International Economic History since 1870 - Report Example

Second World War has been one of the most tragic events in the world history; it is still widely regarded as the most devastating war in the human history. However, during this conflict the United States was the only developed country which was capable to give huge financial assistance to the countries involved in it and was the only developed nation which was capable to provide economic assistance to the nations devastated by the war. As the war was approaching to its end new mechanisms for international economic cooperation were being developed by the USA in order to create more stable economic system; new system was being developed with active cooperation of the Greta Britain. Bretton Woods conference that was held between July 1 and July 22 of 1944 at Bretton Woods( the USA) was attended by the representatives of more than forty countries and led to the creation of Bretton Woods financial system.1 New system was aimed to replace gold standard system which had been maintained since the end of the 19th century. The plan of new economic financial system produced by the United Kingdom and the USA was aimed to remedy some imbalances of pre war economic financial system of gold standard. Such huge economic problems as the volatility of the floating exchange rates, dependence of the countries on the adjustment mechanisms, had been frequently resolved either by recession and deflation or by inflation and rapid expansion. New conference led to the establishment of the new fund International Monetary Fund that was destined to remedy some imbalances in the world economy.2 New mechanism devised by the countries provided for the system with fixed yet adjustable exchange rates; those countries that experienced payment deficits could borrow necessary funds from created monetary fund, whereas the nations with the payment surpluses could lend funds; the agreement also envisaged the change of the exchange rates if the financial steps taken by the Governments were not able to resolve the problem of the payment deficits. In sharp contrast with the pre war period, dollar rather than gold was set as the world reserve currency, other nations provided dollar values for their currencies; the value of the currency of other country in dollar or par value was maintained by the national banks of nations. For instance the United Kingdom set $ 2.80 per British pound; all banks of the nations participants of the Fund agreed to maintain the values of their currencies within 1 percent of the par value of the currency. 3 However, the initial success of the newly created financial system depended on the post war economic recovery especially in the European countries; the USA was almost the only developed country that had strong and stable economy at the end of 1945. The economies of most of the European countries had been devastated by the conflict and required large amount of technical and financial assistance to restore pre war levels of economic development. 4 Despite the fact that over 5 billion dollars had been granted to European nations by 1947, most of these funds were spent on some short-term emergencies and no long term plan of economic recovery had been developed. Apart from economic reasons to restore economies of Europe, the plan was also aimed to check the spread of Communism in some of the countries of Western and Southern Europe; as there was a real threat that leftist parties might win the election throughout whole Western Europe, or that some politicians might be tempted to rebuild shattered economy of Europe by communist methods. Naturally these prospects were not greeted with enthusiasm in the United States, neither the USA could allow European continent to succumb to this Communist threat. Despite the fact that plan was developed with the purpose to check the communism, yet all nations including the countries of the Communist block were invited to participate in the program; latter countries of the Eastern Europe were forced to refuse to participate in the plan. Within the period of four years 16 nations participants of the scheme received 13.5 billion dollars; the results of the plan surpassed initial expectations. The gross national product of the countries, participants of the scheme, rose by 25 % within the four years period; whereas industrial production rose by 35%, overall when the financial aid under this plan ended in 1952, the industrial production of Western European region was 35% higher than pre war years.5 One can assume that European countries, major trade partners of the USA would not have been able to rebuild their economies or the recovery would have taken much longer period of time, without the aid of the United States under Marshal Plan. By the middle of the fifties the economy of the Western Germany, major industrial center of the Western Europe was booming, unemployment dropped and even despite of large migration of Eastern refugees, it became extremely difficult to get a qualified worker; the dearth of workforce led to the introduction of automation process in the industry; moreover, living conditions had also improved as the inflation was low( the price index increased just by 1 percent for six years), whereas index of average weekly earnings rose on 100 percent within the same period of time.6 One of the most striking developments at the end of the fifties and the beginning of the sixties was that the United States by the end of the decade had transformed from the country creditor into the nation debtor. In 1957 and 158 new trend huge deficit in the balance of international payment was visible; moreover it reached 7 billion dollars for these two years mentioned. With European recovery, and strong economy the United States had to import many gods and services from Western European nations and with new post colonial countries, new trade relations with the nations mentioned had been developed; thus this situation led to lamentable results of the depletion of the stock of