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21st Session | 2020
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Table of Contents
Bretton Woods 1944: Establishing a Global Economic
Order 6
Introduction to Committee 6
Introduction to the Topic 8
Timeline of Events 9
Discussion of Past Problems 13
Discussion of the Contemporary Problems 25
Bloc Positions 30
Conclusion 32
Questions a Resolution should answer : 33
Further Reading 33
Bibliography 34
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Dear Delegates,
It is our upmost pleasure to welcome you to this year’s London
International Model United Nations Conference 2020, one of the largest
and most prestigious conferences in MUN. LIMUN prides itself on its
diverse and innovative delegates and complements it with similarly
diverse and innovative committees! To this end, the Bretton Woods
Committee is a perfect example, merging complex historical issues with
the contemporary need to reflect on past events to shape the future.
The Bretton Woods Committee promises to be a challenge for all involved
as we seek to create a new financial system following the catastrophe of
WWII. The year is 1944 and the war is still raging on behind us as the
root causes of the war are starting to become apparent. The failed global
economic system must be changed and thus the allied finance ministers
and delegates meet today to discuss how it should be set up.
Furthermore, reconstruction will doubtless be an issue for the ravaged
European continent - how shall we facilitate this?
INTRODUCTION LETTER
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These are just some of the questions delegates will face during LIMUN
2020. However, you are not alone. We, the chairs, will be there to guide
you every step of the way and look forward to meeting you all this
February. If you have any questions, please let us know, and we can
come into the conference ready and prepared!
Yours Truly, The Chairs Philippe and Luke
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Director - Philippe Lefevre
Dear Delegates,
My name is Philippe and it is my honour to be your director for this LIMUN
Bretton Woods Committee, a brand new and exciting chance to reshape
the global economy following WWII. I am currently a student at KU
Leuven in Belgium studying a master’s in International Politics (when I’m
not at MUN). I have been MUNing for just over 3 years now, and LIMUN
will count as almost my 40th conference since starting.
I am big believer in the skills that MUN can teach you and it is this I wish
to highlight through my directing this committee. The things you learn
through your research, debate and participation will resonate throughout
your professional and personal life in ways you might not know. In this
way, I encourage all delegates to come in with an open mind and I look
forward to meeting you all in London!
Assistant Director - Lukas Hoffman
Lukas is 22 years old and after finishing his Bachelor studies in economics
at the University of Hamburg, is now pursuing his master’s degree in
economics at the University of Uppsala. He is captured in the parallel
universe called MUN for six years now and his preference for unusual
topics already brought him into the League of Nations, the Belt and Road
Initiative Forum and the Peace of Westphalia, so Bretton Woods only
seems like a logical next step. When he is not studying or doing MUN-
stuff, he spends his time reading, wandering through Swedish forests or
cooking for himself and his friends. He is incredibly excited for a weekend
full of intense and technical debate about nothing less than the
reorganisation of the world’s economic system!This is an Easter egg, well
done
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Bretton Woods 1944:
Establishing a Global
Economic Order
Introduction to Committee The Bretton Woods Conference, more officially known as the United
Nations Monetary and Financial Conference, is a conference set to discuss
the reorganisation of the economic system following the upheaval caused
by World War 2. 44 Nations joined the conference, comprising most of the
allies of World War 2, represented by over 730 delegates.
The conference itself was held in the Mount Washington Hotel in Bretton
Woods, New Hampshire (hence the name Bretton Woods) and across the
three weeks of debate, delegates debated upon new ideas for the global
economic order.
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Delegates during this committee will be representing the heads of each of
the 44 delegations. Please check further reading to find a document
where you can find exactly who you are as part of the 44 delegations.
The committee itself was split into three commissions, the first tackling
the creation of an International Monetary Fund, the second tackling the
International Bank for Reconsruction and Development and the third
tackling all other matters. Delegates should be aware that in this
representation of the committee, we are combining all three commissions
but primarily tackling commissions I and II.
Some of the delegates involved in the conference in 1944. From left,
Mikhail Stepanovich Stepanov (USSR), Harry White (UK) and Vladimir
Rybar (Yugoslavia)
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Governments Invited to the Bretton Woods Conference
Introduction to the Topic
During the course of WWII. The United States and Allies recognised the
opportunity and need to reorganise the global economic order, to
liberalise trade between countries and reject the protectionism of the
past. To fulfil these ideas, the finance ministers of the United and
Associated Nations (mostly the allies of World War II) would come
together to discuss how this liberalisation and institutionalisation of the
world economy would function.
The crux of the conference was to do away with the economic nationalism
that pervaded global trade before the 1940s, from Empire’s preferential
trading blocs to the gold-based devaluation and tricky trade of the early
1900s. It was also clear that the way debts and economies worked
together post World War I helped to trigger the current conflict we are
facing now. Therefore, a new way to solve such stifling trade must be
found.
