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Remington Solution

The dramatic consequences of the beggar-thy-neighbor policies of the inter-war period and the
wish to return to peace and prosperity impelled the allied nations to start negotiations about a
new international monetary regime in the framework of the United Nations Monetary and
Financial Conference in Bretton Woods, New Hampshire (US), in July 1944. Delegates from44
countries managed to agree on adopting an adjustable peg system, the gold-exchange
standard. The US dollar was the only convertible currency of the time, so the United States
committed itself to sell and purchase gold without restrictions at US$35 dollar an ounce. All
other participating but non-convertible currencies were fixed to the US dollar. The gold-
exchange standard was not the only competing idea on the table, however. The British
economist, John Maynard Keynes, proposed ambitious reforms for the post-war era and
recommended the creation of an international clearing union, a kind of global bank, along with
the introduction of a new unit of account, the ‘bancor’ (Keynes, 1942/1969). Nevertheless, the
United States insisted on its own plan and branded the British proposal as a serious blow to
national sovereignty.
Delegates also agreed on the establishment of two international institutions. The International
Banks for Reconstruction and Development (IBRD) became responsible for post-war
reconstruction, while the explicit mandate of the International Monetary Fund (IMF) was to
promote international financial cooperation and buttress international trade. The IMF was
expected to safeguard the smooth functioning of the gold-exchange standard by providing short-
term financial assistance in case of temporary balance of payments difficulties.
As opposed to Keynes's plan of a new international clearing union, the Bretton Woods system
did not prevent countries from running large and persistent deficits (or surpluses) in their
balance of payments. Although nations were allowed to correct the official exchange rate in
order to eliminate deficits (hence the name, adjustable peg system), adjustments did not
happen frequently. The UK, for instance, was put under constant pressure by speculators to
devaluate its currency (it did so only once in 1967). Abstention from devaluations that were
believed to be humiliating triggered investors to relocate their capital outside Britain.
The US's situation was unique, however. During the first few years of the new regime, the
country managed to maintain a surplus in its balance of payments. As soon as Europe regained
its pre-World War II economic power, the external position of the United States turned into a
persistent deficit as a natural consequence of becoming an international reserve currency.
Nevertheless, by the mid-1960s, the dollar became excessively overvalued vis-'#x00E0;-vis
major currencies. As a response, foreign countries started to deplete the US gold reserves.
Destabilizing speculations, fed by the huge balance of payments and trade deficit, along with
inflationary pressures, forced the United States to abandon the gold-exchange standard on 15
Although industrialized countries were keen to return to some kind of a controlled exchange rate
mechanism under the so-called Smithsonian Agreement (a de facto dollar standard) in
December 1971, neither the devaluation of the US currency (and the revaluation of the partners'
currencies), nor the dollar's non-convertibility to gold managed to stabilize world finances. In
early 1973, industrialized countries decided to float their currencies and intervene in financial
markets only in case of drastic short-term fluctuations. Longer-term prices of currencies were
determined by demand and supply forces exclusively. This shift in exchange rate policy was
acknowledged by the Jamaica Accords in 1976.
Managed floating, however, did not perform any better, either; in fact, advanced countries had to
interfere on a few occasions in order to avoid calamity. In 1985 for instance, G7 countries
agreed on a substantial devaluation of the US dollar under the Plaza Agreement, as a result of
an increasing pressure of domestic US manufacturers and agrarians to restore their
competitiveness on world markets.
Two years later, in 1987, the Louvre Accord was drawn up in order to defend the dollar from
further devaluation on the markets. While the United States might have benefited from these
globally coordinated actions, one of the main losers was evidently Japan. The appreciation of
the yen proved to be disastrous for the Japanese economy, which faced a decade-long struggle
in the 1990s as a partial consequence of the ‘dollar politics’ (Destler and Henning, 1989).
The 1990s saw the triumph of the neoliberal, pro-market Washington Consensus. Its
programmed points were advocated and disseminated by the major international financial
institutions.8 The IMF used these points as part of its adjustment requirements (or
conditionalities) in exchange for financial assistance. Several countries, especially the so-called
emerging markets such as Mexico, Brazil or the East Asian tigers, deregulated their financial
sectors and fully liberalized capital transactions from the late 1980s onwards. Reforms,
however, were not supplemented by strengthened domestic supervision or monitoring.
Additionally, these currencies were pegged to the US dollar, which happened to appreciate
substantially during the 1990s and caused a loss in the price competitiveness of emerging
markets. The unregulated and free flow of capital, the huge current account deficits, and the soft
pegging regimes made these economies highly vulnerable, resulting in a financial crisis that first
hit Mexico in 1994 and reached East Asia in 1997#x2013;8.
The Washington Consensus and its free-market ideology has been criticized by many rights
from its conception. Stiglitz (2002) blamed the IMF and its rigid conditionalities for the failed
development performance of the periphery. His main argument was that free-market policies
such as liberalization or privatization could not deliver the expected results in an environment of
imperfect or incomplete markets and inadequate or missing institutions. From a wider
perspective, Wallerstein (2005) commented the change of economic thinking of the late 1980s
and early 1990s by arguing that ‘development was suddenly out. Globalization arrived in its
wake ... Now, the way to move forward was not to import-substitute but to export-orient
productive activities. Down not only with nationalized industries but with capital transfer controls;
up with transparent, unhindered flows of capital' (2005: 1265).