Since the beginning of the nineteenth century, globalisation, international trade and free trade between states became the new economic order and several efforts have been made since so to develop policies and strategies to guarantee the stableness of the international pecuniary system. It is safe to state that in truth, the universe economic system has ne’er been in a province of Utopia, but however, we have ne’er stopped seeking to achieve such.
The Bretton Woods epoch of 1944 to 1977, one of the few reasonably successful schemes the universe powers created in seeking to accomplish economic Utopia, though existed for a short period, has been accredited as being one of the most successful international pecuniary systems, so impressive was the economic stableness and growing of the epoch that there have been on-going negotiations for a rejoinder of the system.
In this paper we attempt to cast some visible radiation on the defunct Bretton Woods system and the possibility of its rejoinder. In the first subdivision, we discuss its history, design and aims. Second subdivision, we discuss the grounds for its death. Third subdivision, we discuss the logical thinking behind the calls for a new Bretton Woods. Fourth subdivision, we discuss the obstructions that could forestall the constitution of a new Bretton Woods and lessons from its past experience. Section five will incorporate the decision and some recommendations.
THE OVERALL DESIGN AND INTENDED OBJECTIVE OF THE BRETTON WOODS SYSTEM
Background and Intended Objectives of the Bretton Woods system
At the terminal of the World War II, 44 allied states and Argentina came together in Mount Washington Hotel in the country of Bretton Woods, New Hampshire, United States, with a major motivation of rectifying the ailments of the post-war I era which was characterized by International economic upset, ‘beggar-thy-neighbor ‘ policies- where states seeking to come out of their down provinces do so, but at the disbursal of other states.
The overall intended aim was hence stable exchange rate and possible publicity of universe peace. There was the recognized demand for an institutional forum for International cooperation on pecuniary affairs, so that in the coming of a global crisis, such as universe wars, there would be an internationally agreeable solution, instead than single states following selfish policies.
Build-up of the System
This recognized demand had prior to the conference in 1944, instigated treatments amongst the British and American authoritiess, and their economic experts, who had come up with different programs ; Harry Dexter White of the U.S exchequer on one manus, and Lord Keynes of Britain on the other, and the conference was seen as simply formalising, and finalising the understandings made. The concluding determinations which were agreed to at the Bretton forests conference were influenced majorly by the U.S plans. This is apparent of the economic and military art of the United States at that clip.
The concentration of power in the custodies of few states, the like-mindedness of the overall end ( non needfully the policies in accomplishing these ends ) and the willingness and ability of one country-the U.S to coup d’etat leading, allowed for the success of the Bretton Woods conference.
The system was designed to integrate the advantages of both a fixed rate system, such as the gilded criterion ( stable exchange rate ) , and that of a flexible exchange rate system ( flexibleness ) , and the end point system was the adjustable nog rate system.
The Peg and Exchange Convertibility: The U.S dollar was pegged to gold at the fixed rate of $ 35 per ounce, and every other state ‘s currency was so pegged to the dollar at a par value which had to be maintained or defended by purchasing and selling the dollar in the foreign currency market. Though there was no International Central Bank to bring forth an International currency, and command its supply, the U.S dollar became in consequence, the universe currency. With the fixed nog of $ 35 per ounce of gold, the rate at which states could interchange their dollar for gold and vice-versa, the U.S dollar became every bit good as gold, and this boosted religion in the U.S dollar.
This system afforded an chance for exchange rates amongst states to be fixed in the short tally, within a 1 % set around the pegged rate. A state could alter the rate at which it was pegged to gold, outside the 1 % set, merely if its balance of payment was in ‘fundamental disequilibrium ‘ .
Why The U.S Dollars: The U.S was still the lone currency being backed by gold, and at that clip held three-quarter of the universe ‘s pecuniary gold ( Gold had been transferred to U.S by European states during the war ) , go forthing the $ the most apprehended currency to the remainder of the universe. It was besides the strongest economic system after the World War II, and was considered liquid plenty to run into the demand of increasing Internationalization, and planetary trade.
