Introduction
The international economy underwent a significant transformation following World War II. During the period, different nations experienced significant economic growth. Nations such as Japan, which suffered the most significant casualties in World War II, experienced an eightfold increase in economic growth. One of the contributions of this unprecedented growth was the Bretton Woods Agreement (BWA). This essay will examine the rise and fall of the BWA.
The main elements of the agreement included fixed exchange rates (pegged to the US dollar), currency convertibility, and the establishment of international economic bodies such as the World Bank, the IMF, and GATT. The US played a vital role in the agreement by providing funds and several initiatives, and pulling other nations to join. However, the US pulled the dollar from the gold standard, and the agreement collapsed due to imbalances in trade and the international monetary system.
Elements of the New Economic System
The first element of the new economic system established by the Bretton Woods Agreement was the maintenance of fixed exchange rates. The system fixed the currencies of other countries to the US dollar, with the dollar pegged at $35 per ounce of gold. The currencies were only adjustable to a 1 percent band to the dollar. The decision to implement fixed exchange rates was influenced by the “golden period” of fixed rates during the 19th-century gold standard and the fluctuating exchange rates in the 1930s (Lairson & Skidmore, 2003).
The second element of the agreement was the convertibility of other countries’ currencies to the US dollar. In 1958, the currencies were made convertible, and it was around this time that the agreement reached its full operational capacity (Eichengreen, 2021). Nations would use US dollars to settle their international debt, and those dollars could be exchanged for gold at predetermined, fixed prices.
The creation of international organizations, such as the World Bank, the General Agreement on Tariffs and Trade (GATT), and the International Monetary Fund (IMF), constituted the system’s final component. GATT was intended to serve as a forum for negotiations over reducing tariffs and other trade restrictions (Lairson & Skidmore, 2003). The IMF was tasked with providing financial support to member nations in the event of balance of payments issues.
Additionally, the IMF was responsible for promoting global monetary cooperation and stable exchange rates (Lairson & Skidmore, 2003). The World Bank, on the other hand, was responsible for financing private capital investments made by its member nations. These components ensured a stable global economy, enabling countries affected by the war to regain their financial footing.
Embedded Liberalism
The concept of embedded liberalism posited that international organizations and the governments of various nations should collaborate to influence the global economy. Organizations and nations were enmeshed in a global economic system governed by norms and values promoting harmony and stability. The goal of embedded liberalism in terms of trade systems was to provide an accessible, non-discriminatory system that allowed states to enact other policies while ensuring minimal interference with the countries’ social concerns (Goldstein & Gulotty, 2021).
Regarding capital movements, it permitted countries to enact capital restrictions to stop these movements (Snyder, 2019). The reason is that embedded liberalism recognized that unrestricted capital movements might result in rapid and unstable capital flows across borders. The rules gave nations the freedom to steer their economies away from the vagaries of the world’s financial markets and toward meeting the demands of their people.
In terms of the stability of the international monetary system, embedded liberalism meant fixing the exchange rates to the US dollar and the dollar to gold. It ensured stable, reliable, and predictable exchange rates (Hutton & Giddens, 2000). On the other hand, according to stability for countries, liberalism allowed them to develop their policies to ensure localized welfare and development. It ensured that countries did not degenerate into the economic crisis seen during World War II.
Dominant Economic Position and the BWA
The US had the most dominant economy during the BWA and played a significant role in shaping the agreement. Firstly, the US played a significant role in establishing the working framework of international trade and provided the necessary financial support. The Bretton Woods institutions, including the IMF, World Bank, and GATT, were all established through US political initiatives (Lairson & Skidmore, 2003). In addition, the US-funded European countries, such as the United Kingdom and France, would help ensure that the European economy stabilized.
Secondly, the US dollar was used as the reference for exchange rates. All other currencies were fixed to the dollar to ensure stable exchange rates. Lastly, the US’s dominant economic position placed it in a better position to convince other nations to participate in the agreement (Lairson & Skidmore, 2003). The countries agreed to join the agreement because they trusted the US and its willingness to provide security for their investments.
The main lesson the US learned from the interwar years was to realize its potential in production. Following the war, it continued to produce and export its products to other countries. For instance, by 1944, the US was the world’s largest producer of garments, leading other countries such as Germany and Japan (Hutton & Giddens, 2000). The US also learned from the war and the previous economic depression of the 1930s, which helped it make better policy choices afterward (Hutton & Giddens, 2000). Before the war, the US had been reluctant to import goods from other parts of the world. However, after the war, it imported goods and exported products like never before.
Ways the US Promoted Economic Stability in Europe
The US played a vital role in helping the European economy stabilize after World War II. One way it promoted economic stability within Europe was by providing grants and loans to European nations to help rebuild their economies. Following the precedent set by Lend-Lease, the United States provided additional funding to Britain and France in 1946 to cover the shortfall in payments (Lairson & Skidmore, 2003).
When this proved insufficient, the American leadership decided to provide even more money so that Europe’s recovery could proceed. These institutions had to deal simultaneously with glaring imbalances in the global economy, which were quantifiable by the enormous current account deficits between Europe and the United States. The funding required to address this imbalance was made available by the Marshall Plan.
Why the US Withdrew the Dollar from the Gold Standard
The US took the dollar off the gold standard in 1971, which consequently led to the collapse of the BWA. It was facilitated by two main factors: trade imbalances and the international monetary system. The system became unstable due to the rigid nature of the instruments used to facilitate exchange rates. The Bretton Woods system made little adjustments because the world in 1971 was very different from that of 1945–1950 when the agreement was signed (Lairson & Skidmore, 2003).
On the other hand, there was a tremendous increase in foreign capital’s market dominance, which had adverse effects on the fixed rates. It was marked by the growth of transnational players, such as multinational firms and international banks, and the sizeable Eurocurrency market between 1958 and 1973 (Lairson & Skidmore, 2003). These factors forced the United States to withdraw the dollar from the gold standard.
Conclusion
The elements of the Bretton Woods Agreement included fixed exchange rates, the convertibility of currencies, and the establishment of international organizations such as the IMF, the World Bank, and GATT. Embedded liberalism ensured that nations maintained free and non-discriminatory markets while granting countries the power to regulate capital movements.
On the other hand, the US’s dominant economy benefited the BWA through financial support, initiatives such as those by the World Bank, and by convincing other nations to join the agreement. Lessons from the world wars enabled the US government to formulate better policies and increase its imports and exports. The US promoted European economic stability by providing loans and grants through the Marshall Plan. Lastly, the US withdrew the dollar from the gold standard due to the increase in foreign capital’s market power and trade imbalances.
References
Eichengreen, B. (2021). Bretton Woods after 50. Review of Political Economy, 33(4), 552-569. Web.
Goldstein, J., & Gulotty, R. (2021). America and the trade regime: What went wrong? International Organization, 75(2), 524-557. Web.
Hutton, W., & Giddens, A. (2000). The Bretton Woods system in action. In W. Hutton & A. Giddens (Eds.), Global Capitalism (pp 270–300). New Press.
Lairson, T. D., & Skidmore, D. (2003). The Political Economy of American Hegemony: 1938-1973. Ins: International political economy: The struggle for power and wealth. Orlando: Harcourt Brace College Publishers.
Snyder, J. (2019). The broken bargain. Foreign Affairs, 98(2), 54-60. Web.