Bretton Woods
What is the Bretton Woods System?
A system for monetary and exchange rate management established in 1944 at a conference held in Bretton Woods, New Hampshire.
Why was the system put in place?
Prior to the Bretton Woods System, most countries utilized the "gold standard," in which each country guaranteed it would redeem its currency for its value in gold. The problem with the "gold standard" was that the United States held 75% of the world's supply of gold, and other countries lacked the gold supply to sufficiently back their currency. o During WWI, the gold standard was abandoned to give countries more flexibility in financing the war. This led to over-inflation as countries rapidly printed money. After the war, most countries returned to the gold standard. However, the Great Depression drove up the price of gold, resulting in people redeeming their dollars for gold. The Federal Reserve made things worse by defending the nation's gold reserve by raising interest rates.
Challenges to the "Washington Consensus"
o Anti-globalization movement: Critics of trade liberalization argue that decreasing trade barriers harms developing countries. While the free flow of goods is permitted, labor flow is inhibited by the necessity of a visa or work permit. Critics argue this permits a system in which goods are produced in developing countries and exported to o Developed countries at a huge mark-up, which is funneled into large multinational companies while laborers remain impoverished. o Beijing Consensus: Proposed as an alternative model to the Washington Consensus and characterized by increased state control of the economy
Collapse of the Bretton Woods system
o In 1973, President Nixon unhooked the value of the dollar from gold, effectively ending the Bretton Woods system. Despite this, some of the institutions it created remain in place today, including the World Bank, and the World Trade Organization.
What were the institutions involved in the system?
o International Monetary Fund (IMF): Allowed countries to borrow in the case they needed to adjust their currency's value and didn't have the funds themselves. Each country agreed to contribute to a fixed pool of national currencies and gold to be held by the IMF. Each member of the Bretton Woods system was then entitled to borrow what it needed, within the limits of its contributions. The IMF was also responsible for enforcing the Bretton Woods agreement. o International Bank for Reconstruction and Development (IBRD): Initially created as a lending institution for European countries devastated by World War II. Now the purpose of the World Bank is to loan money to economic development projects in emerging market countries. o General Agreement on Tariffs and Trades (GATT): Signed at a separate conference in Geneva in October 1947. The purpose of the agreement was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. GATT 1947 deals only with trade in goods. It wasn't until GATT 1994 that trade in services, some aspects of foreign direct investment, and intellectual property rights were included as well, among other items. GATT 1994, also called the Uruguay Round, marked the creation of the WTO. o World Trade Organization (WTO): Established in 1995, in many ways as a successor to the GATT. The WTO deals with regulation of trade between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements.
What were the details of the system?
o The US dollar was established as the global currency in lieu of gold, and each country promised their central bank would maintain fixed exchange rates between their currency and the dollar. If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets. That would decrease the supply, which would raise the price. If its currency became too high, the bank would print more. That would increase the supply and lower its price. o Countries promised to refrain from trade warfare (for example, lowering their currencies to increase trade) but maintained some flexibility to regulate their currencies for post-war rebuilding or in the event of economic destabilization.
The "Washington Consensus"
o Washington Consensus = set of 10 economic policy prescriptions considered to constitute the "standard" reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International Monetary Fund (IMF) and the World Bank. It advocates free trade, floating exchange rates, free markets and macroeconomic stability.