The cruelly three decades that coincided with the monetary arrangements of the Bretton Woods organization is often thought of as a time of relative stability, order and discipline. Yet inasmuch as that it took nearly 15 years following the 1944 bull session at Bretton Woods before the system was fully operational and that there were clues of instability throughout the era, perhaps not enough has been made of the relative scrape in trying to maintain the system. Rather than seeing Bretton Woods as a time characterized by stability, it’s more accurate to consider it as being a transitional make up that ushered in a new international monetary order that we’re still real with today.
Divergent Interests at Bretton Woods
In July 1944, commissioners from 44 Allied nations gathered at a mountain resort in Bretton Woods, NH, to chat about a new international monetary order. The hope was to create a system to facilitate intercontinental trade while protecting the autonomous policy goals of individual lands. It was meant to be a superior alternative to the interwar monetary order that arguably led to both the Superlative Depression and World War II.
Discussions were largely dominated by the interests of the two awful economic superpowers of the time, the United States and Britain. But these two outbacks were far from united in their interests, with Britain emerging from the war as a larger debtor nation and the U.S. poised to take on the role as the world’s great creditor. Short of to open the world market to its exports, the U.S. position, represented by Harry Dexter Pale-complexioned, prioritized the facilitation of freer trade through the stability of fixed trade rates. Britain, represented by John Maynard Keynes and wanting the right to pursue autonomous policy goals, pushed for greater exchange fee flexibility in order to ameliorate balance of payments issues.
Rules of the New Arrangement
A compromise of fixed-but-adjustable rates was finally settled upon. Member states would peg their currencies to the U.S. dollar, and to ensure the rest of the world that its currency was dependable, the U.S. leave in turn peg the dollar to gold, at a price of $35 an ounce. Member political entities would buy or sell dollars in order to keep within a 1% bandeau of the fixed rate and could adjust this rate only in the prove of a “fundamental disequilibrium” in the balance of payments.
In order to ensure compliance with the new precludes, two international institutions were created: the International Monetary Fund (IMF) and the Worldwide Bank for Reconstruction and Development (IBRD; later known as the World Bank). The new controls were officially outlined in the IMF Articles of Agreement. Further provisions of the Articles specified that current account restrictions would be lifted while brill controls were allowed, in order to avoid destabilizing capital cascades.
What the Articles failed to provide, however, were effective secondments on chronic balance-of-payments surplus countries, a concise definition of “fundamental disequilibrium,” and a new global currency (a Keynes proposal) to augment the supply of gold as an extra author of liquidity. Further, there was no definitive timeline for implementing the new rules, so it would be fixed to 15 years before the Bretton Woods system was actually in greatest degree operation. By this time, the system was already showing signs of instability.
The At daybreak Years of Bretton Woods
While the U.S. pushed for immediate implementation of Articles requirements, poor economic conditions in much of the postwar world made correcting balance-of-payments issues in a fixed exchange rate regime difficult without some mainstream account exchange controls and external sources of funding. With no global currency created to provide supplemental liquidity, and given the limited credit capacities of the IMF and IBRD, it soon became evident that the U.S. would bear to provide this external source of funding to the rest of the world while allowing for easy implementation of current account convertibility.
From 1945 to 1950, the U.S. was meet an average annual trade surplus of $3.5 billion. In contrast, by 1947 European domains were suffering chronic balance-of-payments deficits, resulting in rapid depletions of their dollar and gold caches. Rather than considering this situation advantageous, the U.S. government earned it seriously threatened Europe’s ability to be a continuing and vital market for American exports.
Within this background, the U.S. administered $13 billion of financing to Europe through the Marshall Develop in 1948, and some two dozen countries, following Britain’s lead, were permitted to devalue their currencies against the dollar in 1949. These transfers helped alleviate the shortage of dollars and restored competitive balance by mitigating the U.S. trade surplus. (To read more, see: What Was the Marshall Plan?).
The Marshall Organize and more competitively-aligned exchange rates relieved much of the pressure on European polities trying to revive their war-torn economies, allowing them to encounter rapid growth and restore their competitiveness vis-à-vis the U.S. Exchange commands were gradually lifted, with full current account convertibility in fine achieved at the end of 1958. However, during this time the U.S. expansionary nummary policy that increased the supply of dollars, along with prolonged competitiveness from other member nations, soon reversed the remainder of payments situation. The U.S. was running balance-of-payments deficits in the 1950s and had a current account shortfall in 1959.
