thus the United States would use its predominant position to restore an open world economy unified under US control which gave the US unhindered access to markets and raw materials

US hegemony and Europe

Furthermore US allies—economically exhausted by the war—accepted this leadership They needed US assistance to rebuild their domestic production and to finance their international trade; indeed they needed it to survive
Before the war the French and the British were realizing that they could no longer compete with US industry in an open marketplace During the 1930s the British had created their own economic bloc to shut out US goods Churchill did not believe that he could surrender that protection after the war so he watered down the Atlantic Charter's "free access" clause before agreeing to it
Yet US officials were determined to break open the empire Combined British and US trade accounted for well over half the world's exchange of goods If the British bloc could be split apart the US would be well on its way to opening the entire global marketplace But as the nineteenth century had been economically dominated by Britain the second half of the twentieth was to be one of US hegemony
A devastated Britain had little choice Two world wars had destroyed the country's principal industries that paid for the importation of half the nation's food and nearly all its raw materials except coal The British had no choice but to ask for aid In 1945 the US agreed to a loan of 3.8 billion In return weary British officials promised to negotiate the agreement
For nearly two centuries French and US interests had clashed in both the Old World and the New World During the war French mistrust of the United States was embodied by General Charles de Gaulle president of the French provisional government De Gaulle bitterly fought US officials as he tried to maintain his country's colonies and diplomatic freedom of action In turn US officials saw de Gaulle as a political extremist
But in 1945 de Gaulle—the leading voice of French nationalism—was forced to grudgingly ask the US for a billion dollar loan Most of the request was granted; in return France promised to curtail government subsidies and currency manipulation that had given its exporters advantages in the world market
On a far more profound level as the Bretton Woods conference was convening the greater part of the Third World remained politically and economically subordinate Linked to the developed countries of the West economically and politically—formally and informally—these states had little choice but to acquiesce to the international economic system established for them In the East Soviet hegemony in Eastern Europe provided the foundation for a separate and stable international economic system
In short the confluence of these three favorable political conditions—the concentration of power the cluster of shared interests and ideas and the hegemony of the United States—provided the political capability to equal the tasks of managing the international economy

The design of the Bretton Woods system

Free trade relied on the free convertibility of currencies Negotiators at the Bretton Woods Conference fresh from what they perceived as a disastrous experience with floating rates in the 1930s concluded that major monetary fluctuations could stall the free flow of trade
The liberal economic system required an accepted vehicle for investment trade and payments Unlike national economies however the international economy lacks a central government that can issue currency and manage its use In the past this problem had been solved through the use of gold and through the use of national currencies

Informal regimes

Background

In the nineteenth and twentieth centuries gold played a key role in international monetary transactions The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk of trading with other countries
Imbalances in international trade were theoretically rectified automatically by the gold standard A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend This decrease in the amount of money would act to reduce the inflationary pressure Supplementing the use of gold in this period was the British pound Based on the dominant British economy the pound became a reserve transaction and intervention currency But the pound was not up to the challenge of serving as the primary world currency given the weakness of the British economy after the Second World War
The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal Yet in an era of more activist economic policy governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the nineteenth century Gold production was not even sufficient to meet the demands of growing international trade and investment And a sizable share of the world's known gold reserves were located in the Soviet Union which would later emerge as a Cold War rival of the United States and Western Europe
The only currency strong enough to meet the rising demands for international liquidity was the US dollar The strength of the US economy the fixed relationship of the dollar to gold ($35 an ounce) and the commitment of the US government to convert dollars into gold at that price made the dollar as good as gold In fact the dollar was even better than : it earned interest and it was more flexible than gold

Exchange rate stability

The Bretton Woods system sought to secure the advantages of the gold standard without its disadvantages Thus a compromise was sought between the polar alternatives of either freely floating or irrevocably fixed rates—an arrangement that might gain the advantages of both without suffering the disadvantages of either while retaining the right to revise currency values on occasion as circumstances warranted
The rules of Bretton Woods set forth in the articles of agreement provided for a system of fixed exchange rates The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade

