International Political Economy #12

The Bretton Woods Monetary System

W. K. Wineco | IPE #12: Bretton Woods

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William Kindred Wineco
Indiana University Bloomington

October 10, 2013

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The Need for a New System

After WWII the US:

Produced 50% of the worlds manufactures. Owned 80% of the worlds gold reserves.
The gold standard had failed.

The postwar economy was clearly going to be dominated by the US.

W. K. Wineco | IPE #12: Bretton Woods

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The Goal

Reconstruct the global economy and produce interdependence. Hopefully peace would come from prosperity (or vice versa). Stable exchange rates can help trade.

Stable exchange rates can provide new democracies with the ability to adjust policy to demands of their citizens. But only if capital mobility is limited.

W. K. Wineco | IPE #12: Bretton Woods

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W. K. Wineco | IPE #12: Bretton Woods

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W. K. Wineco | IPE #12: Bretton Woods

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The Compromise

The $ would peg to gold to restrict the ability of US policymakers to mess with $ value and every one else would peg to the $. Sort of a modied gold standard.

Adjustable pegs built some exibility into system.

Short-term capital nancial decits covered by the International Monetary Fund.

W. K. Wineco | IPE #12: Bretton Woods

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The Politics

This arrangement was the result of, and reinforced, American power: hierarchy.

The $ becomes the key reserve currency and the global currency for foreign exchange purposes.
It was governed by the IMF: institutionalization.

It rmly entrenched the US at the core of a global monetary system: interconnectedness.

W. K. Wineco | IPE #12: Bretton Woods

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The Performance

W. K. Wineco | IPE #12: Bretton Woods

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The Performance

W. K. Wineco | IPE #12: Bretton Woods

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A Keynesian Consensus

Governments smooth over short-run uctuations in the business cycle. Economic stability enhanced political stability.

Although many challenges during these years: Red Armies in Italy and Japan, Baader-Meinhof gang in Germany, SDS/Weather Underground in the US, etc.
The interests of labor are prioritized: high top marginal tax rates, high levels of unionization, expanding social welfare programs, expanding the franchise. Capital regulated at home and restricted from moving abroad.

W. K. Wineco | IPE #12: Bretton Woods

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The Contradiction

It was also doomed.

To grow, states needed to trade. To trade, the supply of $ used internationally (eurodollars, confusingly) also had to grow. But $ was xed in price to gold (at $35/oz), and gold supply didnt grow as fast as the rest of global economy.
The Trin Dilemma.

W. K. Wineco | IPE #12: Bretton Woods

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Dollar As Lingua Franca

W. K. Wineco | IPE #12: Bretton Woods

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Monetary Power

This gave the US quite a lot of power.

Suez Crisis Exorbitant Privilege Vietnam

But it also led to a stockpiling of imbalances that eventually destroyed the system.

W. K. Wineco | IPE #12: Bretton Woods

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The End

1968: two-tier market: private $ no longer redeemable for gold. 1971: $-gold convertibility is suspended.

1973: The dollar is oated and set by market price.

The original Bretton Woods system was gone. What would happen to American prominence?

W. K. Wineco | IPE #12: Bretton Woods

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