Bretton Woods: The International Economic Order After World War II

The 20th century until the end of World War II was marked by wars and crises. Only the United States achieved high economic performance in the period from the end of World War I to the Depression of 1929, and some developed economies achieved high growth rates from 1929 to the beginning of World War II in 1939.

Due to the conditions imposed by the 1929 Depression and World War II, the laissez faire philosophy of capitalism had been eroded to a certain extent. The state was trying to discipline markets with laws by taking on a recuperative role in economies. The calm atmosphere that emerged after World War II meant that the social and economic wounds of war were being healed.

The recovery process after World War II continued until the oil crisis in 1973. The bipolar world created by the USA and the USSR led to the beginning of the cold war period in the 1960s. However, the rise of the capitalist world continued.

After World War II, a new economic order was attempted to be established. From the last quarter of the 19th century onwards, there was an international environment that was trying to reach a global dimension but could not achieve this. There were many reasons, both internal and external, for the advancement of capitalism, but it was thought that international organizations should guide international economic relations, with the idea that international peace could be secured by protecting mutual economic interests. The process of internationalization of economies had now begun.

Wars and crises had intervened, but especially after 1873 it was understood that the risk of a crisis in one country becoming contagious increased. Now it was necessary to establish a new order and bring order to trade between countries.

A conference was held between July 1-22, 1944 with the participation of 44 countries. Some decisions were made at the United Nations Monetary and Financial Conference held at the Mount Washington Hotel in Bretton Woods, New Hampshire, USA. John Maynard Keynes and Harry Dexter White were behind these decisions. A conference that was a preparation for Bretton Woods was also held in Atlantic City between June 15-30, 1944. That conference also went down in history as the Atlantic City Conference.

The three main outcomes of Bretton Woods were:

1. Establishment of the International Monetary Fund (IMF). The IMF's mission would be to stabilize exchange rates and the flow of international funds between countries.

2. Establishment of the World Bank (IBRD - International Bank for Reconstruction and Development). The World Bank's mission was to rebuild infrastructures destroyed during the war and to pave the way for the economic development of countries.

3. Some recommendations that will increase international economic cooperation emerge.

The main outlines of the economic order established after World War II with Bretton Woods were as follows:

1. Countries had to first become members of the IMF. IMF membership was a prerequisite for World Bank membership.

2. Exchange rates were indexed to the price of gold. Governments could only stop indexing exchange rates to gold prices if the economic balance was disrupted at very fundamental points.

3. Member countries would subject their currencies to free exchange conditions suitable for international trade and other current account transactions. In other words, each country's currency would have convertibility. However, a transition period was foreseen at this point. A monetary system that would allow all current account transactions to be carried out in all member countries could not be established until 1958, when the Western European countries and colonies that were members of the IMF made their currencies convertible. In the meantime, member countries were free to carry out their legal arrangements regarding international fund movements.

4. In order to eliminate any negative impacts on the balance of payments of one of the member countries, countries had the right to change the value of their currencies against gold by 10%. The IMF had the right to voice its objection to interventions exceeding the 10% limit, but it did not have the right to force countries to remain within the 10% limit. However, the IMF had the right not to allocate its resources in the event of any application for funds for countries exceeding the said limit.

The order established with Bretton Woods continued until the stagflation conditions that began to be seen in the 1970s. Stagflation is the simultaneous occurrence of high inflation and stagnation. This was the first time in economic history that such a situation had occurred. The order was terminated in 1971.

By the early 1970s, the total volume of transactions made with foreign exchange rates had surpassed the total volume of international flows of goods and services. The need for market-oriented policies, as repeatedly expressed by Friedrich Hayek and Milton Friedman, and the desire to return to the laissez faire philosophy of Classical Economics were increasingly expressed. Globalization, which was nearing its end towards the end of the 19th century, was interrupted by two world wars and especially the 1929 Depression.

The process of embedding capitalism within Immanuel Wallerstein's concept of the world system and leading Francis Fukuyama to write The End of History and the Last Man in 1992 was in motion in the early 1970s. In this book, Fukuyama argues that the free market-based capitalist economy and liberal democracies are the final stage of human sociocultural evolution.

Source: https://en.wikipedia.org/wiki/Bretton_Woods_system