Australia
Belgium
Bolivia
Brazil
Canada
Chile
China
Colombia
Costa Rica
Cuba
Czechoslovakia
Dominican Republic
Ecuador Egypt El
Salvador Ethiopia (P.
4) French Committee
of National Liberation
Greece Guatemala
Haiti Honduras
Iceland India Iran Iraq
Liberia Luxembourg
Mexico Netherlands
New Zealand
Nicaragua Norway
Panama Paraguay
Peru Philippine
Commonwealth
Poland Union of
South Africa Union of
Soviet Socialist
Republics United
Kingdom United
States of America
Uruguay Venezuela
Yugoslavia
Ecuador
Egypt
El Salvador
Ethiopia
French Committee of
- National Liberation
Greece
Guatemala
Haiti
Honduras
Iceland
India
Iran Iraq Liberia
Luxembourg Mexico
Netherlands New
Zealand Nicaragua
Norway Panama
Paraguay Peru
Philippine
Commonwealth
Poland Union of
South Africa Union of
Soviet Socialist
Republics United
Kingdom United
States of America
Uruguay Venezuela
Yugoslavia
India
Iran
Iraq
Liberia
Luxembourg
Mexico
Netherlands
New Zealand
Nicaragua
Norway
Panama
Paraguay
Peru Philippine
Commonwealth
Poland Union of
South Africa Union of
Soviet Socialist
Republics United
Kingdom United
States of America
Uruguay Venezuela
Yugoslavia
Peru
Philippines
Poland
Union of South Africa
Union of Soviet -
Socialist Republics
United Kingdom
United States of -
America
Uruguay
Venezuela
Yugoslavia
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In 1943 the first information meetings of experts from Canada, China,
France, the UK and the US on the creation of a new economic system
began (US State Department, 1948). This was followed in 1944 with joint
reports by said countries on the creation of an International Monetary
Fund and other stability mechanisms. These reports form the basis of the
plan to be developed in Bretton Woods. In May 1944 the President of
United States Franklin D. Roosevelt issues the invitation to 44 United and
Associated Nations to come to Bretton Woods in July 1944 to discuss
these reports and plans further.
So here, on the 1st of July 1944 we gather in Bretton Woods, New
Hampshire to begin debate on the stabilisation and improvement of the
international financial system. However, before we begin immediately
talking about the matters at hand, we must understand how problems
came to be!
Timeline of Events
The economists and delegates of 1944 were well versed with the issues
that pervaded the international financial system before their time.
However, we might need a bit more rehearsal on the events. Below is an
timeline of some of the key financial events that lay the groundwork for
the Bretton Woods conference. You need not know all of them by heart,
but the issues they raised are of critical importance to remember.
1870-1914 – Classic Gold Standard
The currencies of the main world economies are convertible into gold. The
main goal of the central banks is to maintain the gold convertibility of the
currency. Together with a regime of free trade in a time of peace this lead
to economic prosperity for several decades (Eichengreen, 1996).
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1914-1918 – First World War
The First World War had immensely important political consequences but
it also had many consequences for the world’s economic system. Not only
did it terminate the economic pre-war order centred around the classic
Gold Standard and a regime of relatively free trade but it also shifted
economic and political power away from the European powers the United
Kingdom, France and Germany to the United States of America. Not only
were the USA militarily war-deciding for the Entente Powers, but their
economy was also making critical decisions, as they were already
supplying France and the UK with weaponry and supplies before they
formally entered the war. As a result they were a big creditor of the other
Entente Powers at the end of the war (Kershaw, 2016).
1919, 28th of June – Treaty of Versailles
The treaty of Versailles was one of the five peace treaties which ended
the war between the Central and Entente Powers and was negotiated
between Germany and the Entente. With the Treaty Germany accepted
the responsibility of the war and agreed to pay reparations (Kershaw,
2016).
1920-1921 – After-War Recession
The years after the Treaty of Versailles saw a short but heavy recession in
Europe as well as in the United States. The economy of the war parties
was geared towards armament for which the demand was missing after
the war. Europe’s economies were hit by a low domestic demand in the
aftermath of the war, while in the USA mainly farmers were hit by the
decreasing prices for agricultural goods after agricultural production in
Europe increased again after the war (Pressler, 2013).
1921-1929 – “Roaring Twenties”
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The 1920s after the recession at the start of the decade were known as
the “Roaring Twenties”. Mainly the American economy experienced a long
and pronounced boom fuelled by new technological innovations, such as
the mass production for automobiles, and an increased purchasing power
of the population. During these years the US definitively superseded the
European countries as the leading economy of the world (Pressler, 2013).
This period of growth was postponed in Europe. The economies of
Germany and France only recovered in the mid-1920s, while the economy
of the UK never really recovered until the end of the decade (Feinstein,
1997).