The "pegged rate" or "par value" currency regime

What emerged was the "pegged rate" currency regime Members were obligated to establish a parity of their national currencies in terms of gold (a "peg") and to maintain exchange rates within 1 percent plus or minus of parity (a "band") by intervening in their foreign exchange markets (that is, buying or selling foreign money)

The "reserve currency"

In practice however since the principal "reserve currency" would be the US dollar this meant that other countries would peg their currencies to the US dollar and—once convertibility was restored—would buy and sell US dollars to keep market exchange rates within 1 percent plus or minus of parity Thus the US dollar took over the role that gold had played under the gold standard in the international financial system
Meanwhile in order to bolster faith in the dollar the US agreed separately to link the dollar to gold at the rate of $35 per ounce of gold At this rate foreign governments and central banks were able to exchange dollars for gold Bretton Woods established a system of payments based on the dollar in which all currencies were defined in relation to the dollar itself convertible into gold and above all "as good as gold" The US currency was now effectively the world currency the standard to which every other currency was pegged As the world's key currency most international transactions were denominated in dollars
The US dollar was the currency with the most purchasing power and it was the only currency that was backed by gold Additionally all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States a fact that contributed to the supremacy of the United States Thus the US dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system
Member countries could only change their par value with IMF approval which was contingent on IMF determination that its balance of payments was in a "fundamental disequilibrium"

Formal regimes

The Bretton Woods Conference led to the establishment of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (now known as the World Bank) which still remain powerful forces in the world economy
As mentioned a major point of common ground at the Conference was the goal to avoid a recurrence of the closed markets and economic warfare that had characterized the 1930s Thus negotiators at Bretton Woods also agreed that there was a need for an institutional forum for international cooperation on monetary matters Already in 1944 the British economist John Maynard Keynes emphasized "the importance of rule-based regimes to stabilize business expectations"—something he accepted in the Bretton Woods system of fixed exchanged rates Currency troubles in the interwar years it was felt had been greatly exacerbated by the absence of any established procedure or machinery for inter-governmental consultation
As a result of the establishment of agreed upon structures and rules of international economic interaction conflict over economic issues was minimized and the significance of the economic aspect of international relations seemed to recede

The International Monetary Fund

Officially established on December 27 1945 when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement the IMF was to be the keeper of the rules and the main instrument of public international management The Fund commenced its financial operations on March 1 1947 IMF approval was necessary for any change in exchange rates It advised countries on policies affecting the monetary system
Designing the IMF
The big question at the Bretton Woods Conference with respect to the institution that would emerge as the IMF was the issue of future access to international liquidity and whether that source should be akin to a world central bank able to create new reserves at will or a more limited borrowing mechanism
Although attended by 44 nations discussions at the conference were dominated by two rival plans developed by the US and Britain As the chief international economist at the US Treasury in 1942-44 Harry Dexter White drafted the US blueprint for international access to liquidity which competed with the plan drafted for the British Treasury by the eminent British economist John Maynard Keynes Overall White's scheme tended to favor incentives designed to create price stability within the world's economies while Keynes' wanted a system that encouraged economic growth
At the time gaps between the White and Keynes plans seemed enormous Outlining the difficulty of creating a system that every nation could accept in his speech at the closing plenary session of the Bretton Woods Conference on July 22 1944 Keynes stated:
We the delegates of this Conference Mr. President have been trying to accomplish something very difficult to accomplish[1] It has been our task to find a common measure a common standard a common rule acceptable to each and not irksome to any5

