Bretton Woods System in Global Political Economy

Introduction

The Bretton Woods system is accountable for the development of international financial organizations including the World Bank and the International Monetary Fund1. In this light, this paper will describe the Bretton Woods system before exploring its historical background. Further, this paper will identify the purposes for establishing the Bretton Woods system before showing if it is applicable currently. Finally, this paper will pinpoint the strengths and weaknesses of the Bretton Woods system.

The Bretton Woods System

After the Second World War, there was a need for the establishment of an international monetary system that would reconstruct the world due to the detrimental outcomes of the global chaos. The Bretton Woods system traces its roots from the location of the United Nations Monetary and Financial Conference that took place at Mount Washington Hotel in Bretton Woods, New Hampshire in July 19442.

The Bretton Woods system purposed to provide a flexible framework that would also foster the cooperativeness of the various countries engaged in the international financial markets. Importantly, the system sought to create a structure that would perform better than the abandoned gold standards besides the lessons acquired from the Great Depression experiences. In this regard, the conference provided a crucial stage for the delegates from 44 governments to discuss matters of international importance, especially the need for economic growth and development after the World War II3.

Two years before the conference, financial experts from different countries engaged in designing a system that would foster economic growth and curb competitive devaluations besides the creation of an international monetary structure. However, contributors from the U.S. Treasury Department and Britain, led by Dexter White and Maynard Keynes respectively, spearheaded the designing of the envisioned system4.

White’s proposal was much skewed to the interest of the U.S. owing to its authority in the Second World War compared to Keynes’ proposal, but some common similarities allowed the fusion of the two designs5. The participating delegates identified the various monetary turmoil lessons learned from the previous monetary mechanisms in addition to the strategies adopted by different governments during the interwar period6. In this case, the creators of the Bretton Woods system developed it in a way that would curtail the repetition of past errors that affected the international monetary activities negatively.

The conference provided a stage where at least 44 delegates from various nations convened to develop a monetary system that would govern international transactions efficiently. The creators of the system saw the essence of establishing a global monetary system that is cooperative and characterized by the absence of trade barriers. Principally, the national delegates in the conference envisioned a regime or international organization that would fuse the multinational decision-making processes and the different legal obligations that governed the different economies of the world.

As such, the 1944 conference held in Bretton Woods provided a great opportunity for the nations interested in an efficient international trade to design a system that would not only act in their favor but also the growth of the global economy after the harmful consequences of the Second World War7. In this respect, the founding of the Bretton Woods system was a crucial step towards bolstering global economic growth and development as it pioneered the development of the International Monetary Fund (IMF) whose initiatives have an influence on the current global economic climate8.

Reasons for Creating the Bretton Woods System

The rigidity of the previous international monetary systems that existed before the Second World War as demonstrated in the case of the gold standard system prompted the creation of the Bretton Woods system to foster efficient trading in the global markets9. Furthermore, the trade barriers created by different countries during the interwar period elicited trade imbalances thereby, calling for the formation of a framework that would remove the trade barriers10.

Therefore, there was a need to reconstruct the world economies since failing to do so would mean an inequitable economic growth in the various regions of the world. In this regard, the July 1944 United Nations Monetary and Financial Conference created the Bretton Woods Agreement that sought to restore the world’s economic equilibrium especially, the international currencies exchange aspect of the trade11. Hence, the conception of the Bretton Woods system had the interest of promoting equitable economic development among the different players in international trade by fostering trade balances.

Essentially, the Bretton Woods system aimed at engineering a mechanism that would facilitate the convertibility of different world currencies to streamline international trade.12 In this case, the absence of a stable foreign exchange system implied that there was a need to protect the weaker currencies led by the U.S. dollar and the Sterling Pound. The system also hunted for the abolishment of the barriers that not only inhibit global trade but also various current account transactions.13

In this light, the system aimed at streamlining trade amid the competitive devaluation strategies adopted by various countries to protect their socio-economic and political interests during the interwar period14. The adoption of the system showed the extent to which the interwar period influenced the global economies and the need for the creation of a reconstructive strategy for the sustainability of global economies.

In a bid to realize its purpose, the Bretton Woods system adopted four major points. Firstly, the system upheld the essence of maintaining a currency regime operated through an “adjustable peg’ or a “pegged rate.” Here, the members were required to control the currency fluctuations by adjusting their currencies within the agreed par value. Secondly, the system required governments to establish adequate monetary reserve supplies to prevent the free float of currencies.