The Roaring 20s in the US
1923 – Ruhr Occupation and Hyperinflation
To secure the German reparation payments French and Belgian troops
occupied the Ruhr Valley in 1923. The German government called for a
general strike for the duration of the occupation and printed money to
compensate the workers. Over the course of only one year, the price of
the US Dollar increased from 8,000 to more than 4.2 billion Reichsmark.
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Germany fell into hyperinflation. To reanimate the German economy the
value of the currency was fixed to the value of land capital (Pressler,
2013).
1924 – Dawes Plan
After the hyperinflation was overcome, the Entente powers restructured
the German reparation payments. A plan introduced by the US American
economist and politician Charles Dawes, introduced mainly at the behest
of the United States, the annual rate was lowered to one billion
Reichsmark and international loans were granted in order to build up the
German economy (Pressler, 2013). This led to a significant improvement
of the political and economic situation. The inflow of American credits
even led to a slight boom in the late 1920s (Herbert, 2014).
1924 – Germany returns to the Gold Standard
Shortly after the end of the hyperinflation Germany returns to the Gold
Standard. Due to the inflation only at a tiny fraction of the pre-war parity
(Feinstein, 1997).
1925 – The UK returns to the Gold Standard
Following Germany, also the UK returns to the gold standard – to pre-war
parity. The decision to return the gold convertibility of the Pound to the
pre-war level is mainly motivated by prestige reasons (Feinstein, 1997).
1926 – France Returns to the Gold Standard
France returns to the Gold Standard at 20% of the pre-war parity. Other
than in the UK, the main consideration is not to show economic strength
by returning to pre-war parity, but which rate would benefit the French
(export-)economy the most (Pressler, 2013).
24th of October – Black Thursday
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The slump of the stock market prices on the “Black Thursday” and the
“Black Tuesday” five days later marks the begin of the Great Depression
in the USA (Kindleberger, 1973).
1929-1934 - Great Depression
The Great Depression which broke out in the US in 1929 and spread to
the rest of the world in the subsequent years, was an economic crisis of a
until then unknown extant (Pressler, 2013).
June 1930 – Enactment of the Smoot-Hawley Tariff Act
The Smoot-Hawley Tariff Act was originally meant to protect US American
farmers by imposing punitive tariffs on foreign agricultural goods.
Through a dynamic known as log rolling (to gain the support for a
punitive tariff on the goods important for his constituency, the member of
the house supports punitive taxes on the goods important for the
neighbouring constituencies and so forth) it culminated in an act that
imposed punitive tariffs on 20,000 goods. Trade partners respond by
imposing punitive tariffs themselves (Pressler, 2013).
1931 – The UK abolished the Gold Standard
During the crisis of the British export industry, following the enactment of
the Smoot-Hawley Act and the subsequent international tariff increases,
the UK is forced to abolish the gold standard (Pressler, 2013).
Discussion of Past Problems
The Second World War was without a doubt a highly disruptive event for
the world economy but already before there were many problems which
had afflicted the world economy. The symptoms of these problems might
have been cured but most of the underlying problems themselves still
remain unsolved.
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War Debt and Reparations
The First World War devastated large parts of Western Europe and lead to
a drop in international trade proved to be enormously costly for the
involved states. Not only millions of human lives were lost but the war
also demanded tremendous amounts of financial resources (Kershaw,
2016). To cover these requirements the European states lent money from
their population. While the Central Powers Germany and Austria were
largely isolated from the international capital markets, the states of the
Entente also relied on each other to cover their expenses. France and the
other European states were financially backed by the UK and at the end of
the war the European allies owed the US about twelve billion US Dollars
(Pressler, 2013).
When the defeated Central Powers and the victorious Entente gathered in
Paris 1919 to discuss the conditions of the peace, the approaches of the
Entente powers were very different: While the American president
Woodrow Wilson was willing to offer Germany a forthcoming, mild peace,
his French and British allies insisted on major concessions, territorially as
well as economically (Kershaw, 2016). Germany should be held
responsible for all war damages it had caused during the war. France and
the UK hoped to repay the war credits they had taken with their own
population but also with the US with German money. An illusory demand
considering that the German government itself had taken almost 144
billion Reichsmark of debts itself. Still, the exact amount of the
reparations Germany should pay was determined to be 132 billion
Reichsmark in 1921 (Pressler, 2013).
The young British economist John Maynard Keynes who participated in the
negotiations as a member of the British delegation, noted in his work “The
Economic Consequences of the Peace” that the Treaty of Versailles would
not contribute to a sustainable order after the war. The economic
constraints the victorious powers had imposed on Germany without
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offering way to restore the German economy, would lead to economic and
political conflicts (Keynes, 1920).
Keynes’ beliefs should proof true as the reparations were one of the main
reasons of political conflict during the 1920s, for example when French
and Belgian troops occupied Germany’s main industrial area the Ruhr
Valley in 1923 after Germany had not paid its reparations. The German
government called for a general strike in the area and promised to
compensate the workers. The government generated the needed financial
resources by printing money and already a few weeks later Germany fell
into hyperinflation (Pressler, 2013).
