Bretton Woods System - Essay Example

1. Introduction Through this article in which we will try to treat the agreement of Bretton Woods objectives: the first is the nature and the contents of the international economic order which was born with the favour of the Second World war; the second to take the measurement of the distance which separates us today from the project which in was in the beginning; and the third, undoubtedly most ambitious and most difficult also, to see which are the possible avenues which are currently offered to us as regards international economic co-operation. The moment is particularly favourable to open the discussion in these three directions, the mostly with the official signature, April 15 1994 in Marrakech, of the final Act of the Uruguay round, the loop was to some extent tied. Centre piece of the international economic order of post-war period, GATT joined thus the International Monetary Funds (the IMF) with the row of the great international economic institutions. It is undeniable that in the current debate on the international economic co-operation, we miss historical prospect completely. Or at least, we do not want to remember us the context in which was set up what we can call the great sedentary project of post-war period, not more of the role that one intended to make play at the time each great institution in their respective field. It is not a question to reconsider a period, already completed, but at least to remember, on a side, that the Agreements of Bretton Woods belong to a great project which, was not going from there to be carried out, at least until the failure of the Charter of Havana and the Cold war do not come to put at it a downtime. On the other side, which it is a question of setting up this great project, to make "the great decision" as could write it Shotwell in a book which completely reflects the spirit of its time, ''that if the crisis of the Thirties, with its batch of unemployment, dislocation of the world economy, commercial wars, etc, had sufficiently traumatized the spirits so that any idea of return to the past, with this economic order that had exerted oneself to restore in the inter-war period, is immediately evacuated. That is in question; is to set up a new order, an order which breaks with the past. And so that it was thus, it was not only necessary to rebuild the world economy on new bases, but also to rebuild the national economies on bases such renewed. At the time when is held the conference of Bretton Woods, in July 1944 let us recall it, the exit of the War is sealed since the unloading successful in Normandy. It is at the post-war period that is consequently a question of thinking, with the errors of the past which was a question of avoiding renewing, with the way in which one was going to rebuild the world economy. It is also the way in which one was going to institutionalize and widen this solidarity between the allied nations which, across the systemic differences, made so that it appeared possible to set up a new order. It is clear, when one looks at this period with a certain passing that the United States played a role determining in the installation of this new kind, but it agrees to bring many nuances with what could appear with the first access only the installation of a new hegemonic order, a kind of Pax Americana imposed. In this respect, it will be certainly interesting to return on the contents even of the American project, on the debates that one could raise at the time including in the American public opinion, as on the role played by these two large protagonists of Bretton Woods who were Keynes and White, to precisely see the project could be set up only insofar as this project rested on common principles, and that it answered common aspirations. It is under this angle that it is necessary, to approach the international order of post-war period and its prospects; while looking initially towards the United States, as it is them which mainly drew contours of this order, but also and in parallel, while looking towards the other countries, and in particular towards Great Britain and the USSR, two countries without them this order could never have been born. 2. Bretton Woods system The Agreements signed by 44 countries of the world at the end of the Conference of Bretton Woods (New Hampshire), joined together in July 1944 on the initiative of president Franklin D. Roosevelt, had like objectives to try to put an end to the monetary and financial disorganization born from the Second World war and to avoid new crises like that of 1929. At the time of this conference the 44 countries were appropriate of the creation of two structures essential integrationists: the International Monetary Funds and the World Bank. The all member nations of the IMF were held to hang their currency with the American dollar or the gold - of which largest stocks were held by the United States (72% of the world reserves in 1948). Thus the IMF fixed it the rates of exchange of the currencies of the great powers. The World Bank, as for it, originally instituted to provide to the countries of Europe the funds necessary to the rebuilding, was put little by little to grant loans to the no industrial nations. These appropriations were generally intended to build roads, ports and other "adjustments of infrastructures" facilitating the export of raw materials and agricultural produce bound for the industrialized countries. Soon, this system grows rich by a third component ''General Agreement one Tariffs and Trade '' (GATT Agreements). This convention, whose origin also returned to the United States, aimed at liberalizing trade, which caused to return more difficult for the poorest countries and the least advanced technically the task to protect their fragile embryonic industries. These three structures were related between them by a regulation prohibiting to the World Bank to agree the loans to any country no affiliated to the IMF or which refused to subscribe to agreements GATT. This machine made difficult to the debtors of the U.S.A. to exploit the exchanges or to resort tariff handling to reduce their debts, it