The Bretton Wood System Economics Essay

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The Bretton Woods System began in 1944 with the United Nations Monetary and Financial Conference, and established the International Monetary Fund ( IMF ) and the International Bank for Reconstruction and Development ( IBRD ) . In the new understanding on the pecuniary system there was an duty for each state to follow economic policies that maintained the exchange rate of its currency within a fixed value-plus or minus one percent-in footings of gold and for the IMF to assist support states enduring impermanent instabilities of payments ( Markwell, 2006 ) .

The Bretton Woods understanding came near the terminal of a World War that had devastated the Earth and many idea that the war itself was partially a consequence of the economic policies of the pre-war old ages. In the 1930s the United States preferable policies of isolationism that led them to demand refund of Allied war debts from World War 1 and caused states to independently put economic conditions for planetary trade that cause deflationary jobs that aggravated the diminution of universe trade, led to mass unemployment and negatively affected the bulk of the economic systems of the developed universe. The most serious result was the diminution in the international flow of capital and the retarding of development of international investing. The War left the chief economic systems aware that peace could merely be maintained if states cooperated and expeditiously managed the value and exchange rates of currencies. As Cordell Hull ( US Secretary of State ) said ‘trade dovetailed with peace aˆ¦if we could acquire a freer flow of tradeaˆ¦ so that one state would non be lifelessly covetous of another and the life criterions of all states might lift, thereby extinguishing the economic dissatisfaction that breeds war, we might hold a sensible opportunity of enduring peace ‘ ( Hull, 1948, p.81 )

Keynesian economic theory was now the dominant foundation of most states economic policy-making and this promoted a greater function for authorities in trade with national political relations based on authoritiess presuming a duty towards all their citizens. The War besides left states experiencing a clear demand for economic cooperation and peace to be maintained through trade and that trade to be structured by an international pecuniary system based on free markets ( Markwell, 2006 ) . However, it was the program of Harry Dexter White from the US Treasury, instead than Keynes ‘s ain program that was the chief model for the Bretton system, and this showed from the beginning that the dominant state in the system would be the USA, taking to accusals that the Bretton system is little more than an economic vehicle for American hegemony ( Strange, 1996 )

The first end of the new attack to planetary trade was post-war Reconstruction of the devastated economic systems of Europe and Asia. The Bretton Woods system, as the ‘first illustration of a to the full negotiated pecuniary order intended to regulate currency dealingss among autonomous provinces ” ( Cohen, 2009, p.1 ) . However, the world was that Europe and big parts of Asia were in practical economic prostration due to the World War and the creative activity of the International Monetary Fund ( IMF ) needed to besides be supported by an International Bank for Reconstruction and Development, now known as the World Bank ( WB ) .The system was designed to modulate ‘the par value exchange rates and impart modesty currencies to states with trade shortages ‘ therefore enabling them with international aid to re-build their economic systems and subsequently to assist finance the hapless or developing states with their Reconstruction undertakings ( Stephey, 2008, p.1 )

If we examine how states did retrieve from the War and the impressive development in the 1950s and 1960s of states like Germany and Japan, so our appraisal of this period of the Bretton Woods, aligned with the Marshal Plan for Reconstruction, must hold that Bretton was a positive influence and comparatively of some success. The Great Depression in the 1930s was due to the deficiency of a prima, dominant province to play an hegemonic function in the international economic system. In Bretton Woods establishments the US dollar was the dominant currency and became the extension of American hegemony to the international economic system ( Stephey, 2008, p.2 ) . However, as Susan Strange noted, any many-sided establishment might go simply the “ instruments of the structural scheme and foreign policy of the dominant province ” , and for many critics of the IMF and the World Bank, the job is the laterality through these establishments of the bulk of the globes states by a really few powerful states led by the US ( Strange, 1996 ) .

The IMF is seen as a many-sided establishment that lends money to authoritiess to stabilise currencies and maintain order in international fiscal markets. However, its loaning carries rigorous loan conditions that many see as lending to declining conditions for the bulk of citizens in the states that are least able to vie with the economic might of developed states ( Strange, 1996 ) .

