The Causes of the Collapse of the Bretton Woods System

When U. S. President Richard Nixon form from each oney final stageed the backing of U. S. currentness by the halcyon standard st prizegy in 1971, the noble attempts of the Bretton wood delegates fin all toldy abrogateed. . This paper bequeath examine the causes of the death of the Bretton timberland system rough(prenominal) have blamed it on the changing situation of the international scotch system former(a)s blamed it on the ruin of the administration itself. We will look for the Bretton timberland administration, its ideals and contradictions, in an attempt to discern what indeed went wrong.Fixing the change cast in the midst of the U. S.dollar and other currencies was doomed to failure because of various principles of macro scotchs which will be tumbled herein. However, in spite of its failures, the Bretton woodwind instrument System compete a crucial role in the stinting development of europium and japan in the decades immediately after World war II.Its master key purpose was the economic rehabilitation of Europe and Japan, and in this, the Bretton timberland System was indeed successful. The collapse of the Bretton woodwind System in 1971 could be traced to a number of reasons. The virtually master(prenominal) of these was the increasing throw imbalance of the U.S. economy. The cold War among the United States and the USSR drained the U. S. Treasury, leading to deficit spending, and a surge in imports.In particular, the Vietnam War became a veritable b all overlook passel of runaway spending. Furthermore, the rehabilitated economies of Europe and Japan soon made up for scattered ground, and caught up to the United States economy. The U. S. economy, booming throughout the Fifties and Sixties, finally reached the advert of deficit in the early 1970s. At this time, the U. S. started to experience abundant money outflow to the rest of the existence.This was certainly instrumental in the collapse of the Bretton wood Sy stem, merely when not the only reason. A guerrilla reason for the end of the Bretton woods System was the lack of indecorum to maintain its workings. As the U. S. coin came to a crisis in the early 1970s, the System collapsed. The transnational fiscal broth (IMF), the authority to control the cash supervene upon browse, had no power to checker the System from collapsing, and the System subsequently spiraled out of control.The powerlessness of the IMF was due to the lack of autonomy of the U.S. silver dominance based on the money standard. In this paper, we will show that these reasons were the main causes of the end of the Bretton Woods System, by analyzing the economic data and considering the economists and historians arguments. The origin of the Bretton Woods System will be explored to brighten the theory behind the System. Additionally, we will review the earth economy of the fifties, when the Bretton Woods System was working effectively, and compare it to the wo rld economy of the 1960s, when the System began to suffer effectiveness.The comparison is necessary to answer to the question why the Bretton Woods System became ineffective although it was functional at the beginning. This paper will also analyze the grammatical construction of the external Monetary Fund, to see how that too was instrumental in bringing the Bretton Woods System to its close. It is important to understand how the IMF had been trying to order the funds until 1973, the year in which the world transferred to the alter currency system from a pegged deepen evaluate system.The United Nations Monetary and Financial Conference, let on k promptlyn as the Bretton Woods Conference, was a meeting among 730 delegates representing the 45 consort nations of the Second World War. The conference was held at the Mount Washington Hotel in Bretton Woods, in the buff Hampshire. The conference followed the conclusion of the Second World War and convened from July 1 to July 22 , 1945. The purpose of the delegates at this Conference was to establish a immature planetary economic order following the trauma of the war, not simply a re-hash of the world economic system of the 1930s.Most economists agreed that that system had not been economic during the occlusion between world wars. Depression hit the United States in 1929, and recession gripped the world economy in the thirties. While some nations let their currencies float, others set a policy of pegging their currency to gold or other currency. This system had outbreaks of competitive devaluation. In order to keep their mental reservation at a high level, governments introduced switch control, restricted the use of foreign currency and imposed higher tariffs barriers to limit the volume of imports.World craftiness declined because of these restrictions, and the world go about very slow economic recovery in the 1930s. Delegates at the Bretton Woods Conference worked to revamp these short-sighted, re strictive policies. They felt the quest to establish economic institutions which would transform the world economy into a well-oiled machine, one which promoted international trade for all countries..The delegates created three major structures the international Monetary Fund (IMF) the world(prenominal) Bank for Reconstruction and Development (IBRD) or the World Bank and the International Trade Organization (ITO). However, in 1950, the U.S. Congress nixed the formation of the ITO, and it never got mutilate the ground. In place of the ITO, a treaty was agreed upon by most of the world economic powers and the rest of the world.The treaty was commonly known as the General Agreement on Tariffs and Trade (GATT), which took over the ITO ideology. The other devil institutions, IMF and the World Bank, were to take responsibility of being the bi-pillar system of the Post-Second World War orbicular economy. The purpose of the World Bank was to promote development, and that of the Intern ational Monetary Fund was to maintain order in the international monetary system.The delegates of the Bretton Woods Conference based the new global economic structure on a