Even since the US abandoned the Bretton Woods international monetary agreement in 1971, when Nixon took the US dollar off the gold standard, the world's monetary systems have been plagued by a leadership vacuum. The ensuing anarchical international currency relationships have structurally favored the G-7 economies, despite claims of global interdependence. Countries that have been hit with currency runs began to believe that the promise of market capitalism has been a cruel joke to rob them of their wealth and dignity. In the absence of a stable, equitable international monetary order consistent with open global markets, the U.S. continues to push for globalization. The prevailing free-for-all approach to currency relations engenders only monetary nationalism and ultimately fosters a protectionist backlash in all countries. The defeat of President Clinton's attempt to gain fast track trade authority and the gaining momentum of trade protectionists in the U.S. Congress are ominous signs for free traders. The current currency carnage rages on with disastrous economic and political consequences worldwide.
Advocacy of the gold standard is based on the view that governments are inherently inflationary institutions; therefore, the only realistic and lasting solution to the problem of inflation is to completely separate the government from money and return the latter institution to the free market whence it originally emerged.
Under the Bretton Woods (1946-1971) "fixed-exchange-rate" system, the U.S. monetary authority followed a gold price rule, buying and selling gold at an officially fixed price of $35 per ounce. Foreign monetary authorities, on the other hand, pursued a dollar price rule, maintaining their respective national currencies convertible into dollars at a fixed price.
According to supply-sider Laffer, "as long as the rules of the system were being followed, the supplies of all currencies were constricted to a strict price relationship among one another and to gold."
Laughably, "the rules of the system" were subjected to numerous and repeated government violations and evasions, including frequent outright "readjustment" of the price rules, i.e., exchange-rate devaluations, when they became inconvenient restraints on the inflationary policies pursued by particular governments. The Bretton Woods System did not prevent the development of a worldwide inflation which brought the system to its knees in 1968 and led to its final collapse in 1971.
Henry
Below is a short history of the Bretton Woods fixed exchange rates regime.
How Bretton Woods reordered the world
New Internationalist magazine, July, 1994
1- The Bretton Woods Conference
In July 1944, as World War Two was drawing to a close, the world's leading politicians mostly from Northern countries - gathered to set forth notions of how to reorganize the world economy. For the first time in human history almost universal institutions - the International Monetary Fund (IMF), the World Bank and the General Agreement on Tariffs and Trade (GATT) - were established to solve global economic problems. The common view at the Conference was that the depression of the 1930s and the rise of fascism could be traced to the collapse of international trade and isolationist economic policies. The Conference rejected proposals by the eminent British economist John Maynard Keynes that would have established a world reserve currency administered by a central bank and created a more stable and fair world economy by automatically recycling trade surpluses to finance trade deficits. Keynes' notion did not fit the interests of a US eager to take on the role of the world's economic powerhouse. Instead the Conference opted for a system based on the free movement of capital and goods with the US dollar as the international currency. The Fund and the Bank were limited to managing problems related to deficits and to currency and capital shortages.
2 - Rebuilding Europe
One of the first tasks assigned to these new institutions was to provide the capital to help put the war-ravaged European economies back on their feet. Not only did they lack the resources for such a massive undertaking but European finance ministries balked at the harsh "conditionalities" that accompanied support from the IMF as too great an infringement of their sovereign right to shape their domestic economies. So the much looser Marshall Plan was set up to provide US finance to rebuild Europe largely through grants rather than loans. Southern countries now emerging into independence did not fare so well - from the very beginning any loan was accompanied by pressure to keep their economies completely 'open' to foreign goods and capital. In the late 1950s the World Bank was pressured into setting up the International Development Association (IDA) this would provide 'soft loans' and so head off attempts by the new countries of the Third World to set up an independent funding agency under UN auspices.
3 - New International Economic Order
By the early 1960s the South had started demanding a better deal. Rallying in such organizations as the Non-Aligned Movement and the Group of 77, they created the United Nations Conference on Trade and Development (UNCTAD) where they argued for fairer terms of trade and more liberal terms for financing development. The North responded with pious declarations of its good intentions - but also with a hard nosed insistence that the proper forum for any economic forum continued to be the Bretton Woods institutions where they held the balance of power. By the late 1960s, however, the Bretton Woods dream of a stable monetary system of fixed exchange rates with the US dollar as the only international currency was collapsing under the strain of US trade and budgetary deficits. A guarded optimism took hold in the South fueled by moderately high growth rates and a boom in the price of Third World produced primary commodities, particularly oil. This came to a head in 1974 with the declaration of principles for a New International Economic Order. The response to these sweeping demands for change was a few tinkering, inconsequential reforms.
