The nearly three decades coinciding with the monetary system of the Bretton Woods system is often regarded as a time of relative stability, order and discipline. Yet considering that it took almost 15 years after the 1944 conference at Bretton Woods before the system was fully operational and there were signs of instability throughout the era, perhaps the system was trying to keep up. Not built in enough for relative difficulty. Rather than viewing Bretton Woods as a period characterized by stability, it is more accurate to consider it as a transitional phase that marked the beginning of a new international monetary system that we are living in today.
Different interests in Bretton Woods
In July 1944, representatives of 44 Allied nations gathered at a mountain resort in Bretton Woods, NH to discuss a new international monetary order. The hope was to create a system to facilitate international trade while protecting the autonomous policy goals of individual nations. It was considered a better alternative to the inter-war monetary system that arguably led to both the Great Depression and World War II.
The discussions were dominated by the interests of the two great economic superpowers of the time, the United States and Britain. But these two countries were not united in their interests, with Britain emerging as a major debtor nation from the war and America ready to play the role of great creditor to the world. Wanting to open up world markets for its exports, the American position represented by Harry Dexter White preferred the facilitation of free trade through the stability of stable exchange rates. Britain, represented by John Maynard Keynes and seeking freedom to pursue autonomous policy goals, insisted on greater exchange rate flexibility to improve balance of payments issues.
new system rules
The settlement of fixed-but-adjustable rates was finally settled. Member nations would peg their currencies to the US dollar, and to ensure the rest of the world that its currency was trustworthy, the US would peg the dollar to gold at a price of $35 an ounce. Member states will buy or sell dollars to keep them within the 1% band of the fixed rate and can only adjust this rate in case of “fundamental disparity” in the balance of payments.
To ensure compliance with the new regulations, two international institutions were created: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD; later known as the World Bank). The new rules were officially outlined in the IMF Articles of Agreement. Further provisions of the Articles stipulated that current account restrictions would be removed to avoid destabilizing capital flows, while capital controls were allowed.
However, what the articles failed to provide were effective sanctions on old balance of payments surplus countries, a narrower definition of “fundamental inequality” and a new international currency to increase the supply of gold as an addition (a Keynes proposal). . source of liquidity. In addition, there was no fixed time frame for the implementation of the new rules, so it would be about 15 years before the Bretton Woods system would actually be in full operation. By this time, the system was already showing signs of instability.
Bretton Woods’ early years
While the US pushed for immediate implementation of the Article provisions, poor economic conditions in the post-war world made it difficult to resolve balance of payments issues in a fixed exchange rate regime without some current account exchange controls and external sources of funds. Gave. No international currency was created to provide supplemental liquidity, and given the limited lending capacity of the IMF and IBRD, it soon became clear that this outflow of funding to the rest of the world while allowing the US to implement gradual source must be provided. Current account convertibility.
From 1946 to 1949, the US was running an average annual balance of payments surplus of $2 billion. In contrast, by 1947, European nations were suffering from chronic balance of payments deficits, which resulted in a sharp depletion of their dollar and gold reserves. Instead of considering this situation as advantageous, the US government felt that it seriously jeopardized Europe’s ability to become a sustainable and important market for American exports.
In this context, the US provided $13 billion in funding to Europe through the Marshall Plan in 1948, and some two dozen countries, led by Britain, were allowed to devalue their currencies against the dollar in 1949. These moves helped to reduce the dollar deficit and restore the competitive balance by reducing the US trade surplus.
The Marshall Plan and more competitively aligned exchange rates greatly eased pressure on European nations trying to revive their war-torn economies, allowing them to experience rapid growth and the gradual removal of US exchange controls. as well as to restore their competitiveness. With full current account convertibility finally achieved in late 1958. However, US expansionary monetary policy during this time increased the supply of the dollar, as well as increased competition from other member countries, soon reversing the balance of payments situation. The US was running a balance of payments deficit in the 1950s and a current account deficit in 1959.
Increasing volatility in the High Bretton Woods era
These deficits, coupled with depletion of US gold reserves, while remaining modest due to other countries’ willingness to hold some of their reserves in dollar-denominated assets rather than gold, increasingly threatened the stability of the system. With the US surplus in its current account disappearing in 1959 and with the Federal Reserve’s foreign liabilities exceeding its monetary gold reserves for the first time in 1960, this raised fears of a possible run down on the country’s gold supply.
With dollar claims on gold exceeding the actual supply of gold, there were concerns that the official gold parity rate of $35 per ounce has now exceeded the dollar. The US feared that the situation could create an arbitrage opportunity whereby member states would redeem their dollar assets for gold at the official parity rate and then sell the gold at a higher rate in the London market, resulting in a reduction in US gold reserves. will come and one of them will be in danger. Characteristics of the Bretton Woods system.
But while member states had individual incentives to take advantage of such arbitration opportunities, they also had a collective interest in preserving the system. However, he feared that the US was devaluing the dollar, making his dollar assets less valuable. To address these concerns, presidential candidate John F. Kennedy was forced to issue a statement in the late 1960s that he would not attempt to devalue the dollar if elected.
In the absence of devaluation, the US needed a concerted effort by other countries to revalue their currencies. Despite appeals for a coordinated reparation to restore balance to the system, member states were reluctant to re-evaluate, not wanting to lose their competitive edge. Instead, other measures were implemented, including the expansion of the IMF’s borrowing capacity in 1961 and the formation of gold pools by several European countries.
The gold pool brought together the gold reserves of several European countries to keep the market value of gold well above the official ratio. Between 1962 and 1965, as new supplies from South Africa and the Soviet Union were sufficient to meet the growing demand for gold, any optimism soon faded after demand began to outperform supply from 1966 to 1968. Following France’s decision to leave the pool in 1967. ..