bretton woods grp1

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By Group 1


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Introduction (Bretton woodsconference)

y F or the first time in modern history, an international agreement was reached to govern monetary policy among nations.

y It was, significantly, a chance to create a stabilizing internationalcurrency and ensure monetary stability once and for all.

y In total, 730 delegates from 44 nations met for three weeks in July, 1944 at a hotel resort in Bretton Woods, New Hampshire.

y The whole plan for international monetary policy was based onnations agreeing to adhere to a global gold standard.

y Each country signing the agreement promised to maintain itscurrency at values within a narrow margin to the value of gold.


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P urposey The combination of the worldwide depression of the 1930s

and the Second World War were key in leading so many nations to an economic summit of such magnitude.

y The original purpose of rebuilding after World War IIthrough a series of currency stabilization programs andinfrastructure loans to war-ravaged nations.

y By 1946, the system was in full operation through thenewly established

y International Bank for Reconstruction and Development(IBRD, the World Bank) and

y The International Monetary F und (IM F ).


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H ull s veiwsy C ordell Hull, U.S. secretary of state from 1933 through

1944, who wrote:y "Unhampered trade dovetailed with peace; high tariffs,trade barriers, and unfair economic competition, with

war... If we could get a freer flow of trade ... so that onecountry would not be deadly jealous of another and

the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lastingpeace."


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U.S. Interesty The United States was without any doubt the most powerful

nation in the world, both militarily and economically.y Because the fighting did not take place on U.S. soil, the country

built up its industrial might during the war, selling weapons toits allies while developing its own economic strength.y Manufacturing by 1945 was twice the annual rate of 1935-1939.y It is also important to note that the United States owned 80

percent of the world's gold reserves at the time.y So the United States had every motive to agree to the use of the

gold standard to organize world currencies and to create andencourage free trade.


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G old standardy The gold standard evolved over a period of hundreds of

years, planned by a central bank, government, orcommittee of business leaders.

y Throughout most of the nineteenth century, the goldstandard dominated currency exchange.y Gold created a fixed exchange rate between nations.

Money supply was limited to gold reserves.y So nations lacking gold were required to borrow money to

finance their production and investment.y When the gold standard was in force, it was true that thenet sum of trade surplus and deficit came out to zerooverall, because accounts were eventually settled in gold -and credit was limited as well.


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P egged Ratesy The pegged rates - the value of currency to the value of

goldy This maintained sensible economic policy based on anation's productivity and gold reserves.y Following Bretton Woods, the pegged rate was

formalized by agreement among the leading economic

powers of the world.


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Keynes s veiwy The British economist John Maynard Keynes represented

Great Britain at Bretton Woods.y Keynes preferred establishing a system that would have

encouraged economic growth rather than a gold-peggedsystem.

y He favored creation of an international central bank andpossibly even a world currency.

y

He proposed that the goal of the conference was "to find acommon measure, a common standard, a common ruleacceptable to each and not irksome to any."

y Keynes' ideas were not accepted


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U.S. sS tandy The U.S. position was intended to create and maintain

price stability rather than outright economic growth.y As a consequence, Third World progress would be

achieved through lending and infrastructure investmentthrough the IM F, which was charged with managing tradedeficits to avoid currency devaluation.

y In joining the IM F, each country was assigned a trade quotato fund the international effort, budgeted originally at $8.8billion.

y Disparity among countries was to be managed through aseries of borrowings.

y A country could borrow from the IM F, which would beacting in fact like a central bank.


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Effects of bretton woodsy In practice the international currency naturally became the

U.S. dollar and other nations pegged their currencies to thedollar rather than to the value of gold.

y The actual outcome of the Bretton Woods Agreement wasto replace the gold standard with the dollar standard.

y Once the United States linked the dollar to gold at a valueof $35 per ounce, the whole system fell into place, at leastfor a while.

y Since the dollar was convertible to gold and other nationspegged their currencies to the dollar, it created a pseudo-gold standard.


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Faulty presumptiony The Bretton Woods Agreement did not include any

provisions for creation of reserves .y The presumption was that gold production would be sufficient

to continue funding growth and that any short term problemscould be resolved through the borrowing regimens.y By pegging international currency to gold at $35 an ounce, it

failed to take into effect the change in gold's actual value since1934, when the $35 level had been set.

y

The dollar had lost substantial purchasing power during andafter World War II, and as European economies built back up,the ever-growing drain on U.S. gold reserves doomed the Bretton Woods Agreement as a permanent, working system.


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M arshall plany The European Recovery Program (better known as the

Marshall Plan) was organized to give grants tocountries to rebuild.

y The agreements and institutions that grew fromBretton Woods were not adequate for the economicproblems of postwar Europe.

y The United States was experiencing huge tradesurplus years while carrying European war debt. U.S.reserves were huge and growing each year.

y Between 1948 and 1954, the United States gave 16 Western European nations $17 billion in grants.


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C old wary During this period, the C old War became increasingly

worse as the arms race continued.y

The USSR had signed the Bretton Woods Agreement,but it refused to join or participate in the IM F.y Thus, the proposed economic reforms turned into part

of the struggle between capitalism and C ommunism

on the world stage.


