From History: The Bretton Woods System And The International Economy
World War II wreaked havoc on Europe and the international economic system and left the world in both economic and political chaos.
Consequently, it was necessary to establish an international system capable of running the global economic system in a manner that would allow it to avoid the fundamental problems that contributed to creating economic wars — as we followed last week — and in a way that will enable it to apply the neoliberal economic philosophy based on freedom of monetary exchange as a locomotive of development, On the one hand, an instrument of peace between nations and peoples.
This idea was included among the 14 points US President Woodrow Wilson formulated at the peace conference after World War I in 1919. European politicians ignored it, and the Americans fought it.
Now, conditions allowed for its implementation, and indeed, the Allies began to lay down the general structure of the international economy with the decline of the Nazi tide. Towards the end of World War II, the Allies led by the United States and 43 nations met in 1944 in Bretton Woods, New Hampshire, in the northeastern United States.
The meeting aimed to formulate the new financial and economic system in the world to get out of the closed competing economies and the policies "at the expense of the neighbor" that were followed and creating a solid monetary system that leads to growth, capital flow, trade, and the desired economic recovery.
The gathered countries had clear goals and vision, including shared interests, especially that the United States was more than willing to lead the world to implement these new policies after it had abandoned the policy of international isolation and became involved in international politics after the war. More importantly, it was ready to pay the price for implementing this new system after its armies were scattered in many parts of the world.
What contributed to the success of these negotiations was that the major European countries, in turn, desperately needed the role of the United States to finance development in them. Especially since the economies of the United States were at the height of their strength, enjoying rare financial abundance and remarkable scientific progress at the time. With the combination of these factors, an agreement became possible.
The main objective of this new system was to formulate a strategy that guarantees the fixed exchange rates of international currencies to prevent fluctuations that led to economic chaos, not to mention providing the necessary liquidity for reconstruction, especially in the countries of Europe and Japan as a priority as their allies.
And then, in these meetings, the opinion settled on the establishment of two vital international institutions: the first was the International Bank for Reconstruction and Development, and the second was the International Monetary Fund.
The purpose of the World Bank was to provide financing for development in post-war Western Europe at modest interest rates.
Indeed, the Bank was able to carry out part of this task entrusted to it, but its structure and capital did not guarantee it to achieve this goal in total, which forced the United States to intervene strongly in this regard. However, the Bank provided the necessary financing for some projects in France, Luxembourg, and others to contribute to Infrastructure development.
With the international development, the Bank extended its loans to developing countries, and its primary operations today are mainly in developing and least developed countries. Its institutions have already expanded to include today's five leading institutions under the name of the World Bank. It did not face the same problems that the International Monetary Fund faced because its mission was not as complex and challenging as the Fund.
As for the International Monetary Fund, its goal was to manage the international monetary system. Where the opinion of the meeting settled that the existing chaos had to be eliminated, as currency rates were determined against the background of the state's ownership of gold and its reserves of the pound sterling, which was the dominant currency internationally, but after the war, the British money became very deteriorating, not to mention the problems associated with gold.
Consequently, currency exchange rates were fixed on the basis that the dollar would assume the task of gold and sterling together based on the United States' willingness to provide the dollar as an alternative to gold through its desire to convert the dollar into gold at any time based on thirty-five dollars per ounce, with its willingness to provide the necessary dollar liquidity at the international level.
The new system was formulated based on stabilizing exchange rates while allowing them to fluctuate within only 1 percent, which entailed the establishment of a basket of currencies and gold, with an estimated value of about $8.8 billion at the time, to provide the necessary liquidity for countries whose current balance suffers from imbalance so that they do not have to reduce exchange rates.
Countries saw the best way to stabilize exchange rates in this system to prevent isolationist and competitive policies in lowering currency rates to implement protectionist goals. Indeed, after the Second World War, this system came into force. It seemed as if the world had a system that guarantees stability and monetary reassurance, which is the basis of any Opportunities for development, free trade, and political stability.
In fact, despite the exit of the Soviet Union and the countries it occupied in Eastern Europe and which embraced communism from this system, international conditions — especially in Western Europe — were significantly deteriorating. Hence, the United States had to intervene forcefully to ensure that these economies recovered for understandable political reasons. Indeed, the United States intervened through the "Marshall Plan" to provide funding for reconstruction in sixteen European countries worth seventeen billion dollars since 1948.
The "Truman Plan followed this for Greece and Turkey" for the same goal. The United States was ready to play the role of the International Central Bank, so it took many necessary steps to facilitate the movement of the dollar from it to Europe and boosted European imports to it, and accepted the obstacles that Europe placed on its imports to simplify the process of growth in it to the extent that allowed Europe and Japan to get out of the crisis and build economies By 1959 its total reserves of currency and gold were equal to those of the United States itself.
However, the following year, as was expected, witnessed for the first time the beginning of a crisis in the exchange rate of the dollar itself against Western currencies and the Japanese yen. The same is based on stabilizing exchange rates internationally.
The matter is that the basis for the solution to the economic crisis in the "Bretton Woods formula" included the seeds of the financial situation in the medium term. The American economy could not withstand long in the face of international pressures, as countries cannot finance the deficit of others at their expense without running out of their balance.
And this is precisely what happened to the United States, as US gold reserves fell to 19.5 billion dollars from 24.5 billion by 1959, and dollar liquidity increased at the international level from 7.3 billion to 19.4 billion dollars, which created a considerable dollar supply by the standards of that time that exceeded reserves of gold. Accordingly, it was only natural that the dollar began to lose its actual value, and the monetary system began to shake and with it the new economic system.
Immediately the significant countries were forced to collaborate to save the dollar and with it the monetary system. The United States participated in the meetings of European central banks, for the first time, to impose stability on the international financial system. It was agreed that central banks would intervene to ease the pressure on gold through multiple scenarios that ensure that percentages of gold reserves are displayed in them whenever the demand increases to relieve stress on the dollar within acceptable limits.
It was also agreed to establish a "Group of Ten" to formulate the required amendments to the monetary system in the International Monetary Fund, which resulted in the formulation of a new financing mechanism in the Fund to provide exchange rate stability by injecting six billion new dollars for this purpose. At that time, countries thought that these variables were enough to stabilize the international monetary system. Still, the successive international changes were enough to undermine the idea of stabilizing international exchange rates to interfere with the global system in its existing form today, as we will see.
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