Keynes' proposals would have established a world reserve currency administered by a central bank (which he thought might be called "bancor") vested with the possibility of creating money and with the authority to take actions on a much larger scale (understandable considering deflationary problems in Britain at the time)
In case of balance of payments imbalances Keynes recommended that both debtors and creditors should change their policies As outlined by Keynes countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium Thus Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary
But the US as a likely creditor nation and eager to take on the role of the world's economic powerhouse balked at Keynes' plan and did not pay serious attention to it. The US contingent was too concerned about inflationary pressures in the postwar economy and White saw an imbalance as a problem only of the deficit country
Although compromise was reached on some points because of the overwhelming economic and military power of the US the participants at Bretton Woods largely agreed on White's plan As a result the IMF was born with an economic approach and political ideology that stressed controlling inflation and introducing austerity plans over fighting poverty This left the IMF severely detached from the realities of Third World countries struggling with underdevelopment from the onset
Subscriptions and quotas
What emerged largely reflected US preferences: a system of subscriptions and quotas embedded in the IMF which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country as opposed to a world central bank capable of creating money The Fund was charged with managing various nations' trade deficits so that they would not produce currency devaluations that would trigger a decline in imports
The IMF was provided with a fund composed of contributions of member countries in gold and their own currencies The original quotas planned were to total $88 billion When joining the IMF members were assigned "quotas" reflecting their relative economic power and as a sort of credit deposit were obliged to pay a "subscription" of an amount commensurate to the quota The subscription was to be paid 25 percent in gold or currency convertible into gold (effectively the dollar which was the only currency then still directly gold convertible for central banks) and 75 percent in the member's own money
Quota subscriptions were to form the largest source of money at the IMF's disposal The IMF set out to use this money to grant loans to member countries with financial difficulties Each member was then entitled to be able to immediately withdraw 25 percent of its quota in case of payment problems If this sum was insufficient each nation that had the system was also able to request loans for foreign currency
Financing trade deficits
In the event of a deficit in the current account Fund members when short of reserves would be able to borrow needed foreign currency from this fund in amounts determined by the size of its quota In other words the higher the country's contribution was the higher the sum of money it could borrow from the IMF
Members were obliged to pay back debts within a period of eighteen months to five years In turn the IMF embarked on setting up rules and procedures to keep a country from going too deeply into debt year after year The Fund would exercise "surveillance" over other economies for the US Treasury in return for its loans to prop up national currencies
IMF loans were not comparable to loans issued by a conventional credit institution Instead it was effectively a chance to purchase a foreign currency with gold or the member's national currency
The US-backed IMF plan sought to end restrictions on the transfer of goods and services from one country to another eliminate currency blocs and lift currency exchange controls
The IMF was designed to advance credits to countries with balance of payments deficits Short-run balance of payment difficulties would be overcome by IMF loans which would facilitate stable currency exchange rates This flexibility meant that member states would not have to induce a depression automatically in order to cut its national income down to such a low level that its imports will finally fall within its means Thus countries were to be spared the need to resort to the classical medicine of deflating themselves into drastic unemployment when faced with chronic balance of payments deficits Before the Second World War European nations often resorted to this particularly Britain
Moreover the planners at Bretton Woods hoped that this would curb the incentives for nations short of cash to import controls In effect the IMF extended Keynesian measures—government intervention to prop up demand and avoid recession—to protect the US and the stronger economies from disruptions of international trade and growth
Changing the par value
The IMF sought to provide for occasional discontinuous exchange-rate adjustments (changing a member's par value) by international agreement with the IMF Member nations were permitted first to depreciate (or appreciate in opposite situations) their currencies by 10 percent This tends to restore equilibrium in its trade by expanding its exports and contracting imports This would be allowed only if there was what was called a "fundamental disequilibrium" A decrease in the value of the country's money was called a "devaluation" while an increase in the value of the country's money was called a "revaluation"
It was envisioned that these changes in exchange rates would be quite rare Regrettably the notion of fundamental disequilibrium though key to the operation of the par value system was never spelled out in any detail—an omission that would eventually come back to haunt the regime in later years
IMF operations
Never before had international monetary cooperation been attempted on a permanent institutional basis Even more groundbreaking was the decision to allocate voting rights among governments not on a one-state one-vote basis but rather in proportion to quotas Since the US was contributing the most US leadership was the key implication Under the system of weighted voting the US was able to exert a preponderant influence on the IMF With one-third of all IMF quotas at the outset enough to veto all changes to the IMF Charter on its own
In addition the IMF was based in Washington DC and staffed mainly by its economists It regularly exchanged personnel with the US Treasury When the IMF began operations in 1946 President Harry S. Truman named White as its first US Executive Director Since no Deputy Managing Director post had yet been created White served occasionally as Acting Managing Director and generally played a highly influential role during the IMF's first year

