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ECONOMIC SITUATIONOFTHE 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.

Setting


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JULY 1944 IN BRETTON WOODS, NEW HAMPSHIRE

-43 Nations to the Conference tableAllied Nations + Neutral Nations-Purpose was to help promote the growth of international trade and thestability of international payments. The overall aim was to restoremultilateral trade and payments and open competition after a long era ofdisruptions characterized by autarky, bilateral arrangements, and mercantilism.1

-Two rival approaches between Harry Dexter White of the U.S. Treasury andJohn Maynard Keynes of the U.K. Treasury

Conference

1Boughton, James M., American in the Shodows: Harry Dexter White and the Design of the International Monetary Fund, IMF Working Paper

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


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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


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Outcomes

ADJUSTABLE PEG SYSTEM

Members must declare a par value (aka peg) for their national money andmaintain exchange rate fluctuations within maximum margins of 1% parity (aka aband). 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 INSTITUTIONSFOR MONETARY REGULATIONInternational Monetary Fund

International Bank for Reconstruction and Development


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Outcomes

FEATURESOF 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 consistprimarily 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 allcentral bank gold in the world.All members were assigned quotas that need to be paid into the new Fund by25% gold, or currency comparable ($), and 75% in home currency.


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Outcomes




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



INTERNATIONAL INSTITUTIONSFOR MONETARY REGULATION

International Monetary Fund

International Bank for Reconstruction and Development


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OutcomesFEATURESOF CURRENT ACCOUNT CONVERTIBILITY

Binding framework of regulations to remove exchange controls that hadbeen put in place during the devaluation wars of the 1930s. Two Exceptions

1) Extended only to current international transactions. So thatgovernments were to refrain from regulations of purchases andcurrency sales in trade of goods and services.. However, they were

not obligated to refrain from regulation of capital-accounttransactions.

2) Convertibility Rules could be deferred if a member was in atransitional period after the war.

ie. Germany


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Outcomes




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



INTERNATIONAL INSTITUTIONSFOR MONETARY REGULATION

International Monetary Fund

International Bank for Reconstruction and Development (World Bank)


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OutcomesINTERNATIONAL MONETARY FUND (IMF)

Signed on Dec. 27, 1945 and began operations on March 1, 1947Began 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 IMFs 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


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Outcomes

INTERNATIONAL BANKFOR RECONSTRUCTIONAND DEVELOPMENT

Ratified 27 Dec. 1945Original 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


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Implications

UNITED STATESAS GLOBAL HEGEMON

-Almost all of the Outcomes of Bretton Woods were the U.S. Preferences

-All exchange rates were essentially tied to the dollar as a reserve currency andlender 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.

Hegemony: the economic, ideological orcultureal power

exerted by a dominant group over other groups.

-Samuel Huntington, The Third Wave

~Bank for Reconstruction ~International Stabilization Fund ~Fixed-But-Adjustable Monetary

Standard

~Limited International Liquidity ~Removal of all exchange, capital,

and trade restrictions


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Flaws & Failures

THE TRIFFIN DILEMMA

-Robert Triffin, Gold and the Dollar Crisis, 1960The gold exchange is fundamentally flawed by reliance on convertibilityof the dollar into gold. World is relying on American deficits in order toavoid a liquidity shortage.

-By 1950s 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


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Current DayINSTITUTIONS

-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 theworld, and to increase international economic cooperation.

In the United States, there remains a deep-seated ambivalence toward

multilateral engagement. To the worlds most powerful nation, a

unilateral approach can sometimes look appealing. A considerable gap alsoremains in the American publics understanding of multilateral

institutions and issues. This gap must be bridged if Congress is to meet

the international commitments of the United States.

-BrettonWoods Committee, Why Our Work Is Important


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Lessons LearnedBRETTON 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

preserveeconomic order3

-Destabilizing impact of balance of payments neglect

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


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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 andprecaution must be our gods for a little longer still.

-John Maynard Keynes

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