Hyperinflation in Germany
The Dawes Plan which was agreed upon in 1924 brought some ease to
Germany by lowering the annual rate of reparations and granting US
American loans (Pressler, 2013). Although this led to an improvement of
the German political and economic situation and even a slight boom in the
late 1920s, the underlying problem of the war reparations remained
unsolved. Germany would need to repay its debt for many Generations
(Herbert, 2014).
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Crisis in the US American Agricultural Sector
During the war, the agricultural production of Europe was not high
enough to sustain its population. American agricultural products filled this
gap and US American farmers increased their production, took loans and
made investments in machinery as for example the first tractors which
were affordable for the majority of farmers (Pressler, 2013).
When the war in Europe was over, the worldwide agricultural production
increased what led to a decrease in the prices of agricultural goods.
American farmers were not able to sell the surplus supply they had built
up during the war for profit. Many farmers were not able to repay the
loans they had taken to undertake additional investments. As a
consequence, banks which had given out credits to farmers to a large
extent got in trouble because they needed to amortise credits to a large
extent. The crisis in the farming sector hit entire regions and even when
the US American economy was flourishing during the “roaring twenties”,
the farming sector did not recover. The 1920s were a decade of growing
inequality between rural areas and cities in the US (Pressler, 2013).
Overvalued and Undervalued Currencies
While the USA already returned to the convertibility of the US Dollar into
gold to the pre-war parity in 1919, the European States waited a few
more years to undertake the step. Germany returned to the gold standard
in 1924. After the hyperinflation Germany basically had a new currency,
so it did not need to worry about devaluating its populations savings
anymore. As a result, Germany returned to a rate that was only a tiny
fraction of its pre-war parity (Pressler, 2013).
The situation was different in the UK and France, where the old money
from before the war was still in circulation. To not fall behind its rival
Germany, the UK returned the Pound Sterling to gold convertibility in
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1925 – to pre-war parity in order to not devaluate its populations
monetary assets. As the many other northern European countries
returned their currencies to pre-war parity (Feinstein, 1997). Especially
for the UK the move to return to the pre-war parity was not without cost.
To the new exchange rate, the Pound Sterling was massively overvalued.
This was not only dramatic for the British export industry as British
products became more expensive in terms of foreign currencies but it
became also a lucrative business to exchange Pound Sterling into gold,
use this gold to buy Dollar and make investments in the USA. In order to
stop the outflow of gold reserves the Bank of England needed to increase
the interest rates. As credits became very expensive, this led to a
decrease of investments and deflationary pressure what imposed even
more strains on the British economy. The economy of the UK did not
experience “Roaring Twenties” but remained in crisis until the 1930s
(Pressler, 2013).
France already experienced high inflation rates after the war, so French
policymakers were less concerned with the saving of their population
when they returned their currency to gold convertibility. The franc only
returned to about 20% of the pre-war parity. In contrast to the
overvalued Pound Sterling the Franc was undervalued under the new
exchange rate. British gold was now also flowing out to France. The inflow
of British gold and the export industry which was flourishing due to the
favourable exchange rates, lead to a boom of the French economy in the
late 1920s. This boom was however mainly achieved at the costs of the
French neighbours mainly the UK (Feinstein, 1997).
In an economic system with flexible exchange rates the Pound Sterling
could have depreciated vis-à-vis the US Dollar and the Franc. British
exports would have become cheaper for American and French customers
and the economy could have recovered. In the regime of fixed exchange
rates under the gold standard this was not possible. The only way for the
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British economy to recover was an adjustment of the real price level
through deflation. This would have been very painful as it would have
required significant cuts in wages. To at least achieve some relief, the
president of the BoE and other European central bank presidents,
convinced the Federal Reserve Bank (FED) to lower the interest rates in
order to reduce the outflow of gold reserves from the UK to the US.
However, the interest rate cut was not pronounced enough to stop the
recession in the UK, while it fuelled the stock market boom in the US and
thus contributed to the crash that ultimately lead to the Great Depression
(Pressler, 2013).
The Great Depression in the USA
The Great Depression was the largest economic crisis the world had ever
seen in the late 1920s. It broke out in October 1929 after the equity
prices at the US American stock exchange collapsed. On the “Black
Thursday” and “Black Tuesday” millions of Americans lost a great
proportion of their savings, credits could not be paid back and many
banks were forced to depreciate high proportions of the loans they had
given out (Kindleberger, 1973).
The contemporary understanding of economic crises, prevented the
Federal Government under President Herbert Hoover from decisively
intervening in order to lessen the effects of the crisis. Crises were seen as
temporary and beneficial for the economy as they cleansed the economy
from unprofitable companies after a boom and thus contributed to its
long-term success. In times were the consumers used the majority of
their income for the purchase of vital goods as food, this might have been
true as the private demand would have remained fairly stable in times of
economic crises but in US American consumer society of the 1920s,
private households reduced their consumption of non-vital goods with
fatal consequences for the economy (Pressler, 2013).