Addressing Liquid: To fulfill International liquidness, and to forestall the repetition of the gilded deficit of the 1920s, and the radioactive dust of the fixed rate of the 1930s, another major determination to be made was as respects adequate supply of official pecuniary militias ; This was really cardinal to the effectual running of an adjustable nog rate. The conference agreed to a system of subscriptions and quotas which reflected each state ‘s economic strength. The quota of each member state was made up of 25 % of gold and the staying 75 % in the state ‘s domestic currency. The quotas were of import besides because they determined the vote right, and the sum of foreign currency each member state could borrow from the fund.
The Committees: Three committees were set up at the conference to accomplish its intended aims.
The first Commission headed by Harry D, White of the U.S exchequer was designed to explicate the Articles of Agreement of the International Monetary Fund, which was at the very bosom of the system.
The 2nd committee was besides introduced to explicate the Articles of Agreement for the International Bank for Reconstruction and Development. This was chaired by Lord Keynes of the United Kingdom. It so had the responsibility of funding post-war international Reconstruction and development. Now known as the World Bank, it remains a really influential planetary organic structure with a broader capacity.
The 3rd committee, was chaired by Dr. Eduardo Suarez of Mexico, and it was charged with coming up with other agencies of International fiscal cooperation.
THE REASONS FOR THE EVENTUAL DEMISE
Harmonizing to economic historiographers, the Bretton Woods system came to a arrest in the 1970s taking to a switch from a state-led to a market-led system of pecuniary control. Crucial events taking to its death being the suspension of the dollar ‘s convertibility into goldA in 1971, the United states forsaking of Capital Controls in 1974, and Great Britain ‘s stoping of capital controls in 1979 which was fleetly copied by most other major contries, amongst other grounds enumerated below:
Balance of Payment: A major cause for the death of the Bretton Woods system was its dependance on the United States economic system. The system was designed to stay strong every bit long as the U.S economic system remained strong. However, an inordinate supply of US dollars on FOREX markets in exchange for other currencies led to the US dollar depreciation and grasp of non-reserve currencies. To keep the fixed exchange rate, non-reserve states were required to step in on the private FOREX. For illustration, the British cardinal bank was required to run a balance of payments excess, purchase the extra dollars and sell lbs on the private FOREX market.
This Balance of payment excess had inflationary jobs because of the extra supply of the non-reserve state ‘s currency. The U.S. economic system besides faced inflationary force per unit area from runing a balance of payment shortage, the federal authorities outgo rose from financing the Vietnam War and societal plans. The U.S used expansionary pecuniary policies, publishing more money, in order to finance those immense disbursals. This increased money supply, which led to U.S goods going more expensive than foreign goods due the rise in monetary values and caused a big demand for foreign currency.
The Triffin Dilemma: Another ground for the prostration of the system was the Triffin quandary. Robert Triffin was a Belgian economic expert and Yale University professor who highlighted the jobs related to dollar overhang. Dollar overhang occurred when the sum of U.S dollar assets held by non-reserve cardinal Bankss exceeded the entire supply of gold in the U.S exchequer at the exchange rate of $ 35 per ounce. Dollar overhang occurred in the system by 1960 and continued to decline throughout the decennary of the sixtiess. By 1971, foreign retentions of U.S dollars stood at $ 50 billion while U.S gold militias were valued at merely $ 15 billion. This led to guess on the U.S dollar, devaluating the dollar and keeping gold became the safe path. In a gilded exchange criterion this linkage between gold and the modesty currency is believed to supply the restraint that prevents the modesty currency state from disproportional pecuniary enlargement and its resulting inflationary effects.
In the face of balance of payment shortages taking to a terrible depletion of gold militias, the U.S had several accommodation options open. One option was a devaluation of the dollar. However, this was non an option easy to implement. The lone manner to recognize the dollar devaluation was for other states to appreciate their currencies with regard to the dollar, as the currencies were fixed to the dollar. The other devaluation option unfastened to the US was devaluation with regard to gold. In other words, the U.S could raise the monetary value of gold to $ 40 or $ 50 per ounce or more. However, this alteration would non alter the cardinal conditions that led to the extra supply of dollars. At most, this devaluation would merely cut down the rate at which gold flowed out to foreign cardinal Bankss. Besides, since the U.S gold retentions had fallen to really low degrees by the early 1970s and since the dollar overhang was significant, the devaluation would hold had to be highly big to forestall the depletion of U.S gold militias.
