Bretton Woods system

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The Bretton Woods system is the name given to the international monetary system with exchange rate ranges that was newly created after the Second World War , which was determined by the US dollar as the anchor currency . Those involved in its creation wanted to create a system that combines the advantages of a flexible exchange rate system with those of a fixed one. The actual implementation followed a suggestion by Harry Dexter White (1892–1948).

The system was named after the town of Bretton Woods in the US state of New Hampshire , where the finance ministers and central bank governors or presidents of 44 states of the later victorious powers met from July 1 to 22, 1944 for the Bretton Woods Conference and finally the Bretton Woods Agreement signed. The Bretton Woods organizations and institutions, the World Bank and the International Monetary Fund (IMF), were subsequently created to monitor and enforce the agreement .

The Federal Republic of Germany joined the Bretton Woods system in 1949, the year it was founded, and ratified the agreement by law of July 28, 1952 (simultaneously with the agreement on the International Bank for Reconstruction and Development ). The Bretton Woods Agreement was abandoned in the early 1970s, but the institutions continued to exist with partly changed responsibilities.

prehistory

The First World War had already been extremely expensive for most European warring parties and weakened them economically; the more so the Second World War . Even the previously rich Great Britain - in the 19th century it had been the leading world trading nation, sea ​​power and world power (see British Empire ) - was on the verge of insolvency for months after the Second World War. The USA had become the dominant world power , which influenced international monetary and financial policy: arms sales and defense loans made it the world's largest creditor, while its main rival in monetary policy, Great Britain, had become a debtor; 70 percent of the gold reserves were in the USA. During the Second World War, the USA was therefore still working on a world economic order that would apply after the end of the war.

Planning in time of war and its consequences

In Great Britain there had been plans for an international monetary order after the war since 1940 , in the United States since 1941. The British committed themselves in the Atlantic Charter of August 1941 and the mutual assistance agreement of February 1942 to restore convertibility to the pound in the current account . The United States promised to expand financial aid on favorable terms and to respect full employment . In return, the British accepted the principle of non-discrimination in trade .

John Maynard Keynes and Harry Dexter White attempted to reconcile these goals; but their plans rivaled. The last version was published in 1943. This formed the basis for the joint declaration by American and British experts and for the articles of the International Monetary Fund agreement . The White and Keynes versions differed in the obligations they placed on creditors, the mobility of capital, and the flexibility of exchange rates. White wanted a world without course support and controls. Keynes, on the other hand, allowed countries to change their exchange rates and, if necessary, apply trade and exchange rate restrictions so that full employment and the balance of payments can be reconciled. The Keynes "Clearing Union" provided for comprehensive balance of payments financing, which was subject to strict restrictions and penalty interest, and gave the flexibility of exchange rates an important role. He wanted to prevent deflationary policies abroad from forcing countries to import unemployment . If the United States consistently had balance of payments surpluses, as it did in the 1930s, it would have to finance all other countries' drawing rights . According to Keynes, these amounted to $ 23 billion. Since the Clearing Union would bring unlimited obligations for creditors, the Americans opposed the Keynes plan. So the White Plan limited all drawing rights to $ 5 billion and US commitments to $ 2 billion.

The unequal bargaining power of the Americans and the British was reflected in the compromise of the Joint Declaration and in the articles of the agreement. The need for flexible exchange rates is greater, the scarcer the financing. The British wanted flexible exchange rates, while the Americans wanted fixed exchange rates. The compromise brought "fixed, flexible exchange rates", ie level flexibility. Countries had to set their currency in gold or gold convertible currency (dollars). Your exchange rate was allowed to fluctuate a maximum of one percent up and one percent down around this mean. The agreement allowed controls on international capital movements to be maintained. As the British continued to insist on limiting the volume of funding, the Americans were forced to accept the British demand for flexible exchange rates and to accept the continuation of foreign exchange controls. The dollar scarcity made the modest quotas and drawing rights of the agreement almost meaningless. This was evident even before the IMF began operating in 1947.

