Question on ‘Breton Woods Institution’ – Help Please?





Hi everyone I have an essay to write for Wednesday on the Breton Woods Institution, and it is for my Globalization/Global Economy unit. The question is:Critically evaluate the performance of the Breton Woods Institutions. What do you think should be done with these institutions in the future? I want to be able to understand the question fully before I answer, as this is one of my main weaknesses - I blabber on about completely unrelated stuff. If somebody could help me dissect and understand the question, as well as formulate any possible arguments, then that would be very much appreciated.Thanks for all your help in advance guys.



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One Response to “Question on ‘Breton Woods Institution’ – Help Please?”

  1. superscribed says:

    I usually start at Wikipedia and see where that takes me. The first thing you need to do, though, is check your spelling! I recommend that you read that article in its entirety and follow some of the external links for additional information. Then you will “understand the question fully.”Good luck!”The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF). These organizations became operational in 1946 after a sufficient number of countries had ratified the agreement.The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing strain, the system collapsed in 1971, following the United States’ suspension of convertibility from dollars to gold.A high level of agreement among the powerful on the goals and means of international economic management facilitated the decisions reached by the Bretton Woods Conference. The foundation of that agreement was a shared belief in capitalism. Although the developed countries’ governments differed somewhat in the type of capitalism they preferred for their national economies (France, for example, preferred greater planning and state intervention, whereas the United States, at one time, favored relatively limited state intervention), all relied primarily on market mechanisms and on private ownership.Thus, it is their similarities rather than their differences that appear most striking. All the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons.The developed countries also agreed that the liberal international economic system required governmental intervention. In the aftermath of the Great Depression, public management of the economy had emerged as a primary activity of governments in the developed states. Employment, stability, and growth were now important subjects of public policy. In turn, the role of government in the national economy had become associated with the assumption by the state of the responsibility for assuring of its citizens a degree of economic well-being. The welfare state grew out of the Great Depression, which created a popular demand for governmental intervention in the economy, and out of the theoretical contributions of the Keynesian school of economics, which asserted the need for governmental intervention to maintain an adequate level of employment.The liberal economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard, but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency.The only currency strong enough to meet the rising demands for international liquidity was the US dollar. The strength of the US economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.Bretton Woods, then, created a system of triangular trade: the United States would use the convertible financial system to trade at a tremendous profit with developing nations, expanding industry and acquiring raw materials. It would use this surplus to send dollars to Europe, which would then be used to rebuild their economies, and make the United States the market for their products. This would allow the other industrialized nations to purchase products from the Third World, which reinforced the American role as the guarantor of stability. When this triangle became destabilized, Bretton Woods entered a period of crisis which led ultimately to its collapse.By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce … had become increasingly untenable. Gold outflows from the U.S. accelerated, and … the profligate fiscal spending of the Johnson administration had transformed the “dollar shortage” of the 1940s and 1950s into a dollar glut by the 1960s. The US tightened controls over foreign investment and currency, including mandatory investment controls in 1968. In 1970, U.S. President Richard Nixon lifted import quotas on oil in an attempt to reduce energy costs; instead, however, this exacerbated dollar flight … Still, the U.S. continued to draw down reserves. In 1971 it had a reserve deficit of $56 Billion dollars; as well, it had depleted most of its non-gold reserves and had only 22% gold coverage of foreign reserves. In short, the dollar was tremendously overvalued with respect to gold.By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on August 15, 1971, Nixon … “closed the gold window,” making the dollar inconvertible to gold directly… Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the “Nixon Shock”.On 17 and 18 December 1971, the Group of Ten, meeting in the Smithsonian Institution in Washington, created the Smithsonian Agreement which devalued the dollar to $38/ounce … It failed to impose discipline on the U.S. government, and … the pressure against the dollar in gold continued.This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar… In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.”