4 - The Debt Crisis
The windfall surpluses accruing to the oil producing countries of OPEC during the 1 970s - $310 billion for the period of 1972 1977 alone - created a massive recycling problem. Much of this money went into Northern commercial banks who turned around and loaned it to non-oil producing Third World governments desperate to pay escalating fuel bills and fund their development goals. The debt of the non oil producing Third World increased five fold between 1973 and 1982, reaching a staggering $612 billion, and the high interest rates of the mid-1980s further exacerbated the problem. Much of this loan money was squandered on ill considered projects or simply siphoned off by Third World elites into personal accounts in the same Northern banks that had made the original loans. Cash strapped countries like Peru and Mexico were unable even to pay the interest due on their debts. Northern politicians and bankers began to get nervous that the sheer volume of unpayable loans would undermine the world financial system. They turned to the World Bank and the IMF, who were to restructure Third World economies so they could meet their debt obligations.
5 - Rollback
The Bank and the Fund have made full use of the new leverage over Third World economies that accrued to them during the debt crisis. The right wing economic views made popular by the Reagan- and Thatcherites became the reigning economic orthodoxy at the Bank and the IMF. They launched a policy to 'structurally adjust' the Third World by deflating economies and demanding a withdrawal of government not only from public enterprise but also from compassionate support of the basic health and welfare of the most vulnerable. Exports to earn foreign exchange were privileged over almost all production of food and other goods for domestic use. This restructuring was highly successful from the point of view of the private banks who got $178 billion out of the South between 1984 and 1990 alone. Yet Third World debt continued to grow, reaching $1,300 billion by 1992. Much of this debt has shifted particularly in the case of Africa from private banks to the IMF and the World Bank themselves.
6 - The Resistance
The stark fact that the Fund and the Bank now operate with reverse capital flows - in other words they take more money out of the Third World than they put back in - is sobering for those who believed these institutions were there to help. Peoples of the Third World are resisting structural adjustment either through street riots or less confrontational politics. Protest too is coming from the four million people uprooted or to be uprooted by World Bank mega-projects, particularly the building of large dams. Rejection of all things Western is on the rise. Fundamentalism and the politics of ethnic exclusion (from Somalia to India) are turning political costs into military ones. And the Bretton Woods institutions themselves are coming under direct pressure from community activists and environmentalists calling for either their reform or outright abolition. After 50 years the decisions reached at Bretton Woods need some fundamental rethinking.
And a few interesting quotes.
"As long as people are marginalized and distracted [they] have no way to organize or articulate their sentiments, or even know that others have these sentiments. People assume that they are the only people with a crazy idea in their heads. They never hear it from anywhere else. Nobody's supposed to think that. ... Since there's no way to get together with other people who share or reinforce that view and help you articulate it, you feel like an oddity, an oddball. So you just stay on the side and you don't pay any attention to what's going on. You look at something else, like the Superbowl." Noam Chomsky
" The people can have anything they want. The trouble is, they do not want anything. At least they vote that way on election day." Eugene Debs, American socialist leader, 1855-1926.
"We need not deceive ourselves that we can afford today the luxury of altruism and world-benefaction.... We should cease to talk about vague and unreal objectives such as human rights, the raising of the living standards, and democratization. The day is not far off when we are going to have to deal in straight power concepts. The less we are then hampered by idealistic slogans, the better." George Kennan head of U.S. State Department Policy Planning Staff, 1948. (mislabelled as a Dove).
" We in the West must bear in mind that the poor countries are poor primarily because we have exploited them through political or economic colonialism." Martin Luther King, Jr.
" It is not possible to be in favor of justice for some people and not be in favor of justice for all people." Martin Luther King, Jr.
"I don't see why we need to stand by and watch a country go communist due to the irresponsibility of its people." " The issues are much too important for the Chilean voters to be left to decide for themselves." Henry Kissinger, Secretary of State under Richard Nixon, about Chile prior to the CIA overthrow of the democratically elected government of socialist President Salvadore Allende in 1973.