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The Great Depression in the US
Although Hoover called upon the States and municipalities to increase
their investments, he did not consider it a responsibility of the Federal
Government to provide the necessary funds as he believed that a
balanced state budget was necessary to maintain the trust of the
population into the economic system. Therefore, Hoover’s economic policy
was rather passive: Neither did he intervene to rescue insolvent banks
nor did he stimulate the domestic demand (Kindleberger, 1973). His
attempt to stabilise the situation for American farmers by imposing
punitive tariffs on foreign agricultural goods culminated in the Smoot-
Hawley Tariff Act which imposed punitive tariffs on more than 20,000
imported goods. That trading partners responded with punitive tariffs on
there is obvious. Not only did the act not help the US American economy
whose main problem was the low domestic demand but it also disrupted
international trade and lead the way to a new era of protectionism. By the
end of Hoover’s term, the stock market values had fallen by almost 90%,
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the unemployment rate rose from 5% to 25% and the GDP declined to
merely 56% of the pre-crisis level (Pressler, 2013).
Not only the hesitant actions of President Hoover but also the
conservative monetary policy of the FED have been later on identified as
one of the reasons why the Great Depression dragged on for so long. To
avoid a suspension of the Dollar-gold convertibility, the FED did neither
lower the interest rates, extend the money supply nor granted loans to
stabilise banks in financial troubles. While an increase of the money
supply could have lessened the symptoms of the Great Depression by
pumping more money into the economic cycle, the bankrupts of several
banks in fact lead to a contraction of the money supply because less
credits were granted. In their seminal contribution Milton Friedman and
Anna Schwartz calculated that the money supply declined by one third
from 1929 to 1933 (Friedman and Schwartz, 1963).
The US American economic policy changed fundamentally with the
election of President Franklin D. Roosevelt, whose economic program the
“New Deal” successfully combined measures to restore the trust in the
financial system and demand stimulating economic policies and managed
to stabilise the American economy. Although Roosevelt principally
believed in free trade kept the punitive tariffs imposed by the Smoot-
Hawley Tariff Act in place to regenerate the domestic agricultural and
industrial production through restricting the supply in order to stabilise
the prices. While Roosevelt’s economic policy had a positive impact on the
domestic economic situation in the USA, its overall implications for the
world economy were rather negative. He increased the price of gold in
Dollar, before completely abolishing the gold standard in 1933, and thus
devaluated the Dollar vis-à-vis other currencies. Not only was that a
typical example of a beggar thy neighbour policy but by ending an
international economic conference in 1933 with his “bombshell message”
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he also refused to return to an economic order that was based on
international cooperation (Pressler, 2013).
The Great Depression in the UK
In the UK the first reactions on the crisis that was beginning in the US
were positive: The collapse of the stock market prices, finally gave the
BoE some leeway to decrease the interest rates. Allowing companies to
take investments and to partially regain their competitiveness. The main
reason why the “Great Slump”, as it was called in the UK, had such a
negative effect on the UK was that the crisis also led to the collapse of
international trade, for example with the enactment of the Smoot-Hawley
Tariff Act in 1930. This led to a sharp increase of the unemployment rates
especially in the regions where the “old” industries, coal, steel,
shipbuilding and textiles were dominating (Pressler, 2013).
Other than the FED, the BoE was attempting to stabilise other European
banks who had gotten into financial trouble. Thus, the BoE was lacking
reserves to stabilise the Pound Sterling when the economic situation in
the UK worsened in the early 1930s. The BoE was left with no other
choice but to end the convertibility of the Pound Sterling into gold. With
the end of the gold standard the British economy was able to recover, low
interest rates and weak Pound were helping the British export industry
and although the internationally very high tariffs remained an obstacle,
the farewell from the gold standard brought the UK into a very favourable
economic position among the world’s economies in the 1930s. Other
countries such as the Commonwealth or Scandinavian countries followed
the British example and also abolished the convertibility of their
currencies into gold. Instead they tied their currencies to the Pound
Sterling (Feinstein, 1997).
The Great Depression in France
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Until 1931, the economic situation in France was fairly stable. The weak
Franc was helping the French export industry while the agricultural sector
mainly relied on the domestic market and was protected by high tariffs on
agricultural goods. This situation shifted when the UK abolished the gold
standard in 1931. Now it was France whose currency was overvalued and
whose government got under pressure. As the UK a few years before the
French government was determined to keep the gold convertibility of the
Franc which led to recession and deflation. Although the unemployment
rates did not rise as high as for example in the UK or the US, the difficult
economic situation led to an erosion of the political stability in France.
Changing majorities of left and right forces did not succeed in solving the
crisis. The economic conditions in France remained difficult until the
1940s (Feinstein, 1997).
