Entorn Econòmic

Maria Faura Pardo

1 The Bretton Woods System: Configuration of the

new framework for International economic
relations after the Second World War.

Configuration of the new framework for international economic relations after the IIW.

The World after 1945 was conditioned by 3 historical factors:

1. The Great Depression. Important economic phenomen Crisis (1929-1939) –crack del
1929 and the crisis of the capitalist world. German suffered a lot in the crisis which
put Hitler as the winner of the elections. This vulnebarility change politics
prespective.
2. The Second World War. (1939-1945)
3. The Cold War (1947-1989) USA liberalist, free market, democratic political system.
Soviet Union Communism, economic planning, no democratic system, no free
market. Conflict between two political and economical powers. But also all the
world was divided.

1.THE GREAT DEPRESSION:

The Great Depression led to the crisis of laissez-faire. (no political intervention,free market)
1936 John M. Keynes revolutionized economic theory and economic policy. He wasn’t either
a capitalist or a communist. He saw that capitalism had a problem . Said that the crisis was
because of the lack of demand. Firms didn’t sell all the production, this caused lose to the
firms which broght more unempplemoyment. Also ow expectations of business man, n
uture for companies so they safe. People start saving and expending a low part of the
income. He though only 1 element could change this situation. The Government, for
example with the budget deficit.
The management of aggregate demand became essential.
Old system didn’t work (proteccionism) and the crisis proved it. Crisis let to think to new
policies.
Now Government was responsible for low unemployment, high growth rates and moderate
inflation. A lot of unemployment and in that time there wasn’t any unemployment
compensation.
Fiscal and monetary policies (restrictive or expansionary-print more money
+cosumtion+investment-) were the main tools against economic cycles.
Apart from Keynesian economics, the sufferings of WWII and the prestige of the communist
alternative led to the birth of a new social contract
Western elites accepted to pay high taxes and development of the Welfare State in
exchange of maintaining market economy.
Two things at the same time: The publishing of the Beveridge Report in 1942 and the Labor
Party (socialist- party that will care about poupltion after sufering war) in the British
Entorn Econòmic
Maria Faura Pardo

elections of 1945 open the way to these policies. (after the country asking people to fight
for their country could not no help them with a new economy)

The new social contract included

 Aggregate demand policies
 Welfare State (with progressive tax system)-free education, cheap housing,
unemployment benefits, retirement benefits, health national system, children
allowences.
 State-own enterprises
 Regulation
 Neo-corporatist industrial relations
Mixed economy and decreasing inequality.

The Beverige report.

Economy started to improve and also reduced inequality. (1945-1973 all good) after that
crisis of oil.
Entorn Econòmic
Maria Faura Pardo

BRETTON WOODS SYSTEM (1945-1971)

Protagonistes: Estats Units, Britain. Conferencia diferents paisos.

La USSR first participated but later on stooped, it didn’t participate in the FMI , international
bank.

How are we going to organize the economy after the war?

Between the period of IWW and IIWW the economy was a disaster. Britain and USA wanted
to improved the economy avoiding some mistakes that did in the past like the
proteccionism and gold standar.
Since now governments needed more room of maneuver, the international monetary
system needed to be more flexible than the gold standard.
The new system was agreed in the Bretton Woods Conference (July 1944).

Keynes’ obsession was that governments could make monetary and fiscal countercyclical
policies.
Under Keynesian economics domestic equilibrium had not to be subordinated to foreign
equilibrium.

Gold standard, 2 consequences why Keynes was against the gold standar:
-fix exchange rate of gold
If there is unemployment, one of the policies recommended is to print more money. With
gold , policies couldn’t print more money because maybe banks didn’t had all that quantity
of gold.

Under the gold standard goverments were not able to do contraiclial policies.

It was through that fixed exchange rates gave stability and promoted international trade.
Main characteristics of the Bretton Woods system:
 Fixed exchange rate (but it was possible to change parties) ($convertible to gold;
other currencies convertible to $):
 IMF(international organization) could finance temporary foreign deficits (current
account plus foreign direct investment) (but few money). International bank wanted
to finance temporary foreign deficit , it will have to change their exchange rates
(devolve your currency and make exports cheaper. )Curt termini, trade deficit.
 Capital flows controls when necessary.

Mundell-Fleming trilemma:

GOLD STANDARD BRETTON WOODS

Entorn Econòmic
Maria Faura Pardo

Fixed exchange rates Fixed exchange rates

Free capital movement (no restrictions of Free capital movement(3era caracteristica
capital) Bretton woods)
Independent monetary policy Independent monetary policy

At the beginning it did not work very well:

 British pound convertibility failure (1947)
 Need of the Marshall Plan (1948-51)
 European Payments Union (1950-58)
 European currencies did not become convertible until 1958\

In the long run it was unsustainable (Tiffin dilemma):

To supply the world’s risk-free asset ($), the country at the heart of the international
monetary system (USA) had to run a foreign deficit. In doing so, it became more indebted to
foreigners until the risk-free asset ($) ceased to be risk-free.

Most of the currencies had yo be convertible to dollars in order to be able to print more of
their own currency. Dollars worked as gold. Everybody wanted dollars, usa had a lot of
gold). International pressure to the USA to print more dollars. In the 60s usa proposed a
more relaxed economic system.

USA during the 1960s financed

 Their growing budget deficit (Vietnam, Great Society)
 Their foreign deficit
Issuing dollars that were demanded all over the World.

This contradiction became unsustainable in August 1971 and Nixon suspended the
convertibility of the dollar into gold.
This was the end of the Bretton Woods system and the beginning of the floating exchange-
rate era.

Mundell-Fleming trilemma:
BRETTON WOODS POST BRETTON WOODS
Fixed exchange rates Fixed exchange rates
Free capital movement Free capital movement
Independent monetary policy Independent monetary policy

THE GOLDEN AGE (1950-1973)

During these years of mixed economies and the Bretton Woods system capitalist economies
grew faster than ever and no serious financial crisis happened.
The oil crisis of 1973 stopped this Golden and Keynesian Age.

Economic policy factors helped to this economic bonanza:

Entorn Econòmic
Maria Faura Pardo

 Financial stability
 Aggregate Demand management
 Social peace
 High levels of consumption
But also other helped:
 Structural change
 Technological catching-up
Entorn Econòmic
Maria Faura Pardo

Reading chapter 1 The Impossible Settlement

1. Why does Tony Just say “The years 1941-45 were just an interlude in an international
struggle between democracies and Soviet totalitarianism”? (p. 5)

2. What was the American post-war strategy until 1947? Did it reach its objectives? (p. 110)

3. What does Tony Judt mean when he says “[in mid-1947] France urgently needed not just
AmericanaidbutGermanrecovery”? (p.11)

4. What does Tony Judt mean when he says “if you could not destroy Germany, then join
her up to a European framework in which she could do no harm militarily but much good
economically”? (p.11)

5. Which strategy had USA, UK, France and USSR on Germany, and how did they change it in
the period 1945-48?

Germany divided 2 parts, 1 federated, usrr.

Marshalplan part west, ajudes estats units. More jobs, more salary.