reinforced the competitiveness of American industry on the world markets and conferred on the industrial powers, particularly in the U.S.A. an enormous influence on the planning of the development projects. These three interdependent organizations constituted a monolithic structure weighing on the international trade. And, since 1945 at the beginning of the Seventies, in fact the U.S.A. dominated the system. Into the plan of the nations, they integrated the integrators. It is interesting to also recall that the agreements quoted in top set up an international monetary system founded on the fixed equivalence of exchange to try to avoid the monetary fluctuations likely to unbalance the markets. Each country being committed to ensure the convertibility of its currency and defending the parity of its own currency on the foreign exchange market, the national banks had the role of intervening, by purchase or sale of their own currency, to limit the fluctuations of the rates of exchange so that they do not deviate from the official parity moreover or of less than 1%. A requirement of the payment balances had been founded, just as a limitation with 10% of the devaluations compared to the parity of the end of the war, devaluations from now considered as exceptional makeshifts. One had also restored the system of 1922 of Standard Gold Exchange, allowing the countries to create currency on the exchange-value of their stock of gold, credits in national currencies but also in foreign currencies and this particularly in dollars, which is related to gold at the fixed rate of 35 dollars the ounce (value 1935). The function of the International Monetary Funds which is fed by terrified payments of the Member States will consist in conceding - within precise limits - drawing rights with regard to any country whose reserves of exchange are insufficient but which is capable to get the currency of another country of which it is debtor. It is within this framework that are also set up the International Bank for the Rebuilding and the Development (IBRD) which will become the World Bank and within this framework in which conceived the General Agreement on Tariffs and Trade (GATT), whose first negotiation intended to abolish the tariff barriers was concluded in 1947 (KENEN, 2000). 3. From Bretton Woods agreement until today The experiment of the European towards the United States and Switzerland during the Second World war had persuaded the craftsmen of the agreements of Bretton Woods, John Maynard Keynes and Harry Dexter White, that the control of the capital had a significant role to play in the future of the international economy and that this control was exerted initially in the countries benefiting of this capital flight. A strong opposition of the lobby of the American banks to this principle had led so that the articles of the International Monetary agreement of the International Monetary Funds (Article 8-2b), allow simply the international co-operation as regards movements of capital and does not make of it a requirement (HELLEINER, 2000). After the war and within the framework of the Marshall plan, the American government agreed to give information to the European countries on the capital entered to the USA during the conflict but not on the enormous capital flight whose Europe was victim after the war. The system of Bretton Woods could meet the needs for the world trade during twenty-five years regarding the support of an American balance of payment in constant deficit. The States dealt with the control of their currency and their credit. The IMF ensured the convertibility of the currencies and granted, with the World Bank, of the assistances and the loans to the countries in difficulties which could not obtain it on the international market. One can consider, with Barry Eichengreen and Peter B. Kenen that three factors gave at the same time the force and the flexibility necessary to the institutions born of Bretton Woods: capacity and will of the United States to grant or prohibit financings to gain the support or the support of various countries, in particular within the framework of the Cold war; the limitation of the number of the industrialized countries included in the financial system, very in withdrawal compared to the initial number of the signatories of the agreements; the fold of the countries of post-war period compared to the importance of the exchanges in the Twenties, which made privilege the domestic policies of full employment (Eichengreen & Kenen, 2001). Pressure on the dollar, in the context of the "Vietnamese mud pit" in which the American army and the diplomacy were situated, pushed the government of the United States to remove the convertibility of its gold currency, in 15 August 1971, and to devaluate the dollar. This operation initially proceeded on December 18 of the same year (official passage to 38 dollars the ounce of gold), then, in the second time, in February 1973. Nevertheless, it should be announced that these events did not open the way with the crisis of the Seventies. In fact, the monetary ruptures constituted not the cause but the consequence of imbalances geo-economic which accumulated during the growth - and in particular, among these imbalances, the relative decline of the American economy compared to its competitors Japanese and German (Lesourne et Godet, 1985). In fact the agreements of Jamaica, in January 1976, officially removed the formal rules of Bretton Woods, by an amendment in article 4 known as agreement. The mode of the fixed rate of exchange and thus the system of Bretton Woods had lived. The movements of capital were liberalized, each central bank played according to its own dynamics, but with an increasingly sharp interdependence, while the governance of the world economy was left at the International Monetary Funds: this last saw its mission and its means increasing whereas it was, in fact, little armed to face there, and that the events of 1971 had removed its principal raison of existence to him. A Consensus of Washington - marked by a return of the United States to the foreground - will build itself in the years 1980 around the IMF, of