After the war, Europe had a great need for capital goods, food and other goods. As a result, it only had limited opportunities to produce goods for export . The trade deficit of postwar Europe amounted to 1,947, for example, to 7.5 billion dollars. Under the Marshall Plan , the United States raised approximately $ 13 billion in intergovernmental aid to finance the deficits in Europe between 1948 and 1951. That was more than six times the maximum obligation under the articles of the agreement and more than four times the drawing rights established in favor of Europe. The system of parities proved to be unusable, although the support exceeded that set out in the articles of the agreement. Despite this, import controls could not be abolished. White and Keynes underestimated the damage the Japanese and European economies had suffered, and with it the cost of rebuilding .

The Bretton Woods system

Participants in the Bretton Woods Conference

Mount Washington Hotel

The representatives of the 44 nations met on July 1, 1944 at the Mount Washington Hotel . The following governments were represented: Egypt , Ethiopia , Australia , Belgium , Bolivia , Brazil , Chile , China , Costa Rica , Dominican Republic , Ecuador , El Salvador , France , Greece , Guatemala , Haiti , Honduras , India , Iraq , Iran , Iceland , Yugoslavia , Canada , Colombia , Cuba , Liberia , Luxembourg , Mexico , New Zealand , Nicaragua , Netherlands , Norway , Panama , Paraguay , Peru , Philippines , Poland , South Africa , Czechoslovakia , USSR , Uruguay , Venezuela , United Kingdom and United States .

aims

Restoring Europe as an economic center and an important trading partner for the USA was at the heart of the Bretton Woods conference. The Bretton Woods Agreement pursued one goal above all: The exchange rates between the currencies were to be stabilized so that world trade could proceed without problems and trade barriers and there were no difficulties with payment transactions. This in turn should stimulate the economy to the point where trade and investment could increase. Special bodies should be set up to achieve this goal. Above all, the aim was to prevent a race to devalue between nations, as in the phase between the First and Second World Wars.

proposals

Harry Dexter White (left) and John Maynard Keynes at the opening meeting of the Board of Governors of the IMF in Savannah on March 8, 1946

At the conference, the Joint Statement by Experts on the Establishment of an International Monetary Fund was discussed, which was a compromise proposal from the two previously discussed plans for a world monetary system, namely

In the Keynes plan, international payment transactions were to be processed via a new clearing house, the International Clearing Union (ICU). He planned to take over the settlement of payments between the central banks with an independent, international and virtual payment method Bancor . The value of the bancor should be defined in gold and the member states should fix their currency against the bancor . The aim of the ICU was to balance the current accounts of the member countries on the basis of stable exchange rates.

In contrast to the Keynes Plan, the White Plan did not refer to an international clearing house with book money, but to a fund into which the member states were to pay at fixed quotas in order to be able to issue loans later. The White Plan was also based on the system of fixed exchange rates.

The different ideas in the two plans can be explained by different starting points. The aftermath of the war put the British in a pronounced debtor position with a heavy trade deficit . Therefore, they were interested in a supranational monetary system that was not dominated by any national currency. The opposite was true of the Americans as a creditor nation.

Contents of the Bretton Woods Treaty

The “White Plan” became part of the Bretton Woods Agreement. At its center was the US currency, to which all other currencies had a fixed exchange ratio. The exchange ratio between dollars and one ounce of gold was set at $ 35 per ounce of fine gold (31.104 grams). In order to secure the gold parity of the dollar, the FED pledged to buy or sell gold indefinitely at that price . The gold price in US dollars has been fixed for decades.

The central banks of the member states undertook in the Bretton Woods Treaty to intervene in the foreign exchange markets to keep the rates of their currencies within set limits. As soon as one of the exchange rates no longer corresponded to the real exchange ratio, they had to buy or sell foreign currency in order to restore the relationship. This foreign exchange trade had to take place at the previously established exchange ratio. Foreign exchange transactions were mainly buying and selling of local currencies of the respective countries against the US dollar. With their monetary policy and the associated financial policy measures, the central banks should stabilize exchange rates within a bandwidth of one percent.

