The Five Pillars of the Bretton Woods System

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The Five Pillars of the Bretton Woods System
Bretton Woods System
National Sovereignty
Fixed Exchange rates
A Gold standard
International Institutions World
Bank IMF ITO/ GATT
Fundamental Disequilibrium
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Objectives

• To create monetary stability
• To encourage trade
• Mechanism
• The United States allows the monetary system to
  be secured by its currency and economy. This
  gives the US an enormous amount of power, ushers
  in US hegemony and secure alliances between the
  US and Western states vital for US foreign
  policy objectives during the cold war

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The Bretton Woods System

• In July 1944, 730 delegates from all 44 allied
  nations gather at Bretton Woods, New Hampshire to
  set about designing a post war economic order
  that would ensure monetary stability and promote
  trade between nations
• Founded on a shared belief in capitalism
  (Keynesian)
• Rise of government intervention and the welfare
  state - Keynes
• Wanted to actively manage the system to prevent
  the mercantilist (beggar-your-neighbour, currency
  trade blocks) policies led to economic decline
  for many states. Lack of international
  cooperation on IPE issues also a cause of
  economic protectionism in 1930s.
• Economic Securitypolitical security, Cordell
  Hull, US Secretary of State
• System prevailed until 1971 and was successful in
  achieving the objectives of the major powers,
  especially the US

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National Sovereignty

• States could choose their own domestic economic
  policies
• Very important as many states would not have been
  part of a system that dictated the type domestic
  economic to be used.
• Made system unique, as usually international
  norms/regime dictate domestic economic policy

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A gold standard

• The dollar (stable) and the US economy being the
  strongest were used to provide monetary stability
  for the system.
• The US was exchangeable for gold
• The dollar was pegged at 35 1 ounce of gold
• US holder of huge gold reserves enough to
  underwrite the system
• Gold standard secures against effects of
  inflation and large amounts of deficit spending,
  maintains monetary honesty
• The dollar becomes as good as gold, and has more
  benefits e.g. earns interest

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Currency convertibility

• All currencies were convertible to facilitate
  trade and other economic interaction
• Currencies usually quoted in relation to their
  value to the and/or gold
• The system opts for fixed exchange rate, to
  prevent huge debilitating currency fluctuations
• All currencies are fixed in relation to the
  dollar and are only allowed slight fluctuations
  from this point. Countries undertake to maintain
  this value by closely monitoring currency value
  and to take the measures necessary to maintain
  the value of their currency within their set
  range.
• A hybrid system - stability of gold but with a
  certain amount of flexibility, does not stifle
  economic growth if there are short term monetary
  problems e.g. deficits

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The Monetary System under Bretton Woods
Other currencies
Other currencies
Other currencies
Other currencies
The US Dollar 35 1 ounce of gold
Gold
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International Institutions

• The International Monetary Fund (IMF)
• Designed to assist states with monetary stability
• Would provide loans for this purpose
• Also to provide short term loans to states
  experiencing balance of payments difficulties
• Staffed mainly by US economists (agenda setting)
• Quota voting rights gives US predominance
• More involved in economic policy setting today

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International Institutions

• The international bank for reconstruction and
  development (IBRD)/the World Bank
• Objective to provide capital in the form of loans
  to assist in rebuilding war devastated Europe
• See the dawn of foreign aid
• Rebuilding Europe 5 years
• Was also to assist economic development in the
  developing world but at this time was not seen as
  a priority
• Belief was that facilitating economic development
  was the role of the state
• Thus although rebuilding and development given
  equal weight in founding documents,
  reconstruction takes precedent

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The World Bank (cont)

• Problem the IBRD does not have the economic
  means to rebuild Europe on its own
• Huge security threat by the Soviet Union
• US steps in with the Marshall Plan grants not
  loans/ Truman Doctrine
• By 1950 Europe reconstruction is complete and
  economies are sustainable
• Bank now turns to focus on the Developing world
  New front for the war against communism
  (Khrushchev - 1956)

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The World Bank Cont

• 1956 International Finance Corporation,
  encourages private investment in developing
  world.
• 1960 International Development Association,
  created by the US, separate but closely linked to
  the Bank.
• IDA makes loans at low interest rates to
  developing world
• Why was the reconstruction of Europe successful,
  why did it only take 5 years but the development
  of the developing world fraught with problems and
  still not at an end

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International Institutions

• The International Trade Organization (ITO)
• Would seek lower restrictions on trade and set
  rules of commerce
• Idea vetoed by US Congress (too liberal/too
  protectionist)
• The General Agreement on Tariffs and Trade (GATT)
• Established in 1947 as alternative to the ITO
• Designed as and interim agreement among 23
  nations
• Designed to promote and protect free trade in the
  post was liberal international economic order

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GATT cont

• When an ITO failed to materialize it was
  transformed into a institutional framework in
  which governments pursued multilateral
  regulations and discussed trade policy
• Primary function to increase international trade
  and reduce trade barriers and other impediments
• Encourage nations to abide by the principle of
  most favoured nation status a trade concession
  given to one must be given to all this
  encourage comparative advantage in trade

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GATT cont

• Never intended to be formal institution with
  enforcement power
• Commercial treaty
• Forum for negotiation and to reach consensus to
  settle dispute among parties
• Negotiations took the form of Rounds
• Over time due to increase of trade dispute, GATT
  did become involved in dispute settlement
  following increasingly legalistic procedures

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GATT cont

• US opened its own market and tolerated free
  riding especially by the Japanese and Europeans
  as their economic vitality was an important
  foreign policy goal (cold war, long term gains
  out weighted short term costs)
• Road to free trade in second half of 20th century
  a rocky one as negotiations to increasingly lower
  tariffs met resistance along the way
• 1994 end of Uruguay Round which began in 1986
  sees the creation of the World Trade Organization
  (WTO) a free trade organization with teeth
• The WTO is what the ITO was initially envisioned
  to be

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Fundamental Disequilibrium

• States could in theory adjust their currency
  outside the limits imposed by the fixed exchange
  rate system
• However, the concept of what constituted
  fundamental disequilibrium was never adequately
  defined.