Bretton Woods Flashcards
The start of Bretton Woods
After WWII the world needed a new financial system
44 countries sat down
The design British economist John Maynard Keynes and American Chief International Economist of the U.S. Treasury department Harry Dexter White.
US by that time held 2/3 of the worlds gold reserve
The bretton woods system
All currencies got linked to the dollar and the dollar was linked to gold
The role in economic recovery
Stability in exchange rates.
It helped to restore and reconstruct economies in disorder after the war.
Helped to avoid inflation.
Explain the institutions/organizations of the Bretton Woods system.
IMF: International Monetary Found, lends money to countries that are in trouble and can not attract financing from other sources.
IBRD (World bank): International Bank for Reconstruction and Development, help less developed countries grow
ITO: International Trade Organization.
Never fully ratified.
Based on free-trade oriented ambitions: lowering tariffs and trade quotas.
Many countries demanded special treatments for agriculture, textiles, iron, etc.
The U.S. regarded international trade as the key to recovery and growth.
More import demands = more exports = USD shortages.
GATT replaced ITO in 1947
General Agreements on Tariffs and Trade.
Free trade was a much more difficult process to solve than anticipated due to numerous disagreements.
(European Payment Union (EMU)): Active from 1951. Liquidity deficits in Europe solved through a net-debt/net-credit system. Successful adjustments by stimulating trade and exchanges = full currency convertibility reached. EPU became a means for spurring European integration in Western Europe; increased interdependence; increasing real incomes and productivity.
USD shortages 1945-58
- Lack of domestic supplies and European imports (foremost from Eastern Europe and West Germany) implied profound initial dependence on the USD.
- Altered trade and productivity relations gave the U.S. a profound commodity export expansion.
- Many countries experienced initial balance of payments disequilibrium – devaluations and adjustments needed.
- Lack of currencies in general and USD in particular because of its gold limits.
- Thus, initial restrictions in imports gave motives for bilateral trade deals, quantitative restrictions, as well as exchange controls (legacies from the interwar years).
US expansion in Indochina
politically costly and economically devastating = declining confidence in USD due to the war in Vietnam.
- The Vietnam war was partly paid by excessive printing of USD.
1960 USD
USD in circulation > U.S. Gold reserve
Early 1960s from USD deficits to a global surplus
Stronger European currencies and stronger intra-European trade as well as better terms-of-trade for Europe due to the fixed exchange rate system and the incremental relative productivity catch-up.
Oil
Oil prices had a steep fall in price because of the inflating dollar. OPEC formed in 1960.
The end of Bretton woods
In 1971 the U.S. gold supply was no longer adequate to cover the number of dollars in circulation. President Richard M. Nixon devalued the U.S. dollar relative to gold. After a run on gold reserve, he declared a temporary suspension of the dollar’s convertibility into gold. By 1973 the Bretton Woods had collapsed.
