Posted at 11.14.2018
John Maynard Keynes, a British economist argued the need for a fresh economic system. Keynesian economics rejected the set rate gold standard towards a fluctuating exchange rate. Keynes also called for an international bank to prevent another economic problems. He argued for slight protectionism both nationally and internationally. In order to argue the way the post-war liberal international financial order fell into turmoil it is essential to comprehend the components and function of the monetary system. This new monetary order possessed defining characteristics which contains embedded liberalism, in which it was argued that liberal trade promotes economical growth. Another characteristic of the new order is multilateralism, where a range of countries combine attempts, in this case was the establishment of organisations through this new economical system. Present at Bretton Woods, both John Maynard Keynes and Harry Dexter White argued their ideas for the new monetary design, 'Keynes and White also favoured capital handles to be able to preserve a stable international exchange rate system and liberal trading order'. The aims of the Bretton Woods conference were to make a deal a new economic order which would govern economic relations among indie nation states. It had been also founded to restore the international monetary system, create a system of rules, organizations, and procedures to regulate the international monetary system. . 29 countries were show hint the articles of agreement at the Bretton Woods conference. However, 'Keynes plan was never talked about significantly at Bretton Woods and the members agreed on the White plan'. Finalised in 1947, in Cuba, under Bretton Woods agreements it was made the decision that platinum was to be pegged at $35 per ounce. This meant that each other money was set to the united states dollar.
Another institution proven was the international monetary fund. This was designed to be able to aid state governments maintain fixed rates of exchange. This finance is paid subscriptions yearly from member countries in which is used to assist countries battling to pay the balance of repayments deficit. It could also find answers to problems including the convertibility of currencies and any financial issues within the world. The theory was that nations with prolonged deficits were to be given overdrafts in order to help the nation's market which acted as a safety net for the world economy. IMF agreement was required change in exchange rates. In addition, it was established to advise countries on policies affecting the monetary system. The IMF main purpose was to regulate inflation also to introduce strict plans. This meant that the divide between the north and producing south grew. It implies that the liberal economical order was only of benefit to traditional western countries. This is harmful to world market as developing countries continued to acquire from the international lender for reconstruction and development to pay balance of repayments, instead of reinvesting it within their economy.
Another institution set up under this arrangement was the international loan company for reconstruction and development. The aim of this institution was to assist the rebuilding of European countries from the devastation brought on by the war. It turned out regarded in 1944 that the new system could enter into being only after having a return to normalcy following a disruption of World Warfare II. It had been expected that international overall economy would recover. It was also expected to promote the development of world trade and funding the reconstruction of European countries. The IBRD possessed an authorized capitalization of $10 billion and was expected to make lending options of its money to underwrite private lending options and to concern securities to raise new cash. Another policy set up was the general agreement on tariffs and trade. This inspired trade between nations by laws and reductions. It also dished up as the supervisory body should any trading disputes arise.
The new liberal monetary order all together possessed its weaknesses which can be argued helped to donate to the crisis during the 1970s, 'The Keynesian paradigm had not been what it seemed to be. It was not absolutely all that easy to control the overall economy by wielding the levers of fiscal insurance policy'. First of all individuals disagreed with the foundations of Keynesian economics. Both Milton Friedman Robert Lucas shaped different quarrels which argue the machine was bound going to crisis. Firstly, it is argued that federal intervention amounts from ineffectiveness to damage to the economical system. Instant information of any downturn is available widely through information technology such as computer systems and through the means of the media. This might therefore that before any international organization has the perfect time to react, businesses could react which could conclude having a negative influence on the current economic climate. Furthermore it is presumed that recessions eventually recover themselves which the market normally takes steps in order to improve without the need for outside intervention. Out of this controversy, monetarism was acknowledged in which would dispute that the market has the features to adapt itself to combat inflation and unemployment and that governments role ought to be to inject a steady amount into the economy and preserve money supply. Another weakness within this technique was the inability to predict the onset of decolonisation and rising nationalism. This process witnessed many says around the globe gain independence using their company past colonial occupiers. If the Bretton Woods contract took place, only the users of the United Nations signed the articles of agreement. However the range of countries within the international system increased dramatically, especially following the fall of the original empires and the collapse of the Soviet Union. These recently established countries would have to be considered within the new economic reform. On top of that, with such a radical change in economics, a hegemonic condition is fundamental in order to maintain this change. Nevertheless the leading economic forces were unwilling to simply accept the needs and constraints on their macro-economies that must make such a system effective.