The other option unfastened to the U.S was a alteration in domestic pecuniary policy to cut down the extra supply of dollars on the FOREX. Recall, that money supply additions were high to assist finance lifting federal shortage disbursement. A reversal of this policy would intend a significant decrease in the growing of the money supply. If money supply additions were non available to finance the budget shortage the authorities would hold to fall back to a much more unpopular method of funding ; viz. raising revenue enhancements or cut downing disbursement. The unpopularity and internal trouble of such financial and pecuniary prudence led the U.S to fall back to other options.
Suspension of the Dollars Convertibility: The concluding blow on the Bretton Woods system came on August 15, 1971 when the so U.S president Richard Nixon announced steps to stem the inordinate flight of dollars on foreign demand and cut down the balance of trade shortage every bit good as cause non-reserve states to appreciate their currencies against the dollar. The steps were a 10 per centum surcharge on imports, a 90 twenty-four hours pay and monetary value control, and the suspension of convertibility of dollar to gold. The 10 per centum surcharge on imports was to coerce states, such as Japan, to appreciate their currency by 10 per centum and the 90 twenty-four hours pay and monetary value control was to forestall foreign exporters from reassigning the load of the 10 per centum import revenue enhancement through increased monetary value on the American people every bit good as cut down rising prices. The suspension of convertibility of dollar to gold finally ended the gilded exchange criterion of the Bretton Woods system and changed the system to a modesty currency system. This prompted the Smithsonian understanding of December 1971 where non-reserve states agreed to appreciate their currencies against the dollar for the 10 per centum import charge to be dropped, and the eventual devaluation of the dollar. The monetary value of gold rose from $ 38 per ounce to $ 44.20 per ounce in 1971 and even higher to $ 70.30 per ounce doing an addition in flight of dollar abroad and motivating non-reserve states to abandon the pegging of their currency to the dollar and traveling into a floating exchange rate government.
THE REASONING BEHIND ONGOING DISCUSSIONS TO INTRODUCE A NEW SYSTEM
The last 10 old ages have been followed by many public treatments about Bretton Woods ‘s system with different controversial sentiments. Harmonizing to S.Dammasch ( 2000, p.11-12 ) “ Human rights activists argue that the programmes for the structural accommodation ( SAP ) of the developing states initiated by the World Bank and the IMF has led to increase poorness of the East-bloc provinces. In contrast, nevertheless, major industrialized states have begun to worry about the deductions of the turning size and the bad nature of fiscal motions in times of increasing globalisation tendencies. Therefore, calls for a “ new system of Bretton Woods ” have been heard in about every industrialised state ” .
Several calls have been made over the old ages for a refurbished international system to undertake the job of uncontrolled capital flows amongst states. Several Financial journalists have besides noted that Financial crises since 1971 have been preceded by largeA capital inflowsA into affected parts. It was n’t until late 2008 that this thought began to have significant support from taking politicians.
There has been a call by Gallic President Nicolas Sarkozy during the World Economic Forum in Davos in 2010, for the reinvention of the Bretton Woods system of currency ratings in order to take volatility and pecuniary use by some states to heighten their export successes. ( Diane Francis, 2010 )
On October 13, 2008, British Prime MinisterA Gordon Brown ( APT Team, 2008 ) said “ universe leaders must run into to hold to a new economic system: ‘We must hold a new Bretton Woods, constructing a new international fiscal architecture for the old ages in front. ‘ ”
By and large the industrial states experienced much slower growing and higher unemployment in the station Bretton Woods epoch, and harmonizing to Professor Gordon Fletcher in retrospect the 1950s and 60s when the Bretton Woods system was runing came to be seen as aA aureate age. ( Fletcher.G,1989 ) . Fiscal crises are seen to hold been more utmost and have increased in frequence with the emerging economic systems bearing the brunt of it before the most recent planetary fiscal crisis which started in 2007.
