Purpose Of The Bretton Woods System example essay topic

The Bretton Woods system is commonly known to refer to the international monetary regime that prevailed from the end of World War II until the early 1970's. Taking its name from the site of the conference where it was held in 1944 at the American resort village of Bretton Woods, New Hampshire. The delegates met to discuss the post war recovery of Europe as well as a number of monetary issues such as unstable exchange rates and protectionist trade policies. The Bretton Woods System proved to be history's first example of a fully negotiated monetary order intended to govern currency relations among sovereign states and to promote the smooth functioning of the international monetary system.

Through doing this it was intended to encourage international trade and support high rates of sustainable economic growth, a needed change from the 1930's when many of the world's major economies had unstable exchange rates and many nations were using restrictive trade policies. In the early 1940's, the United States and Great Britain developed proposals for the creation of new financial institutions that would stabilize exchange rates and boost international trade. During this period there was also a recognized need to organize a recovery in Europe in the hopes of avoiding the problems that arose after the First World War, and therefore The Bretton Woods system was created. At Bretton Woods three institutions were planned in order to promote a new economic world order. Firstly, The International Monetary Fund (IMF) was created to ensure a stable exchange rate regime and the provision of emergency assistance to countries facing a temporary crisis in their balance of payments regime. The World Bank (WB) was created to facilitate private investment and reconstruction in Europe, and assisting with development in other countries.

Finally, the General Agreement on Trade and Tariffs (GATT) was signed in 1947 and became a forum for negotiations on trade liberalization. (Bayliss and Smith, p. g. 278) In this essay I intend to assess the role that the Bretton Woods System played in the international economic order and evaluate the results and implications that this landmark in global economic relations has had. In doing this I will look at the gold standard that existed beforehand and evaluate if and how the Bretton Woods System is different and then analyze the system itself when it was in operation with the view to establishing what exactly was its relevance to the international economic order.

The gold standard was a system of fixed exchange rates by which currencies were given a fixed value in terms of gold and were fully redeemable for the amount of gold that they were worth. Membership of the Gold Standard required that countries both convert their currency into gold on demand and did not restrict international global flows. "The values of major currencies were fixed to the price of gold, providing the basis for a system of fixed exchange rates: the classical gold standard". (Held and McGrew, pg. 195) Up until the twentieth century the British pound was the dominant global currency, and at this time the British Empire still stood strong, when vast amounts of world trade was completed in pounds sterling as it easily maintained its gold backing.

However, by the 1920's Britain was encountering severe economic problems as many of the newly industrialized countries were now beginning to compete in the global economy. Inevitably this forced the pound to become devalued and in 1931 it was removed from the gold standard for good. Following this period the Bretton Woods System was established and it proved to greatly alter the economic order that had existed previously. In stark contrast to the pound the US $ replaced it as the base currency which was fixed to gold at $35 per ounce.

Not only did the Bretton Woods system change the base currency of global trade it also altered economic activity on a colossal scale. Whilst the gold standard had previously aimed at regulating economic activity to a much slower degree through restricting the growth of money supplies and the promotion of free convertibility. The purpose of the Bretton Woods System proved to be a complete contrast as it aimed to improve and promote international trade and relations by reducing tariffs and embargoes that individual countries had installed. A further characteristic of the BWS was the implementation of fixed exchange rates; as previously under the gold standard exchange rates had been fixed to a parity. The gold standard was anti-inflationary but the new BWS understood that inflation was just the price to pay for growth. The Bretton Woods System aimed at preventing currency competition and promoting monetary co-operation among nations.

Under the system, the IMF member countries agreed to an arrangement of exchange rates that could be adjusted within defined parities with the U.S. dollar or, with agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. "Advocates of the Bretton Woods System believed that stable exchange rates would avoid the 'beggar thy neighbour' policies of the 1930's and benefit economies around the world by expanding international trade. However, over time, exchange rates became uncompetitive because of infrequent changes in parities. In addition, there were often large destabilizing flows of currency, as speculators bet on the value at which the fixed exchange rate would be re-fixed. There were also concerns that a fixed exchange rate system did not allow countries enough freedom to pursue their own monetary and fiscal policies". (web) The Bretton Woods System proved to be extremely different from that of the gold standard and the differences that are outlined above illustrate this change. The BWS had a different agenda and a contrasting approach to the global economic order than the previous gold standard and a significant role to play over the following thirty years.