the World Bank and the American Treasury, consensus that Williamson (1990), economist in the Institute for International Economics, described in the form of ten commands: The budgetary discipline must fight against the deficits, sources of inflation and capital flights; The tax reform must aim at the broadest taxation (broad plate and moderate marginal rates); The money rates must be remunerative in real terms; The rates of exchange must be competitive to make it possible to accumulate commercial surpluses; The exchanges must be liberalized, which supposes a lowering of the tariff barriers; The attractively aspect of a territory must be improved to allow direct flows of investment; It is of well managed company only private; The subsidies with the unproductive activities must be eliminated or reduced at least, with the profit of the educational, medical and social missions of the States; The excess of regulation paralyses the economic initiative and creates an uneven situation between those which reach the circles of the capacity and those which cannot claim there; The defence and the promotion of the rights of ownership are fundamental: a poor legal framework, ineffective jurisdictions can have an uninitiated effect on creation of richness (Williamson, 1990). By considering the problem under this angle, it appears easier to us to take the measurement of the distance which separates us today from than one intended to set up at Bretton Woods and, consequently, to locate the intrinsic limits of an order which cannot answer, if not at piece-rates, with the problems of a world economy which does not have great any more a deal to see with the way in which one could still consider the regulation in 1944. If we take again the three stability conditions which we identified higher, of force is to note that in the three cases, those could be filled only partially and temporarily, at least so much and as the presupposed as a long time necessary ones remained unchanged. 3.1. First case The stability of the international monetary system was largely facilitated by the hegemonic statute of the United States and the dollar. This report, at first sight paradoxical, was largely underlined by holding of the theory of hegemonic stability but perhaps not for the good reasons. According to this theory, there would be indeed a close link between the stability of an international economic order and the maintenance of the hegemonic statute of the power which in was in the beginning. Only a great power fully assuming its responsibilities on the matter can "produce" this good international publishes that is stability, to assume the costs of them and to make some comply with the rules. On the basis of a given in question of this statute, which can only occur at one time or with another since the play of the economic forces causes to modify the economic chart of the world, generates anti-systemic forces whose result is to destabilize and to erode the established modes (Cerny, 1990). The problem, and it is in the sense that this theory is criticisable, it is not the fact so much that only a great power can "produce" this stability in the international economic relations, that a lot of authors regard as a good publishes, but that, in order to be stable, any international economic order, and we allow ourselves to insist on the feature of union, must be strongly polarized on a power which exerts a kind of recognized leadership, with all that implies of responsibility and assumption of responsibility of costs inherent in this function. This power must also be the centre financial of the world, a centre which channels the international financial transactions and ensures the multilateral payment, and sees its currency being used as ultimate reference to the whole of the rates of exchange. In this respect, there is hardly difference between the order of liberal inspiration centred on the Standard Gold and sterling delivers it, which was that of the XIXe century, and the institutionalized order centred on the relative fixity of the exchanges the ones with respect to the others, and the dollar which will be that the agreements of Bretton Woods will come to devote. As from the moment when these three conditions are not any more or, are badly filled, as from the moment when competition settles in the system, which this one blocks very quickly and shows all its defects. It was very visible at the time of the various monetary crises which were going to lead finally to the agreements of Jamaica of 1976, where anything was not finally regulated if not that one ratified the statute pivot which the dollar in the system plays. This is still more today, whereas the world economy became polycentric and that the financial and monetary plays became much more open. What of no body do not want to really recognize, it is that it can continue to function satisfactorily, the international monetary system orders, on the national bases on which it is built, a solid proportions co-operation between the large central banks and recognition de facto that the United States and the dollar enjoy a particular statute within this system, like the agreements of the ''Louvre'' and Plaza will endeavour to do it. And it is on this presupposed tacit that rests currently; one presupposed which is in contradiction with same realities of a polycentric world. 