The United States from the World War II as the Strongest Economy in the World - Research Paper Example

 While the World War II is still raging in 1944, 730 delegates from all 44 Allied nations gathered at Mount Washington Hotel in Bretton Woods, New Hampshire which become the venue for the birth, deliberation, and formal institution of the Bretton Woods Agreements. The agreement’s primary goal is the reconstruction and rebuilding of the international economy which was hugely devastated by the war. The Bretton Woods Agreement is a fully negotiated monetary order intended to govern currency relations among sovereign states. The main features of the system are the following: an obligation for each country to adopt a monetary policy to main the exchange rate of its currency within a predetermined value, allowing only a fluctuation of 1% in terms of gold; and the establishment of the International Monetary Fund (IMF) which is tasked to curb and resolve temporary payment imbalances (Bretton Woods System 1-4). Recognizing that nations need a monetary reconstruction after the World War II, countries initially concur to implement the rules and policies as stipulated in the Bretton Woods Agreement. However, the large disparity among member nations in how they pursue economic development led to the eventual collapse of the system in 1971. Each of the countries which signed their allegiance to the Bretton Woods indicates its recognition of four important factors. This uniformity becomes the cornerstone and the main factor which holds the international economy together. First, all the nations involved recognize and agree that “the interwar period had conclusively demonstrated the disadvantages of unrestrained flexibility of exchange rates” (Cohen 4). It can be recalled that the Great Depression in 1930s has become a grim reminder of how floating exchange rates discourages trade and investment while increasing the risk of destabilization and competitive depreciations. On the other hand, architects of the Bretton Woods are also reluctant in adopting permanently fixed exchange rate like the 19th century gold standard. Thus, avoiding both maxims, delegates agree on a “pegged rate” or “adjustable peg” currency regime or a par value system (Cohen 5). Thus, each country is obligated to choose a par value in their national currency and intervene in order to maintain the exchange rate within 1% above or below the preset rate. This par value can be changed only with the approval of the IMF and only if the country’s balance of payment is in “fundamental disequilibrium.” Secondly, all nations hold that “if exchange rates were not to float freely, states would also require assurance of an adequately supply of monetary reserves (Cohen 6).” The financial hegemony held by the United States during the period significantly affected the final decision: “a system of subscriptions and quotas embedded in the IMF, which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country” (Cohen 7). Each nation is assigned its own quota commensurate to its economic situation. In time of need, each IMF member is allowed to borrow a certain amount of fund according to its quota. Third, each nation holds that “it was necessary to avoid any recurrence of the kind of economic warfare that had characterized the decade of the 1930s” (Cohen 8). Thus, countries are obliged to commit into the elimination of the pre-existing exchange controls which limit currency convertibility and encouraged to return to a system of free multilateral payments. Members are strictly prohibited in engaging in discriminatory exchange practices or exchange regulation. Lastly, all signatories of the Bretton Woods Agreement maintain that “there is a need for an international forum for international cooperation on monetary matters” (Cohen 9). This called for the establishment of the IMF which serves as an institution which provides the much needed procedure and machinery for governmental consultation. However, it can be seen that since the voting system in the IMF is commensurate to the quotas assigned to each nation, the power is tilted to more economically developed nation. The United States is seen to have a significant control over the decision-making as it represents one-third of all IMF quotas. These four important points were able to initially unify all the nations in the Bretton Woods Agreement. However, these factors were not strong enough to bind an international economic system of internally differentiated countries which approach economic and political issues differently. These differences are largely dictated by their economic power and stability, financial and monetary structures and economic policies. These factors will be investigated separately in the following paragraphs. The United States has emerged from the World War II as the strongest economy in the world. The country is unscathed from the devastating effect of wars but is able to establish a productive manufacturing industry. United States has accumulated wealth through the sales of weapons and loaning money to the combatants. While Europe and East Asia are economically shattered by the World War II, United States enjoys the economic prosperity as it holds the a majority of investment, manufacturing productions, and exports. In 1945, the nation is the largest producer of coal, oil, and electricity. United States also manufactures large quantities of machineries, holds 80% of the total gold reserves, has one of the most powerful armies, and owns the atomic bomb (Bretton Woods System 17-19). This position of the United States in the world economy in a period where almost all the countries are economically depressed give it a significant advantage. It should be noted that it spearheaded economic recovery after the war by instituting policies in its favor and interest which is sometimes detrimental to less developed economies. The United States become the key player in the new international financial system. Having the most developed economy, the country becomes the global monetary hegemon or the world’s money manager. The dollar becomes the reserve currency and the United States al so pledged the convertibility of its dollars into gold at a fixed price making it a perfect substitute for gold. Being the key player in the economy, the United States maximized its power to act on its interest in order to further pursue economic development. Being a large manufacturer of goods, United States is most likely to gain from free trade as it will have a market for its products. The country is expected to have an assured global market for its huge exports at the same time that it also gains access to vital raw materials from foreign nations. The high voting power of the United States gives it a very strong veto power in IMF decisions. In fact the whole Bretton Woods Agreement is almost solely designed by the United States. Prior to the collapse of the system, it can be recalled that the country ran huge balance of payments deficits. United States’ response is unexpected: “When the US also became a deficit country it was able to avoid disciplinary adjustment by suspending the convertibility of its currency into gold. In fact the suspension of convertibility in 1971 was accompanied by bellicose demands that other countries should revalue their currencies so as to eliminate "unfair exchange rates," backed up by the imposition of a 10 per cent import surcharge until such time as they complied. The US was, in other words, seeking to pass on the cost of adjustment to other states” (Braithwaite and Drahos 13). The collapse of the system is largely due to the resistance of the United States to allow its internal domestic policy to be compromised for the sake of fixed exchange rate system (Suranovic 5). On the other hand, other nations are also relating to each other in different ways. It can be seen that under the Bretton Woods Agreement, countries rely on the convertibility of dollar into gold. However, as countries recover, they pursue more financial interdependent policies. It can be recalled that in 1958, monetary interdependence was facilitated by the return of convertibility of Western Europe currencies. This was followed by the convertibility of yen in 1964. This convertibility facilitated the vast expansion of international financial transactions. As Europe and Japan institute measures to revive their economies, they have misplaced the United States as a hegemon. In the late 1960s, the dollar is overvalued while the Deutsche mark and yen are undervalued. However, Japan and Germany are unwilling to revalue as it will make their exports more expensive. The United States on the other hand, opts to maintain its credibility by maintaining its exchange rate (Bretton Woods System 20-25). Works Cited Braithwaite, John and Peter Drahos. “Bretton Woods: Birth and Breakdown.” Fathom. April 2001, pp. 97-101 “Bretton Woods System.” Wikipedia: The Free Encyclopedia. 10 October 2006. 15 October 2006 Cohen, Benjamin. “Bretton Woods System.” Department of Political Science. University of Santa Barbara California. n.d. 15 October 2006 Suranovic, Steven. “The Breakup of Bretton Woods.” 01 December 2005. 15 October 2006 Read More