code of what they felt to be economic fairness. This code related to a global regime of fixed but adjustable exchange rates. This system of adjustable rates was designed to implement equity on a world economic scale. The adjustable fixed rate provided exchange rate stability in the short run, just like the gold standard system. At the same time, it also allowed the possibility to adjust the exchange rate when a national balance of payment is in a crucial state of disequilibrium.However, the weakness of this adjustable exchange system was that it lacked the stability, the induction of the gold standard and the flexibility of the flexed exchange rate regime. Despite the demerits of this currency exchange mechanism, the Bretton Woods System worked fairly well in the 1950s and early 1960s. The adjustable-fixed exchan ge was successful in increasing international trade and supporting the recovery of the economy in Europe and Japan.The system resulted in the per rate system, under which currencies of the process countries were fixed within 1% of the protect of the U.S. dollar, which was pegged to the nurture of gold. With this system, the IMF was successful between 1946 and 1966, although it had its kinks. The Bretton Woods delegates hastened the integration of the world economy, but they could not so easily achieve a smooth currency exchange system, because the destruction of the Second World War was too massive to recover without unilateral action such as discarding the pegged exchange rate system. both(prenominal) nations set up their own restrictions on trade and currency exchange so that the IMF could not get those countries into the world currency system.Moreover, the finished European nations requested massive funding from the IMF until 1950. In spite of IMF mistakes, the global econo my progressed after 1951. The Fund successfully spread its economic activities to all members, not just to the fund users. However, after 1966, the world economy changed comfortably once again. The problems inherent in the Bretton Woods System started to be subject gradually in the mid-1960s. Richard N. barrel maker, in his book The International Monetary System, listed the bears of the Bretton Woods System as well its contradictions..The first characteristic of the system was that member countries of the Bretton Woods System would determine their own domestic economic policies. This permitted autonomy of domestic economies, enabling nations to pursue their own internal economic objectives, such as assuring low inflation or achieving the natural unemployment rate. The second feature of the Bretton Woods System, according to Cooper, was that the U. S. currency be pegged to gold. The third feature was that other nations adopted the adjustable-exchange rates system.Cooper argues tha t these three features of the Bretton Woods System contradicted each other Countries could not frame their national economic policies independently and unruffled maintain fixed exchange rates and currency convertibility except by luck and coincidence. That potential conflict was recognized by the Bretton Woods architects Cooper suggests that to fix these contradictions, the creators of the system, the delegates, added two elements. One was the establishment of the IMF, and the other was altering exchange rates under the condition that a nation comes to a monstrous economic imbalance. correspond to Cooper, the Bretton Woods System architects assumed that new gold return coming into monetary unobtrusivenesss would be an ample supply to provoke adequate product. The US dollar, they further assumed, would be able to provide for the undeniable liquidity to keep the exchange rate at the fixed level. However, until the 1970s, growth in the global gold demand had been increasing fast er than new gold production. World monetary reserves outside the United States change magnitude by $54 billion, a 4. 5 per cent per annum growth rate.United States gold reserves departed to other countries to the tune of $9 billion, while only $4 billion came from new gold production. Foreign exchange, which was overwhelmingly in dollars as the medium of choice, supplied $30 billion of the growth in reserves. Additionally, the IMF started, in 1970, to provide Special Drawing Rights (SDRs), which is the new type of international reserve assets generally called paper dollars. U. S. gold reserves declined dramatically during this period because its parentage of gold had gone to much of the rest of the world.The reasons for this exodus of American crown were complicated and controversial. Military expenditures involved with the Cold War and the Vietnam War predominate. As the result of heightened expenditures, the United States tried to incr simplicity its money supply regardless of being able to back it up with gold reserves. The rest of the world accumulated these garbled U. S. reserves until the beginning of the 1970s, which caused uncertainty in the mensurate of the US dollar itself. The second reason for the exodus of U. S. capital was that the European and Japanese economies had caught up to the United States economy.Due to the increased economic clout of bring around nations, the United States began suffering from the trade deficit. European nations and Japan were taking good of the underestimated bell of their currency, enabling them to increase the volume of their exports. The United States suffered because of the high price of the dollar relative to other currencies. After accumulation of the wealth, European countries and Japan embarked on converting reserve surpluses into dollar reserves. They practiced this policy because of the interest that could be earned on U. S. dollars.Moreover, if it ever became necessary the U. S. dollar could be conve rted to gold. These were miscalculations of the International Monetary Fund creators.. In these ways, the Bretton Woods economic structure was undermined, as the nominal price and real value of U. S. currency came into conflict. In 1970, in order to restore the system, the IMF introduced a new international reserve asset. Special Drawing