The Bretton Woods Era 194473

1
The Bretton Woods Era1944-73

• IPE II
• Lecture 3

2
Lecture Outline

• The Impossible Trinity (A Conceptual framework
  for the IMS)
• Three Eras in the Modern International Monetary
  System
• The Interwar Years and Hegemonic Stability Theory
• The Bretton Woods Conference
• The Gold-Dollar Standard
• Exorbitant privilege and Golden Chains
• Alien, The Euromarkets?
• The Information Age

3
The Impossible Trinity

• Three Desirables, only two possibles
• Fixed Exchange Rates
• Monetary Policy Autonomy (interest rates)
• Capital Mobility

4
Impossible Trinity Example 1

• Government chooses fixed exchange rates and
  capital mobility
• THEREFORE
• No monetary policy autonomy

5
Impossible Trinity Example 2

• Government chooses monetary policy autonomy and
  fixed exchange rate
• THEREFORE
• Can not choose capital mobility

6
Impossible Trinity Example 3

• Governments choose monetary policy autonomy and
  capital mobility
• THEREFORE
• No fixed Exchange rates

7
History of the IMS

• The Gold Standard 1870-1931 Capital Mobility,
  fixed exchange rates, no monetary policy autonomy
  
• The Gold-dollar Standard 1944-71 Fixed Exchange
  Rates, Monetary Policy autonomy, no capital
  mobility
• The Dollar Standard 1973-? Capital mobility,
  Monetary Policy Autonomy, no fixed exchange
  rates

8
The Inter-war Years and HST

• American Neglect of Hegemonic duties
• maintain open market for distressed goods
• Provide countercyclical or at least long term
  lending
• Stable Exchange Rates
• Ensure the coordination of macroeconomic policies
• Acting as lender of last resort
• British Incapable of Leadership
• US unwilling to Lead E.H. Carr in 1918 ,
  world leadership was offered , by almost
  universal consent, to the United States and
  was declined.
• (Charles Kindleberger, (1973) The World in
  Depression 1929-39)

9
The Keynesian Vision

• The state goes beyond government, to
  institutions and multi-level regulatory bodies
• International system should be subject to
  national economic priorities
• Deficits and trade imbalances between countries
  should be eliminated

10
The Conflict at Bretton Woods

• Keynes Proposal
• - Bancor neutral world currency
• - ICU international clearing union
• Creditor nations should spend their surplus into
  debtor nations
• US Proposal
• - Gold as world monetary anchor (but USA held 70
  of world gold)
• -Stabilization Fund gt IMF

11
The US Vision

• International trade based upon national
  currencies on a system of fixed exchange rates
• Free world trade
• Centre-stage for new monetary authorities
• No obligation on surplus nations to spend the
  surplus back into deficit countries
• Instead lending to developing countries through
  the World Bank and the IMF

12
Harry Dexter White on the ICU

• the other countries wanted these creditor
  countries to adopt a policy which would put less
  pressure on the exchange rate of the debtor
  countries and enable them to sell more goods
  here We have been perfectly adamant on that
  point. We have taken the position of absolutely
  no on that.
• The debtor countries, on the other hand, would
  have to pay deterrent charges. And the more they
  borrowed from the fund, the higher the charges
  would be, so that they should be under pressure
  to put their balance of payments in order (cited
  in Rowbotham 2000 42).

13
The Bretton Woods Regime

• - Fixed but adjustable exchange rates to the
  dollar for freely convertible currencies.
• - The dollar was fixed to gold an ounce of gold
  35
• - All other countries tied to gold through dollar
• - National economic priorities full-employment
  growth and demand-management policies (Keynes).
• - Capital controls in most countries to tame
  speculation.

14
Keynes (cited in Rowbotham 1998 242)

• I sympathisewith those who would minimise,
  rather thanmaximise, economic entanglement
  between nations. Ideas, knowledge, art
  hospitality, travel- these are the things which
  should of their nature be international. But let
  goods be homespun whenever it is reasonably and
  conveniently possible and above all let finance
  be primarily national.

15
Keynes on Speculation

• Speculators may do no harm as bubbles on a steady
  stream of enterprise. But the position is serious
  when enterprise becomes the bubble on a whirlpool
  of speculation. When the capital development of a
  country becomes a by-product of the activities of
  the casino, the job is likely to be ill-done
  this is a scarcely avoidable outcome of our
  having successfully organised liquid investment
  markets. It is usually agreed that casinos
  should, in the public interest, be inaccessible
  and expensive (Keynes 1936 376).

16
The Gold-Dollar Standard

• Up to 1958 Dollar shortage. US hegemony
  beneficial
• After 1958 dollar glut. US hegemony an
  exorbitant privilege (De Gaulle 1968)
• Americas allies acquiesced in a hegemonic
  system that accorded the United States special
  privileges to act abroad unilaterally to promote
  Us interests. The United States in turn condoned
  its allies use of the system to promote their own
  prosperity, even if this happened to come largely
  at the expense of the United States. (Cohen
  1977 97)

17
Privilege and Shackle?

• Spending binge
• Exporting inflation from US
• Promise of dollar convertibility into gold
• Triffin Dilemna (Robert Triffin at Yale 1960)

18
Alien The Euromarkets

• A Private alternative to Bretton Woods
• An alternative source of dollar financing
• Beyond the state
• A cite for speculating against the Dollar
• 1957 markets shift from one directed towards
  the furtherance of distinct national regimes of
  accumulation, based on a system that was almost
  wholly regulated, to one that is today mostly
  responsive to the demands of global speculation
  and almost wholly unregulated (Burn 1999)

19
The Information Age

• Unlike the other standards, the information
  standard is in place, will never go away, and has
  substantially changed the world. it is more
  draconian than any gold standard. It is beyond
  the political control of the world, and thats
  the good news.(Walter Wriston ex Citicorp Chair,
  Quoted in Frieden 1998, Pg.114.)