Development of the system ... Are they working or not in crisis ...
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.
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.
In the 1930s several conferences dealing with the world monetary problems caused by the
Great Depression had ended in failure. But after World War II the need for a stabilizing system that avoided the mistakes, which had been made earlier, became evident. Plans were made for an innovative monetary system and a supervising institution to monitor all actions.
First negotiations took place under wartime conditions.
First negotiations took place under wartime conditions.
Conference of Bretton Woods
In 1944 an international conference took place in Bretton Woods, New Hampshire (USA). 44 countries attended this conference in order to restructure international finance and currency relationships. The participants of this conference created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD/World Bank).
Additionally, they agreed on implementing a system of fixed exchange rates with the U.S. dollar as the key currency.
The plans for the system of Bretton Woods were developed by two important economists of these days, the American minister of state in the U.S. treasury, Harry Dexter White, and the British economist John Maynard Keynes who stated: “ We, the delegates of this Conference, Mr President, have been trying to accomplish something very difficult to accomplish.[...] It has been our task to find a common measure, a common standard, a common rule acceptable to each and not irksome to any.” This statement outlines the difficulty of creating a system that every nation could accept. The ideas of John Maynard Keynes and Harry Dexter White have been described as very different from each other on several occasions but in fact there are extraordinary similarities. According to the White plan, a Bank for Reconstruction (today the World Bank) and an International Stabilisation Fund should be established. The Keynes plan called for the same. The only difference was that Keynes wanted to vest the IMF with possibilities to create money (a fact that can easily be understood in the background of Great Britain’s suffering from the deflation policies in the Inter-War period) and with the authority
Additionally, they agreed on implementing a system of fixed exchange rates with the U.S. dollar as the key currency.
The plans for the system of Bretton Woods were developed by two important economists of these days, the American minister of state in the U.S. treasury, Harry Dexter White, and the British economist John Maynard Keynes who stated: “ We, the delegates of this Conference, Mr President, have been trying to accomplish something very difficult to accomplish.[...] It has been our task to find a common measure, a common standard, a common rule acceptable to each and not irksome to any.” This statement outlines the difficulty of creating a system that every nation could accept. The ideas of John Maynard Keynes and Harry Dexter White have been described as very different from each other on several occasions but in fact there are extraordinary similarities. According to the White plan, a Bank for Reconstruction (today the World Bank) and an International Stabilisation Fund should be established. The Keynes plan called for the same. The only difference was that Keynes wanted to vest the IMF with possibilities to create money (a fact that can easily be understood in the background of Great Britain’s suffering from the deflation policies in the Inter-War period) and with the authority
to take actions on a much larger scale. In case of balance of payments imbalances John Maynard Keynes recommended that both sides, debtors and creditors, should change their policies. Countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Harry Dexter White, on the other hand, saw an imbalance as a problem only of the deficit country. Economists today agree that White was mistaken and Keynes was more farsighted. However, Keynes’ plan was never discussed seriously at Bretton Woods and the participants agreed on the White plan. The United States defined the value of its dollar in terms of gold, so that one ounce of gold was equal to $ 35. All other members had to define the value of their money according to what was called the “par value system” in terms of U.S. dollars or gold.
The dominant role of the USA
The USA has been and still is the dominating power of the Bretton Woods system. After World War II the United States was the country with the biggest economic potential. The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that
contributed to the supremacy of the USA. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system. The headquarters of the two main institutions (the IMF and the World Bank) are situated in Washington D.C. The dominant role of the USA already became apparent when the American ideas of the Bretton Woods system gained more acceptance than those of Great Britain. The plans of the British economist John Maynard Keynes were rejected and the model of the American economist White was favoured. Despite “Keynes’s part in constructing the Bretton Woods system, his vain struggle, over five wartime missions to Washington, to preserve Britain’s financial independence from the United States” the Bretton Woods system is dominated by the USA.
contributed to the supremacy of the USA. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system. The headquarters of the two main institutions (the IMF and the World Bank) are situated in Washington D.C. The dominant role of the USA already became apparent when the American ideas of the Bretton Woods system gained more acceptance than those of Great Britain. The plans of the British economist John Maynard Keynes were rejected and the model of the American economist White was favoured. Despite “Keynes’s part in constructing the Bretton Woods system, his vain struggle, over five wartime missions to Washington, to preserve Britain’s financial independence from the United States” the Bretton Woods system is dominated by the USA.
Regards,
ADJ