The Great Depression in Germany
Other than France, Germany was hit by the Great Depression relatively
soon after its beginning in the USA. The inflow of US American credits to
Germany after the end of the hyperinflation lead to a slight boom but the
economic institutions of Germany themselves were still weak and relied
on the inflow of US American credits. When the Great Depression broke
out in the USA, this inflow stopped and the German economy began to
drift into recession. As in France, the crisis in Germany led to an extreme
polarisation of the political landscape. The end of the coalition
government of the moderate political powers over a disagreement on the
height of unemployment benefits, brought a centre-right government und
Chancellor Brüning into power. Brüning had no majority in the parliament
and mainly governed through presidential decrees. Scarred from the
experience of the hyperinflation, Brüning was determined to keep the gold
parity of the Reichsmark and opted to fight the crisis with a strict
austerity policy. Although he successfully renegotiated the reparation
payments Germany was obliged to pay, his severe cuts of social benefits
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gave him the byname “Hunger Chancellor”. Brüning was forced to resign
in 1931 after a series of bank failures which contracted the money supply
and worsened the economic conditions in Germany. Although in 1931
worse was prevented by introducing capital controls and banking holidays,
short-lived subsequent governments also failed to end the economic crisis
(Pressler, 2013).
The crisis in Germany should drag on until the takeover of the National
Socialists. With a mixture of demand stimulating expansive fiscal policy,
protectionist trade policy, exchange limitations and the rearmament of
the German military, Hitler and his helpers reduced the still high
unemployment rates of the year 1933 to full employment in only a few
years. As frequently pointed out by economic historians, this economic
policy was not sustainable in the long-term and in its logic, it did not need
to be. The main goal of the national socialists was to make the German
economy ready for war, the costs were to be paid by others (Pressler,
2013).
In general, the flaws of the economic system of 1929, the Great
Depression and the poor crisis management of policy makers during the
crisis played an important role for the outbreak of the Second World War,
as it was the crisis who brought Hitler into power and gave him and his
regime economic successes in the first years and thus inner political
legitimation (Herbert, 2014).
Protectionism and “beggar thy neighbour” policies
As already briefly mentioned in the last section one of the side effects of
the Great Depression was the return of protectionist policies. The most
extreme example probably is the trade policy of the national socialists
whose goal was a state that would be independent from international
trade and would produce all necessary goods itself. The Nazi regime
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introduced import restrictions: The import of resources like oil which
Germany could not produce itself needed to be confirmed by the regime’s
authorities while the import of consumption goods was completely
abolished (Pressler, 2013).
But not only the rise of autocratic regimes contributed to the downfall of
international trade. Also, in the USA, one of the world’s oldest
democracies imposed several policies with negative impact on
international trade. The Smoot-Hawley Tariff Act which was implemented
under the Hoover administration, imposed punitive taxes on over 20,000
goods and prompted several other countries to impose punitive tariffs
themselves. This rather protectionist policy was continued by Hoover’s
successor Franklin D. Roosevelt. Although he principally believed that free
trade would be desirable, his “New Deal” only brought forward the
reforms which were necessary for the US American economy and imposed
them regardless of possible adverse effects, e.g. the depreciation of the
US Dollar had on other countries (Pressler, 2013).
Already before the crisis, France had profited economically from the
weaknesses of his trading partners. The economic strength of France in
the late 1920s was largely based upon the undervalued France. Thus,
accepting that the own economic boom caused a recession in the UK
which was the only country that adhered somewhat to the principles of
free trade (Pressler, 2013).
As shown above the growing protectionism in the years prior to the
Second World War contributed to economic distress and the rise of
populist movements and nationalism. A new economic order would need
to contain rules for fair and sustainable international trade in order to
contribute to political stability.
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Discussion of the Contemporary Problems
Debate at the Bretton Woods conference will be focused around the
creation and running of two main institutions as well as a host of other
problems that we should (time permitting) find solutions for. As
mentioned, many of the ideas for these institutions had been based on
previous plans provided by the early allies of WW2 so we will be taking a
closer look at these plans and some of the areas where they most
diverged.
Many of these plans are heavily simplified and delegates are encouraged
to investigate them in more detail in the further reading. Furthermore,
none of the plans were esteemed to be final and many revisions were
made before their deliberation in 1944.
Keynes and White at the Bretton Woods Conference, the two had very
diverging ideas on the Institutions in the new economic order
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The Keynes Plan
Written in draft in 1941 and shared in 1943, the plan written by Lord
Keynes from the UK was one of the most influential documents of the
early discussions about reshaping the economic system.
A key part of Keynes plan was the creation of an International Currency
(or clearing) Union. This institution would be based on a new type of
currency, sometimes called Bancor, which would be fixed in terms of gold
and exchangeable by the British Commonwealth, US and all other
members of the Union. The purpose of this union was to allow the
clearing of debts between countries. As only bancor would travel between
its members, then debts and banking can be easily dealt with. The UK and
US in this regard would be founding members and hold a special position,
with central banks of Union members running the day-to-day operations.
