GPSEB

• BRETTONWOODS SYSTEM• RISE OF EURO• NEW INTERNATIONAL

ECONOMIC ORDER

• MAHAVEER SINGH(173)• VIKRAM PURI(163)• NISHANT DHANKHAR(127)• MANDEEP SINGH(61)• PRABHJYOT SINGH(37)

ECONOMIC CONDITIONS AFTER WW1

• After World War I most countries wanted to return to the old financial security.

• By 1926 all leading economies had re-established the system, according to which every nation’s circulating money had to be backed by reserves of gold and foreign currencies to a certain extent.

• But several mistakes in implementing the gold standard .

• Every single country tried to increase the competitiveness of its export products in order to reduce its payment balance deficit by deflating its currency.

• This strategy only led to success as long as a country was deflating faster and more strongly than all other nations.

• This led to THE GREAT DEPRESSION.

• All these mistakes were to be avoided after WW2.

RISE OF BRETTONWOOD

• In 1944 an international conference took place in Bretton Woods, New Hampshire (USA).

• 44 countries attended this conference in order to restructure international finance and currency relationships.

Mechanism: The United States allows the monetary system to be secured

by its currency and economy. This gives the US an enormous amount of power, ushers in US hegemony and secure alliances between the US and Western states – vital for US foreign policy objectives during the cold war

The Dominant Role Of The USA

• After World War II the United States was the country with the biggest economic potential.

• ALL European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into

the United States, a fact that contributed to the supremacy of the USA.

• Policy makers thought that currencies should be backed by gold .

• In 1946, the US held $26 billion worth of gold when the estimated world total was $33 billion.

A gold standard

– The dollar (stable) and the US economy being the strongest were used to provide monetary stability for the system.

– The US $ was exchangeable for gold and all other currency was pegged against dollar.

– The dollar was pegged at $ 35 = 1 ounce of gold.

– US holder of huge gold reserves enough to underwrite the system

– The dollar becomes as good as gold, and has more benefits e.g. earns interest

Currency convertibility

– All currencies were convertible to facilitate trade and other economic interaction

– Currencies usually quoted in relation to their value to the $ and/or gold

– The system opts for fixed exchange rate, to prevent huge debilitating currency fluctuations

– Exchange rates are allowed to fluctuate within the band of 1% against $ which affords 2% against non-dollar currencies.

– A hybrid system - stability of gold but with a certain amount of flexibility, does not stifle economic growth if there are short term monetary problems e.g. deficits

– Central Banks had to buy or sell currencies to keep exchange rates within bands

The Five Pillars of the Bretton Woods System

Bretton Woods System

NationalSovereignty

FixedExchange

rates

A Gold standard

International InstitutionsWorld Bank

IMFITO/GATT

FundamentalDisequilibrium

– States could choose their own domestic economic policies.

– Very important as many states would not have been part of a system that dictated the type domestic economic to be used.

– Made system unique, as usually international norms/regime dictate domestic economic policy

National Sovereignty

The International Monetary Fund

• Established on December 27, 1945.• Commenced its financial operations on March 1, 1947.

OBJECTIVES:• To promote international monetary cooperation by establishing

a global monitoring agency.• Facilitates world trade expansion.• Ensures exchange rate stability.• Moreover, member countries with disequilibriums in their

balance of payments are provided with the opportunity to correct their problems by making the financial resources of the IMF available for them.

OPERATIONS OF IMF:

• Quota Subscription: When joining the IMF, each country must contribute a certain sum of money, which is called a quota subscription and is a sort of credit deposit.

• IMF uses this money to grant loans to member countries

• For the country that files an application for loan it provides an opportunity to buy a foreign currency and paying with gold or the national currency.

• The IMF has no control over national economic policies of its members

IBRD-THE WORLD BANK

• Its goals are to improve living standards and to eliminate the worst forms of poverty.

• The World Bank is an independent organisation of the United Nations.

• Each country that wants to join it, has to be a member of the IMF.

• The World Bank aims to keep payments in developing countries balanced and fosters international trade.

CRISIS OF THE SYSTEM

• In the 1960s the warring nations of World War II grew unexpectedly fast.

• This led to a weakening of the position of the USA and a devaluation of the U.S. dollar needed.

• Reserves were inadequate to back the trade expansion .• Reserves were mainly in the form of GOLD and US DOLLAR.• The US balance of payments was disturbed.• People lost faith in dollar and wanted their currency to be

converted into gold.