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U.S. Delineationy It became increasingly difficult to maintain the peg of the U.S.

dollar to $35-per-ounce gold.y An open market in gold continued in London, and crises

affected the going value of gold.y The conflict between the fixed price of gold between centralbanks at $35 per ounce and open market value depended on themoment.

y During the C uban missile crisis, for example, the open market value of gold was $40 per ounce.

y The mood among U.S. leaders began moving away from belief inthe gold standard.y President Lyndon B. Johnson argued in 1967 that:"The world

supply of gold is insufficient to make the present system workable


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C ollapsey The IMF set up Special Drawing Rights (SDRs) for use as trade between

countries.(1968)y The intention was to create a type of paper gold system, while taking

pressure off the United States to continue serving as central banker tothe world.

y However, this did not solve the problem; the depletion of U.S. goldreserves continued until 1971.

y By that time, the U.S. dollar was overvalued in relation to gold reserves.y The United States held only 22 percent gold coverage of foreign

reserves by that year. SDRs acted as a basket of key national currenciesto facilitate the inevitable trade imbalances.

y The US was very reluctant to devalue, given the status of the dollar asthe international currency. Though an attempt was made to saveBrettonWoods in 1971 (the Smithsonian Agreement), by 1973 theinability to agree on par rates led to its collapse.


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The New International Economic

Order (NIEO)y The N ew International Economic Order (NIEO) was a

set of proposals put forward during the 1970s by developingcountries through the United Nations C onference on Trade

and Development to -----y promote their interests by improving their terms of trade,y increasing development assistance,y developed-country tariff reductions, and other means.y It was meant to be a revision of the international economic

system in favor of Third World countries,y Replacing the Bretton Woods system, which had benefitedthe leading states that had created it especially theUnited States.


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H istoryy The term was derived from the Declaration for the

Establishment of a New International Economic Order ,y

adopted by the United Nations General Assembly in1974, andy referred to a wide range of trade, financial, commodity,

and debt-related issues (1 May 1974)


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N orth- S outh Dialoguey An agenda for discussions between industrial and

developing countries,y

focusing on restructuring of the world's economy topermit greater participation by and benefits todeveloping countries (also known as the "North-SouthDialogue").

y

Along with the declaration, a P rogramme of Actionandy a Ch arter of Economic Rig h ts and Duties of States

were also adopted.


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Tenets of N IEOy Developing countries must be entitled to regulate and control the

activities of multinational corporations operating within their territory.y They must be free to nationalize or expropriate foreign property on

conditions favorable to them.y They must be free to set up associations of primary commodities

producers similar to the OPE C ; all other States must recognize thisright and refrain from taking economic, military, or political measurescalculated to restrict it.

y International trade should be based on the need to ensure stable,equitable, and remunerative prices for raw materials, generalized non-reciprocal and non-discriminatory tariff preferences, as well as transferof technology to developing countries; and should provide economicand technical assistance without any strings attached.


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F inal outcomey In the 1970s and 1980s, the developing countries pushed for

NIEO and an accompanying set of documents to beadopted by the UN General Assembly.

y Subsequently, however, these norms became only of rhetorical and political value,

y except for some partly-viable mechanisms, such as the non-legal,

y

Non-binding Restrictive BusinessP

racticeC

odeadopted in 1980 andy the C ommon F und for commodities which came in force

in 1989.


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Euroy The Euro ( ) is the common currency of the European Union

(EU). The euro is the second largest reserve currency and thesecond most traded currency in the world after the U.S. dollar.

y It was agreed by the European C ouncil in 1995 that the euro would replace the European C urrency Unit at a rate of one-to-one at the start of stage three of Economic and Monetary Union on 1 January 1999.

y The European C ouncil unanimously decided on 25 May 1998 that11 member states had met the convergence criteria formembership of the single currency.

y These were: Austria, Belgium, F inland, F rance, Germany,Ireland, Italy, Luxembourg, Portugal and Spain.

y Euro banknotes and coins were 1 January 2002, and nationalcurrencies were gradually phased out.


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U sage of Euroy The currency is also used in a further five European

countries, with and without formal agreements, and is

consequently used daily by some 327 millionEuropeans.y Over 175 million people worldwide use currencies

which are pegged to the euro,y

including more than 150 million people in Africa.


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European C entral Bank ( EC B)y The euro is managed and administered by the

F rankfurt-based European C entral Bank (E C B) and the

Eurosystem (composed of the central banks of theEurozone countries).y As an independent central bank, the E C B has sole

authority to set monetary policy.y

The Eurosystem participates in the printing, mintingand distribution of notes and coins in all MemberStates, and the operation of the Eurozone paymentsystems.


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M aastricht Treatyy The 1992 Maastricht Treaty obliges most EU Member

States to adopt the euro upon meeting certainmonetary and budgetary requirements, however, notall states have done so.

y The United Kingdom and Denmark negotiatedexemptions, while Sweden turned down the euro in a2003 referendum, and has circumvented the obligation

to adopt the euro by not meeting the monetary andbudgetary requirements.y All nations that have joined the EU since 1993 have

pledged to adopt the euro in due course.


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N ations still outsidey Three EU member states remained outside the euro

area.y

Voters in Denmark rejected membership of the euro ina referendum in September 2000, 53% voting no.y In Sweden a similar decision was made in a

referendum held in September 2003 (56% voting no).y The L abour P arty government in the United

Kingdom plans to hold a referendum on membershipwhen the time is right .


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A ccesion statesy The 10 accession states that joined the EU on 1 May

2004y

C yprus, the C zech Republic, Estonia, Hungary, Latvia,Lithuania, Malta, Poland, Slovakia and Sloveniay will only be able to adopt the euro when they have

fulfilled the convergence criteria.


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y

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