The IMF is supposed to concentrate on making ‘a stable clime for international trade by harmonizing its members ‘ pecuniary policies, and keeping exchange stableness ‘ ( Bretton Woods Project, 2005 ) . It can ‘provide impermanent fiscal aid to states meeting troubles with their balance of payments ‘ and it is based on consensual decision-making with the purpose of ‘helping ‘ states whose economic systems are under-developed or in crisis ( Bretton Woods Project, 2005 ) . However, to measure the success of this 1 has to measure the grade of ‘fairness ‘ in IMF/World Bank schemes and many critics, like Strange ( 1996 ) and Mazzei ( 2007 ) are extremely critical of the true intent of the Bretton Woods System. For illustration, Mazzei ( 2007 ) finds that it is the ‘poor states that really finance the World Bank and non the other manner around ‘ ( p.2 ) . Mazzei notes how ‘that for 20 old ages hapless states have financed the World Bank, while it is rich states that contribute merely 1/4 of entire fund ‘ and yet it is them who hold 3/4 of the ballots ( p.2 ) .

The first major point of concern for the planetary economic system was in 1971 when the US used its power over the planetary economic system through the Bretton Woods system to protect its ain involvements against those of the remainder of the universe. The United States one-sidedly terminated convertibility of the dollar to gold. The US could now one-sidedly command the planetary economic system by take a firm standing that the United States dollar became the exclusive backup of currencies and a modesty currency for all the member provinces ( Strange, 1996, p.20 ) . This really led to the practical prostration of the Bretton Woods System in the 1970s and plunged the universe into economic diminution while it fought to set to the alterations brought approximately by US policies ( Strange, 1996 ; Cohen, 2009, Calleo and Rowland, 1973 ) . The US ended the ligature of the Dollar to the Gold Standard and left it and other planetary currencies to drift free. Keynes had originally planned that the universe adopt a planetary currency but it was acceptance in 1944 of Dexter White ‘s ain program to do the dominant trading currency of the universe the Dollar that had structured the future policies of the IMF/World Bank and allowed the US to hold the power to rule the globes trade.

By the 1970s the US was coming under strong unfavorable judgment for its one-sided control of planetary trading. Gallic President Charles De Gaulle ‘claimed that the international pecuniary system allowed the United States to populate beyond its agencies and forced the European excess states to finance America ‘s military imperium overseas ‘ ( Gavin, 2002, p.4 ) . The Bretton Woods system was designed to divide pecuniary economic policies from power political relations, and yet, by the seventiess it had become ‘highly politicized and needed changeless political intercession to maintain the system working swimmingly ‘ ( Gavin, 2002, p.5 ) . The mistakes of the Bretton Woods System were listed by Bordo ( 1991, p.20 ) as ‘the gold exchange criterion, which placed the United States under menace of a convertibility crisis ‘ secondly the jobs with the ‘adjustable nog, because, in the face of turning capital mobility, the costs of distinct alterations in paras were deemed so high, the system evolved into a loath fixed exchange rate system without any effectual accommodation mechanism ‘ and eventually that ‘U.S. pecuniary policy was inappropriate for a cardinal currency ‘ . Therefore, the Bretton Woods System collapsed in the 1970s but its basic establishment of the IMF and later the World Bank remain as the steering organic structures of the international economic system.

The World Bank ‘s undertaking is imparting to advance the growing of universe trade and to finance the post-war Reconstruction of European economic systems. It is a ‘multilateral establishment that lends money to authoritiess and authorities bureaus for development undertakings ‘ . However, the Bank besides imposes rough conditions through Structural Adjustment Programs, coercing states to follow reforms, deregulate capital markets, promote denationalization of province endeavors, and downsize public plans for societal public assistance. This consequences in policies such as denationalization of public-service corporation providers, conveying in fees and denationalization of instruction and wellness services. For its critics the World Bank and IMF have become the subscribers to the continuity of universe poorness instead than vanguard for forestalling it and stand for non the involvements of the planetary society but instead the involvements of Wall Street and the United States Treasury Department ( Strange 1996, Cohen, 2009, Markwell, 2006 )

In contrast, the protagonists of the World Bank insist that the Bank is an establishment in which the rich developed states can function to better the planetary economic system and the ‘capacity of states to merchandise by imparting money to war-ravaged and destitute states for Reconstruction and development undertakings ‘ ( ) .

Therefore, in measuring the success of the Bretton Woods System and its subsequent trading administrations such as the IMF and the World Bank, one can see a really different analysis depending on your political association. Rather than separate power political relations from planetary trading, the System has become straight linked to the lucks and hegemony of the US. Its record in assisting a devastated Earth recover from the affects of World War 11 is really good and the planetary economic system has grown over each decennary. However, its critics still see it as chiefly dominated by the US and its Alliess and whilst it continues to back up the growing of trade its image as a vehicle chiefly for the US retards how good its hereafter function in the planetary economic system will be judged by the turning economic powers of states like China and India.