28-07-2012, 11:26 AM
The System of Bretton Woods
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Abstract
This text introduces the system of Bretton Woods, which was established in 1944 at the
conference of Bretton Woods, New Hampshire. Starting with the economic situation after
World War I, this essay outlines the importance of creating a supranational organisation
promoting international trade flows and monetary stability. After stressing the dominant role
of the USA in this system its main institutions, the International Monetary Fund and the
World Bank, are presented. Furthermore, the most important adjustments to the changes in the
economic environment from the point of the system’s establishment until now are explained.
The system’s crises in the 1970s especially is examined and latest activities are described.
This review of the Bretton Woods system concludes with some future prospects. Recent
criticism brought up by human rights activists are mentioned and the World Bank’s reactions
to these criticisms are identified. Finally, ideas about a new system of Bretton Woods are
introduced.
Introduction
In times of globalisation the economic environment changes rapidly. Capital movements
become larger and at the same time less controllable. Therefore, the need for a stabilising
system becomes more and more apparent. In the past such a system has been established at
the conference of Bretton Woods. Already in 1944 the British economist John Maynard
Keynes emphasised “the importance of rule-based regimes to stabilise business expectationssomething
he accepted in the Bretton Woods system of fixed exchanged rates.”1 Recently
leading industrial nations have been calling for a renewal of the purpose and the spirit of this
system in order to cope with the growing size of international trade and capital flows. This
essay gives a short overview of the system’s development from 1944 until today and stresses
especially problems and obstacles. It identifies mistakes that have been made and points out
aspects that have to be taken into account when implementing a “new system of Bretton
Woods”.
Development of the system
The international economic situation
After World War I most countries wanted to return to the old financial security and stable
situation of pre-war times as soon as possible. Discussions about a return to the gold standard
began and by 1926 all leading economies had re-established the system, according to which
every nation’s circulating money had to be backed by reserves of gold and foreign currencies
to a certain extent. But several mistakes in implementing the gold standard (mainly that a
weakened Great Britain had to take the leading part and that a number of main currencies
where over- or undervalued) led to a collapse of the economic and financial relations, peaking
in the Great Depression in 1929. Every single country tried to increase the competitiveness of
its export products in order to reduce its payment balance deficit by deflating its currency.
This strategy only led to success as long as a country was deflating faster and more strongly
than all other nations. This fact resulted in an international deflation competition that caused
mass unemployment, bankruptcy of enterprises, the failing of credit institutions, as well as
hyper inflations in the countries concerned.
The International Monetary Fund
Purpose
The IMF was officially established on December 27, 1945, when the 29 participating
countries at the conference of Bretton Woods signed its Articles of Agreement. It commenced
its financial operations on March 1, 1947. The IMF is an international organisation, which
today consists of 183 member countries. The purposes of the IMF are to promote international
monetary cooperation by establishing a global monitoring agency that supervises, consults,
and collaborates on monetary problems. It facilitates world trade expansion and thereby
contributes to the promotion and maintenance of high levels of employment and real income.
Furthermore, the IMF ensures exchange rate stability to avoid competitive exchange
depreciation. It eliminates foreign exchange restrictions and assists in creating systems of
payment for multilateral trade.
The future of the system of Bretton Woods
During the last five to ten years especially the system of Bretton Woods has been topic of
many public discussions with controversial opinions. Human rights activists argue that the
programmes for the structural adjustment of the developing countries initiated by the World
Bank and the IMF led to a “thirdworldisation” of the East-bloc states, which means that they
dramatically increased poverty in those countries. Large-scale agrarian and industrial projects
destabilised national economies, destroyed the environment and social patterns. It is pointed
out that the inner structure of the Bretton Woods institutions, where the right to say is
proportional to the amount of money that each country contributes, is symbolic of the
capitalistic ideology, which completely ignores the interests of the people living in developing
countries.12 Thus, human rights activists demand that the IMF and the World Bank stop
interfering in national policies of sovereign countries. The World Bank is well aware of the
problems that can be caused by projects in less developed areas. It reacted by providing the
possibility to file requests to an Inspection Panel. A person that files a request to the World
Bank has to show that he/she lives in the project area and will most likely be affected
negatively by activities related to the project. These negative effects must be caused by a
failure from the World Bank to follow its policies and procedures. Additionally, the request
must have been discussed with the Bank management with an unsatisfactory outcome.
Conclusion
The system of Bretton Woods of 1944 with its fixed exchange rates does not exist anymore
today. Its institutions and procedures had to adjust to market forces to survive but still its
goals are as valid today as they have been in the past.
The benefits of the Bretton Woods system were a significant expansion of international trade
and investment as well as a notable macroeconomic performance: the rate of inflation was
lower on average for every industrialised country except Japan than during the period of
floating exchange rates that followed, the real per capita income growth was higher than in
any monetary regime since 1879 and the interest rates were low and stable.14 It has to be
noted that leading economists nowadays argue “whether macroeconomic performance
stability was responsible for the successes of Bretton Woods, or the controverse.
