lecture 12 bretton woods

7/27/2019 Lecture 12 Bretton Woods

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International Political Economy #12

The Bretton Woods Monetary System

William Kindred Winecoff

Indiana University Bloomington

October 10, 2013

W. K. Winecoff | IPE #12: Bretton Woods 1/14
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The Need for a New System

After WWII the US:

Produced 50% of the worlds manufactures.

Owned 80% of the worlds gold reserves.

The postwar economy was clearly going to be dominated by the US.

The gold standard had failed.

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The Goal

Reconstruct the global economy and produce interdependence.

Hopefully peace would come from prosperity (or vice versa).

Stable exchange rates can help trade.

Stable exchange rates can provide new democracies with the ability to

adjust policy to demands of their citizens.

But only if capital mobility is limited.

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5/14W. K. Winecoff | IPE #12: Bretton Woods 5/14
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The Compromise

The $ would peg to gold to restrict the ability of US policymakers to

mess with $ value and every one else would peg to the $.

Sort of a modified gold standard.

Adjustable pegs built some flexibility into system.

Short-term capital financial deficits covered by the International

Monetary Fund.



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The Politics

This arrangement was the result of, and reinforced, American power:

hierarchy.

The $ becomes the key reserve currency and the globalcurrency for foreign exchange purposes.

It was governed by the IMF: institutionalization.

It firmly entrenched the US at the core of a global monetary system:

interconnectedness.

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The Performance



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The Performance

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A Keynesian Consensus

Governments smooth over short-run fluctuations in the business cycle.

Economic stability enhanced political stability.

Although many challenges during these years: Red Armies in

Italy and Japan, Baader-Meinhof gang in Germany,SDS/Weather Underground in the US, etc.

The interests of labor are prioritized: high top marginal tax rates, high

levels of unionization, expanding social welfare programs, expanding the

franchise.

Capital regulated at home and restricted from moving abroad.



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The Contradiction

It was also doomed.

To grow, states needed to trade.

To trade, the supply of $ used internationally (eurodollars,confusingly) also had to grow.

But $ was fixed in price to gold (at $35/oz), and gold supply

didnt grow as fast as the rest of global economy.

The Triffin Dilemma.



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Dollar As Lingua Franca

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Monetary Power

This gave the US quite a lot of power.

Suez Crisis

Exorbitant PrivilegeVietnam

But it also led to a stockpiling of imbalances that eventually destroyed

the system.

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The End

1968: two-tier market: private $ no longer redeemable for gold.

1971: $-gold convertibility is suspended.

1973: The dollar is floated and set by market price.

The original Bretton Woods system was gone. What would happen to

American prominence?

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lecture 12 bretton woods

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