The Rise of the Global Economy Following Second World War - Research Paper Example

?The Rise of the Global Economy following WWII The Bretton Woods system was formed to manage financial and commercial relations of the nations, whichspearheaded industrialization in the mid-20th century. It is the first system to establish a fully bargained monetary system with the aim of presiding over monetary issues of independent states. As World War II continued, a delegation of 730 representatives from 44 member states deliberated an agreement, which was aimed at rebuilding the international economic order. The world economic climate changes rapidly, as a result of globalization. The movement of capital between countries becomes huge and sometimes uncontrollable. This calls for a system that can stabilize the economy. Following the need to have a control system, the 44 nations that convened in Breton woods charted the way forward. A British economist by the name John Maynard stressed the significance of rule based regimes that can stabilize the international business. His suggestions were accepted in Briton wood fixed exchange rates. This article discusses the Breton wood system, which was established in 1944 at Breton wood conference. It begins with the analysis of the economic situation after the First World War, and afterwards discusses the significance of creating a supranational organization that assist in trade flows. In addition, the most significant adjustment resulting from the establishment of this system is explained. The system started to develop immediately after the Second World War, when several countries wanted to go back to the old financial security system that existed before the war. This was the gold system. It was required that every country that took part in the international trade should have their money backed by reserves of gold and foreign currencies. However, many mistakes during implementation of the gold standard resulted in the collapsing of financial and economic relations between countries. To curb these problems, all countries tried to raise the competitiveness of their export so as to decrease the payment of deficit through deflation of the currency. However, this worsened the situation and resulted in international deflation competition that brought about mass unemployment, bankruptcy of companies, failing of credit organizations, and high inflation in affected countries. As such, a stabilization modality was necessary (O'Hara, 1994). These issues occasioned several monetary conferences. During the Second World War, there was a need to set up a system that could stabilize the currency, and at the same time avoid the mistakes that were made in the past. During the conferences, it was planned to put in place innovative monetary systems and an independent institution that could oversee all the actions that were taken. The main negotiations took place in Breton in 1944. Forty four countries attended the conference to find a solution to the past problems. International Monetary Fund and World Bank were created in the process of these negotiations. There was also an agreement to have a system of fixed exchange rates, with United States dollar as the main currency. The plan on how the system could operate was put forward by two notable economist of that time, that is, John Maynard (British economist) and Harry White (an American minister of state in treasury). Harry called for the establishment of bank of recovery (World Bank) and International Stabilization Fund. On the other hand, Maynard was calling for the same, but he differed with Harry because he wanted the International Monetary Fund to create funds and have powers to take any action on a larger scale. When there was an imbalance in payment, Maynard wanted both the creditors and debtors to change their policies - he wanted nations with surplus payment to increase their imports from nations with deficit, hence creating foreign trade equilibrium. However, white saw the problem of imbalance as concerning the nation that has a deficit. In the conference, the value of US dollar was defined in terms of gold and all other currencies defined into “par value system” in terms of US dollar. After the Second World War, US become the largest economic potential. The European countries that were involved in the World War II were highly indebted and opted to transfer massive amount of gold to US. This caused acceleration of US economic potential, making the US dollar exceptionally strong and; therefore, it became the key currency of Breton woods system. The headquarters of the two main monetary bodies, the International Monetary Fund and World Bank, was situated in US giving them a dominating position. Under the Breton woods policies, the countries were required to remove the existing exchange control limits and assume the system of free multilateral payments. However, some member states refused involvement in discriminatory monetary practices or exchange regulations. Only two practical were exempted. The first practical was that convertibility roles were extended to the current international transactions only (O'Hara, 1994). The governments were supposed to desist from regulating purchases and sales of money for trade in goods and services. However, they were not required to desist from regulating capital account business. The second practical was that convertibility roles could be deferred if a country decided so during postwar transition time. The countries that were deferring their convertibility roles were referred to as article XIV countries, while those that were accepting the convertibility were called article VIII countries. The new system was successfully following the creation of IMF and World Bank. The purpose of International Monetary Fund was to promote international monetary cooperation by creating world monitoring agency that supervises, consults, and collaborates on financial matters (O'Hara, 1994). The organization facilitated the expansion of world trade, therefore, contributing to the maintenance and promotion of employment and high income. The IMF rules guaranteed exchange rate stability in order to get rid of competitive exchange depreciation. The system gets rid of foreign exchange restrictions and helps the members to come up with payment systems of multilateral trade. Furthermore, member nations that had disequilibrium in their transaction payment balance were given a chance to correct the mistake by seeking financial assistance from the IMF. In the