3.2. Second case The stability of the international monetary system was also largely favoured by the complementarities of the aims in view by the State-nations on the domestic level and the international scene. The installation of an international monetary order was essential, from the American point of view at least, insofar as it were primarily a question of reducing the risks which could let run on the development of the international trade the instability of the currencies and imbalances of the balance of payments. It acted by there avoiding the competing depreciations of the currencies and preventing the States from resorting to measurements of fixing of quotas in the event of imbalance in the balance of payments. The two other broad objectives were also to allow the compensation and the payment of the transactions on the one hand and to reduce the risks of restriction of exchange which block, like specifies it besides article 1 of the statutes of the IMF, the development of the world trade, on the other hand. However, it should immediately be recalled that the negotiations of Bretton Woods had also another object: that to make possible the States to pursue the goals that each one of them judged legitimates, in particular as regards full employment, of growth and development. The creation of Funds was to give them the possibility of having access to additional sources of financing and of being able to hope on the support of an independent institution to face any problem in theory considered as temporary, whether it is of balance of payments or rate of exchange (Cooper, 1985). As its name indicates it, the IMF will be never and nothing else than a reserve funds, aid funds in the event of momentary difficulties, a task to which this one was always confined besides, and this in spite of all criticisms whose it could be the object. But it does not remain about it, less than, replaced in its context, the creation of this funds could be understood only insofar as it were a question as much of having an organization of vigilance on the international financial markets to make it possible the Member States to have a certain number of additional degrees of freedom in the continuation of their own objectives. The very liberal vision, and very narrowly financial which finally was essential within the institution made so that the application of this mandate was always done in a very restrictive way. In a certain way it was in the order of the things since, as Keynes itself had wished it, the correct operation of the Funds as of the international monetary system itself ordered an authoritative, preserving and careful management of the cash in hand. On the other hand, which had perhaps not been envisaged, it is that in the application of this mandate, the things were going to be inverted and that, rather than to make it possible the States to have the additional degrees of freedom with respect to the world economy, it is with them that one asked to adjust oneself, and this, in an increasingly pressing way as this one imposed its constraints. One of the dramatic consequences of this it is that the parameters which will have been those of the economic policy during the three decades of post-war period will have to finally be abandoned with the turning of the Seventies and Eighties. From an economic policy until turned there towards the interior, full employment and social justice, one went by need for passing to a policy from now on turned towards outside, towards the international markets. In addition, another consequence of the inversion of the adjustment is that, from now on, to be "bearable" and "durable", the economic growth must be competitive. But how to define this competitiveness If not with respect to the others, if not by having production costs lower than the others, if not by having competitive advantages that the other countries do not have. We do not need to insist a long time on top and on the completely contradictory situation which we currently live: pushed until the end, the logic of such a model led to the policies of competitive no inflation and the strategic policies industrial, which is exactly the opposite of what was required in 1944! The astonishing paradox comes owing to the fact that the States nations as from the moment when economic prosperity is not dependent any more on the continuation of the growth and a more right distribution of its fruits inside the national borders, each State defines on the matter a line of demarcation between the intern and the external one, of such kind that each economy manages to fit with a certain degree of success in a world economy which transcends it. Thus the State is then completely legitimated to act on the internal and external factors likely to condition this success. Welfare state one passes thus by successive adjustments at the competitive State. Not the competitive State of the liberal economists, but the competitive state of the new industrial economy or the new international economy. Perhaps in this new context, it there does not take place as much, seems to us it, to be delighted by the supposedly happy outcome of the Uruguay round. The markets will be perhaps more open and the trade undoubtedly will be regulated better with the world Organization of the trade, but one can wonder whether the States already entirely did not integrate these data in the definition even of their policies in the direction where it is not a question more of seeing the world as an external constraint of which it would be necessary to hold account in this definition but quite simply as the new framework in which remains to lay down these policies. 3.3. Third case The model of international co-operation which was at the origin of the agreements presupposes the existence of permanent mechanisms to ensure the balance of the international economic relations. It was with this concern which a system made up was to answer, on a side, the IMF, and, other the IBRD. The mandate of the Bank was to be to support the rebuilding and the raising of the economies devastated by the War, to promote the private international investments and to increase the standard of living, to improve the productivity and the working conditions in the Member States by supporting the access of the latter to their productive resources. These two institutions however never considered the realization of their mandate differently than by regarding the international economic relations as having to be balanced relations, than it either in the short and medium term when it is about balance of payment or longer-term when it is about development. The problem of the payment balances was the throbbing problem of the post-war period, without one however never managing to regulate it if not in the cases of temporary imbalances. With the years the approach changed: a little simple vision which tended to associate imbalance and inadequacy of the rates of exchange, one