Chief amongst these strengths of the old Bretton Woods as noted by Anna J. Schwartz ( 2000 ) was that there were low and stable rising prices rates on the norm for most Industrialized states except for Japan during the Bretton forests epoch. More so, considerable enlargement of international trade and investing and the existent per capita income growing was higher than in any pecuniary government since 1879.
CHALLENGES TO A NEW BRETTON WOODS SYSTEM
Assorted factors have been identified as getas in the wheel of the promotion of a new Bretton Woods system, some of them are:
Development of the World Economy: One of the major grounds why a new Bretton Woods system might non work is because of how evolved the planetary economic system has become in footings of international trade and pecuniary direction. After the death of the old Bretton Woods system, the undermentioned structural alterations have taken topographic point in universe economic systems:
Growth of international currency markets: due to the instability and deficiency of certainty in the fiscal universe, holding a fixed exchange rate became hard and therefore rational outlooks and anticipations were fuelled with uncertainness. Therefore, for states to do good informed determinations based on predominating economic conditions, they adopted a floating exchange rate system, so that the true value of the economic system could be revealed at all times.
A major ground the Bretton Woods system was successful was because of its fixed exchange rate system. Therefore, with the current addition in trade and volatility of the pecuniary system, a fixed rate system might be hard to implement.
Lack of Dominant Currency: During the Bretton forests era the U.S. dollar was the most stable and powerful currency. It was besides the lone currency strong plenty to be exchanged for gold. Since it was the strongest currency, states traded largely in the dollar.
Although presently, due to the prevalent economic conditions, the dollar and other currencies like the Chinese RMB, euro, hankerings are unstable and non strong plenty to be dominant currencies.
The Old Bretton Woods was successful because it merely had one currency to step by. The deficiency of a dominant currency would therefore pose challenges to the development of a new system and multiple currencies will merely be more destabilizing.
Derivative trading: with the outgrowth of the international currency markets, derivative trading has been a popular front-runner of the fiscal market bargainers. Speculation, hedge, derived functions and arbitrage trading in the fiscal system have important impact on the degree of international monetary values and exchange rates, that it can non be ignored. Integrating these in a new pecuniary system would affect composite controls which might be hard to implement.
Conflicts of Interest: Different states have different degrees of growing, different aims, and different currency policies. For some states following a fixed exchange rate is more convenient, while for others, particularly developing states holding a flexible exchange is more profitable. Due to the varying penchants and aims of each state, being concerted and following a peculiar policy could be rather inconvenient and disadvantageous for most.
Floating Exchange Rate System: The fixed exchange rate system of the old Bretton Woods was advantageous but had restrictions. Though it encouraged monetary value stableness and was anti-inflationary, its restrictive nature prevented necessary accommodations to economic disequilibrium. Soon, the exchange rates worldwide for most states are flexible. This flexibleness makes trade between developing and developed states endurable and profitable. When fixed, trade is expensive for most underdeveloped states. And with the current economic recession, flexibleness is what the economic system needs to do profitable trade.
The Original vs. A Sequel: Harmonizing to G. Rachman ( 2008, Financial times ) , a new bretton forests will flop. Reason being that ;
Like most subsequences, Bretton Woods II is non traveling to be about every bit good as the original. The first conference gave birth to the World Bank and the International Monetary Fund. Its replacement will be duller and less eventful.
The first ground for this is that the planetary fiscal crisis, bad as it is, is non every bit bad as the Second World War. The war destroyed the established order and so the universe leaders who drew up the postwar establishments on a clean slate.
Second, there is n’t adequate clip. The original Bretton Woods conference benefited from two old ages of readying, and non a few hebdomads. Finally, there are struggles of involvement and U.S has neither the power nor the disposition to enforce a new set of agreements on the remainder of the universe.
Of class his sentiment is subjective, but in truth, given an ailment prepared program and struggles of involvements, a new Bretton Woods is most likely to neglect.
Inefficient Administration: Making a Bretton Woods system that takes history of the complex intrinsic and extrinsic model of the planetary economic system is rather hard. The economic system has evolved a batch since the 1944 when the first Bretton forests system was made. There are more universe leaders now, and the more the universe leaders are, the higher the differences in penchants. Making a Bretton Woods that could perchance incorporate the aims of all states is non merely hard but if created will necessitate high care.