Institutions

The organs for organizing, implementing and supporting the agreement were the World Bank and the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF). The IMF had the task of monitoring and supporting the Bretton Woods system by providing financial aid from the capital contributions of its member states. The aid was aimed at the member states that had run into foreign exchange difficulties, in the form of lending in the event of temporary balance of payments problems or imbalances, combined with severe savings and stabilization requirements for the lending country. However , the IMF hardly had to fulfill this function as lender of last resort during the first few years. The IMF and IBRD ensured that the Bretton Woods system worked smoothly and that there were no problems with its implementation. The current task of these bodies is to grant loans to developing countries and to countries with weak currencies.

Gold dollar standard

Up until the Great Depression of the 1930s, most countries tried to orientate themselves back to the gold standard of the time before the First World War. The money supply, which was inflated during the war and not covered by gold or valuable foreign exchange, and the high national debt made this goal difficult. The really necessary, strongly deflationary economic policy could not be sustained, especially during the downturn in the global economic crisis. As a result, almost all countries broke away from the gold standard, which - with sufficient gold coverage - results in a system of fixed exchange rates. In fact, a system of flexible exchange rates was created . The USA, too, effectively broke away from the gold standard in 1933 by banning private gold ownership and arbitrarily setting the exchange rate at $ 35 per troy ounce of gold. This allowed the US to fight the Great Depression in the country through an expansion of the money supply and a competitive devaluation .

Towards the end of the Second World War, the question of the future of the international financial system arose again. The Bretton Woods system was based on two factors:

Effects

Number of countries with banking crises from 1800 to 2000 - conspicuously low during the life of the Bretton Woods system

Europe experienced an " economic miracle " in the 1950s and 1960s . Fixed exchange rate systems have advantages and disadvantages; Which participants had which advantages and disadvantages in which phases (compared to a regime of flexible exchange rates) cannot be proven ex post either.

Even without the Bretton Woods system, the USA would have been independent in terms of its monetary and currency policy in the post-war years, since its domestic market was significantly larger than the markets of all European countries combined.

Trilemma of the exchange rate system

The so-called trilemma of monetary policy describes the incompatibility of the three objectives of monetary policy: 1. autonomous monetary policy , 2. fixed exchange rate and 3. free international capital movement. It is therefore possible to achieve a maximum of two goals at the same time. Due to the fixed exchange rates within the Bretton Woods system and the increasing liberalization of international capital movements - also in the course of globalization - the possibilities of the member states to pursue an autonomous monetary policy dwindled. The fixed exchange rate of the D-Mark against the dollar meant for West Germany, for example, that the Bundesbank had to slow down the strong appreciation of the D-Mark by buying dollars. This led to imported inflation , which the Bundesbank was able to curb but not completely stop. In March 1973, the central banks involved in the Bretton Woods system ended their interventions. From then on, three (Ireland, Great Britain and Italy) of the then EC states let the rates of their currencies float freely on the foreign exchange markets; the remaining six (West Germany, France, Denmark and the Benelux countries) formed the European Exchange Rate Union (“currency snake”).

Crisis and collapse

Systemic flaws in the Bretton Woods monetary system

The Bretton Woods monetary system helped to resolve the global currency chaos that had arisen as a result of the Great Depression and World War II. In the first years after the Second World War, the fundamental reorganization of the world currency system made a major contribution to the stabilization of international capital movements and international trade.

However, the system had some shortcomings that became more and more apparent over time and ultimately led to the system's dissolution. In particular, the lack of balance of payments adjustment mechanisms, the dominance of the US dollar, the divergence of structural global economic developments and the fundamental problems of a system of fixed exchange rates were among the shortcomings.

In the Bretton Woods system, there were no cover rules for the circulation of money, which is a significant difference to the system of the gold standard. Furthermore, there was no obligation to allow the money supply pricing mechanism to operate unimpeded in order to address balance of payments imbalances. In this way it was possible for the countries to pursue a monetary policy regardless of their own currency reserves. To combat national employment problems, many countries therefore pursued expansionary monetary policies. The creation and expansion of balance of payments deficits and inflation were the result.

More and more countries found themselves in a situation of persistent balance of payments imbalances, which were ultimately classified as fundamental. National currencies were devalued autonomously if the balance of payments deficits persisted. By contrast, currencies in countries with balance of payments surpluses appreciated. Therefore, a system of fixed exchange rates proved unenforceable.

