From Bretton Woods to the idea of a Bretton Woods II system

Table of contents:

1. Economic situation until the foundation of Bretton Woods in 1944

2. Bretton Woods - Theoretic idea
2.1 The International Monetary Fund (IMF)
2.2 World Bank

3. The End of the Bretton Woods System
3.1 Floating versus fixes exchange rates

4. The Bretton Woods II System in Asia

5. Euro or Dollar?

6. Conclusion

1. Economic situation until the foundation of Bretton Woods in 1944

According to the world financial crisis in 1929 and the awaiting consequences of the World War II, the United Staates of America and their narrowst political and economic partner Great Britain, decided to instituionalise their economical relationsship between itself an the other states. This relationsship should comprehend all economic relationsships, an idea of financing development, a solution model for a correct international monetary transaction and a corrdinated currency policy. Refering to (Freiberg/Jürgens 1988) another aim was to reconstruct the disrupted national economies. The first ideas about a new world order, also in economic fields, have been publicated as the “Atlantic- Carta” by President Roosevelt and Prime Minister Churchill in 1941. (Tetzlaff 1996, S. 42, 43).

At that time, the United States were the most influential player with high economic prospections after the World War II. The country was not ruined by the war and the production potential was intact. On the other side there is Great Britain which survived the war only by using foreign assets. (Andersen 1997, S .28)

The United States observated Europe as a new market for their products. To support Great Britain with arms and materials they had to annul all tariff regulations.

In 1944 the United Staates and Great Britain induced 44 staates, including the Soviet Union, to participate on the “United Nations Monetary and Financial Conference”. It should be the decisive meeting to convince the partners to establish a new and more concrete form of collaboration on all economic questions. The collaboration should be characterized by cooperation against confrontation, rebuilding against destroying, peaceful economic competition against competitore destruction and by the aim to create prosperity for everybody. (Tetzlaff 1996, S. 21, 22).

The debates based on papers of the future International-Monetary-Fund-Director Harry Dexter White and the British economist John Keynes. (Tetzlaff 1996, S. 43, 44). The analysis and guidelines didn’t reffering to the actual situation in World War II, but they focussed the discussion not only on after prospection, but also on the historical review happening in the 1920s and 1930s. (Andersen 1977, S. 33).

After the so called “Golden Twenties”, in 1929 the United States were shocked by the biggest stock exchange crack in the history. Over years the share prices were driven by speculation. Following the positive trend, millions of depositors invested their money, expecting a new and higher price. Some used also credits to finance their speculations. There exists no exact and defined reasons why the stock exchange crashed just on this thusday in 1929.

Not only in the United States, also in other parts of the world the economy get into problems. In Japan and in Germany for example, banks had problems with irrecoverable credits. In 1931 Great Britain was bonded at the “Gold Standard” which regulated the convertibility from money to Gold. Between 1929 and 1932 the big domestic production of the United States declined more than 60 %. Because of the stock exchange crash, banks hadn’t enough liquidity to operate on the credit market. Now the rotation was interupted. In consequence of this, the United States minimized the importation and the exportation of the capital.

(http://www.zeit.de/2008/15/Harold-James-1929?page=5).

These years were characterized by a uncoordinated national currency and financial policy in which national states didn’t collaborate. Almost every state manipulated the currency rate and currencies have been devaluated to stabilize the exports to the home industry. In 1932 the new elected US president Roosevelt approved a reform program for the US- economy which became famous as the “New Deal”. With a package of political, economic and social reforms as well as investments in public constructed projects, the government attempted to stimulate the market. Finally it was the wartime economy which pushed also the economy in the United States. At this time, the United States were the world biggest creditor and capital exporters, instead of Great Britain. Also Europe was affected for longer time by the great depression. Great Britain tried to stimulate the export, especially in the Commonwealth States. France had great economic problems for the entire decade. Because of the war with Germany, Great Britains industry was stimulated enourmusly by public spendings. (Tetzlaff 1996, S. 42).