[attachment=29357]
Abstract
This text introduces the system of Bretton Woods, which was established in 1944 at the
conference of Bretton Woods, New Hampshire. Starting with the economic situation after
World War I, this essay outlines the importance of creating a supranational organisation
promoting international trade flows and monetary stability. After stressing the dominant role
of the USA in this system its main institutions, the International Monetary Fund and the
World Bank, are presented. Furthermore, the most important adjustments to the changes in the
economic environment from the point of the system’s establishment until now are explained.
The system’s crises in the 1970s especially is examined and latest activities are described.
This review of the Bretton Woods system concludes with some future prospects. Recent
criticism brought up by human rights activists are mentioned and the World Bank’s reactions
to these criticisms are identified. Finally, ideas about a new system of Bretton Woods are
introduced.
Introduction
In times of globalisation the economic environment changes rapidly. Capital movements
become larger and at the same time less controllable. Therefore, the need for a stabilising
system becomes more and more apparent. In the past such a system has been established at
the conference of Bretton Woods. Already in 1944 the British economist John Maynard
Keynes emphasised “the importance of rule-based regimes to stabilise business expectationssomething
he accepted in the Bretton Woods system of fixed exchanged rates.”1 Recently
leading industrial nations have been calling for a renewal of the purpose and the spirit of this
system in order to cope with the growing size of international trade and capital flows. This
essay gives a short overview of the system’s development from 1944 until today and stresses
especially problems and obstacles. It identifies mistakes that have been made and points out
aspects that have to be taken into account when implementing a “new system of Bretton
Woods”.
Development of the system
The international economic situation
After World War I most countries wanted to return to the old financial security and stable
situation of pre-war times as soon as possible. Discussions about a return to the gold standard
began and by 1926 all leading economies had re-established the system, according to which
every nation’s circulating money had to be backed by reserves of gold and foreign currencies
to a certain extent. But several mistakes in implementing the gold standard (mainly that a
weakened Great Britain had to take the leading part and that a number of main currencies
where over- or undervalued) led to a collapse of the economic and financial relations, peaking
in the Great Depression in 1929. Every single country tried to increase the competitiveness of
its export products in order to reduce its payment balance deficit by deflating its currency.
This strategy only led to success as long as a country was deflating faster and more strongly
than all other nations. This fact resulted in an international deflation competition that caused
mass unemployment, bankruptcy of enterprises, the failing of credit institutions, as well as
hyper inflations in the countries concerned.
The International Monetary Fund
Purpose
The IMF was officially established on December 27, 1945, when the 29 participating
countries at the conference of Bretton Woods signed its Articles of Agreement. It commenced
its financial operations on March 1, 1947. The IMF is an international organisation, which
today consists of 183 member countries. The purposes of the IMF are to promote international
monetary cooperation by establishing a global monitoring agency that supervises, consults,
and collaborates on monetary problems. It facilitates world trade expansion and thereby
contributes to the promotion and maintenance of high levels of employment and real income.
Furthermore, the IMF ensures exchange rate stability to avoid competitive exchange
depreciation. It eliminates foreign exchange restrictions and assists in creating systems of
payment for multilateral trade.
The future of the system of Bretton Woods
During the last five to ten years especially the system of Bretton Woods has been topic of
many public discussions with controversial opinions. Human rights activists argue that the
programmes for the structural adjustment of the developing countries initiated by the World
Bank and the IMF led to a “thirdworldisation” of the East-bloc states, which means that they
dramatically increased poverty in those countries. Large-scale agrarian and industrial projects
destabilised national economies, destroyed the environment and social patterns. It is pointed
out that the inner structure of the Bretton Woods institutions, where the right to say is
proportional to the amount of money that each country contributes, is symbolic of the
capitalistic ideology, which completely ignores the interests of the people living in developing
countries.12 Thus, human rights activists demand that the IMF and the World Bank stop
interfering in national policies of sovereign countries. The World Bank is well aware of the
problems that can be caused by projects in less developed areas. It reacted by providing the
possibility to file requests to an Inspection Panel. A person that files a request to the World
Bank has to show that he/she lives in the project area and will most likely be affected
negatively by activities related to the project. These negative effects must be caused by a
failure from the World Bank to follow its policies and procedures. Additionally, the request
must have been discussed with the Bank management with an unsatisfactory outcome.
Conclusion
The system of Bretton Woods of 1944 with its fixed exchange rates does not exist anymore
today. Its institutions and procedures had to adjust to market forces to survive but still its
goals are as valid today as they have been in the past.
The benefits of the Bretton Woods system were a significant expansion of international trade
and investment as well as a notable macroeconomic performance: the rate of inflation was
lower on average for every industrialised country except Japan than during the period of
floating exchange rates that followed, the real per capita income growth was higher than in
any monetary regime since 1879 and the interest rates were low and stable.14 It has to be
noted that leading economists nowadays argue “whether macroeconomic performance
stability was responsible for the successes of Bretton Woods, or the controverse.