The collapse in 1973

The Bretton Woods system suffered from a design flaw known as the Triffin dilemma from the start . Growing world trade led to an increasing need for dollar currency reserves. These currency reserves could only be generated through constant current account surpluses with the USA. As a reserve currency country, the USA was not subject to other countries' current account adjustments because the debt was financed in its own currency from abroad as long as foreign countries had an interest in building currency reserves. However, permanent US current account deficits sooner or later had to undermine confidence in the dollar. The United States has had large current account deficits since the Bretton Woods system was established; as a result, the dollar holdings held by foreign central banks in the late 1950s far exceeded the US gold reserves. If all Bretton Woods members had insisted on the obligation to redeem gold provided for in the Bretton Woods system at the same time, the USA would not have been able to comply with this in full. At the beginning of the 1960s, the system went into a brief imbalance when the base price on the London gold market (US $ 35 per troy ounce) could no longer be maintained. In October 1961, the major central banks set up a gold pool that tried to keep the free gold price at the level of the official price. Confidence in the dollar was weighed down by the high foreign reserves, although - for political reasons - no state requested the exchange of its own dollar reserves for gold. In 1966, the French President de Gaulle asked the United States ( Johnson government ) to exchange the French dollar reserves for gold and to deliver the gold to France. The inadequate gold backing of the dollar (only about half of the reserve currency dollar could have been exchanged for gold) triggered a political crisis. In 1968 the obligation to redeem dollars in gold was restricted to the central banks of the member states. The then US President Richard Nixon stopped the nominal gold peg of the dollar on August 15, 1971 (" Nixon shock ").

Weaknesses in the Bretton Woods system became increasingly apparent from the mid-1960s. At the end of the 1960s, the US recorded economic growth (including the Vietnam War ), but also rising inflation and rising current account deficits . The D-mark in particular was severely undervalued against the US dollar. By contrast, the currencies of Great Britain, New Zealand, Israel, Denmark and Spain were devalued in late 1967. In 1968 there was speculation about an appreciation of the mark against the dollar. By initiating tax measures to reduce Germany's foreign trade surpluses on November 19, 1968 and postponing the appreciation of the mark for the time being, the grand coalition under Chancellor Kiesinger attempted to save the stability of the international currency system. Exports were taxed by four percent, while imports were relieved by four percent.

Opinions within the German Federal Government were divided when, in the spring of 1969, another revaluation of the D-Mark was discussed. Economics Minister Karl Schiller (SPD) supported the revaluation of the D-Mark, while Finance Minister Franz Josef Strauss (CSU) was against it. An 8.5 percent revaluation was decided on October 24, 1969 by the social-liberal government under Willy Brandt . The exchange rate of the US currency fell from 4 D-Marks per dollar to 3.66 D-Marks per dollar.

The capital controls that had been in effect until then were finally abandoned in 1970 by the USA, Canada, the Federal Republic of Germany and Switzerland. The dollar came under increasing pressure due to the high US military spending for the Vietnam War and the growing economies, especially in Japan and Germany. In particular, the inflow of dollar capital into West Germany did not stop . The Federal Government ( Cabinet Brandt I ) decided in May 1971 to release the DM exchange rate. The dollar collapsed 9.3 percent to 3.32 Deutschmarks per dollar in the weeks that followed. Although the Bundesbank continuously cut interest rates, speculative capital continued to flow into the Federal Republic, which threatened to increase the German inflation rate. Therefore, on February 17, 1973 , the federal government ( Brandt II cabinet ) passed a so-called stability program to dampen the economy and limit inflation, which came into force in mid-1973.

The dollar price on the free gold market had been putting pressure on the official gold price for a long time. When a devaluation of 10% was announced in February 1973, Japan and the EEA countries decided relatively quickly not to fix the exchange rates of their national currencies (on the dollar) in future. From March 2nd to 19th, 1973 the foreign exchange exchanges in many European countries were closed as the Bretton Woods system threatened to collapse. Between March 11 and 14, 1973, several European countries decided to abandon the system of fixed exchange rates for good. Switzerland and Great Britain went first at free exchange rates. In 1973 the Bretton Woods system was officially overridden. After the termination of the Bretton Woods Agreement, exchange rates were released in most countries.