Countries would be able to take and deposit money from this Union with
overdraft facilities for many being outweighed with the credit system
upheld by members with more bancor. It would function, fundamentally,
as a reserve bank for central banks with the Pound Sterling and US Dollar
initially setting the rate of exchange of the bancor.
The maximum allowance of debt would be in proportion to their foreign
trade but there would be no need to limit the credit balance of a country.
From the start of the Union, a “quota” of each country would be se based
on the sum of a countries exports and imports of three pre-war years.
Then, A country could only increase their debit balance by a quarter of
the quota and be charged 1% of their quota to the reserve fund of the
union.
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The Bancor, as mentioned, would function as a “quantum” of international
trade, not determined by the gold industry or one countries production of
their currency, but by the requirements of the international system.1
The White Plan
Harry Dexter White formed another backbone to the plans introduced in
the Bretton Woods conference, and his final plan was issued in 1943 by
the US Treasury.
White’s plan revolved around the creation of an International Stabilization
Fund (of the United and Associated Nations). The Fund would help to
restore balance of payments to countries without having to exploit
international trade in order to create this. It’s primary purpose therefore
was to stabilise exchange rates of currencies of the United Nations. It
would consist of gold and all the currencies of member governments
where each member would give a quota from its central bank, the total of
which should equal at least $5 Billion.
The Fund would have a monetary unit called the unitas, equal to $10 of
gold. The value of this would not change without 85% of the member
states voting in favour of changing it. Following the creation of the fund,
each country would then establish their currency in relation to the unitas.
The powers of the fund would primarily be to buy, sell and hold gold (or
government securities) and sell them to other member countries. Along
with this, it could also sell currencies of members to other members in
order to keep the exchanges of currencies stable. It can also handle
1 Keith Horsefield, J. (1981). The IMF 1945-1964 Vol III: Documents. p3-30
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repayments and loans provided it receives collateral and that a plan for
repayment be created.
Finally the fund will be administered by a board of directors, with all
members appointing a director who will stay for 5 years. The voting
power of the members will be based on their quota, each starting with
100 votes and the country with a higher quota receiving 1 extra vote for
each 100,000 unitas (or $1 million) with no country being able to have
more than 25% of the votes.
The member states must oblige themselves to maintain exchange rates
established by the funds, not to engage in other countries to undermine
these exchange rates and remove all restrictions to transfer foreign
transactions. Alongside this they are asked to cooperate with others to
regulate movements of capital, not to enter new clearing arrangements
and to help give the fund with information it may need. 2
The French Plan
The French plan also relied on a fundamental institution, in this case
called the Monetary Stabilization Office. The office would be based upon
an agreement nations sign, which would contain certain conditions that
help keep the stability of the monetary system.
Firstly, it would fix the exchange rate of participating countries that could
not be changed without an agreement of all. The stability would then be
kept by central banks who would buy and sell currencies to maintain this
rate. For this to occur, foreign exchange control must be relaxed. Foreign
exchange could then be used to make payments in those currencies.
2 Keith Horsefield, J. (1981). The IMF 1945-1964 Vol III: Documents. p37-97
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However, a limit would be set for the amount of exchange that each
country could use.
As a guarantee in case countries would depreciate their currency, they
would have to give collateral, in gold or other securities. Inflationary risks
would have to be tackled through sterilization, meaning that in general
countries deposit their currency to other countries and when inflation
happens the country suffering inflation would take back this currency
without losing control of its own circulation.
This plan is similar to one used before between the period of 1920-1940
noted as gold exchange standard. The main difference is that there would
not be complete confidence of a currency allowing countries to react
against competitive devaluation.
The Canadian Plan
The Canadian Plan was seen to be an alternative to the British and
American Plans, with stress given to the action needed to take by
institutions to retain control of any monetary union. The main issue
Canadian economists highlighted was the lack of extension of credit to
achieve quick resettlement of debts following the war. Therefore, credit
needed to be available to re-establish trade as soon as the agreement
comes into force.
In the Canadian plan, both a clearing mechanism and an exchange rate
mechanism would need to be set up, alongside a substantial fund to settle
debts and shortages following the war. Similar to both the British and
American plans, quotas would need to be determined and subscriptions
set up to pay the deposits to the monetary union in full, up to a total of
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$8,000 Million. Loans would therefore only be available up to 50% of the
quotas of the country.
A unit of currency would also need to be created for this Union, consisting
of 137 1/7 grains of fine gold. Exchange rates would therefore be fixed in
terms of rates of local currencies and gold.
Much of the Canadian plan is a synthesis of the British and American plan,
with more focus set on the initial action to be taken following the
agreement and Union coming into force.
Bloc Positions
The United Kingdom
- The United Kingdom’s main concern in the course of the Bretton
Woods talks was to avoid the destruction of the privileged position
sterling had before the war. Furthermore, the UK was in substantial
debt during the war and an efficient and effective way to handle
these debts (mostly to the US) and maintain exchange rates at the
same time was of upmost concern.