the gold in the USA as well as piling up of short term liquid claims against dollar, which directly threatened the stability of the dollar; it was new situation as the world experienced the dearth of dollars at the forties. The situation was not naturally augmented by the fact that new competitors had appeared in various traditional markets of the United States7(some of new competitors had recovered due to substantial aid from the United States) By the middle of the sixties, however, it became clear that the problem of the deficit in the balance of payments should be dealt with; the problem was so serious that the Government had to take some radical measures to remedy it. Gold reserves had almost been depleted and the Congress had to abandon the requirements that deposits should be backed up by 25 percent of gold; thus more than 5 billion dollars were actually freed to back the foreign claims of the United States. The government even had to exercise the control over the lending of various financial institutions overseas; as many financial organizations had been induced by high interest rates overseas to lend substantial funds to some companies in Europe and Latin America. The government was even forced to take some measures to curb outflow from individual companies. This precarious position was the consequence of the commitments of the United States under Breton Wood system, and it was evident that with these deficiencies the system had to be changed. 8The level of import had been increasing steadfastly and by the end of 1965, the United States imported many more goods and services than in the year 19649. In order to remedy some imbalances in the world trade, new form of international reserves was devised in 1968(these forms of the reserves were called "drawing rights") and they were aimed to sustain the growth in the world trade. More than 70 nations agreed to take part in this scheme and many joined them afterwards. 10 Similar to Marshal Plan programs were also taken at the end of the 40 and the beginning of the fifties in Japan which was under direct military occupation of the United States. The steps taken by the Allied command were aimed to transform Japan into the stable economic and trade partner of the United States. With the success of post war recovery, the plan of IMF came into full effect only at the end of 1958. By that time many countries had already started to maintain the official rates of their currencies by operations with dollars, many banks had shifted to dollar as the main reserve currency and even trade between various European nations was conducted in dollars. In spite of the fact that new system was aimed to remedy some problems experienced by the countries under Gold standard regime, it became clear within the short period of time that new system did not prevent the nations from changing their currencies, neither it was very easy for the United States to sustain the fixed price of gold, which was a prerequisite for the new world financial system. By the end of the sixties major Western European countries had devaluated their currencies, whereas the USA was cramped by the clauses of the treaty to set its own exchange rates as well as determine its balance of payments position. As the amount of dollars held as the reserve currency by various national banks rose and the stock of gold held at the United States diminished, it became evident that the United States could not fulfill its commitments to exchange gold for dollars. In 1971, President Nixon took several steps to end Bretton Wood system and introduced some tariffs to encourage other nations to revaluate their currencies against the dollar; within a very short period of time floating exchange rates regime was adopted by most of developed nations. But the activities of the USA are not confined to the program aimed at the development of developed countries; they also affect the progress in the developing nations as well. In order to assist the developing countries to develop their economies, new bank -World Bank was created. World Bank is one of the most striking examples of the influence of the United States in the world arena. World Bank is one of the most important banks that oversees financial operations and provides loans and grants to the developing nations. Whereas the main aim of the IMF was to provide sufficient funds for the reconstruction in the post was Europe, the mission of the World Bank was to provide identical assistance for the less developed countries. In 1948 World Bank provided Chile less developed nation with its first credit. Since this year the World Bank has provided various countries with the credit on the total sum of 500 billion dollars (most of the nations recipients have been less developed or medium developed countries). The World Bank comprises several entities, the most important of which are International Bank for the reconstructions and development, the international Finance Corporation, and Multinational Investment Guarantee Agency. The bank comprises 184 members; each member country is as shareholder of the Bank and the number of shares owned by the nation is calculated according to the size of its economy. So far, during the last 50 years, the United States has been and is still the largest shareholder (with little less than 17 percent of the shares): they are followed by Japan that has 7.87 percent of the shares and Germany (4.49 percent). All other shares are owned by other members of the Bank. Apart from having the largest portion of shares in the bank, the United States also has control over Executive Directors who are supposed to manage most of the day to day activities of the Bank, can authorize lending operations, and develop various policies of the bank as well implement current strategies. The president of the World Bank is selected and nominated by the USA and the executives formerly approve the candidacy submitted by the USA. 11 The president of the World Bank is actually the chairman of the Board of Directors. The