Lesson 9.1 - The golden age of capitalism (Bretton Woods & DGSS) (2017)

Apunte Inglés
Universidad Universidad Pompeu Fabra (UPF)
Grado International Business Economics - 2º curso
Asignatura International Business & Economic History
Año del apunte 2017
Páginas 6
Fecha de subida 05/02/2017
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Apuntes días 27 de enero y 2 y 3 de febrero

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a.villagrasa IBE, 2nd Year - 2nd Term Business history Lesson 9.1: Bretton Woods & DGSS Outline CHANGE IN MENTALITY .................................................................................................... 2 WARS ................................................................................................................................ 3 The WW2 (1939-1945) ................................................................................................. 3 The cold war (1947 – 1991) .......................................................................................... 3 Soviet Union (USSR) .................................................................................................. 3 BRETTON WOODS ............................................................................................................. 4 Marshall Plan ................................................................................................................ 4 New monetary system .................................................................................................. 4 DOLLAR GOLD STANDARD SYSTEM (DGSS) ...................................................................... 5 New institutions............................................................................................................ 5 Innovations ................................................................................................................... 5 Problems ....................................................................................................................... 5 1. No real mechanism of adjustment ....................................................................... 5 2. Asymmetric system .............................................................................................. 6 1 IBE, 2nd Year - 2nd Term a.villagrasa Business history CHANGE IN MENTALITY After the war, most countries experienced the highest growth rates of their history, which could be sustained during a long period of time. The interwar period and the WW2 lead to the transition to capitalism.
Economic systems emerged during this period.
There was a change in government too. They were afraid of another Great Depression or World War, so they decided to adopt a new strategy and began intervening more in the economy which implied a great change in institutions. There was a change in the approach to the monetary system and full unemployment and high growth became the key objectives for all western economies.
In classical economies the government had small presence in the economic life.
They stated that it was necessary to: 1. Find a new way to organize international trade: A system such as the GSS wasn’t reasonable anymore because they were forced to implement deflationary (corrective) policies to maintain the parity.
2. Government intervention: Governments became concerned about the importance of controlling unemployment and economic growth, and Keynesian revolution provided the tools and the justification for state intervention.
3. Big political change: The Soviet Union (USSR) became very important and there was a lot of tension which led to the cold war.
2 a.villagrasa IBE, 2nd Year - 2nd Term Business history WARS The WW2 (1939-1945) The Second World War was a conflict between fascist countries and the Allies. It stated with the Nazi offensive and then the allies counterattacked.
The consequences of the war were:  Human and material losses  Population movements  Reduction of participant countries’ income  Interruption of commercial relationships  Europe was week and USA took the leadership The cold war (1947 – 1991) The WW2 was a strange war taking into account what had happened during the 20’s and what happened after (cold war) in the sense that the US was allied with USSR.
However, after the death of Roosevelt it became obvious that the relation between USSR and US would be complicated because they didn’t want to cooperate. The permanent tension grew between the two superpowers and the rejection of the USSR to sign the Bretton Woods principles was considered the beginning of the cold war.
This tension and suspicion lasted until the Soviet Union dissolved.
Soviet Union (USSR) The Soviet Union was created during the WW1. The “fathers” of the union were Stalin, Trotsky and Lenin but Stalin and Trotsky had a different idea of what the “socialist revolution” should be. Stalin wanted to do the revolution only inside the country, while Trotsky wanted to spread it. At the end, Stalin’s vision imposed but its strategy changed during the WW2, as they became a very strong power.
During the war they had made huge military achievements and after the war, in the 30’s their economic growth was very fast. Then, many eastern European countries started creating democratic communist republics in control of the USSR (with the exception of Yugoslavia).
The importance and support to socialist and communist parties spread to other western countries. As governments were afraid of communist revolutions in their countries and wanted to reduce tension, they were willing to implement policies to reduce inequality. This is why during this period there’s a spread of the progressive tax system, the welfare state… If the economy is performing well there aren’t incentives to make a revolution.
