Question

Discuss the significance of the post World War II period in terms of global economic organization and institutions. Consider the impact of the Bretton Woods institutions and also how the global economy was divided at this time.

Answer 1

The need was felt to establish a more efficient and reliable world monetary system after the abandonment of the gold standard and unstable international monetary conditions during the inter-war era. In 1944, in Bretton Woods , New Hampshire in the United States, the leaders of 44 countries gathered to establish the basis of the international monetary system. The Bretton Woods conference outlined such concepts as the rules for the world monetary system to work.

The Bretton Woods Scheme envisaged the elimination of all limitations on the complete convertibility of member countries ' currencies into currencies of one another or into dollars. It was expected that the member countries would not introduce new trade restrictions. The current trade barriers were to be phased out by way of multilateral agreements. However, limits on international liquid capital flows have been allowed to encourage Member States to safeguard their currencies from massive, destabilising international cash flows.

Although the IMF was only willing to offer funding to the Member States to resolve the temporary BOP shortfall, the sums collected will have to be returned over a limited span of 3 to 5 years. This clause was deemed appropriate to keep the IMF funds from being locked up for long periods. Under the Bretton Woods Scheme, the International Bank for Reconstruction and Development was expected to provide long-term development assistance.

The Bretton Woods Scheme was argued to give rise to the United States' seigniorage over other nations, as the dollar became the world reserve currency that gave the Americans some excessive privilege. The problem of seigniorage emerged when the issuing nation of dollar was the United States. It could issue more dollars when and when dollars were needed.

In the other hand, another nation wanting to expand its keeping of dollars could do so only by producing an export surplus, i.e., in exchange for dollars, it will have to forego actual money. A much higher rate of return for dollars from foreigners will be received by the United States central bank than what it could obtain in the home world. The presence of seigniorage among some of the countries, including France, was the cause of irritation. This element has weakened the Bretton Woods System in the long run,

There was a general issue of symmetry between nations with a debt and a surplus, or between the United States and the rest of the world. Although the Bretton Woods Scheme intended that the burden of adjustment in payment imbalances could be spread by both deficit and surplus countries, the brunt of adjustment fell practically exclusively on deficit countries.

Although surplus countries were free to continue to run surpluses as long as they were willing to raise reserves, their reserves could not be decreased indefinitely by deficit countries. This deficit-surplus-country asymmetry uncovered a significant flaw in this mechanism and became partially responsible for its eclipse.