The IMF and IBRD still exist today.

Reform approaches

Even before 1973, economists were making arguments in favor of flexible exchange rates. They stated that flexible rates in macroeconomic governance would increase decision-makers' monetary policy autonomy. They would eliminate the asymmetries of the Bretton Woods system. Flexible exchange rates would also reduce fundamental balance of payments imbalances. Fixed exchange rates caused parities to change and made speculative attacks possible. Critics of the flexible exchange rates feared that these would favor excesses of monetary and fiscal policy. Flexible exchange rates would be subject to destabilizing speculation and the uncertainty about their development would affect foreign trade and international investment. In addition, the national economies are not prepared to forego influencing the exchange rate when formulating their fiscal and monetary policy. In the opinion of the critics, flexible exchange rates would make an independent object in macroeconomic policy.

The experience with flexible exchange rates does not fully confirm either the opinion of the supporters or those of the opponents. It is clear, however, that no exchange rate system can function well without international economic cooperation. No exchange rate system works if individual countries act alone and only pursue their own interests. The Bretton Woods system worked until the US unilaterally embarked on an overly expansionary policy. Hence, if countries fail to address common macroeconomic problems in a coordinated manner, the system of flexible exchange rates will create problems.

classification

Consequences for the world monetary system

After the collapse of the Bretton Woods system, there were strong exchange rate fluctuations. These are closely related to the development of international capital movements. As a result, various regional exchange rate regimes emerged. For example, the countries of the European Community joined together in 1972 before the final collapse to form the European Exchange Rate Union and in 1979 to form the European Monetary System (EMS), through which exchange rate fluctuations between the member countries remained within certain ranges .

The world currency system is much more heterogeneous today than it was in the times of the Bretton Woods system. Today's world monetary order is a mixture of a system with fixed and flexible exchange rates. There is a floating exchange rate system between the countries of the EMS and non-member countries such as Japan and the USA. On the international foreign exchange markets in London, New York, Tokyo and Frankfurt, the individual currencies adapt to the conditions of supply and demand in this exchange rate system.

Assessment of the Bretton Woods system

Today, three realizations and conclusions can be drawn:

  1. Currencies that are still closely tied to the dollar today are depreciating and appreciating more frequently than between 1944 and 1971. The general trend in the market determines the appreciation or depreciation of a currency. In western countries, most exchange rates change from day to day.
  2. In order to influence the exchange rate, some central banks intervene in the international foreign exchange markets. This is mostly intended as a tool to smooth out temporary fluctuations in exchange rates. In order to influence the general trend in the development of the exchange rate of a currency, the central banks sometimes intervene. To prevent their currency from devaluing, countries with a trade deficit buy their own currency. Other countries that are in surplus are selling their currency so that it does not appreciate. For example, from September 2011 to January 2015 , the Swiss National Bank ensured that at least 1.20 Swiss francs had to be paid for one euro by means of unlimited foreign currency purchases . Most currencies do not float completely freely, although there are few fixed exchange rates. Interventions by central banks aimed at influencing the exchange rate are called “dirty” or “managed” floating .
  3. As an international means of payment, gold hardly plays a role today.

literature

  • Graham Bird: Changing Partners: Perspectives and Policies of the Bretton Woods Institutions. In: Third World Quarterly. Vol. 15, No. 3, September 1994, ISSN  0143-6597 , pp. 483-503.
  • Barry Eichengreen : Desequilibrios globales y las lecciones de Bretton Woods. In: Desarrollo Económico. Vol. 44, No. 176, January / March 2005, ISSN  0046-001X , pp. 619-644.
  • Diane Elson: People, Development and International Financial Institutions. An Interpretation of the Bretton Woods System. In: Review of African Political Economy. Vol. 21, No. 62, December 1994, ISSN  0305-6244 , pp. 511-524.
  • Friedrich August Freiherr von der Heydte : The Gold Agreement of 1969 and international law . In: Ius et commercium. Studies on trade and Commercial law. Festschrift for Franz Laufke on his 70th birthday on June 20, 1971 presented by the Law Faculty of the Bavarian Julius Maximilians University in Würzburg . Holzner, Würzburg 1971, pp. 345-357.
  • Ben Steil: The Battle of Bretton Woods. The Making of a New World . Princeton University Press, Princeton (New Jersey), USA, ISBN 978-0-691-14909-7 .
  • John Williamson: On the System in Bretton Woods. In: The American Economic Review. Vol. 75, No. 2, = Papers and Proceedings of the Ninety-Seventh Annual Meeting of the American Economic Association. May 1985, ISSN  0002-8282 , pp. 74-79.