Because of this, some people believe that inequality has increased since the collapse of the USSR.
3 a.villagrasa IBE, 2nd Year - 2nd Term Business history BRETTON WOODS Marshall Plan After the war, the US was claiming back the debts accumulated. The cold war conditioned the institutions and increased the fear to communism. To avoid it from spreading all over Europe and establish their influence in the continent, the US made the Marshall plan.
The Marshall plan was economic aid given to European economies to help them recover from the war. In exchange, countries had to accept the Bretton Woods principles.
New monetary system The Bretton Woods principles contain all the rules for the new international monetary system that were agreed by capitalist countries in a conference. The Soviet Union had participated in previous meetings but, at the end, they decided not to sign.
The objective was to encourage international trade, so the idea was to create something similar to the GSS but with more autonomy, flexibility and access to liquidity. The GSS wasn’t feasible anymore because being forced to implement constant deflationary policies to maintain the parity is not compatible with achieving the welfare state, so they created the Dollar Gold Standard System (DGSS).
4 a.villagrasa IBE, 2nd Year - 2nd Term Business history DOLLAR GOLD STANDARD SYSTEM (DGSS) Instead of making all currencies convertible into gold, they made them convertible into US dollars at a fixed exchange rate and the dollar was supposed to be convertible into gold.
It provided more liquidity than the GSS because you can print more dollars but you can’t make more gold. The concern about flexibility was addressed by introducing cooperation mechanisms.
New institutions    International Monetary Fund (IMF): It was created to ensure the correct functioning of the DGSS and to maintain stable exchange rates. It provided credit to countries with short term problems. For example, giving dollars to countries having problems in their bank reserves.
World Bank: Its main objective was to foster development in poor countries. It was supposed to address long term issues. However, it was never very important and its role has been very criticized for people against globalization.
GATT: It was a set of agreements of international trade with the aim of liberalizing it by progressively reducing tariffs (protectionism).
Innovations To address the concerns about flexibility and liquidity, there were some differences between the GSS and the new system:    Adjustable exchange rate: The exchange rate was supposed to be stable but it could be changed it there were fundamental disequilibria (but there wasn’t consensus of what they were).
Control of capital: Countries could limit the amount that could be exchange to limit international capital flows and possible liquidity runs.
IMF: The IMF was created to monitor national economic policies and to provide short term credit to countries having problems to maintain the exchange rate.
Problems 1. No real mechanism of adjustment In reality, there wasn’t a real mechanism of adjusting. As in any fixed exchange rate system, monetary policy was limited to control inflation and monetary supply and 5 a.villagrasa IBE, 2nd Year - 2nd Term Business history there are problems of overvaluation1 that can only be solved with deflation (restrictive policies), devaluation or capital controls.
Overvaluation is dangerous because, at some point, you run out of dollars and no one wants your currency.
The mechanisms of the DGSS didn’t work because controls of capital were a temporary solution and countries couldn’t agree which were cases of fundamental disequilibria.
Moreover, exchange controls contradicted the liberalization movements and had to be supplemented by other polices. At the end, countries with constant problems to guarantee their convertibility, such as France and Italy were forced to deflation, which generated social unrest.
2. Asymmetric system Symmetric systems: Nobody has the capacity of choosing monetary policy and interest rate in an autonomous way.
The US had great advantage with respect to other countries. When countries had trade deficits, there was more supply than demand of their currency, so it depreciated.
However, in the case of the US, this wasn’t a problem because there was always demand for dollars because they were the international accepted currency. Hence, they could choose policies autonomously and have as much deficit as they wanted. In periods of abundance of dollars, other countries could increase their monetary supply, but they were harmed when there was scarcity.
Countries complained because they were “importing inflation from the US” Despite the contradictions, it provided certain stability during the golden age.
However, eventually, there were a lot of dollars in circulation, so convertibility into gold wasn’t credible and this led to the collapse of the system.
1 Systematic trade deficit because your products have increased more than your partners’ because of a shock or inflation.
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