Agreements of Bretton Woods

The agreements of Bretton Woods are economic agreements having drawn the broad outlines of the international financial system of the post-war period. Their main aim was to set up the bases of the world monetary policy and to support the rebuilding and the economic development of the countries touched by the Second world war.

They were signed the July 22nd 1944 with the Mount Washington Hotel , with Bretton Woods with the the United States after three weeks of debates between 730 deputy representing all 44 nation Alliées.

The principal instigator of these agreements was John Maynard Keynes which directed the British delegation and Harry Dexter White, attending the secretary with the American Treasury. France was represented there by Pierre Mendès France. There was also a Soviet observer .

The Keynes plan was outlined as of 1941 and prepared a true world monetary system (the Bancor). The American part, built starting from 1942, rather proposed to create funds of stabilization builds on the deposits of the Member States and a bank of rebuilding for after war.

At final the two organizations were born:

the the World Bank (BIRD)
the Funds international currency (the IMF)

A third organization would have being created and instructed with the International business. But in the absence of agreement, he will agreement see the day only in 1995 with the creation of the World Trade organization after the negotiation cycles of the General agreement one tariffs and trade (GATT).

Historical context

Crisis of 1929

The experiment of the Grande depression, during which the policies of exchange control and the tariff barriers excessive had led to the economic disaster, was still fresh in the spirits of the participants. In the Years 1930, indeed, the policies of exchange control had handicapped the system of the international payments on which the international business rested. Moreover policies of the various governments of the time, using the Devaluation S monetarists to improve competitiveness of their exports in order to reduce the deficit of their trade balances, accelerated the deflationary spiral and had as a consequence a diving of the national revenues, a contracting of the Consommation, a Chômage of mass and a total decline of the International business. The commercial exchanges then became limited to exchanges between zones or country using the same currency (exchanges between country and their colonies for example). This caused to block international financial flows and to limit the investments. Even if in the short run these policies made it possible to increase the public revenues which applied them, they appeared catastrophic in the medium and long term.

Rise of American hegemony

The Second world war, which has made rage for already 5 years, largely started the financial capital and the labor. The European countries, having suffered more from this war, are likely to become places of revolt and to offer a compost to the Communisme. The the United States decide to organize in 1944 a conference of which the goal is to create a monetary system able to support the rebuilding.

The US economy leaves the war, consolidated in its position of the most powerful economy in the world, with an industry in rapid growth and having accumulated many capital. Indeed the United States had not been touched by the devastations of the war and on the contrary the country had grown rich and developed a flourishing industry by selling weapons with combined and in their lending funds. Thus the industrial production of 1945 doubled compared to what it was right before the war. In comparison, Europe and the Far East appear ruined militarily and economically.

Whereas the conference of Bretton Woods met, the relative advantages of the US economy appeared obvious and dominating. The United States had most of the world capital and they were also first on the level manufacturing output and exports. In 1945 the United States produced half of the coal, two thirds of the Pétrole and more half of the electricity on a world level. They were able to produce great quantities of boats, of Avion S, cars, chemicals, of Armes manufacturing and other products. Moreover 80% of gold world reserves were held by American and the US Army. Being given this situation, the United States could hope, more than any other nation, benefit from a liberalization of the international exchanges which would enable him to run out its products on the worldwide market and to supply itself there freely out of raw materials.

Consequences of the Agreements

The decisions taken by the 44 States present go clearly against the powers of the Axe: the Germany and the Japan. The Italy already joined with combined at this time.

The principal decision which results from these agreements is the abandonment of the Gold Standard, adopted before the First World War, with the profit of the standard gold exchange or Gold Exchange Standard. The new system gives a dominating place to the Dollar, and the other currencies see their course indexed on him. The reserves of the Central banks must then be made up of currencies and either of gold (In fact, it is theoretically possible to guarantee a national currency on gold, but only the United States can allow it. The attempt in this direction of the United Kingdom was a failure.).

The architects of Bretton Woods had as an original intention ensure the stability of foreign exchange rates. However, the system of the Gold Standard resting on fixed rates did not appear any more adapted to the requirements of the modern economy. Moreover the worldwide production of gold did not allow any more to face the needs related on the trade and the investment. Finally world part of the gold reserves were held by the Soviet Union which would not take part in a capitalist system of regulation of the exchanges. The British currency which had been used before war to assist gold, could not fulfill this role because of state any more of the British economy. Only the dollar was a sufficiently strong currency to satisfy the increasing international demand for liquidities. The force of the US economy, the fixed rate of the dollar compared to gold (35$ the ounce) and the fact that this rate is guaranteed by the US government made the dollar as gravitational as gold. Actually it was even gravitational because it bore interest and was more flexible of use than gold.

A criticism formulated against the system set up by these agreements relates to the fact that no control had been founded on the quantity of emitted dollars, which made it possible the United States to make turn the board to tickets and thus to grow rich on the back by the rest of the world obliged to undergo resulting inflation.

The agreements gave rise to three international agencies:

the World Bank or BIRD;
the Funds international currency (the IMF);
an organization aiming at regulating the International business.

However, the State S could not agree on the exact definition of this last organization. Thus, it is a series of agreements which was born from this will to control the trade: agreements of the General agreement one tariffs and trade (GATT), formalized in 1947 and modified thereafter in the form of cycles. At the end of the Agreement of Marrakech, on January 1st 1995, GATT was equipped with an official legal entity: the World Trade organization (OMC).

Whereas GATT depended on the United Nations (UNO), OMC it, is not subjected any more there since part of their respective objectives are in contradiction, which will make it possible OMC to work out its own rules.

The bankruptcy of the system

As of the beginning, these agreements showed their weakness. The disagreement in connection with the international business delayed of almost 50 years the creation of OMC. In the same way, the first loan granted by the the World Bank to France appears quite insufficient and is supplanted by the Marshall plan which provides then a help much more effective.

Lastly, the Gold Exchange Standard could not survive various the Economic crises which shook the worldwide economy since the Années 1950. Devoting the hegemony of the dollar, it was the object of violent criticisms.

In the gold and the dollar crisis (1960), Robert Triffin note that the system of Bretton Woods induced that the United States has an adverse balance of payments in order to feed the world in international means of payment. However, this phenomenon has another effect: it contributes to a progressive weakening of the confidence from abroad in the dollar. Thus, the important needs for the worldwide economy in a reliable currency, the dollar, contribute paradoxically to the loss of confidence in the reliability of this currency. Robert Triffin believes to see in this paradox an insurmountable, known dilemma like the dilemma of Triffin , which necessarily leads to a collapse of the system and invites since 1960 with a reform of the system international currency.

The convertibility of the gold dollar was abandoned the August 15th 1971 unilaterally by the United States. After one intermediate period, where one tried to maintain after a fashion parities fixed, the system of the floating exchanges was set up on March 19th 1973, which was ratified by the Accords of Jamaica, in January 1976.

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