Bretton Woods

International economic system. Committee of Twenty # FMI (Fondo Monetario Internacional)

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The Bretton Woods system was establish in USA on 1944 after the World War II

to regulate international monetary interaction. It was expected to be a

successful agreement but it never work as they had planed. The objectives at

Breeton Woods was to set up an international economic system that would

prevent another economic and political collapse and another military

conflict.

To begin with, the International Monetary Fund (IMF) and the World

Bank were to perform military functions for the international systems. This

was created to perform the delicate situation in which Europe was in. The

after war crisis in Europe made the Americans to react on helping the

Europeans to reconstruct their whole nation. The IMF was set to intervene

whenever there was any temporary balance of payment desiqulibrium. It also

was establish a International Bank for Reconstruction to give loans to

anyone who need. This idea would boom the economy forward to a rapid

recovery.

The lack of optimism went down by 1947.The system was not really

working. The Europeans had to face many problems. The World War II had a

tremendous impact on the economy. However, Europe best negotiations were

overseas. This made the Europeans fell to a big chaos. Its payments deficit

was large and growing. They had to import goods in order to survive.

The IMF could not support the situation that Europe was facing. Loans

where just available for current accounts deficits, not for capital and

reconstruction's purpose.

Apart from the economic crisis, there was also a political fight The

governments of Italy and France faced pressures from powerful labor unions.

Britain, due to its economic difficulties, was withdrawing from India and

Palestine and also abandoning its political and securities commitments to

Greece and Turkey.

After 1947, due to this circumstances, the Bretoon Woods system involved

from limited management by international organization management by USA..

In 1947 the gold didn't had the same valor as before. It was

insufficient to meet the demands of growing international trade and

investment Although the pound were a strong currency, the dollar faced more

the demand for international liquidity.

A huge dollar shortage show up in USA. It was running huge trade

surpluses due to the scarcity of money that where abroad. The United States

had to run a payment deficit

From 1947 to 1958, the United States encouraged an outflow of dollar

which provided liquidity for international economy .

In addition to providing liquidity, the United States managed imbalance

in the system. The Marshall Plan was created to give an amount of $ 17

billion in outright grants to 16 countries of Western Europe. By this

process the outflow of dollars will stabilized again.

Japan and Europe were under the control of protectionism. They didn't

allow any import from the USA. Although the Americans could not export they

goods, they would not impose any barriers to the Europeans and the

Americans because in the long run the Americans will benefit from this

situation by widening market for U.S exports. By this procedure Europe and

Japan recovery and then expanded. The U.S got forward partly because of the

dollar outflow, which led purchase of U.S goods and services.

In 1960, for the first time, foreign dollar holding exceeded U.S gold

reserves. Private long terms capital outflow, caused to a great extent by

direct investment abroad foreign military expenditure led to payments

deficit in 1950, 1953, and 1959.

In 1961 the banks will support any currencies that will come under pressure.

The bankers began to play an important rule in the Eurocurrency market by

investing, intervening, and accumulating information.

The Group of Ten, formed in December 1961, was set by ten industrial

countries- Belgium, France, Germany, Italy, the Netherlands, Sweden,

Canada, Japan, the United Kingdom and the United States- to create the

General Arrangement to Borrow.

In 1968 the Group of Ten stopped a dollar crisis by creating a private

market in which the price of gold could fluctuated freely and a public

market in which the group agreed to sell one another gold at $35 an once.

Finally the United Sates push up the system by improving the U.S balance of

payments and reestablishing confidence in the weakning dollar.

The Bretoon System begun to crack due to the continuing world crisis. The

level of financial integration was the purpose. The U.S had many banks

abroad and there was also a vast integration of foreign banks to the U.S

By late 1971 there was a run of dollar in the United States. For the first

time the US showed a balance of deficit. This caused inflation to raise and

unemployment grew tremendously.

Instability was starting to be alarming until summer 1971. Suddenly

President Nixon announced that the gold would not be convertible to gold and

that United States will impose tariffs on imported goods to force West

Germany and Japan to revalue their currency. By this date the Bretton Woods

came to its end.

Moreover, after the agreement was made, the IMF and the Commitment on Reform

of the International Monetary System brought together to reform the

International monetary System. Although, the agreement prevented

deterioration in the system, it did not solve the principal problems of

managing interdependence.

In 1972, Britain and Ireland floated their currencies raising up to another

currency crisis. It has been establish the end of 25 years of fixed exchange

rates. This new system of floating exchange rate created an environmental

inestatability among the business man. (see graph)






The Committee of Twenty also failed on trying to achieve a reform.

Inflation was uncontrollable and there was an enormous dollar outflow to

foreign countries. But the worst came up when oil exporters raised the price

of petroleum. Deficit begun to raise among non oil countries. The developed

countries could not live without consuming oil. Privates banks started to

respond to the critically situation by lending funds to the oil importing

countries.

In conclusion, the Breakdown of Bretton Woods was followed by the huge

inflation, the new floating exchange rate and the oil crisis. In January

1974 the Committee of Twenty conclued that because of the turmoil in the

international economy it will impossible to make up a plan for monetary

reform.