passed to the approach of the surplus request, which this one is due to a problem of "absorption" or monetary creation, then, since the Eighties, with that of the maladjustment structural of the offer. The time of the adjustments also lengthened. By need, and for reasons which hold, inter alias, with the fact that these two institutions had to more and more narrowly coordinate their policies to help the developing countries to face the serious problems of debt to which they were confronted during the last decade. It does not remain about it less, that they are short or long term, developing country or industrialized countries, that the problem of the imbalance of the payment balances was always dealt with as problem whose causes were to be required in the disarrangement of "fundamental". As from the moment when it is admitted that the markets, since the conditions which ensure the correct operation of it are met, tend towards balance on the one hand, and that the variations of development which exist between the countries can be filled, all then becomes a question of time and adjustment. The problem, it is that neither time nor the adjustments were never in themselves sufficient when it is a question of ensuring the commercial balance of the ones and the development of the others. The historical experiment shows on the contrary that, if the competitive advantages are never acquired, the plays of the market and forced measurements of adjustment are not enough therefore creating them. Solutions are on a side, at the State to remain passive and, other, at the market to be "relevant". Two presupposed contestable which, once precisely called in question, will be used as starting point with the designs of the new industrial economy and the new international economy. But at all events, the new parameters of the economic policy hardly go in other direction than the one which was always that of the States nations, when it is a question for them of sitting their own identity and to be defined compared to others on the international economic scene. 4. Conclusion It is clear that the world of today does not have great any more a deal to see with only it was in 1944. We will undoubtedly not fail to point out to justify the new liberal speech with the claims of worldwide and universal horizons who asserted themselves on the favour of the current crisis. In their operating mode even, the international economic institutions do not have great any more a deal to see with only they were the shortly after the war. Thus to take only the case of the agreements of Bretton Woods, many which is those will say that the agreements died since long time ago, since 1971 or 1973, i.e. since the moment when one passed from a system of fixed rates of exchange to a system of flexible rates of exchange. New institutions also were created, so much so that today there is hardly field of the international economic relations where there are not international institutions, that those have a universal vocation, regional or purely functional calculus. It is always advisable to be extremely careful when this kind of question is approached. The more so as, for as criticisable as it can be, international economic order existing have many positive points to its credit. It inter alias things will have allowed a phenomenal development of the exchanges and international investments. On the other hand, force is also to give reason to those which since long date support an order which trails a very heavy liability, to start with the countries of the Third World which, of large excluded from the system that they were at the time of its foundation, were constrained these last years to be integrated into it by the force of the things. Despite everything the good intentions, little case was done particular situation which the developing countries can live. The liberalization of the exchanges also had considerable disintegrator's effects on the national structures, without one not managing to find a substitute in the State and with the historical role only this one could play in the construction and the integration of national spaces. Lastly, in a world deeply arranged hierarchically, the hiatus became extremely large between the recognition of the equality in right of the States and the effective statute of which those can enjoy within the world economy, between the capacity that the laid down rules and the impatience of the others vis--vis the arrogance of the rich countries have the ones to circumvent. However, to answer all these questions raised above, it is imperative that our thinking must be to guide by the desires to base a new international economic order on the base of two arguments, one, older, of an economic nature and the other, more recent, of a political nature. References CERNY, P. G. (1990). The Changing Architecture of Politics - Structure, Agency and the Future of the State, Londres, Sage Publications. COOPER, R. N. (1985). Economic Interdependance and Coordination of Economic Policies, in Ronald W. JONES et Peter B. KENEN (dir.). Handbook of International Economics, New York, North Holand, vol. 2: 1195-1234. Eichengreen, B. & Kenen, P. B. (2001). "L'organisation de l'conomie internationale depuis Bretton Woods: un panorama, in Michel AGLIETTA coord., Cinquante ans aprs Bretton Woods"..., p. 14. - see also Barry EICHENGREEN et Harold JAMES, Monetary and Financial Reform in Two Eras of Globalization, in NBER Conference on the History of Globalization, SANAT_Barbara, 4-6 Mai 2001, 44p. Revised Version. HELLEINER, E. (2000). The Politics of Global Financial Reregulation: Lessons from the Fight against Money Laundering, New York, Centre for Economics Policy Analysis, Working, n15. KENEN, P. B. (2000). The International Economy, Cambridge - New-York, Cambridge University Press, 4th ed., p. 444 - 492. LESOURNE, J. & GODET, M. (1985). La Fin des Habitudes, Les mille sentiers de l'avenir, p. 33, Paris, Seghers. WILLIAMSON, J. (1990). "What Washington Means by Policy Reform," in Latin American Adjustment: How Much Has Happened edited by J. Williamson (Washington: Institute for International Economics). Read More