The role of the Bretton Woods system from its creation in 1944 until its eventual collapse in 1971 on the international economic order was colossal, and best charecterised by the institutions that it established paying particular attention to the IMF and the WB. The IMF was conceived primarily as a supervisory institution to promote international monetary co-operation and facilitate growth of international trade, which was achieved through maintaining monetary exchange stability and assisting member countries who are experiencing balance of payment problems. In his opening speech at the Bretton Woods conference, Henry Morganthau said: .".. The IMF would create a stable climate for international trade by harmonizing its members' monetary policies and maintaining exchange stability... ". (web) What emerged from the establishment of the IMF was a system of subscription and quotas. Member countries deposit a sum of money known as a 'quota subscription'. This sum will then determine exactly how much money the country can draw from the fund in times of crisis.

These quotas also determine the voting rights of each member country, which inevitably means that decision-making power in the IMF rests with the highest contribution. The IMF lends money to member countries faced with balance of payment problems i.e. when a country fails to earn sufficient foreign currency through exports provisions of services to pay for its imports. In return for financial assistance from the IMF, borrower countries must implement a set of economic reforms aimed at overcoming their balance of payment problems. Loans are disbursed in installments and payments are tied to a countries compliance with the structural adjustment policies. "For example, the United States has 18% of the votes, while Mozambique has only 0.07%. In total most industrialized countries have over 50 per cent of the votes".

(Bayliss and Smith, pg. 213) The IMF ensures that members are forbidden to engage in discriminatory currency practices or exchange regulation, although the member countries are not obliged to refrain from regulation of capital account transactions. It was thought that the IMF would provide a forum for the co-operation on international monetary matters. A second body that is also a defining characteristic of The Bretton Woods System is the World Bank. What we now call the World Bank originally started out as the International Bank for Reconstruction and Development (IBRD). The World Bank is the largest public development institution in the world, lending around $25 billion a year to developing countries. The main purpose of the bank as outlined in Article one of its Articles of Agreement, are: "To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes and to promote the long-range balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging international investment...

Thereby assisting in raising productivity, the standard of living and conditions of labour in their territories". (web) The WB was initially established to provide loans to members of the IMF and to act as an agency to foster reconstruction in war to rm Europe and to promote development throughout the rest of the world. The bank aims to achieve these goals through the provision of long-term loans to governments for the financing of development projects and economic reform. Each member of the bank contributes 2% of its subscription in gold or US dollars and 18% of its national currency. Members pay in 20% of the capital while the remaining 80% is kept "callable" (To be paid in the event of a default).

This guarantee allows the bank to raise money for its lending purposes on international capital markets by the scale of its bonds. To start with the bank was slow at lending money to developing countries but during the 1950's, the bank began to increase its lending and also increased support for the foundations of institutions within countries for development purposes. The amount of its lending grew sharply and by the 1980's it had lent over $160 billion to over 4,000 projects. The World Bank's influence on the global economic order has continued to rise and is charecterised by the increasing use of more neo-liberal policies and systems. The neo-liberal system that were advocated by Friedman and Hayek were implemented during the late 1970's and was largely influenced by economic theories from Britain and the United States. What this proves is that during the thirty years that the Bretton Woods System was in operation the two institutions successfully managed to change the economic order of global trade and finance.

It is possible to come to this conclusion because before the Bretton Woods System there was no real global finance agreement and global trade and finance did not really exist. The creation of the Bretton Woods System established the institutions that eventually paved the way for globalization and the current trend of free markets and low protectionism. However, it would be impossible to ignore the fact that the system was not always successful in everything that it aimed to achieve. The Euro Dollar Markets of the 1950's is a classic example of this, as the system failed in its bid to control the free movement of money, which was viewed as one of the main problems of the 1930's. The legacy of the Bretton Woods System is still clearly evident in the world today, as both the IMF and the WB are still in operation and have both far exceeded the original purpose that they were established for.

The Bretton Woods System managed to firmly establish capitalism as a global ideology and proved to be the most significant turning point in the history of post war capitalism. The impact of the Bretton Woods System still lives on today, it guaranteed the rise of the United States as the world superpower and firmly established the dollar as the global currency for trade and finance. The institutions it has created has ensured modernization of many third world countries and allowed for the development of numerous companies to expand from corporations to multinationals that in turn have provided extensive employment and growth of industry that would have otherwise have not existed. In my opinion, the Bretton Woods System laid the foundations for the international economic order that exists today. The establishment of the IMF and the WB have allowed the third world countries to expand and flourish and it has also given them increased opportunities to implement many systems and industries that would have otherwise not been possible.

Criticisms have been made however, that the system lad to the concentration of world power in the hands of the few which allowed countries such as the USA and Japan greater power and influence, due to the quota system that is in place whereby votes are allocated by the size of investment. It is safe to say, that the Bretton Woods System has played a major role in the international economic order as it laid the foundations for the new 'global village' that exist today.