Tema 8: Bretton Woods

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Triffin Dilemma

• Country whose currency is global reserve currency must be willing to supply the world with an extra supply
of its currency to fulfill demand for reserves  Trade Deficit and Inflation.
• Solution?
• Reduce dollars in circulation by cutting the deficit.
• Raising interest rates to attract dollars back into the country.
• Bretton Woods system  US had to run a current account deficit.
• With more US dollars in the system than were backed with gold under the Bretton Woods agreement, the US
dollar was overvalued.
• The gold reserves of the United States were reduced as foreign governments converted US dollars to gold
and took it offshore

Together again (1939-1973)

• Reconstruction east & west.

• Bretton Woods System in action.

• Decolonization & Socialism in action.

• The end of Bretton Woods.

Reconstruction east & west

• The US leads the way.

• The immediate task.

• The US and the European reconstruction.

• The Soviet bloc.

The US leads the way (I)

• Was the US into internationalism?

• Fight “nationalism, protectionism and war”.

• American free-traders: SoS Hull.

• 1941: US Congress deal with UK.

• Keynes-White agreement (1941):

• Freer international trade.

• Currency stability with flexibility.

• Gold backing without rigidity.

The US leads the way (II)

• Bretton Woods agreements (July 1944):

• Speculative vs. Productive investments.
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 • International Bank of Reconstruction and Development.
• International Monetary Fund.
• John Maynard Keynes and Dexter White.
• Meetings began in 1941.

The immediate task

• BW’s was not focused on rebuilding.

• Europe need imports: food, commodities…
• … but not real capacity to do it.
• US prosperity.
• Europe & Japan were exhausted.
• US turn outwards…
• Changed conditions, but same mind.
• Not competition vs. Dollar.
• American leading industry.
• Anti-Soviet strategy:
• Truman Doctrine.
• Economic Recovery Plan: Marshall Plan (13.5 bn. $).
• Dean Acheson.

The US and the European reconstruction (I)

• American loans and aid.
• 10 bn. $ right after war to Japan and Europe.
• American markets: Finance.
• Export-led growt to the US.
• American support: “teaching democracy”.
• Gold-dollar standard: bear on US.
• Trade liberalization.
• European politics: left-leaning.

The Soviet Union builds a bloc

• Greater devastation in Central/Eastern Europe.
• Soviet Union: 20 million people lost.
• Hyper-inflation and deeper crises.
• Bigger pre-war states, smaller private sectors.
• January 1949: Council for Mutual Economic Assistance – CMEA vs. Marshall Plan.
• Central planning in Europe

Together again (1939-1973)

• Reconstruction east & west.
• Bretton Woods System in action.
• Decolonization & Socialism in action.
• The end of Bretton Woods.

Bretton Woods System in Action

• Post war growth accelerates.
• United States of Europe.
• Bretton Woods in trade.
• Bretton Woods monetary order.
• International investment under Bretton Woods.

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Postwar growth accelerates
• BW’s sprit:
• Integration tempered with domestic attention.
• Markets tempered with social reform.
• US Leadership tempered with Western cooperation.
• BW’s delivered: growth, low unemployment, stable prices.
• From export-led growth to domestic growth.
• American not slow: Exports and Industry.
• Europe: Consumer durables.
• America: the center of the network…but multipolarity!

The United States of Europe

• Relevance in the global economy.
• Loss of elevance: France, Germany, Italy.
• Not the best neighboors.
• World War II cost: 263 years of economic growth.
• From top to bottom.

“There will be no peace in Europe if the States rebuild themselves on the basis of national sovereignty, with its
implications of prestige politics and economic protection (...). The countries of Europe are not strong enough
individually to be able to guarantee prosperity and social development for their peoples. The States of Europe must
therefore form a federation or a European entity that would make them into a common economic unit”
Jean Monnet

Bretton Woods in Trade

3 big achievements:
• Relatively free trade.
• Stable currency values.
• High levels of international investment.
Trade liberalization:
• GATT: Forum, not organization.
• Political compromise.
• Gold stability and adjustment flexibility.

Bretton Woods monetary order

• Mid point: gold standard / interwar flexibility.

• Bancor proposal: Keynes.
• Dollar and Gold.
• Short-term capital flows restrictions.
• The unholy trinity.
• The US and the cost of the adjustment.