The International Bank for Reconstruction and Development

1818 H St. NW, Washington DC
No provision was made for international creation of reserves New gold production was assumed sufficient In the event of structural disequilibria it was expected that there would be national solutions—a change in the value of the currency or an improvement by other means of a country's competitive position Few means were given to the IMF however to encourage such national solutions
It had been recognized in 1944 that the new system could come into being only after a return to normalcy following the disruption of World War II. It was expected that after a brief transition period—expect to be no more than five years—the international economy would recover and the system would enter into operation
To promote the growth of world trade and to finance the postwar reconstruction of Europe the planners at Bretton Woods created another institution the International Bank for Reconstruction and Development (IBRD)—now known as the World Bank The IBRD had an authorized capitalization of $10 billion and was expected to make loans of its own funds to underwrite private loans and to issue securities to raise new funds to make possible a speedy postwar recovery The IBRD (World Bank) was to be a specialized agency of the United Nations charged with making loans for economic development purposes

Readjusting the Bretton Woods system

The dollar shortage and the Marshall Plan

The Bretton Wood arrangements were largely adhered to and ratified by the participating governments It was expected that national monetary reserves supplemented with necessary IMF credits would finance any temporary balance of payments disequilibria But this did not however prove sufficient to get Europe out of the doldrums
Postwar world capitalism suffered from a huge dollar shortage The United States was running huge balance of trade surpluses and the US reserves were immense and growing It was necessary to reverse this flow Dollars had to leave the United States and become available for international use In other words the United States would have to reverse the natural economic processes and run a balance of payments deficit
The modest credit facilities of the IMF were clearly insufficient to deal with Western Europe's huge balance of payments deficits The problem was further aggravated by the reaffirmation IMF Board of Governors in the provision in the Bretton Woods Articles of Agreement that the IMF could make loans only for current account deficits and not for capital and reconstruction purposes Only the United States contribution of $570 million was actually available for IBRD lending In addition because the only available market for IBRD bonds was the conservative Wall Street banking market the IBRD was forced to adopt a conservative lending policy granting loans only when repayment was assured Given these problems by 1947 the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system's economic problems6
Thus the much looser Marshall Plan—the European Recovery Program—was set up to provide US finance to rebuild Europe largely through grants rather than loans The Marshall Plan was the program of massive economic aid given by the United States to favored countries in Western Europe for the rebuilding of capitalism In a speech to Congress on June 5 1946 US Secretary of State George Marshall stated:
The breakdown of the business structure of Europe during the war was complete ... Europe's requirements for the next three or four years of foreign food and other essential products principally from the United States are so much greater than her present ability to pay that she must have substantial help or face economic social and political deterioration of a very grave character7

From 1947 until 1958 the United States deliberately encouraged an outflow of dollars and from 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy Dollars flowed out through various US aid programs: the Truman Doctrine entailing aid to the pro-US Greek and Turkish regimes which were struggling to suppress socialist revolution aid to various pro-US regimes in the Third World and most important the Marshall Plan From 1948 to 1954 the United States gave sixteen Western European countries $17 billion in outright grants
To encourage long-term adjustment the United States promoted European and Japanese trade competitiveness Policies for economic controls on the defeated former Axis countries were scrapped Aid to Europe and Japan was designed to rebuild productive and export capacity In the long run it was expected that such European and Japanese recovery would benefit the United States by widening markets for US exports and providing locations for US capital expansion
In 1958 the World Bank created the International Finance Corporation and the International Development Agency Both have been controversial Critics of the IDA argue that it was designed to head off a broader based system headed by the United Nations and that the IDA lends without consideration for the effectiveness of the program Critics also point out that the pressure to keep developing economies "open" has lead to their having difficulties obtaining funds through ordinary channels and a continual cycle of asset buy up by foreign investors and capital flight by locals Defenders of the IDA pointed to its ability to make large loans for agricultural programs which aided the "Green Revolution" of the 1960s and its functioning to stabilize and occasionally subsidize Third World governments particularly in Latin America
Bretton Woods then created a system of triangular trade: the United States would use the convertible financial system to trade at a tremendous profit with developing nations expanding industry and acquiring raw materials It would use this surplus to send dollars to Europe which would then be used to rebuild their economies and make the United States the market for their products This would allow the other industrialized nations to purchase products from the Third World which reinforced the American role as the guarantor of stability When this triangle became destabilized Bretton Woods entered a period of crisis which lead ultimately to its collapse

