International Monetary Economics, Bretton Woods Agreement - Assignment Example

Module Question In the aftermaths of World War I, Nation s endeavoured to revive the gold standard monetary regime but soon after it failed to provide enough liquidity and collapse severely in the form of great depression. It is argued that keeping gold standard led to the crisis as economic activity could not establish rapidly and ultimately authorities failed to recover. Given the stances and destruction of World War II, world’s leading nations gathered at Bretton Woods in 1944 for establishing new international monetary system to avoid previous mistakes (Bordo, Michael and Barry). This system was the result of United Nations Monetary and Financial Conference held at Bretton Woods later named upon it. Bretton Woods System which is also known as International Monetary Regime laid the base for International Monetary Fund and World Bank. This fully negotiated system came through acceptance of around 42 allies’ nations plus a neutral state of Argentina. This system was envisioned to govern currency relations among states and in this regard, IMF; an international supranational authority was established to overlook foreign exchange rate systems. Though IMF was established to correct imbalances and intervene where needed but most of its decisions and policies were declined towards its most powerful player, the United States (Dominguez). This agreement was primarily focused on four principles. Firstly, both Americans and Britain negotiators agreed that instability in post war period was during 1930s was due to flexibility of exchange rates. Unrestrained and floating exchange rates resulted in destabilizing speculations and depreciations which in turn had discouraged investment and trade to take place. Americans and Britain had conflicting opinions to place exchange rates. Both polar giants were reluctant to either actively control economic policy if needed or to use the fixed rates as of classical. Negotiation of policy makers finally ended up with the consent of using alternative rates neither free floating nor fixed (Bartov, Eliahu and Gordon). The emerged rate was known as pegged rate currency regime; this system was also named as the par value system. Adjustable peg rate was considered to overcome disadvantages of both fixed and floating exchange rates. Though the operations of this system were not clearly defined but nations were required declare a par value for their currency. Secondly all nations agreed that if pegged exchange rate is to be used then nations must assure adequate supply of monetary reserves. The emerged system of this agreement was designed for U.S preferences. This system of quotas and subscriptions was authorised to IMF which required countries to pool in liquidity in the form of national currencies, gold reserves. Countries were subscribed to specified quotas in accordance of their importance to be paid for the fund which stood at 25% in gold or in currency convertible into gold and 75% of the members’ domestic currency. Member countries could then borrow foreign currency when needed for balance of payments (Dooley, Folkerts-Landau and Peter). Thirdly, all member states and governments agreed to avoid the repetition of economic conflicts of 1930s. In this regard all nations were bind to exchange in a uniform currency and all limitations were required to be removed for discriminatory exchange regulation. International Monetary Fund was assigned to oversee the governing currency convertibility process. Finally, all member states agreed that for international cooperation and stability of international monetary regime, it is necessary for an institutional forum to manage international monetary matters. In the absence of such institution, world has failed to stimulate inter-governmental consultation while with the establishment of IMF, international monetary stability will enhance. IMF will attempt to provide international monetary cooperation to member states. These four principles provided the basis for Bretton Woods System, this system was an alternate to gold standards which was supplemented by gold and national currencies. These funds developed adjustable pegs as new exchange rate. IMF in this regime was supposed to administer, regulate, finance and provide financial consultancy to member states through enhanced cooperation. Question 2 Bretton Woods Agreement with its adjustable pegged rates provided backbone to countries faced with balance of payment crisis and with institutional assistance of IMF member states managed to cope up with post war economic shortcomings. This system went in practice for around a quarter century and under capitalism world economies expanded immensely that had never been estimated. The living standards, technology, facilities and economies flourished rapidly but along with expansion, the system could not manage the conflicts of capitalistic economy which were specified by John Keynes too. The breakdown of Bretton Woods involved two interconnected failures that could not be controlled by this international monetary regime. In this regime dollar was the alternate convertible into gold due to its financial stability and gold reserves. With the passage of time, US hegemony over international power declined which posed problems for the overvalued dollar. Japanese yen and European hard money had gained enough maturity in contrast to US dollar. Secondly in the expanded face of global economy, finance and production, US dollar failed to meet the increased demands (Chirico). Besides rise in military spending in the course of Vietnam War and domestic spending due to financial stability became an increasing threat to the regime. The US dollar’s fixed value compared to gold in such scenarios seemed overvalued. The free convertibility as stated by the agreement failed to apply in practice and became worst in the wake of sterling crisis when Euro dollar market caused greater loss in capital movement. This crisis of hard money was handled by the decision to cut operations of the British Bank. This contradiction created uncertainty on either controlling financial market or giving away the status of international financial hub to London. Dollar was backed by gold under this agreement but with the increasing international liquidity required more dollars in circulation and consequently the relationship between dollar and gold became shakier and contradictory. US administration responded to overcome the circulation crisis and attempted to contain capital movement. These regulatory stances were eased up with limiting capital outflows and countering the balance of payment deficit. Such controls helped US dollar to gain some value as it was preferred for holding rather than consumption. These policy tools temporarily helped controlling the situation but failed to sustain the fixed exchange rates in the longer run. Growth of Euro dollar market in the next decade of 1960s became foulest as sterling came under pressure in 1967 and dollar in 1968 (Haraldur). Given the dollar problems President Richard Nixon temporary suspended the system. Though efforts were made by Japan and European powers to reinstate the system but America refused