US Financial Crisis: Is It the Moment for Bretton Woods II?

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US Financial Crisis: Is It theMoment for Bretton Woods II?

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But the pre-War classical gold standard, which fixed foreign exchange rates permanently, had the shortcomings of limiting the international liquidity and requiring the trade deficit nations to undergo deflation and contraction . So, a fine balancewas sought between the two polar alternatives of fixed and floating exchange rates so as to secure the advantages of the both, without suffering the disadvantages of the either. This resulted in the emergence of ‘a pegged but adjustable’ exchange rate regime known as ‘par value system’ where member countries were obliged to stick to their declared par value.The exchange rate fluctuations were limited to amaximumof 1%above or below the parity. However, the requisite alteration in par value could be resorted to as per agreed procedures in rare occasions in order to correct a fundamental disequilibrium in the balance of payments of a member country. Under the Bretton Woods system, foreign currencies were pegged to the US dollar and the US dollar was pegged to gold at $35 per oz. It meant as if all currencies were anchored to gold. The right to convertibility into gold was granted only to foreign central banks and not to individual dollar holders with the deliberate objective of putting a stop to speculative activities in the currency market.

The focus of the Bretton Woods conference was centred on two issues - How to establish a stable system of exchange and how to rebuild the war-ravaged economies of Europe. Towards this end, two international organisations were set up. The International Monetary Fund (IMF) was to look after the first issue while the International Bank for Reconstruction and Development (IBRD), popularly known as the World Bank,was to concern itself with the second issue.Athird organisation, named International Trade Organisation (ITO), was conceived to encourage free trade; but it came out stillborn with US’ refusal to ratify it, though tariff reductions were pursued through a watereddown General Agreement on Tariffs and Trade (GATT), which later on eventuated into the World Trade Organisation (WTO).

Bretton Woods was, in actuality, more than an attempt to shape the global economic system. Lurked behind the US interest in strengthening the economies of the rest of the world, particularly theWest Europe,was the real intent to immunise themfromthe impending contagion of communism and to contain the sway of Soviet Union. The NorthAtlantic Treaty Organisation (NATO) was born post-BrettonWoods to hedge against Soviet invasion. Therefore, the US allowed almost tariff-free access toWest Europe even though the latter imposed tariffs on their imports. This helped Europe develop economically. But theUS also benefitted aswell onmatters political andmilitary by securing their acquiescence to its decisions. For redevelopment ofWestern Europe, the US extended loans, most of which later on turned into grants under theMarshall plan.Any country such as Japan, South Korea and Taiwan signing up as its cold war allies also gained from the US trade deficit with them.

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1] Schifferes Steve, “How Bretton Woods reshaped the world”, http://news.bbc.co.uk/mobile/i/bbc_news/business/globalcreditcrunch/ 772/77251/story7725157.shtml, November 14th 2008
2] Stiglitz Joseph E., “The Next Bretton Woods”, The Economic Times, November 11th 2008
3] “Rahm Emanuel: Don’t Waste A ‘Serious Crisis’”, http://allthenewsthatfits.wordpress.com/2008/11/21/rahm-emanuel-dontwaste- a-serious-crisis
4] Desai Meghnad, “Dealers with Dollars”, The Financial Express, November 3rd 2008, page 6