Bretton Woods and the Cold War

In 1945 Roosevelt and Churchill prepared the postwar era by negotiating with Joseph Stalin at Yalta about respective zones of influence; this same year US and Soviet troops joined together in Germany and confronted one another in Korea
Harry Dexter White succeeded in getting the Soviet Union to participate in the Bretton Woods conference in 1944 but his goal was frustrated when the Soviet Union would not join the IMF In the past the reasons why the Soviet Union chose not to subscribe to the articles by December 1945 have been the subject of speculation But since the release of relevant Soviet archives it is now clear that the Soviet calculation was based on the behavior of the parties that had actually expressed their assent to the Bretton Woods Agreements The extended debates about ratification that had taken place both in the UK and the US were read in Moscow as evidence of the quick disintegration of the wartime alliance
Facing the Soviet Union whose power had also strengthened and whose territorial influence had expanded the United States assumed the role of leader of the capitalist camp The rise of the postwar United States as the world's leading industrial monetary and military power was rooted in the impact of the US military victory in the instability of the national states in postwar Europe and the wartime devastation of the Soviet economy
Thus American power had to be used to rebuild US-friendly regimes and free market capitalism especially in Europe and prevent Soviet-backed regimes from spreading across the war-torn countries of Europe The conflict however was that European nations which still nominally held large colonial possessions overseas could not simultaneously rebuild their own economies and hold on to their colonial empires The fiscal discipline imposed by Bretton Woods made the US the only nation that could afford large-scale foreign deployments within the Western alliance Over the course of the late 1940s and early 1950s the United Kingdom and France were gradually forced to accept abandoning colonial outposts which would in the late 1950s and early 1960s lead to revolt and finally independence for most of their empires
The price paid for this position—especially in the Cold War climate—was the militarization of the US economy what US President Dwight D. Eisenhower called the "armament industry" and "the military-industrial complex" and the related notion that the US should assume a protective role in what was referred to as "the free world" Looking back at the origins of the Cold War in a paper that Harry Dexter White was writing at the time of his death he lamented the "tensions between certain of the major powers" that had brought "almost catastrophic" consequences including an "acute lack of confidence in continued political stability and the crippling fear of war on a scale unprecedented and almost unimaginable in its destructive potentialities" [2]
Despite the economic effort imposed by such a policy being at the center of the international market gave the US unprecedented freedom of action in pursuing its foreign affairs goals Because of the surplus in the balance of trade it was possible to keep armies abroad and to invest outside the United States Because other nations could not sustain foreign deployments US power to decide why when and how to intervene in global crisis increased The dollar continued to function as a compass to guide the health of the world economy and exporting to the US became the primary economic goal of developing or redeveloping economies This arrangement came to be referred to as the Pax Americana in analogy to the Pax Britannica of the late nineteenth century and the Pax Romana of the first (See Globalism)

The Late Bretton Woods System

The US balance of payments crisis (1958-1968)