Rights (SDRs) were expected to supplement the other agents of global reserves, i. e. U. S. dollars and gold. The need for liquidity in the international monetary system was the reason for the psychiatric hospital of SDRs.In 1970, when the SDRs were first allocated, the United States had the largest share, totaling about $867 million, followed by the United Kingdom, at $410 million. According to Acheson, A problem is the prospect of conflict over the amount of SDRs to be created. The development of the new asset system was eventually unsuccessful. Richard Harper argues that the failure of IMF came from a fundamental problem within the system itsel f. The problem, he says, is that a fixed exchange-rate system requires national governments to arrange their monetary policy in problematic ways.If, for instance, one nation has continuously higher inflation rate than others, it cannot compete in the world market, and its citizens would be buying more pricy imported products, leading to trade deficits. Therefore, the government has to be adjusting to its trading partners all the time. Harper goes on to say that under the pre-1914 gold standard system, in that respect would no such problem because the inflation rate would spill over to the countries around it and achieve a convergence. By contrast, under the par value system, the mechanism of self-converging is missing.Harper summarizes his thoughts about monetary cooperation between nations Lack of co-ordination of monetary policies and, in particular, the implementation of inappropriate policies by any individual member, resulted in the countries in question facing runs on their currency when there was perceived to be an imbalance between their internal monetary policies and external exchange rates. He argues that this systematic flaw was closely related to the ultimate obsolescence of the Bretton Woods System. asymmetry of the System came to a head, and it collapsed, like a house of cards.The real augur of its death was in 1971, when U. S. officials declared suspending the convertibility between dollars and gold, making other nations currency float. The fixed exchange rates between U. S. dollars and other world currencies disappeared, and the Bretton Woods System went the way of the dinosaursextinction. After its collapse, on March 19, 1973, the central banks of the world economic powers gave up their commitment to stabilize exchange rates between their currencies and the dollar.After suspending the convertibility from dollars to gold, the fixed exchange rates between U. S. currency and others began to disappear, even though many nations insisted on keep ing the pegged exchange rates of the Bretton Woods System. Riccardo says It now seems clear that the really essential characteristic of Bretton Woods was not the support of party but the convertibility of the dollar After March 1973, the central banks cursorily discovered that it was simply not possible to abandon exchange rates to market forces completely. In this way, the Bretton Woods System lost its key componentconvertibility from dollars to goldin 1971, then an ancillary key componentadjustable-fixed exchange rates in 1973.Henceforth, currency valuations were determined according to market fluctuations. The IMF lost the function of setting exchange rates.. Conclusion The Bretton Woods System came to an end in 1973, almost three decades after the Conference. The System contained contradictions and flaws since its foundation in 1945. Some economists argue that the systems defects were negligible, and that the problem lay in the changing world economy, not the Bretton Woods Syst em itself. However, it is undeniable that the mechanisms of the Bretton Woods System were not flexible enough to adjust to a changing world economy.Adaptability is the key to survivability, and in this sense, the Bretton Woods System was doomed to failure. The revivals of European nations and Japan were predictable, given the scope of international policy to revive these stagnant economies. More than thirty years have passed since the collapse of the Bretton Woods System. Some economists say that Bretton Woods II is emerging in the world today.. The accompaniment that china pegs its currency to the US dollar seems similar to the situation at the Bretton Woods Conference of yesteryear.Because of the fixed exchange rate system between the Chinese Renminbi and the U. S. dollar, the United States suffers a huge trade deficit with China today. . Matthias Kaelberer argues that Bretton Woods II would be different from the classic one, for the Bretton Woods System from 1944 to 1973 was ag reed upon by its members, while the emerging system of today comes from Chinese de facto unilateral behavior pegging its currency to the U. S. currency. However, he also emphasizes that, no content what their origin, reviewing the classic Bretton Woods System will be helpful and important to predict the consequences of the Chinese-American fixed exchange rates relationship.The Bretton Woods Conference helped ease the worlds economy through a tumultuous period after the Second World War. Although the economic solutions they espoused seem anachronistic today, we should also thank the architects for playing a vital role in restoring some semblance of equilibrium to a world in tatters.BibliographyAcheson A. L. K. , Chant, J. F. and Prachowny M. F. J. Bretton Woods Revisited Evaluations of the International Monetary Fund and the International Bank for Reconstruction and Development. Papers Delivered at a Conference at Queens University, Kingston, Canada.Toronto, On, Canada University of Toronto Press. 1972.Chacholiades, Miltiades. International Monetary Theory and Policy. New York McGraw-Hill. 1978.Cooper, Richard N. The International Monetary System Essays in World Economics. Cambridge, Mass. MIT Press. 1987.Harper, Richard. Inside the IMF ethnography of Documents, Technology, and Organizational Action. San Diego Academic Press. 1998.Parboni, Riccardo. The Dollar & its Rivals. London, England Verso. 1981. Witteveen, H. 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