Bretton Woods

The Bretton Woods system was establish in USA on 1944 after the World War II
to regulate international monetary interaction. It was expected to be a
successful agreement but it never work as they had planed. The objectives at
Breeton Woods was to set up an international economic system that would
prevent another economic and political collapse and another military
conflict.
To begin with, the International Monetary Fund (IMF) and the World
Bank were to perform military functions for the international systems. This
was created to perform the delicate situation in which Europe was in. The
after war crisis in Europe made the Americans to react on helping the
Europeans to reconstruct their whole nation. The IMF was set to intervene
whenever there was any temporary balance of payment desiqulibrium. It also
was establish a International Bank for Reconstruction to give loans to
anyone who need. This idea would boom the economy forward to a rapid
recovery.
The lack of optimism went down by 1947.The system was not really
working. The Europeans had to face many problems. The World War II had a
tremendous impact on the economy. However, Europe best negotiations were
overseas. This made the Europeans fell to a big chaos. Its payments deficit
was large and growing. They had to import goods in order to survive.
The IMF could not support the situation that Europe was facing. Loans
where just available for current accounts deficits, not for capital and
reconstruction's purpose.
Apart from the economic crisis, there was also a political fight The
governments of Italy and France faced pressures from powerful labor unions.
1
Britain, due to its economic difficulties, was withdrawing from India and
Palestine and also abandoning its political and securities commitments to
Greece and Turkey.
After 1947, due to this circumstances, the Bretoon Woods system involved
from limited management by international organization management by USA..
In 1947 the gold didn't had the same valor as before. It was
insufficient to meet the demands of growing international trade and
investment Although the pound were a strong currency, the dollar faced more
the demand for international liquidity.
A huge dollar shortage show up in USA. It was running huge trade
surpluses due to the scarcity of money that where abroad. The United States
had to run a payment deficit
From 1947 to 1958, the United States encouraged an outflow of dollar
which provided liquidity for international economy .
In addition to providing liquidity, the United States managed imbalance
in the system. The Marshall Plan was created to give an amount of $ 17
billion in outright grants to 16 countries of Western Europe. By this
process the outflow of dollars will stabilized again.
Japan and Europe were under the control of protectionism. They didn't
allow any import from the USA. Although the Americans could not export they
goods, they would not impose any barriers to the Europeans and the
Americans because in the long run the Americans will benefit from this
situation by widening market for U.S exports. By this procedure Europe and
Japan recovery and then expanded. The U.S got forward partly because of the
dollar outflow, which led purchase of U.S goods and services.
In 1960, for the first time, foreign dollar holding exceeded U.S gold
2
reserves. Private long terms capital outflow, caused to a great extent by
direct investment abroad foreign military expenditure led to payments
deficit in 1950, 1953, and 1959.
In 1961 the banks will support any currencies that will come under pressure.
The bankers began to play an important rule in the Eurocurrency market by
investing, intervening, and accumulating information.
The Group of Ten, formed in December 1961, was set by ten industrial
countries− Belgium, France, Germany, Italy, the Netherlands, Sweden,
Canada, Japan, the United Kingdom and the United States− to create the
General Arrangement to Borrow.
In 1968 the Group of Ten stopped a dollar crisis by creating a private
market in which the price of gold could fluctuated freely and a public
market in which the group agreed to sell one another gold at $35 an once.
Finally the United Sates push up the system by improving the U.S balance of
payments and reestablishing confidence in the weakning dollar.
The Bretoon System begun to crack due to the continuing world crisis. The
level of financial integration was the purpose. The U.S had many banks
abroad and there was also a vast integration of foreign banks to the U.S
By late 1971 there was a run of dollar in the United States. For the first
time the US showed a balance of deficit. This caused inflation to raise and
unemployment grew tremendously.
Instability was starting to be alarming until summer 1971. Suddenly
President Nixon announced that the gold would not be convertible to gold and
that United States will impose tariffs on imported goods to force West
Germany and Japan to revalue their currency. By this date the Bretton Woods
came to its end.
3
Moreover, after the agreement was made, the IMF and the Commitment on Reform
of the International Monetary System brought together to reform the
International monetary System. Although, the agreement prevented
deterioration in the system, it did not solve the principal problems of
managing interdependence.
In 1972, Britain and Ireland floated their currencies raising up to another
currency crisis. It has been establish the end of 25 years of fixed exchange
rates. This new system of floating exchange rate created an environmental
inestatability among the business man. (see graph)
The Committee of Twenty also failed on trying to achieve a reform.
Inflation was uncontrollable and there was an enormous dollar outflow to
foreign countries. But the worst came up when oil exporters raised the price
of petroleum. Deficit begun to raise among non oil countries. The developed
countries could not live without consuming oil. Privates banks started to
respond to the critically situation by lending funds to the oil importing
countries.
In conclusion, the Breakdown of Bretton Woods was followed by the huge
inflation, the new floating exchange rate and the oil crisis. In January
1974 the Committee of Twenty conclued that because of the turmoil in the
international economy it will impossible to make up a plan for monetary
reform.
4