conference, all payments were fixed to the dollar, and they were allowed to fluctuate within a narrow band value. The Breton policies required that central banks should intervene in situations where a country’s currencies threatened to get out of the required band. If a country’s currencies were seen to move beyond the par rate, then that nation had a right to declare that it had experienced disequilibrium in its currencies. The system rules would then provide the affected country with recourse through devaluation or evaluation of its currencies. When a country joins IMF, it must first pay a certain amount of money called quota subscription. These amounts create a fund that the organization gives to member countries that are facing temporary financial problems. A country could immediately withdraw 25 % of its contribution in case it encountered some financial problem. Also, a member can ask for more funding if what it gets is not enough. Before borrowing the money, the member is required to show how the financial problems will be solved. The more a nation contributed to the IMF, the more it was allowed to borrow. This stimulated the countries to contribute aggressively in order to get more loans, hence improving their economic growth. The funds that the IMF lends are not the same as borrowing from the conventional credit organization. When a country requested for a loan, it had an opportunity to buy a foreign currency and pay it back with a national currency. Within a period of five years, the country should repay all the debts (Hagele, 2010). The creation of World Bank in Breton became one of the most significant monetary institutions that provided loans to developing countries. It assisted its members successfully by providing loans of up to 16 million dollars annually. The World Bank uses it financial capability, well educated employees, and extensive knowledge to assist the developing nations to move into a bath of stable, sustainable, and equitable growth, in its efforts to stamp out poverty in developing countries. It assists its members in restructuring their economies and giving them capital to be used in productive investment. It further encouraged foreign direct investment (FDI) through guarantees and accepting of corporations with different investors. The institution aims at keeping the payments in developing nations balanced and improves international trade, and it is working in more than 100 developing countries. It runs by forming assistance strategies through cooperating with government agencies, nongovernmental organizations and private companies. It provides financial capabilities, analytical, advisory and capacity building to these organizations (Hagele, 2010). By 1965, many banks had formed international syndicates, and by 1970, more than half of largest banks in the world were already shareholders through such syndicates. Multinational banks have the capability to carry out large international transfers of capital for investment purposes and speculation against currencies exchange rate fluctuations, these made large capital flows (Miller et al., 2010). After the Breton wood system was formed, economic restructuring all over the world demands new forms of Institutions. The restructuring came as a result of new developments, such as decolonization of several developing nations. Since integration presented many challenges, the western countries had to seek ways of solving their social and economic problems. Breton wood key institutions such as IMF and World Bank had to alter their plans and introduce new institutions. At that time, developing nations were seen as suppliers of raw materials, which led to wide protesting among the people. As a result of that, the World Bank developed two organizations, the IDA (International Development Association) and IFC (International Finance Cooperation). IFC was meant to give credit to private institutions that lack capital for projects development in developing countries. IDA was meant to give credit to the poorest countries at favorable conditions. For instance, the payment period for the credit was up to 50 years, and interest rate was far much below the market rate (Eichengreen, 1994). The development of the two organizations greatly improves the economic growth of the developing countries (Miller et al., 2010). Around 1960s, there was a massive economic growth all over the world. In particular, the countries that participated in World War II grew very fast and unexpectedly. This led to the weakening of U.S and devaluation of the dollar. This occurred because the reserves were not enough to back the trade expansion in order to slow down the economic growth. The International Monetary Fund reacted to the situation by giving special drawing rights (SDRs). This helped the nations that were members to supplement their holdings of foreign currencies and gold (Eichengreen, 1994). Apparently, Bretton Woods was well coordinated system, which was formally negotiated and solidly implemented in the form of IMF, which is an international organization charged with enhancement of the economic cooperation among its members. The United States took a front role in stabilization of the economy after World War II Seemingly. The United States domination of the system at its initial stages is an evidence of how it drew its dominance of world economic matter for many years. The critical role of the united stated was put to test during the post war period, which led the collapse of par value system and the gold exchange standard in the early 1970s. However, these challenges did not have significant impacts on the monetary relations, as it was the case in the 1930s. Instead, under the support of the IMF, the cooperation was significantly safeguarded. The IMF continued to play its key roles, including spearheading consultations, financial and regulatory assignments. Bretton Woods, therefore, has played a particularly critical role in maintaining the world economic order. References O'Hara, P. (1994). Bretton Woods System and Post Bretton Woods System. Retrieved from: http://www.econ.tcu.edu/harvey/5133/bretton.html Eichengreen, B.J. (1994). The Bretton Woods System: Paradise lost? University of California at Berkeley, Dept. of Economics: Washington. Miller, F., Vandome, F., & McBrewster, J. (2010). Bretton Woods System. VDM Verlag Dr. Mueller e.K: New York. Hagele, K.C. (2010). The Breton Woods System of Fixed Exchange Rates - Theoretical Background and Its Development. GRIN Verlag: Breton wood. Read More