Increasing Instability in the High Bretton Woods Era
The depletion of U.S. gold reserves squiring these deficits, while remaining modest due to other nations’ hunger to hold some of their reserves in dollar-denominated assets rather than gold, increasingly augured the stability of the system. With the U.S. surplus in its current account disappearing in 1959 and the Federal Secure’s foreign liabilities first exceeding its monetary gold reserves in 1960, this created fears of a potential run on the nation’s gold supply.
With dollar applications on gold exceeding the actual supply of gold, there were bear ons that the official gold parity rate of $35 an ounce now overvalued the dollar. The U.S. feared that the setting could create an arbitrage opportunity whereby member nations command cash in their dollar assets for gold at the official parity reproach and then sell gold on the London market at a higher rate, accordingly depleting U.S. gold reserves and threatening one of the hallmarks of the Bretton Woods technique.
But while member nations had individual incentives to take advantage of such an arbitrage moment, they also had a collective interest in preserving the system. What they feared, be that as it may, was the U.S. devaluing the dollar, thus making their dollar assets insignificant valuable. To allay these concerns, presidential candidate John F. Kennedy was compelled to broadcasting a statement late in 1960 that if elected he would not attempt to devalue the dollar.
In the lack of devaluation, the U.S. needed a concerted effort by other nations to revalue their own currencies. In defiance of appeals for a coordinated revaluation to restore balance to the system, member political entities were reluctant to revalue, not wanting to lose their own competitive irritable. Instead, other measures were implemented, including an expansion of the IMF’s give capacity in 1961 and the formation of the Gold Pool by a number of European political entities.
The Gold Pool brought together the gold reserves of several European countries in order to keep the market price of gold from significantly succumb to above the official ratio. While between 1962 and 1965 new replenishes from South Africa and the Soviet Union were enough to nullify the rising demand for gold, any optimism soon deteriorated once necessitate began outpacing supply from 1966 through 1968. Check up on France’s decision to leave the Pool in 1967, the Pool collapsed the continuing year when the market price of gold in London shot up, draw back away from the official price. (To read more, see: A Brief Account of the Gold Standard in the United States.)
Collapse of the Bretton Woods Technique
Another attempt to rescue the system came with the introduction of an foreign currency—the likes of what Keynes had proposed in the 1940s. It would be issued by the IMF and devise take the dollar’s place as the international reserve currency. But as serious deliberations of this new currency—given the name of Special Drawing Rights (SDR)—only offed in 1964, and with the first issuance not occurring until 1970, the rectify proved to be too little, too late.
By the time of the first issuance of the SDRs, total U.S. imported liabilities were four times the amount of U.S. monetary gold as backups, and despite a brief surplus in the merchandise trade balance in 1968-1969, the takings to deficit thereafter was enough pressure to initiate a run on the U.S. gold reserves. With France seeping its intentions to cash in its dollar assets for gold and Britain requesting to Stock Exchange $750 million for gold in the summer of 1971, President Richard Nixon obstructed the gold window.
In a final attempt to keep the system alive, concordats took place in the latter half of 1971 that led to the Smithsonian Concordat, by which the Group of Ten nations agreed to revalue their currencies in out of kilter to achieve a 7.9% devaluation of the dollar. But despite these revaluations, another run on the dollar transpired in 1973, creating inflationary flows of capital from the U.S. to the Group of Ten. Governs were suspended, allowing currencies to float and bringing the Bretton Woods set-up of fixed-but-adjustable rates to a definitive end.
The Bottom Line
Far from being a years of international cooperation and global order, the years of the Bretton Woods settlement revealed the inherent difficulties of trying to create and maintain an international conduct that pursued both free and unfettered trade while also allowing states to pursue autonomous policy goals. The discipline of a gold standard and unchangeable exchange rates proved to be too much for rapidly-growing economies at varying levels of competitiveness. With the demonetization of gold and the change to floating currencies, the Bretton Woods era should be regarded as a transitional make up from a more disciplinary international monetary order to one with significantly uncountable flexibility.