2. Bretton Woods - Theoretic idea

The foundation of the two involved organizations, International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD) = World Bank, was the concrete act to realize the idea of an international stabilized currency policy. The industry states focused their interests more and more on the role of the International Monetary Fund; the development countries were interested on the implications of the World Bank. (Tetzlaff 1996, S. 43, 44).

The ideas of multinational development cooperation and free competition environment were a great oppurtunity for the United States. The aim was to establish the free market economy on fundaments of institutions and to utilize it for national foreign insterests. The idea of Bretton Woods conference was a link between anticolonialism and a new economic imperialism. (Wehler 1971, S. 185, 186).

The Bretton Woods institutions - International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD) = World Bank - are based on a hierarchical level of cooperating national states. The function of the International Monetary Fund is to be a reserve bank of industry states, as well as being a controlling body which is supervising the account of payments and the accounts of debits. The duties of World Bank have been defined to coordinate and resolve development and reconstruction aid. (Tetzlaff, S. 47).

It was a long way before the Bretton Woods institutions began their work concrete in 1947. From 1942 until the conference in 1944 in Bretton Woods were discussed proposals by different states. Many oft that proposals was presented by the United States and by Great Britain. Some of the fundamental aspects in the discussion presented by the national states were to build up a strong world economic, to influence the capital movement, to provent currency manipulation but also to maintain the national currency and economic policy.

There were discussed many suggestions whith visibile differences by national states. A first crux was the discussion of membership on Bretton Woods Insitutions. The first idea was to create a bilaterale agreement only by the United States and Great Britain, finally it became a multilateral agreement for all member states. The IMF and the World Bank are also special organisations of the United Nations (UN). To get a World Bank membership it is necessary to be part of the International Monetary Fund. Furthermore interesting suggestions were made for the memebership rights of vote. From the first moment on, the United States and also Great Britain broke up with the concept of “One State - one Vote”. Great Britain launched the idea to calcolate the rights of vote on basement of imports/exports in the last years. The only right calculation for the United States was to take the national income. (Andersen 1977, S. 35- 90).

Until the Bretton Woods Institution became capable of acting in 1947, the role of the Soviet Union was not clearly defined. On the the conference in 1944 the Soviet Union played an active role. That could be influenced by the strategic collaboration with the United States to complete the World War II. After World War II the differences between East and West became more and more visibile. The Soviet Union and its affiliates didn’t participate on the Bretton Woods Institutions. Others went out quickly after, some others entered before the Cold War was finished.

2.1 The International Monetary Fund (IMF)

The conzeption of the International Monetary Fund was to establish rules of a close collaboration of the international Monetary policy and to guarantee a sucessfull collaboration on the cross- national monetary transaction.

Furthermore the IMF tried to offer solutions in cases of deficites on balance of payments. The principal point of the agreement was the idea of a fixing currency parity. On grounds of different economic decisions in the 1960s, the well balanced system of a fixing currency system was dissolved. In 1971 the United States decided to brake up the Dollar/Gold convertibility. This was the end of the Bretton Woods system and the IMF changed their conceptual formulation. (Tetzlaff 1996, S. 77).

Due to the fact of the enourmes debt position of the developing world, the IMF became more and more a consulter and revisor to release new credits for countries which have payments difficulty. The permission of this credits is connected to programms of adaptions of economic and financial structures in a country. This could be the privatization of banks and public cooperations, the reduction of public spendings but also the introducing of a Good Governance standard. The International Monetary Fund offers technical assistance to obtain the objectives. This credits of the IMF are not common credits, but conditioned drawings of lots. Each country get their one quota; on this quota the IMF can install recommendiations and specific obligations. The first 25% of the quota is not connected to a recommendiations because of the payment of currency to the IMF. The second quota is bonded to moderates recommendiations, to receive furthermore credits the state must signe a stand- by arrangment with the IMF. In addition the state conclude a letter of intent, in which a substantial reform of the economic policy is defined. (Tetzlaff 1996, S. 83)

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