WHY US HAD DEFICIT IN BP:

(a) a higher rate of return outside, which results in a capital outflow.(b) military commitments in Europe and Asia.(c)The Vietnam war also caused inflation in the US.(d) Space race with USSR.

1958-1971:1. Cumulative reserve deficit of $56 billion.2. Gradual depletion of international reserve assets .3. Increase in liabilities to foreign central banks.4. From 1963,the foreign central banks tried to convert their dollar

reserves into gold.5. Gold reserve of US DEPLETED.

Collapse of the Bretton Woods:

• The US had one third gold stock against dollar amount.

• under the Smithsonian Agreement the price of the gold was raise to $38.2/1oz.

• Bandwidth was increased to 2.35%

Collapse of the Bretton Woods:

• In 1970, funds began to move at an enormous rate from the US dollar to financial centers in Europe and Japan.

• PRESIDENT NIXON announced on August 15, 1971:

‘’suspension of dollar's convertibility into gold’’

The Nixon Shock

• August 7th ,1971 Richard Nixon announces that US would no longer exchange dollars for gold.

• Imposes surcharge imports into the US in an attempt to force a realignment of other currencies exchange rates

• Move unexpected and done without consultation• Move heralds the beginning of a floating exchange

rate system• Jamaica Accord (1976) made legal floating rates.

New International Economic Order

• NIEO was initiated by Non-Aligned Nations in their 1973 Summit meet at Algeria.

• later endorsed by Group of 77 at UNCTAD 1973.• The Declaration for the Establishment of a New

International Economic Order, adopted by the United Nations General Assembly in 1974.

• It is meant to revise economic system in favor of “South” or third world nations.

UN declaration

• “Establishment of a New International Economic Order based on equity, sovereign equality, interdependence, common interest and cooperation among all States, irrespective of their economic and social systems which shall correct inequalities and redress existing injustices, make it possible to eliminate the widening gap between the developed and the developing countries and ensure steadily accelerating economic and social development and peace and justice for present and future generations.”

Objectives

• To create an International pressure on the “North” or developed nations.

• To resolve problems of primary commodities as related to trade and development.

• To get assistance in development.• Improved access to markets in developed countries

through the progressive removal of tariff and non-tariff barriers and of restrictive business practices.

• Setting up general principles for pricing policy for exports of commodities of developing countries.

• Measures to eliminate the instability of the international monetary system, in particular the uncertainty of the exchange rates.

• To formulate an international code of conduct for the transfer of technology corresponding to needs and conditions prevalent in developing countries.

• To promote international co-operation in research and development in exploration and exploitation, conservation and the legitimate utilization of natural resources and all sources of energy

• to regulate and control the activities of multinational corporations operating within their territory.

Why Failed

• They tried set up associations of primary commodities producers similar to the OPEC but they are less critical.

• The “ north” had upper hand in economy, so it failed in 1989.

• They tried to dominate developed countries on the basis of the Number strength.

• Their own economies were being run inefficiently.• The price stability was not viable in international

trade if it was to be free.

Euro

• The euro was established by the provisions in the 1992 Maastricht Treaty.

• Introduced on January 1, 1999• Now, currency of 15 nations and 320 million people in

euro zone• Second most popular currency after the US dollar.• By Aug. 1, 2007, there were $840 billion worth of euro

notes all around the world, compared to $814 billion U.S. dollars.

• The €500 note, accounting for 38% of the currency's value in circulation, favoured by the underworld.

Euro V/s Dollar

• The share of the euro as a reserve currency has increased from 17.9% in 1999 to 26.5% in 2008.

• U.S. dollar’s share fell from 70.9% to 64.0% in the same timeframe.

• The euro zone accounts for roughly half of financial assets growth

• The euro had surpassed the dollar for international bond issues (although the overall size of the U.S. bond market remains larger).

• Demand of euro as international currency rising..

Why Euro rises?

• Euro provides investors with an alternative currency.

• Backed by 12 independent nations, less risky • Euro zone economy is as strong as the US. • The combined share of eurozone votes in the

IMF and World Bank exceeds that of the US (23 percent to 17 percent)

• Used widely as black money havens in Europe.

• Euro zone's financial depth (the ratio of its financial assets to GDP) to more than 3.5 times its economic output.

• Its financial depth has grown 5.5% annually over the last 10 years, compared with the 2.8% pace of US.

• Lower interest rates by the Central Bank to promote international loans in Euro.

• Financial crisis of 2008 in the US.

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