What explains the demise of the Bretton Woods system Essay

What explains the demise of the Bretton Woods system - Essay Example The joint venture brought about a system wherein countries having problems in balance of payments can solve it because of one of the feature of fixed exchange rates in the agreement. This has laid to an economic reconstruction in Europe for a very long decade which in turn gave rise to capitalist expansion, which has not been seen till date. This gave an added boost to the global economy where mostly in the capitalist countries, the standard of living of the working class has improved to a very high extent. (Bordo & Eichengreen, 1993). In the period of post World War 1, majority of the countries had a tendency to go back to the previous situation of financial stability and security as it prevailed before such wars were held. The old gold standard were again preferred and every country tried to incline towards it and by 1926 all the leading economies again established the system and accordingly the circulating money of every nation had to be geared by gold reserves and foreign currenc ies to a huge extent. But while implementing the gold several steps were undertaken mistakenly as a result of which the economic and financial relations collapsed leading to the Great Depression in 1929. In order to reduce the deficit in payment balance by deflating its currency every single country gave a boost to its export product to increase its competitiveness in productivity. This idea fell in place and was running successfully till the countries continued deflating their currencies. This over laid phenomenon marked an international deflation competition which led to unemployment among masses, enterprises were rubbed out of bankruptcy, many credit institutions failed and also hyper inflation was noted to occur in various countries concerned. (Kenen, 1994; Moggridge, 1980). Due to this phenomenon of Great Depression, several conferences who were dealing with the world monetary problems ended up in failure in the decade of 1930s. But every country tended for a stabilizing system that rectified mistakes which became one of the evident phenomenons. After this, several plans were made in order to build an innovative monetary system and an institution that will supervise all sorts of actions and financial hazards. During the war time conditions, all of the initial negotiations happened. (Kenen, 1994; Moggridge, 1980). In Bretton Woods, New Hampshire (USA), an international conference took place in 1944. This conference was attended by 44 countries so as to restructure the international finance and currency relationships. The International Monetary Fund (IMF) and The International Bank For Reconstruction And Development (IBRD/ World Bank) was created by the participants of this conference . In addition, they also accepted the fact of implementing a system of fixed exchange rate with the U.S dollar as the leading currency. Harry Dexter White, the American Minister of State in the U.S treasury and the British Economist John Mayard Keynes were responsible to devel op the plans for the Bretton Woods system. They also stated that they want to establish a system which would be acceptable by all the nations. The ideas of Harry Dexter and Keynes always happened to be very similar to each other. The White Plan supplements that a Bank for Reconstruction and an International Stabilization Fund should be put up. This was similar to what Keynes has described in his plan. But there was a little difference which got reflected in Keynes plan was he wanted to vest the IMF ideas with possibilities to create money and with the authority to take actions on a very large scale. Whenever there will be imbalances in the balance of payments both the sides, that is, both the debtors and creditors must change their policies. Countries that have their payments in excess should increase their scale of imports from the countries