By the 1970s the unsustainability of the Bretton Woods System (BWS) became increasingly apparent. Evaluate the factors which led to the collapse of the BWS and its impact on the subsequent evolution of the international political economy
Following the Second World War, the Bretton Woods system was implemented as a means of monetary management among independent nation states. It was based on Keynesian economics and a shared belief in capitalism. Bretton Woods, BWS, was considered a necessary response to the anarchic protectionist and neomerchantilist policies favoured in the great depression of the 30s. It was used to stop nation states using currency devaluations to increase competitiveness. Due to a lack of scale and coordination, these policies stagnated foreign direct investment and international trade volume. Bretton Woods created a fixed exchange rate system pegged to the dollar, maintained by other countries selling or buying their own currency and in turn keeping its value linked to that of the dollar. For more than a decade the system was associated with steady growth and trade. However, by the late 60s,as a result of a power shift away from the hegemony of the USA, as well as the misuse of both fiscal and monetary policy and the outflow of capital 'the system was on a trajectory headed towards collapse.'1
A prominent factor in the system’s decline was the USA's existence as a dominant hegemony. Following the Second World War many countries were left with depleted capabilities. Not only in terms of military force, but also politically weakened and economically exhausted, which left the USA as a prominent power with control over half of the world’s manufacturing capacity, and half the world’s gold. This gave it the ability to pressure previously dominant countries, such as the UK and France, into accepting the Bretton Woods system, especially since these countries realised they could not effectively compete with the USA in an open market. While the USA remained dominant the system was successful. However the mid 60s and the growth of multinational industries saw the rise of both the European Economic Community (EEC) and Japan as international economic powers. Collectively their total reserves, growth and trade outranked that of the USA. As the distribution of power became increasingly pluralistic, dissatisfaction with the system grew.
The USA began to loose control over its fiscal and monetary policy in the late 60s, and the dollar became overvalued. Within a few years the USA asked Germany and Japan to revalue their undervalued currencies, due to their significant surplus and to stimulate demand for the dollar. This was inevitable, as 'no matter how reserves are distributed initially, they will eventually be redistributed to the surplus countries.'2 The diluting effect to their surpluses and its impeding impact on their exports meant there was no incentive for Germany or Japan to revalue, and the IMF had no power to enforce it. This undermined the essence of the system: that it could be used to provide stable national currencies. The emergence of developing and restabilising countries opened a new stance, led by growing powers in Europe, that perhaps the dominance of both the dollar and the USA was not certain and acted as a significant stimulus away from the BWS. Furthermore relations strained between the USA and the USSR and fear of communism cooled resulting in less reason to cement a very Western monetary system. As Europe and other states’ GDPs grew and security issues became less of a concern the transatlantic defence ties loosened and economic tensions resulting from policy misuse within the USA began to surface.
The power shift away from US dominance and its impact on Bretton Woods had serious implications for IPE. The inherently economic system had been challenged, at the least, by political forces and a shift in power. This highlights the influence both politics and economics have on each...
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