its revival since their freedom of operations was at stake. No doubt the system could easily been reinstated but US was not willing to withdraw its military spending from Vietnam War. Dollar problems did not only constrained financial position of USA but it also weakened the foreign policy and hegemony of United States of America too. In order to maintain the hegemonic role of US, policy makers decided to demise this system of Bretton Woods. Question 4 International Monetary Fund is an international financial institution established after Bretton woods conference in 1944. Its creation was targeted to address the financial crises of Second World War. Soon after its creation IMF carried out the international monetary system regime for implementing pegged exchange rates. IMF was assigned to administer and regulate the financial stability throughout the member states. IMF monitored the whole regime through its successes and failures. During 1950s when growth accelerated IMF conceded its involvement through collection of funds from member states. Again in 1960s and 1970s when central banks were in need of dollars to meet their deficits, IMF provided US dollars according to the quotas of member states (Endres). Bretton woods system failed and collapsed in 1970s but IMF continued its operations for adjustments of financial systems through lending, inflation controls, capital influxes and through exchange rate determination etc. IMF has played an important part in global financial system throughout its existence. During 1980s when financial system was more integrated, IMF provided financial loans, technical assistance and structural adjustment programs to countries for balance of payments and financial stability. Apart from its individual operations, IMF has been actively involved in monetary cooperation among states as third party. IMF has promoted assistance and consultancy for stable monetary policy determination and implementation. Initially IMF was created for stabilizing economy but with time its influence has expanded as many countries became part of the process (Kenen and Alexander). Nowadays, IMF is actively involved in promoting globalised trade, liberalised economies, sustainable growth and development. IMF’s operation have also been effective in reducing unemployment and poverty (Isard). Role of IMF around the world has not always been accepted with grace, many countries and scholars have also criticised the role of IMF. Financial loans and biased policies of IMF have been on top of the list. It is argued that policies of IMF are designed in favour of financial giants which support capitalism and especially in favour United States of America. Secondly, these financial loans and assistance come with shocking conditionality such as economic openness, involvement in fiscal policies and reduction in subsidies etc. (Masson, Paul and Michael). Such conditions are criticised for taking away state sovereignty and uninvited interference. Consequently in most of the cases, structure adjustment programs and financial loans have failed to boost development rather have caused more poverty and unemployment along with huge financial loan too. Question 5 European Union was formed in 1957, the efforts were concentrated for crafting a common market for trade. Even though the target was achieved quite easily but enhanced economic cooperation required monetary cooperation to overcome exchange exposure, fluctuation risks and volatile prices. Each country had its own national currency whereas trade in multiple currencies was risky and some states used to impose higher exchange rates to attain higher profits. Creation of euro in 1999 proved to be beneficial for Eurozone. It helped European economies to perform better, brought more jobs and stability to Europe (Spahn). The benefits of this uniform currency were diversified, many countries enjoyed economies of scale and consumers were provided with stable price and differentiated products. Creation of Euro integrated European financial markets and brought economic stability to the region. Euro as a currency established tangible relationship among European States and earned interest of investors for investment and progress. No doubt, there are certain constraints and controversies attached to the Euro currency. If examined critically, Euro and integration of European Union has worsened economic conditions of many smaller nations. Italian economy and industry can be quoted here which in 1970s was flourishing and also gained higher returns early in the integration but later on Italian industry failed to cope up with the increased demand. Industry could not maintain the standards and productivity along with the fast pace of EU. Euro and EU policies are blamed to be in favour of large nations which have provided new markets with free mobility for developed nations whereas smaller nations failed to compete in the integrated global markets and ended up having budget deficit (Győrffy). In order to shorten the deficit, small nations acquired debts from European Central Bank. All nations were allowed to take loans from ECB but debt to GDP ratio was restricted at 60% and unfortunately for stability of Eurozone, ECB has to offer more debts. According to 2011 statistics, Spain with lowest debt to GDP ratio was at 65%, Ireland with 75%, Greece and Italy with 110% debt to GDP. Many small nations failed to perform accordingly but Euro since its inception has enjoyed higher value and provided safe heaven to investors. Work Cited Bartov, et al. Exchange Rate Variability and the Riskiness of U.s. Multinational Firms: Evidence from the Breakdown of the Bretton Woods System. Cambridge: National Bureau of Economic Research, 1995. Bordo, D. Michael and J. Eichengreen Barry. A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform. Chicago: University of Chicago Press, 1993. Chirico, Joann. Globalization: Prospects and Problems. California: SAGE Publications, 2014. Dominguez, Kathryn M. The Role of International Organizations in the Bretton Woods System. Cambridge: National Bureau of Economic Research, 1992. Dooley, Michael P., D. Folkerts-Landau and M. Garber Peter. An Essay on the Revived Bretton Woods System. Cambridge: National Bureau of Economic Research, 2003. Endres, A M. Great Architects of International Finance: The Bretton Woods Era. London: Routledge, 2005. Győrffy, Dóra. Institutional Trust and Economic Policy: Lessons from the History of the Euro. Budapest: Central European University Press., 2013. Haraldur, Jóhannsson. The Culmination and Collapse of the Bretton Woods System 1959-1971 (1973). Reykjavík: Akrafjall, 1997. Isard, Peter. Globalization and the International Financial System: Whats Wrong and What Can Be Done. London: Cambridge University Press, 2005. Kenen, Peter B and K. Swoboda Alexander. Reforming the International Monetary and Financial System. Washington, D.C: International Monetary Fund, 2000. Masson, R Paul and Mussa Michael. The Role of the Imf: Financing and Its Interactions with Adjustment and Surveillance. Washington, D.C.: International Monetary Fund, 1995. Spahn, Heinz-Peter. From Gold to Euro: On Monetary Theory and the History of Currency Systems. Berlin: Springer, 2001. Read More