Web links

Individual evidence

  1. ^ Michael D. Bordo: The Bretton Woods International Monetary System: An Overview. In: Michael D. Bordo, Barry Eichengreen: A Retrospective on the Bretton Woods System. The University of Chicago Press, 1993, ISBN 0-226-06587-1 , p. 5.
  2. a b c See glossary entry by the Federal Ministry of Finance
  3. Federal Law Gazette Part II p. 637  ( page no longer available , search in web archivesInfo: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice.@1@ 2Template: Toter Link / www.bgbl.de  
  4. Bretton Woods Conference web.worldbank.org, accessed on November 27, 2010.
  5. See The Collapse of the Bretton Woods System 1973 ( Memento of March 6, 2006 in the Internet Archive ).
  6. ^ Paul JJ Welfens: Foundations of economic policy. 2nd Edition. 2005, ISBN 3-540-21212-4 , p. 235.
  7. Michael D. Bordo (Ed.): A Retrospective on the Bretton Woods System. Lessons for International Monetary Reform (= A National Bureau of Economic Research Project Reports ). University of Chicago Press, Chicago IL a. a. 1993, ISBN 0-226-06587-1 , p. 32.
  8. Cf. Manfred Borchert: Aussenwirtschaftslehre. Theory and politics. 7th, revised edition. Gabler, Wiesbaden 2001, ISBN 3-409-63907-1 , p. 427.
  9. See Börsenlexikon  ( page no longer available , search in web archivesInfo: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. .@1@ 2Template: Dead Link / www.boerse-online.de  
  10. ^ Anna Schwartz : The Operation of the Specie Standard. In: Michael D. Bordo: The Gold Standard and Related Regimes: Collected Essays. Cambridge University Press, 1999, ISBN 0-521-55006-8 , p. 218.
  11. ^ Otmar Emminger : D-Mark, dollar, currency crises. Memories of a former Bundesbank President . DVA, Munich 1986, p. 195.
  12. See Wolfgang Cezanne : Allgemeine Volkswirtschaftslehre. 6th, revised edition. Oldenbourg, Munich a. a. 2005, ISBN 3-486-57770-0 , pp. 644-647.
  13. Gerhard Rübel (2009): Basics of monetary foreign trade , Oldenbourg Wissenschaftsverlag, ISBN 978-3-486-59081-4 , p. 171.
  14. see also en: London Gold Pool .
  15. Diether Stolze : Will de Gaulle defeat the dollar? In: The time . No. 36, September 2, 1966.
  16. spiegel.de November 25, 1968: Gold back
  17. Waiting for Stability , Die Zeit No. 20, May 11, 1973, accessed on January 28, 2014
  18. Die Bonner Stabilssünder , Die Zeit No. 26 of June 22, 1973, accessed on January 28, 2014
  19. ^ The collapse of the Bretton Woods system ( memento from November 28, 2009 in the Internet Archive ) zeitenwende.ch, accessed on: December 1, 2010.
  20. a b cf. Horst Hanusch, Thomas Kuhn, Uwe Cantner : Economics. Volume 1: Basic Micro and Macroeconomics. 6th, improved edition. Springer, Berlin a. a. 2002, ISBN 3-540-43288-4 , pp. 483-484.
  21. ↑ The National Bank sets a minimum rate of CHF 1.20 per euro. (PDF) Swiss National Bank , September 6, 2011, accessed on October 10, 2014 (press release).