- The UK is seen as one of the two economies of primary concern with
the new economic order, along with the US, but their early
dominance in the debate of a monetary order was watered down
with the joint statement.
The United States
- The US has quickly become the world’s largest creditor at the time
of the Bretton Woods conference and its primary concern is how to
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protect the loans it has given, and continue the effective rebuilding
of economies after the war. The US Dollar has almost become the
main currency used in major international transactions and
protection of this dominance is also a key issue.
- The US is one of the most favourable to the complete
institutionalisation of the new economic system and seeks to
establish strong links with member states to allow whatever new
institution to function effectively following 1944.
The USSR
- The USSR, as another recipient of US help during the war, sees the
Bretton Woods conference as little concern to itself. Whilst holding
some of the largest industrial economies on earth, it’s financial
concerns are minimal whilst the war is still going
- It has also been noted that it is opposed to the dominance of any
one currency following the war and seeks a more cooperative
institution.
Europe
- As Europe has been utterly ravaged by the way, reconstruction is of
key concern. The lack of provisions for reconstruction were its
primary issue with the Keynes plan, and detailed information about
reconstruction are needed for many European nations.
- Furthermore, whilst the French plan did not get much support
during the intitial phases of investigation, it is still an important
economy in the world system and generally disfavours a strong
institution at the heart of the economic system
Latin and Central America
- Most of Latin and Central America participated in the conference
seeing a way to create an institution that could help them in their
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difficult process of growth. Many had become trapped in their
middle-income economies and the long-term provisions for any
institution is of primary concern for them.
Africa
- Decolonisation has not yet swept across the continent but its ideas
are near. The reconstruction and development of the continent is of
primary concern, especially regarding the upheaval that could
occur. The dominance of any currency is not favourable to these
nations, especially as currency flows are already difficult to
manage.
Asia
- Asia has not yet had strong financial institutions in many of its
member states, so any new economic order must help them
develop their nascent economies.
Conclusion
The Bretton Woods conference is filled with hundreds of ideas and
avenues to go down. The unions and currencies and historical mistakes
that have plagued the financial world must be reconciled in this
conference once and for all. Whilst delegates may remember their
primary concern is liberalisation of trade, and an end to damaging
competitive practises, they must also remember that the solution is
always cooperation, and that these United and Association nations must
stay so.
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Questions a Resolution should answer :
❖ How should the exchange rates of countries be regulated following
the war?
❖ How should the reconstruction of Europe and many other
devastated areas be financed and aided?
❖ What institution should help govern the financial system?
❖ Should an international currency be created to manage the funds of
said institution?
❖ What method of administration should this instate have?
Further Reading
Kurt Schuler And. “Who Was at Bretton Woods?” Centre for Financial Stability, July 1, 2014.
http://www.centerforfinancialstability.org/bw/Who_Was_at_Bretton_Woods.pdf.
• It is important to find out who exactly you are representing and
who chaired your delegation at the Bretton Woods conference
Keith Horsefield, J. “The IMF 1945-1964 Vol III: Documents,” 1981.
https://www.elibrary.imf.org/staticfiles/IMF_History/IMF_45-65_vol3.pdf.
• A list of the plans and provisions created before the Bretton Woods
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Bibliography
• Eichengreen, B. (1996). Golden Fetters: The Gold Standard and the
Great Depression, 1919-1939. Oxford, United Kingdom: Oxford
University Press.
• Feinstein, C.H. (1997). The European Economy between the Wars.
Oxford, United Kingdom: Oxford University Press.
• Friedman, M. and Schwartz A. (1963). A Monetary History oft he
United States 1867-1960. Princeton, United States: Princeton
University Press.
• Herbert, U. (2014). Geschichte Deutschlands im 20. Jahrhundert.
Munich, Germany: C.H. Beck.
• Keith Horsefield, J. “The IMF 1945-1964 Vol III: Documents,” 1981.
https://www.elibrary.imf.org/staticfiles/IMF_History/IMF_45-
65_vol3.pdf.
• Keith, Edited by. “Twenty Years of International Monetary
Cooperation VOLUME III: DOCUMENTS,” n.d.
http://imsreform.imf.org/reserve/pdf/keynesplan.pdf.
• Kershaw, I. (2016). To Hell and Back: Europe 1914-1949. London,
United Kingdom: Penguin Books.
• Kindleberger, C. P. (1973). The World in Depression, 1929-1939.
Berkeley, United States: Princeton University Press.
• Kurt Schuler And. “Who Was at Bretton Woods?” Centre for
Financial Stability, July 1, 2014.
http://www.centerforfinancialstability.org/bw/Who_Was_at_Bretton
_Woods.pdf.
• Pressler, F. (2013). Die erste Weltwirtschaftskrise, eine kleine
Geschichte der großen Depression. Munich, Germany: C.H. Beck.