International investment in BW’s

• Different from expected.
• Expectations: WB lending to Europe and Japan.
• Reality: Marshall plan did that.
• WB and development mission.
• FDI: multinational corporations.
• Not in agriculture anymore.
• Not in colonies, but in developed countries.
• From country to firm perspective.
• Two reasons for FDI growth:
• Stability and country-related growth.
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 • Persistance of several trade barriers.
• Tariff jumping multinationals.
• Auto-industry, computer, chemicals…

A little summary here…

• The Bretton Woods system of exchange rates was set up as a gold exchange standard. The U.S. dollar was
the reserve currency, and the dollar was fixed to gold at $35 per ounce.
• The International Monetary Fund (IMF) was established to provide temporary loans to countries to help
maintain their fixed exchange rates.
• U.S. expansionary monetary policy and its inflationary consequences were exported to the nonreserve
countries by virtue of the fixed exchange rate system.
• The suspension of dollar-gold convertibility in 1971 effectively ended the gold exchange standard and
marked the death of the Bretton Woods system.
• The Bretton Woods system collapsed in 1973 when all the currencies were allowed to float.
• A fixed exchange rate system requires non-reserve countries to give up the independence of their monetary
policy regardless of domestic economic circumstances.

Together again (1939-1973)

• Reconstruction east & west.
• Bretton Woods System in action.
• Decolonization & Socialism in action.
• The end of Bretton Woods.

Decolonization and Socialism

• Import-substituting industrialization.
• The third world embraces ISI.
• Socialist expansion and division.

Import-substituting industrialization

• LATAM isolation: 1930-1950s.

• Self-production: cofee, cattle, copper…
• No imports from US or Europe.
• 1940s: industrial and urban LATAM.
• Support for autarky: 40s and 50s.
• High barriers on trade.
• State-controlled industries.
• Large but inefficient.
• Still poor, agricultural and institutionally weak.

The Third World embraces ISI

• India: post-colonial nationalist reorientation.

• India: rapid industrialization.
• Asia and Africa: 2-3% year growth.
• Economic structure transformed:
• Cities emergence.
• From agriculture to industry.
• Greater protection and subsidies.
• Bigger governments.
• Extracting elites.
• Not sustainable growth.

Socialism expansion and division

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 • 1939-1960: From 1 to 14 socialist countries.
• USSR was a real threat / alternative.
• Different socialisms:
• Room for private sector.
• China, North Korea, Vietnam.
• Asian replicas to Stalin’s Soviet Union.
• Central planning with variations.
• 1953 Stalin died –> National paths separated.
• Softened version of Stalin’s approach.
• China opposite direction.
• Popular discontent in USSR.
• Khruschev: something more than revolution.
• Agriculture and Industry reorganization.
• Strong growth.
• Two big problems: over-centralization and lack of investments.
• Political / ideological barriers to reforms.
• China and the third world.

Together again (1939-1973)

• Reconstruction east & west.
• Bretton Woods System in action.
• Decolonization & Socialism in action.
• The end of Bretton Woods.

The end of Bretton Woods

• The compromises unravel.
• Challenges to trade and investment.
• Crises of import substitution.
• Socialism stagnates.
• The end on en era.

The compromises unravel

• American trade-off: international vs. domestic.

• $ / gold: 35 dollars per ounce.
• Two causes for break-up:
• Restoration of international finance.
• Reliability of the dollar? Balance of Payments.
• US inflation: real appreciation.
• Expected devaluation –> Selling dollars.
• Protection was not enough.

Challenges to trade and investment

• Trade liberalization was all-winning until 70s.
• Then losers emerged…
• …specially in the US: textile, Steel, footwear…
• Protectionism again.
• And the American balance of payments.
• Tougher GATT negotiating rounds.
• NTBs: Non-Tariff Barriers.
• Inflation.
• Backlash vs. multinational firms.

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Crises of import substitution
• Chronic problems with balance of trade.
• Import intensity of import substitution.
• Trade defficits…how to Finance them?
• Budget deficit + inflation.
• Balance of payments crises:
• Brazil.
• Chile.
• Mexico…
• Re-openning to international markets.

Socialism stagnates
• Economic reforms: stopped / slowed.
• Reforms: threat to socialist elites.
• Not rising living standards.
• Falling behind technologically.
• Public effort was not sufficient.
• Open to trade…was not enough.
• Rising popular instability.

The end of an era

• Post WW II compromise:

• Domestic + International.

• Market + Welfare State.

• Success: Growth and welfare.

• Problems: US taking the adjustment costs.

• Third World: unstable growth.

• New challanges, new strategies.