Bretton Woods System

--Creation, Evolution and Collapse

The Gold Standard System

• Britain as the Hegemon• Financial Crises under Britain: Baring Crisis in

1870s and the 1907 U.S. Financial Crisis• Financial Crisis: Tendency in the Peripheral

Countries• Different Arrangements for Exchange Rates

The Keynes and White Plans

• Harry Dexter White: Pro-price stability• John Maynard Keynes: Pro-growth Plan• A Compromised, but more U.S. Version• Embedded Liberalism: From Laissez Faire to

Government Intervention• Economic, Political and Strategic Purposes:

Truman Doctrine, Containment Policy

Major Mechanisms under Bretton Woods System

• IMF• World Bank• ITO—GATT• US Dollar Pegging at $35/ounce: Dollar-Gold

Standard: “As good as gold”• The Triffin Dilemma

Sea Changes in the International System

• The European Recovery Plan (The Marshall Plan)• European (e.g., Germany) and Japanese Economic

Rise• The Dollar Overhang: 1962• The Vietnam War and the Great Society Project• The Private Market vs. Government Market

regarding the Value of Dollar in terms of Gold• Nixon’s Unilateral Decision: August 15, 1971• Stagflation

Ad Hoc Plans after Nixon’s Policy

• The Smithsonian Agreement: 1971-1973• The End of Bretton Woods System: 1973• The Oil Crisis: Quadrupling of Oil Price in Less a

Decade• The Creation of Petrodollar• The Cycles: Petrodollar, Eurodollar and the Third

World Debt• Two Cycles of Bust and Boom: 1980s and 1990s

Balance of Payments

• Balance of Payments: A statistical record of all the international monetary transactions undertaken by the residents of one nation with those of other nations in a given year, measured in current dollars. Surplus, Deficit and Equilibrium.

• Current Account: Money received for exports of goods and services.

• Capital and Financial Account: Money received from foreign buyers for sales of bonds, stocks, real estate, patents and other assets.

The Mundell Trilemma

• The Fleming-Mundell Impossibility Theorem• The Unholy Trinity: Free Capital Flow, Fixed

Exchange Rate and the Autonomy in Macroeconomic Policy

• The Bretton Woods System: Fixed Exchange Rate, Policy Autonomy, but Control over Capital Flow

Sea Changes Again

• Technological Innovations: Communication and Transportation

• Financial Products• The Importance of Private Capital• The Importance of Portfolio Investment• Financial Liberalization and Financial

Globalization

Susan Strange: Innovations and Changes in Financial Industry

• Mad Money: When Markets Outgrow Governments• Five Changes in 1980s1. Enormous and Fast Technological Innovations2. The Sheer Size of the Market3. End of Banking: commercial Banks turned into

Investment Banks4. The Emergence of Asia—Japan and China—as a Major

Player in the Casino Capitalism5. The Growing Involvement of Organized crime in Finance

(Money Laundering for drug, corruption, tax evasion).

S. Strange: Three Main Categories of technology

1. ComputersElectronic Money, Light Speed of Change

2. Chips—Clearing House Interbank Payments SystemBy 1995, one day transaction 1.3 trillion in this system;

credit card, digital money. Significance for money supply and the velocity of money

3. SatellitesFax, the internet, email, teleconference.

Innovative Financial Changes: New Products, Derivatives

• Eurodollas Loans in 1960s• Junk Bonds (high-yield bonds) in 1970sThe average market value of newly issued bonds rated B or CCC in the 1970s:

$322million; in 1986, $25.9 billion.

• Global Derivative MarketsFuture Contracts, Hedging against from losses in changing commodity (e.g.,

oil, minerals) prices and foreign exchange prices. Hedge funds.In 1995, the value of derivative contracts in 26 countries amounted twice the

value of world economic output--$47.5 trillion.

• Credit Derivatives: Default swaps and default options• Loopholes, Cracks in American regulatory system, tax law, etc.

Global Financial Cooperation

• G-4• G-7• G-10• G-20• G-2?