After the end of World War II, the US held $26 billion in gold reserves of an estimated total of $40 billion (approx 60%) As world trade increased rapidly through the 1950s the size of the gold base increased by only a few percent In 1958 the US trade deficit swung negative The first US response to the crisis was in the late 1950s when the Eisenhower administration placed import quotas on oil and other restrictions on trade outflows More drastic measures were proposed but not acted on. However with a mounting recession that began in 1959 this response alone was not sustainable In 1960 with Kennedy's election a decade long effort to maintain the Bretton Woods at the $35/ounce price was begun
The design of the Bretton Woods System was that only nations could enforce gold convertibility on the anchor currency - the United States Gold convertibility enforcement was not required but instead allowed Nations could forgo converting dollars to gold and instead hold dollars Rather than full convertibillity it provided a fixed price for sales between central banks However there was still an open gold market 80% of which was traded through London which issued a morning "gold fix" which was the price of gold on the open market For the Bretton Woods system to remain workable it would either have to alter the peg of the dollar to gold or it would have to maintain the free market price for gold near the $35 per ounce official price The greater the gap between free market gold prices and central bank gold prices the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market
The first effort was the creation of the "London Gold Pool" The theory of the pool was that spikes in the free market price of gold set by the "morning gold fix" in London could be controlled by having a pool of gold to sell on the open market which would then be recovered when the price of gold dropped Gold price spiked in response to events such as the Cuban Missile Crisis and other smaller events to as high as $40/ounce The Kennedy administration began drafting a radical change of the tax system in order to spur more productive capacity and thus encourage exports This would culminate with his tax cut program of 1963 designed to maintain the $35 peg
In 1967 there was an attack on the pound and a run on gold in the "sterling area" and on November 17 1967 the British government was forced to devalue the pound US President Lyndon Baines Johnson was faced with a brutal choice either he could institute protectionist measures including travel taxes export subsidies and slashing the budget - or he could accept the risk of a "run on gold" and the dollar From Johnson's perspective: "The world supply of gold is insufficient to make the present system workable—particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth" He believed that the priorities of the United States were correct and that while there were internal tensions in the Western alliance that turning away from open trade would be more costly economically and politically than it was worth: "Our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies"
While West Germany agreed not to purchase gold from the US and agreed to hold dollars instead the pressure on both the Dollar and the Pound Sterling continued In January 1968 Johnson imposed a series of measures designed to end gold outflow and to increase American exports However to no avail: on March 17 1968 there was a run on gold the London Gold Pool was dissolved and a series of meetings began to rescue or reform the system as it existed However as long as the US commitments to foreign deployment continued particularly to Western Europe there was little that could be done to maintain the gold peg
The attempt to maintain that peg collapsed in November 1968 and a new policy program was attempted: to convert Bretton Woods to a system where the enforcement mechanism floated by some means which would be set by either fiat or by a restriction to honor foreign accounts

"Floating" Bretton Woods 1968-1972

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The post-Bretton Woods international economic order

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Footnotes

1For discussions of how liberal ideas motivated US foreign economic policy after World War II, see eg Kenneth Waltz Man the State and War (New : Columbia University Press 1969) and David P. Calleo and Benjamin M. Rowland American and World Political Economy (Bloomington Indiana: University of Indiana Press 1973)2Cordell Hull The Memoirs of Cordell Hull vol 1 (New : Macmillan 1948) p. 813Quoted in Robert A. Pollard Economic Security and the Origins of the Cold War 1945-1950 (New : Columbia University Press 1985) p84Baruch to E. Coblentz March 23, 1945 Papers of Bernard Baruch Princeton University Library Princeton N.J quoted in Walter LaFeber Russia America and the Cold War (New York 2002) p125Comments by John Maynard Keynes in his speech at the closing plenary session of the Bretton Woods Conference on July 22, 1944 in Donald Moggeridge (ed) The Collected Writings of John Maynard Keynes (London: Cambridge University Press 1980) vol 26, p. 101 This comment also can be found quoted online at [3]6Edward S. Mason and Robert E. Asher The World Bank Since Bretton Woods (Washington DC: The Brookings Institution 1973) pp. 105-107 124-1357Comments by US Secretary of State George Marshall in his June 1947 speech "Against Hunger Poverty Desperation and Chaos" at a Harvard University commencement ceremony A full transcript of his speech can be read online at [4]

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