Political Economy of International Trade and Finance
Name: Swati Vohra
‘What Lessons from the post war ‘Bretton Woods Compromise’ could help G20 policymakers today?’
Turning crisis and problems into opportunities for growth & learning has led to great innovations & development. Such was the case when the world was experiencing great economic instability during the World War -II. It was during 1930’s when the great depression gave rise to ‘protectionism’ from different countries in a bid to protect their economies. In 1936, there were buzz and ties of cooperation between Britain, France and U.S. for mutual currency stabilization under the ‘Tripartite Agreement’ . However, this was the least effort done to restore the international monetary relations, but the actual reconstruction was until WWII. It was the difficulties faced in reconstruction after World War I, that influenced Britain and US officials during World War II to begin planning for post monetary reconstruction. There was a need to formulate rules and understanding to guide national policies following the war to aid the facilitation of common objectives – of establishing peace and prosperity through stabilizing the world economy. Headed by Harry Dexter White from American side and John Maynard Keynes from Britain side led the negotiations which culminated into a conference that extended to 44 allied governments in total, in July 1944 at New Hampshire at Bretton Woods. The International Monetary Fund (IMF) and the World Bank were also launched as the two pillars of the international financial system. In 1944, however, the only country selling the gold for dollar was the U.S. The Articles of Agreement thus resulted in a system in which every currency was actually convertible into dollars, in dollars which in turn was convertible into gold at the rate of $35 per ounce. This is how the Bretton Woods agreement manifested.
Despite the ‘big’ plans and ideas set forth by Bretton Woods seemed conventional wisdom and very promising and offered a ray of light at the time of serious crisis; however, those rules contributed for a little time to the performance of the world economy over that period, but subsequently started having diminishing effect. Some scholars today argue that what the world is missing today is the uniting of a new international consensus around a broader economic ideology that was similar to embedded liberalism. It is also shared that world also misses and there’s no one to lead the way like Keynes. I feel if that would be true, then the only concentration would have been on interstate power and having a great wave of the capitalist economy, without the having a legitimate social purpose which was advocated by Ruggie. Among other reasons, one of the reasons of fall of Bretton Woods compromise was the difference in their ideologies of capitalism vs socialism. Scholars have also compared the unique wartime conditions that prevailed in early 1940’s that is absent today and unlike the G44 at Bretton Woods, the G20 today doesn’t have a broader strategic glue.
One of the major reasons for the collapse of the Bretton woods system was due to growth of foreign dollar balances, which were theoretically- and legally payable in gold on demand. The gold exchange standard acted like a termite in the then Bretton Woods system.
One of the features of the Bretton Woods system which stood out was that the interwar period had demonstrated the disadvantages of freely fluctuating exchanges. Trade and investments were not encouraged by the floating rates, whereas speculation and competitive depreciation was encouraged. The negotiators at Bretton Woods came up with a compromise to find an equilibrium between such extremes and suggested to have “pegged-rate” or “adjustable-peg” regime.
The liberalism that was restored after World War II was termed as ‘Embedded Liberalism’. The U.S. hegemony has been described as “embedded liberalism'”, a system that allows more coercive forms of power that are used to embed the world capitalist order.
Changing with the Changing times
Bretton Woods was clearly going under a turbulent phase with imbalances in the US dollar, times were swiftly changing. Early 1950’s saw the emergence of a new term called ‘dollar shortage’. It indicated the understanding that only United States had the capability to take the responsibility for global monetary stabilization. The term dollar shortage clearly indicated America’s dominance of international finance relations. However, deficit in dollar began in 1950, after devaluation of European currencies in 1949 at the insistence of the US. During late 1950’s the balance of payment of America which preciously was in excess became persistently deficit. These persistent deficit experiences by America took a new dimension later in 1958, with US balance of payments plunging into higher deficits. This resulted in “dollar glut” as opposed to “dollar shortage”. Dollar glut was accumulation of American dollars outside of US as a reserve currency. This was a result of the imbalance in persistent payments between the surplus countries of Europe, Japan and US. It was quite evident that this situation posed an increasing threat to the structure of Bretton Woods that was under strain, defect was forming in both the mechanism of liquidity creation and payment adjustment.
Further, Ruggie points out the post 1971 inconvertibility of the dollar into gold plausibly had been usefully framed within the broader rubric of liquidity problems and floating rates exchange within adjustment problems. He further suggests that liquidity provisions at Bretton Woods proved inadequate . Although to have a supply of international liquidity adequate was one of the fundamental principles of Bretton Woods system, however, with the increasing volume of international trade increased liquidity requirements there was a growing pressure on exchange rates. Triffin observed that there were endless stop-gap measures taken under secretary of the treasury for the dollar. The reason for such measures were taken to make gold unattractive and that would further increase the capacity of the IMF to supply liquidity and to increase the capacity of central banks to neutralize the flow of speculative capital. While there seem to be some measures taken to handle the crisis through diverting the attention from dollar, thus, in 1968 rendering dollar inconvertible into gold which was made official in 1971.
With such fluctuations were indicating that the policies employed by Bretton Woods at the time weren’t functioning. I believe that one of the lessons for G20 policy-makers can be to adapt to the changing times and needs, which I understand that G20 is already taking into consideration. Its focus has been expanding. While economic and financial issues remain at the central agenda. G20 also includes topics such as – global economy, financial markets, fiscal affairs, trade, employment, women in the labor market etc.
Furthermore, there was a need of proper exchange rate alignment. With a correctly aligned exchange rate, an external deficit provides an early warning that deflation is needed. As long as the presupposition of the Keynesian demand management, that price levels are constant remained valid, things were fine. However, there did reach the case where the external deficits became. Thus, there was requirement of a proper exchange rate alignment. As Ruggie suggest, the present arrangement to bear in mind the distinct the “instrument of fixed rates from the norm of outlawing competitive currency depreciation and thus providing a framework for relatively stable exchange”. “Acceptance by central banks throughout the world of dollars as the base for the creation of their own national currencies.” For G20 or any other fora, it is important to have stabilized framework of exchange as opposed to the having competitive currency depreciation by keeping one currency s fixed (as dollar was done).
Egalitarian system, sharing of shares, expansion of other countries in G20