THE BRETTON WOODS SYSTEM

The Bretton Woods System

After the two world wars, world leaders sought to create a

global economic system that would ensure a longer-lasting
global peace.
They believed that one of the ways to achieve this goal was
to set up a network of global financial institutions that would
promote economic interdependence and prosperity.
 The Bretton Woods System

The Bretton Woods System was inaugurated in 1944 during

United Nations Monetary and Financial Conference to prevent
the catastrophes of the early decades of the century from
reoccurring and affecting international ties.
The Bretton Woods System was largely influenced by the
ideas of British economist John Maynard Keynes.
 The Bretton Woods System

John Maynard Keynes believed that economic crises occur

not when a country does not have enough money, but when
money is not being spent and, thereby, not moving.
When economies slow down according to Keynes,
governments have to reinvigorate markets with infusions of
capital.
 The Bretton Woods System

Delegates at Bretton Woods agreed to create two financial

institutions:
 International Bank for Reconstruction and Development
 International Monetary Fund
 The Bretton Woods System

Shortly after Bretton woods, various countries committed

themselves to further global economic integration through
General Agreement on Tariffs and Trade (GATT) in 1947.
GATT’s main purpose is to reduce tariffs and hindrances to
free trade.
 Neoliberalism and Its Discontents

The high point of global Keynesianism came in the mid

1940s to the early 1970s. During this period, government poured
money into their economies , allowing people to purchase more
goods and, in the process, increase demands for these products.
As the demand increased, so did the prices of these goods
 Neoliberalism and Its Discontents
Westerns and some Asian economies like Japan accepted
the rise in prices because it was accompanied by general
economic growth and reduced unemployment.
 The theory went that, as prices increased, companies
would earn more, and would have more money to hire
workers.
 Neoliberalism and Its Discontents

In the early 1970s, however, the prices of oil rose sharply as

a result of the Organization of Arab Petroleum Exporting
Countries’ imposition of an embargo in response to the decision
of the United States and other countries to resupply the Israeli
military with the needed arms during the Yom Kippur War.
Arab countries also used the embargo to stabilize their
economies and growth.
 Neoliberalism and Its Discontents

The “oil embargo” affected the Western economies that

were reliant to oil.
To make matters worse, the stock markets crashed in 1973-
1974 and it effectively ended the Bretton woods System.
 Neoliberalism and Its Discontents

The result was a phenomenon that Keynesian economics

could not have predicted- a phenomenon called stagflation, in
which a decline in economic growth and employment
(stagnation) takes place alongside a sharp increase in prices
(inflation).
 Neoliberalism and Its Discontents
Around this time, a new form of economic thinking was
beginning to challenge the Keynesian orthodoxy.
Economists such as Friedrich Hayek and Milton Friedman
argued that the governments’ practice of pouring money into
their economies had caused inflation by increasing demand of
goods without necessarily increasing supply.
 Neoliberalism and Its Discontents

Economists like Friedman used the economic turmoil to

challenge the consensus around Keynes’s ideas.
What emerged was a new form of economic thinking that
critics labeled neoliberalism.
 Neoliberalism and Its Discontents

From the 1980s onward, neoliberalism became the codified

strategy of the United States Treasury Department, the World
Bank, the IMF, and eventually the Word Trade Organization
(WTO)- a new organization founded in 1995 to continue the
tariff reduction under the GATT.
The policies they forwarded came to be called the
Washington Consensus.
 Neoliberalism and Its Discontents
The Washington Consensus dominated global economic
policies from the 1980s until the early 2000s.
 It advocates pushed for minimal government spending to reduce
government debt.
 They also called for the privatization of government-controlled
services, believing that free market can produce the best results.
 They pressured governments, particularly in the developing world,
to reduce tariffs and open up their economies, arguing that is the
quickest way to progress.
 Neoliberalism and Its Discontents

The appeal of neoliberalism was in its simplicity. Its advocates

like US President Ronald Reagan and British Minister Margaret
Thatcher justified their reduction in government spending by
comparing national economies to households.
Thatcher, in particular, promoted an image of herself as a
mother, who reined in overspending to reduce the national debt.
 Neoliberalism and Its Discontents

The problem with household analogy is that governments are

not households.
 For one, government can print money, while households cannot.
 The constant taxation systems of governments provide them a
steady flow of income that allows them to pay and refinance debts
steadily.
 Neoliberalism and Its Discontents

Despite the initial success of neoliberal politicians like

Thatcher and Reagan, the defects of Washington Consensus became
immediately palpable.
After communism had collapsed in Russia in 1990s, the IMF
called for the immediate privatization of all government industries.
 Neoliberalism and Its Discontents
The government assumed that such a move would free
these industries from corrupt bureaucrats and pass them on to the
more dynamic and independent private investors.
What happened, however, was that only individuals and
groups who had accumulated wealth under the previous
communist order had the money to purchase these industries.
 Neoliberalism and Its Discontents

In some cases, the economic elites relied on easy access to

government funds to take over the industries. This practice has
entrenched an oligarchy that still dominates the Russian
economy to this very day.