Essay
BRETTON WOODS SYSTEM ESSAY
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- History
- Institution
- Oxford University (OX)
BRETTON WOODS SYSTEM TOP QUALITY ESSAY INCLUDING IMPACT, WHY THIS COLLAPSED AND HISTORIOGRAPHICAL CRITIQUE.
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The Bretton Woods System to 1973.The Bretton Woods system (BWS), negotiated at the Bretton Woods conference in 1944,
established the rules for a new, post-World War Two, international monetary system. Three periods
explain the BWS’ history, inactivity, strength, and collapse. The BWS collapsed due to a mixture of
long and short-term factors. This includes problems with its structure, problems with the American
economy and foreign countries’ disillusionment with the system.
America had the strongest surviving economy after World War Two and so led the 1944
Bretton Woods conference. The conference attempted to foster economic reconstruction after
World War Two and the Great Depression. More specifically, it tried to design an international liberal
capitalist economic order. America’s Harry Dexter White aimed to cut financial speculation. The
agreements in the conference reduced trade barriers, regulated the relationships between
economies and created organizations to help countries in need of aid.
Within this system, the United States became the world banker. The BWS had three major
terms. Firstly, it fixed the exchange rate at $35 per ounce of gold. America could adjust the number
of dollars in circulation to keep up this exchange rate. Gold backed up the dollar but was not linked
to other currencies. All other currencies, such as the Deutschmarks, Pound Sterling and French Franc
became convertible to the dollar at pegged, or fixed rates. Each country could devalue or re-value its
exchange rate within one percent of the agreed rate. Secondly, the BWS set up financial institutions
that supported member nations. The International Monetary Fund (IMF) bolstered confidence in the
world economy. It requested financial quotas from member nations proportionate to their
economies’ sizes. If a country had financial difficulties it could withdraw 25% of its quota
immediately and later ask for more loans from the IMF. This generated confidence in the IMF as able
to avoid economic collapses as the world banker. On the other hand, the International Bank for
Reconstruction and Development (IBRD) gave further loans to developing countries to help build
their infrastructure.
The BWS breaks down into three periods. Firstly, from its set up in 1945 to 1958, the BWS
was inactive. The IMF lacked enough funds in this period to deal with the scale of post-war
problems. Countries used alternative solutions for their immediate post-war reconstruction, such as
the Marshall Plan. American representatives dominated the IMF and agreed that should a country
get support from the Marshall Plan they could not also get IMF support. Furthermore, European
countries traded within the European Payments Union until its breakup in 1958.
Nonetheless, the BWS was initially met with positivity from Britain. An article reporting on
the Bretton Woods conference whilst it occurred outlined its basic plan. It reported that the BWS
would foster stable currencies with the return of normal trade conditions, international co-operation
and by creating an interdependent international exchange. The article commended ‘that forty-four
nations…[created] two novel institutions to give unity’. 1 It seemed that the IBRD and IMF were
complimentary and useful. Furthermore, currency convertibility for increased trade freedom would
underpin economic growth and confidence, which would avoid a future trade restriction or
depression.
British worries about the BWS existed. Another more pessimistic article expressed some of
these concerns. It expressed concern about whether the BWS would ‘promote or hinder the…
maintenance of national income and level of employment’. 2 Put simply, that the BWS might put
Britain in danger of facing mass unemployment. This concern did have legitimate grounds and
1
‘Bretton Woods and After’, The Times, 24th July 1944.
2
‘Examining the Plan’, The Times, 4th August 1944.
, predicted the 1947 Sterling Crisis. There was a run on the pound sterling and countries resolved this
outside of the BWS. After the war, Britain was bankrupt but needed to buy American goods for
reconstruction. Through the Lend-Lease Pact until 1945, America gave Britain what Britain needed
with loans for repayment after the war. After the war, Britain asked America for a further loan.
America granted this loan on the condition that Britain met the Bretton Woods obligation in 1947.
The rest of the world needed American dollars, so people converted the pound sterling to dollars.
Within weeks, the proceeds of the American loan had drained out of Britain. So, the government
made the currency inconvertible. Due to lack of funds, the BWS in this period was temporarily
obsolete, as countries resolved issues outside of the BWS.
A period of strength for the BWS lasted from 1958 until 1971. The BWS ignited in 1958, with
the IMF having accrued enough funds to help countries in crises. Currencies started becoming fully
convertible as confidence grew in the IMF reserves. The IMF helped during a major economic crisis,
such as when Britain withdrew money from the IMF during the 1956 Suez Canal crisis. However, in
the late 1960s confidence in the dollar declined. People feared America would untie the dollar from
gold, so people sold American dollars. This created a crisis in the dollar and put strains on the BWS
which used the dollar as a reserve currency.
The BWS collapsed between 1971 and 1973. The fall in confidence in the dollar put the BWS
under strain as the dollar was the most important currency in the system. The US had a large
balance of payments deficit and tried to force Japan and Germany to devalue their currencies
through the 1971 Nixon Shock. This ended the convertibility link between the dollar and gold. The
December 1971 Smithsonian Agreement attempted to reform Germany and Japan’s currency values
but was unsuccessful in addressing the American deficit problem. In response, European countries
allowed their currencies to float, forming the European Snake in March 1972. The BWS collapsed
when Germany, Japan, and America allowed their currencies to float.
The interesting question is, why did the BWS, a system which brought the world from the
brink of economic collapse after World War Two and during reconstruction during the late 1950s
and 1960s, collapse? And when did this failure start? One school of thought critiqued the design
flaws in the system because of its reliance upon the dollar. Other schools put forward that the 1960
economic crises aversions show that the system could cope, but the American consumerism society
ruined the economic balance that was vital to the BWS. Alternative scholars argued that the Bretton
Woods system outlived its reconstructive purposes and foreign disillusionment with the system
brought about its demise.
The BWS relied heavily upon America for dollar reserves. During the 1960s and 1970s,
America amassed a huge balance of payments deficit on its current account. This fatally undermined
confidence in the dollar and so the BWS. Kenwood argued, ‘the US deficit policy…became untenable’
for the BWS.3 Europe and America debated who should take responsibility and adjust their exchange
rates to support the system. However, with hindsight, the consumerist changes American society
made in the 1950s and the 1960s created a situation which needed a new monetary system or a
substantial alteration of the BWS. Living standards increased dramatically after the war. This
increase in living standards formed the consumerist society. This propelled a massive increase in
goods imported from abroad which was not balanced against America’s capital account. America did
not generate enough capital through investments or production to fund its expenditure.
Government expenditure also dramatically increased, most notably to fund Johnson’s domestic
social programs and the Vietnam war. As Schenk argued, ‘the pressure [on the BWS] was
exacerbated by the inflationary effects of the Johnson administration’. 4 Johnson’s welfare and
Vietnam policies massively increased America’s debt, which choked an already struggling system.
But here Schenk supposed that America’s worrisome financial situation did not start the BWS’ failure
3
Kenwood, A., (ed.) Growth of the International Economy, 1820-2015, (New York: Routledge, 2013), pp. 255.
4
Schenk, C., International Economic Relations since 1945, (London: Routledge, 2011), pp. 48.
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