Lesson FROM THE OLD BRETTON WOODS
U.S Deficit budget: During the Bretton forests epoch, the U.S ran shortage budget. Due to the state ‘s changeless loaning to other states, they experienced a terrible shortage in their balance of payments which strongly affected their international fiscal place and position negatively. This shortage made the dollar weak and unreliable.
Due to the big graduated table of economic activities globally, the exchange rate is ever seting to reflect the existent value of the economic system. Therefore holding merely one currency pegged to gold in this present clip is no longer sensible. Currencies need to be flexible against each other, so that when a state runs a shortage, and its currency looses value, the whole economic system will non lose at the same clip.
Bretton Woods Policies: When the policy of a fixed exchange rate system was established, the fiscal strength of developing states was non adequately taken into consideration. In the short tally, the fixed exchange rate worked good for the developed states, but as the developing states claimed independency and began to germinate into the planetary economic system, trade with the developed economic systems at a fixed rate was decidedly excessively expensive for them.
Furthermore, constabularies imposed by the World Bank and IMF on developing states like SAP i.e. structural accommodation plan did n’t work out good on the development states, it has been argued that it worsened their degree of poorness, S.Dammasch ( 2000, p.11 ) .
The Slide to breakdown: The dislocation of the Bretton Woods system occurred via the failure of the dollar as the dominant currency, the regulations of cooperation for its convertibility into gold and the exchange rates regime. The deficiency of a backup currency to decide the issue or at least minimise the losingss incurred contributed to the death of the system.
Therefore the Bretton Woods dependance on the dollar been the lone currency that could be convertibility to gold was excessively hazardous.
Short tally vs. Long tally maps: Another job with the Old Bretton Woods was that the same program was made for the short tally and long tally. Right after World War II, the international pecuniary system was merely concerned with their present quandary of how to acquire the economic system back on path. Given the devastation caused by the war, turn toing the pressing demand of the economic system was appropriate but during ratings in the short tally, proper strategies and policies should hold been arranged to counter what could travel incorrect in the long tally.
The undoing of the Bretton forests system was that the programs for the short tally were allowed to run indefinitely into the long tally until they could no longer keep. Thus the system defaulted.
RECOMMENDATIONS AND CONCLUSION
The worst banking crisis since theA Great DepressionA strongly suggests that a planetary rules-based system is necessary to supervise fiscal markets and organize economic direction. Hence, this has led to the on-going treatments to re-introduce the Bretton forests system. As discussed in the earlier portion of this paper, this is non traveling to be an easy undertaking as the universe ‘s market economic system has drastically changed and therefore can non be compared to mid 90 ‘s. This has led us to propose some recommendations which should be helpful if this vision of re-introducing the Bretton Woods system is to be realized.
A new Bretton forests system is plausible every bit long as it can accommodate to changing economic conditions as the planetary economic system evolves. Thus the followers:
Stronger pecuniary policy: Given the current system of drifting exchange rates, the World Bank should rede the authoritiess of each state to implement pecuniary policies that guarantee that their currency is non undervalued or overvalued.
Inflation aiming: Plans to forestall the happening of insistent fiscal crises should be made ; one defect that is common in all fiscal crises is rising prices. Inflation is good for the economic system, but when this rising prices is inordinate, the growing is nonreversible. Therefore as economic growing occurs for some sectors of the economic system, other sectors are worse off roll uping loss and debt. There is a immense instance of inequality in the economic system and no existent economic development of all time occurs. Thus a new Bretton Woods system should take considerate history of the inequality caused by rising prices.
Regulation for derived functions: From the recent fiscal crisis, derivative trading has been seen to hold played a immense function in increasing the negative impact of the crisis. If possible, a particular ordinance organic structure or commission should be tasked with duty of monitoring and modulating the derived functions market. Because most derived functions are OTC, there is no public information as to their minutess, but since it has proven through the recent crisis that it has a strong clasp in the market. Such activities should be divulged to the authorities. So, that to a certain extent an equal regulative model can be established and fiscal loss minimized.