Robert Triffin, an American economist got recognized a weakness within the Bretton Woods system. The amount of U. S. us dollars in flow outweighed the quantity of silver in reserve. The key reason why the united states was the hegemonic state was because it was the most promising and stable financial state however, the 1960s observed a change in the value of yellow metal. An ounce of gold could be exchanged for $40 in Britain, even though the price was pegged at $35. This shows the dollar was overvalued. There is a solution to the dilemma. As the united states acted as the hegemonic condition, all currencies were centred on the buck. This idea became damaging to US overall economy, 'growing US balance of payments deficit designed that foreign governments were accumulating huge amounts of dollars- in aggregate quantity far exceeding the US government's stock of gold'. Through the 1960s demand for the money became low as countries were unwilling to simply accept the high inflation rates. This subsequently designed that because reserves of the dollar were low, the united states looked for an inflationary policy and established a limit on the convertibility of the buck. This may be argued was a weakness of the Bretton Woods system.
The explanations why the dollar endured can be put down to a few reasons. In the beginning, the US international policy was establish on the damage of communism and with money being invested to avoid the pass on of the ideology, 'the US pledged financial and military resources to confrontation of the Soviet Union'. US money were also used to help restore Western European countries and Japan in form of the Marshall Plan. The aim of this course of action was to avoid countries turning to communism, to bring wealth and to avoid another battle. The monetary repercussions from the Vietnam War 'economic burden of battle contributed to the destabilisation of the American overall economy that resulted in the stagflation of the 1970s', the American society were struck hard with a steep go up in taxes in order to cover the Conflict which got repercussions on inflation and an equilibrium of payments problems. Not only did the cold battle have a deep impact on the overall economy of the US, but all the countries included suffered, 'chilly war rivalry fed the flames of local issues, contributing to escalation violence and increasing poverty'.
The introduction of oil was important in explaining why the post-war liberal international financial order fell into crisis during the 1970s, 'The essential oil embargo which followed the 1973 Yom Kippur Warfare between Arabs and Israelis, supplied a terrific surprise to the market'. The 'seven sisters' organised a monopoly over engine oil in the centre East and collaborated to be able to create low prices and maximise their own passions over those of the oil producing states. The Organization of the Petroleum Exporting Countries (OPEC) is a long lasting was created to be able to counter act the exploitation. With scientific advancements and an evergrowing reliance on the natural source, petrol producing countries commenced to realise they were being exploited by Western powers and wished to reverse this technique. OPEC decided to use the creation of essential oil as political leverage in form with their foreign policy. The price tag on engine oil increased in 1973 from $1. 40 to $5. 90, this was eventually elevated to $11. 60. The sharpened escalation of oil prices inflicted a power crisis within both the US and Western Europe who had been dependent on Midsection Eastern oil for his or her energy options. Although the US had petrol reserves, the costs hit Western Europe hard and helped to donate to explain how the post-war liberal international economic order dropped into crisis through the 1970s.
In Conclusion, the reasons why post-war liberal international monetary order dropped into crisis through the 1970s are under much scrutiny. It had been believed that marketplaces could self-recover without the need of international companies. Nov the US as a hegemonic vitality also contributed to why the order dropped into turmoil. With repercussions on the currency from the Marshall plan, the chilly war and the Vietnam Warfare, America appeared to be involved more in international than domestic insurance policy. The final reason the order came to problems was the consequences of the olive oil crisis. Engine oil producing countries realised european countries reliance on the natural source and were therefore in a position to utilize this as a political tool. Moreover, It could be argued that the system established at Bretton Woods was weak and too controlled, 'the system was too rigid, too slow-moving, too distorting. . . it denied market segments the salutary ramifications of competition. It froze relationships, shored up cost levels, and, of critical significance, institutionalised inflation'.