World Bank is still the largest pool of the financial sources for the developing nations. Despite the fact that the president is appointed by the USA, some of the candidacies submitted by the US have not been accepted with enthusiasm by members of the bank. For instance when the candidacy of current president of the World Bank - Paul D. Wolfowitz, was submitted many members feared that he would not be able to fulfill his duties as the manager of the bank which was supposed to serve the interests of developing nations12. International Monetary Fund was established to provide various developed countries with sufficient and effective help to the members of the nations-members of the fund. The activities of the Fund are aimed to defend the currencies of the nations against various external crises as well as remedy some payment deficits. Initially, the fund was funded by each country member of this financial organization (under the quota based on predicted pots war trade patterns); latter the quotas as well as overall structure of organization were modified to reflect the progress of the trade between the nations. Currently, country, each year, can borrow from the fund up to 150% of its quota and up to 450% within three years period. The fund comprised both developing and developed nations; however more developed nations have more control as they supply most of the financial funds. Like at the World Bank the USA has more than 17 percent of the voting control, whereas all other developed nations have much less -Germany( 5.55 percent) and Japan( 5.55%). 13 During the Asian economic crisis of 1998, the USA provided IMF with more than 17 billion dollars to stabilize the currencies of the countries affected by the crisis and restore the reserves of the fund. These steps allowed the Bank to continue negotiations with various countries such as Brazil, in order to save this country from financial disaster. 14 This step reflects the importance and the dimension of the influence of the USA in the financial market of the world and global economy as general. Creation of the International Monetary Fund, launching of Marshal plan as well as designing of new world financial and monetary system are ones of the most notable post war steps, aimed to resolve persistent economic problems of post war world; the steps mentioned were taken under the guidance or with active participation of the United States. Marshal plan helped to restore industrial capacities of the European countries and eventually transformed them, with the participation of the European Governments, into major trade partners of the United States and stable developed nations. Under direct military control and supervisions of the United States, Japan was able to jettison its militarism and transform itself into one of the leading economic powers of the world. Without American involvement this process might have taken much longer time, or would not have been successful at all, as the USA was the only country during that period of time that had sufficient economic and financial power to tackle these problems. Despite the fact that Bretton Wood System is regarded by many observers as ineffective, it helped to resolve some problematic economic issues of post war period and assured more stable transformation to floating exchange regime. Actually in my opinion, many vital elements of the world's post war economic system were created in the USA. USA was the organizer participated in one of the most successful reconstruction process in Europe that helped to transform these countries into stable democratic nations with strong economies; due to the American policy of reconstruction, these countries have became major trade partners of the USA in the world arena. Similar to Marshal Plan program helped to transfer Japan into the leading economic Asian power, the status that this country had maintained up till the middle of the nineties. Apart from that, post war economic status of the USA allowed this country to influence two major financial organizations- World Bank and the International Monetary Found. The USA still has by far the largest vote power in both of these organizations mentioned (this status it acquired in post war period and has maintained it since), which has allowed this country to influence vital economic decisions around the globe, both in developing and developed nations. However, new financial system devised in the post war period entailed some negative and positive consequences for the USA as well. The fact that dollar has became new reserve currency (the position that dollar had maintained till the appreciation of euro) contributed both to the investment in some American bonds and to the flight of capital in the fifties and sixties; it also entailed some trade imbalances between the USA and the rest of the world. In spite of the fact that many recovered countries have became the trade competitors of the USA and have been transformed into the countries with stable and sound economic systems, the sheer volume of the American economy coupled with the influence in various financial institution have assured maintaining of the status of the USA as a leading economic power of the world. The United States played one of the major roles in post war economic recovery of the world; even though the dimension of this role receded as the countries restored their economic capacities, the United States has managed to maintain and will maintain its influence as a leading economic world power for many decades to come. Works cited page. 1) Encyclopedia Encarta 2004. 2) Encyclopedia Britannica 2005. 3) John B Taylor, Macroeconomics, Norton & Company, 1997. 4) Encyclopedia Americana 2005. 5) Colliers Year Book 1955. 6) World bank, http://www.bicusa.org/bicusa/issues/world_bank/index.php 7) Wolfowitz Picked for World Bank, 8) Eiteman David K. Multinational Business Finance, Addison -Weshely publishing, 1995, p.697. 9) 1998: Economics: IMF and World Bank Meet Amid Global Crisis, Encyclopedia Encarta 2004. Read More