In this case, members could secure quotas from the IMF to enhance their monetary reserves adequacy15. Thirdly, all members were required to abandon discriminatory monetary exchange regulations and practices by removing exchange controls limiting. Fourthly, the system agitated for the establishment of a global forum that fostered cooperativeness regarding monetary matters, leading to the creation of the IMF16. Therefore, one could understand the aims of the Bretton Woods system by studying the undertakings of the IMF today since it derives its foundations from the system’s principles.

The Dissolution of the Brendon Woods System

The Bretton Woods System is not applicable today due to economic developments in the 1960s leading to the overvaluation of the U.S dollar against the gold. Mainly, the U.S economy under the presidency of Lyndon Johnson experienced massive military spending like in the case of the Vietnam War as part of the Great Society programs that resulted in a substantial overvaluation of the U.S dollar. The actual dissolution of the Bretton Woods system occurred between 1968 and 1973.17

The “temporary” suspension announcement made by U.S former President, Richard Nixon, in 1971 marked the actual beginning of the abandonment of the fixed exchange rate system. The move meant that the dollar’s valuation could no longer be converted into gold for trading in the international markets18. 1973 saw the intensification of major currency fluctuations leading to the collapse of the system. For this reason, the world’s leading economies let the demand and supply forces determine their currencies’ free float besides pegging their currency against the value of the main currencies.

Strengths and Weaknesses of the Bretton Woods System

The Bretton Woods System promoted a considerable growth of international investment and trade19. Additionally, the system bolstered macroeconomic development as various industrialized countries with the exception of Japan experienced low inflation rates on average. The adjustable peg that allowed the convertibility of currencies into gold20. Moreover, the strength of the regime manifested in the exceptional per capita income growth recorded in the member states since 187921. Thus, the strength of the international monetary regime engineered by Keynes and White was displayed by its ability to foster the different aspects of macroeconomic growth in the member countries.

The weakness of the system manifested in the capital movement limitations that hindered member governments to control their individual capital flows22. Furthermore, the system lacked full rigidity since the adjustment of parities could only occur after a financial crisis or speculation. Additionally, pegging other currencies against the dollar instead of gold created a structural weakness since it hindered the devaluation of the dollar. Therefore, the Bretton Woods system undermined the realization of the reconstruction of different economies at the same pace since only one main currency, the U.S. dollar, dominated international trade.

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Footnotes

  1. Craig Murphy and Roger Tooze, The new international political economy (Berlin: Springer, 2016), 31.
  2. Victor Argy, The postwar international money crisis: an analysis (London: Routledge, 2013), 55.
  3. Thomas Oatley, International political economy (London: Routledge, 2015), 144.
  4. Alfred Eckes, A search for Solvency: Bretton Woods and the international monetary system, 1941-1971 (Austin: University of Texas Press, 2014), 45.
  5. Argy, The postwar international money crisis, 70.
  6. Murphy and Tooze, The new international political economy, 51.
  7. Argy, The postwar international money crisis, 82.
  8. Seay, The origins of Political Economy, Virginia Commonwealth University, 2015.
  9. Eckes, search for solvency, 87.
  10. Paul Masson, “The evolution of exchange rate regimes and some future perspectives,” in Handbook of Exchange Rates, eds. Jessica James, Ian Marsh, and Lucio Sarno (Hoboken: Wiley, 2012), 142.
  11. Murphy and Tooze, The new international political economy, 70.
  12. Eckes, A search for solvency, 99.
  13. Oatley, International political economy, 166.
  14. Murphy and Tooze, The new international political economy, 40.
  15. Seay, The origins of Political Economy, Virginia Commonwealth University, 2015.
  16. Eckes, A search for solvency, 105.
  17. Eric Helleiner, “A Bretton Woods moment? The 2007–2008 crisis and the future of global finance,” International Affairs 86, no.3 (2010): 620.
  18. Seay, The origins of Political Economy, Virginia Commonwealth University, 2015.
  19. Mason, The Evolution of Exchange Rate Regimes, 134.
  20. Ibid.
  21. Eckes, A search for solvency, 121.
  22. Seay, The origins of Political Economy, Virginia Commonwealth University, 2015.