ECON311 Research Report Assessment Answer

Introduction

The Bretton Woods Agreements introduced innovative frameworks for intergovernmental cooperation on economic issues between countries. These agreements were reached at Bretton Woods. In addition to this, a brand new global monetary framework was developed, which was founded on fixed exchange rates and restrictions regarding capital. Changes in the structure of the global economy occurred at the same time as shifts in the economies of various nations, which led to an expansion of the government's purview and a more proactive engagement in the regulation of economic fluctuations. A pervasive sense of uncertainty characterized the post-war consensus in all of its incarnations, be they international or local. At the very least, a portion of the responsibility for this phenomenon can be placed on the occurrences and predicaments that surrounded the Great Depression. The topic of this inquiry was the positive aspects of having deregulated marketplaces.

The thesis statement is to evaluate the immediate aftermath of Bretton Woods’ debacle in the economy of the US.

Discussion

There is a system of variable pricing for vital services like as energy and insurance, and the price paid for these services is determined by the purchasing power of the individual consumer (Pentland, Lipton & Hardjono, 2021).

The advent of the digital economy has bestowed numerous benefits upon a sizable portion of the world's population. This phenomena, however, has also resulted in an increased possibility of consumers who were previously self-assured and competent receiving bad deals and substandard service. This is despite the fact that the likelihood of these customers having these outcomes was previously low. This phenomena is not restricted to people who are already considered to be vulnerable, such as the elderly or those who have a restricted amount of financial means. The coming together of these three distinct elements ultimately resulted in the dismantling of the above structure. If any of these persons had been absent from the scene, there would have been huge changes made to the tale (Pentland, Lipton & Hardjono, 2021).

It is possible that increased flexibility would have made it easier to achieve greater coherence across the various fiscal policies, in contrast to the expectation that changes in parity within the context of a fixed rate framework would give rise to complications. If there had been fewer opportunities for capital to be moved around during the 1960s, a number of problems that arose at the decade's end would have been avoided. It's arguable that the ever-increasing vigor of capital markets was a crucial factor in keeping the expansion of the economy going during the aforementioned time period, and that this is a point worth considering. On the other hand, the continuity of the system might have been preserved if there had been greater uniformity in the policies of the national government. It is possible that the system could have been maintained if Germany and Japan had exhibited a greater readiness to address rising levels of inflation (Campos, 2018). 

 Even very slight deficits were hard to obtain finance during the Bretton Woods period, which was typified by regulated capital markets and set exchange rates. This led to immediate strain on the exchange market. As a consequence of this, countries that were experiencing deficits were required to implement fiscal measures on an ad hoc basis, which resulted in a cycle of stopping and starting over and over again. In order to deal with their own deficits, Germany's allies, most notably France, were put in the position of having to consider the possibility of enacting deflationary policies and austerity measures. This choice was deemed unattractive by the political class in France because of the possibility that it would limit the growth of the economy and produce poor electoral results. The preferred course of action involved the expansion of Germany; however, this strategy was not well received by the German population, who were concerned about the implications that inflation would have. In addition, the powerful and independent Deutsche Bundesbank was against going in this direction as the country's central bank. In the beginning, it appeared as though resolving the problem of the German current accounts within the context of Europe required an intricate and original political strategy. This strategy would need to compel French policymakers to implement greater fiscal restraint than they desired, while at the same time convincing German officials to adopt a less rigid approach to pricing. The basic character of the alliance was one of mutual benefit. The economic happenings leading up to the war, as well as the institutions that were established at Bretton Woods, were characterized by asymmetry and a worldwide imbalance. During the time of the gold standard, there was a hierarchical structure that gave core nations preferential treatment while demoting peripheral nations to a subordinate position. This structure was defined by the presence of a subordinate position (Balasubramanian & Raghavan, 2018).

During the 2008 financial crisis, China went back to what it had done before, which was to tie its currency exchange rate to that of the US dollar. The Chinese government has recently said that it thinks the dollar standard may not be enough to keep money stable between the United States and Asia. Also, they have said that the U.S. financial market might not always be the world's main hub. China has chosen to make its exchange rates more flexible in order to reach its goal of concentrating production for its own market.

The Covid-19 problem of 2020 can also be blamed for the end of the policies put in place after Bretton Woods. Instead of having set exchange rates like they did during the Bretton Woods era, exchange rates now change in response to market demand because national currencies are not stable. After World War II, the Bretton Woods agreement was broken in the 1970s. This led to changing exchange rates, inflation, slow economic growth, trade disputes, and long periods of crises that lasted more than twenty years. A unified currency in Europe and currency crises in developing countries can both be seen as results of the end of the fixed exchange rate system. This system was created by economists in the years after World War II to avoid the terrible things that happened in the 1930s. It was harder for people in poor countries to learn new things. A lot of Asian countries tried to keep their currencies tied to the dollar even though they were borrowing a lot of money in dollars. This led to the Asian crisis in the late 1990s, which then spread to other countries in Latin America and Russia. At the turn of the century, it became clear that many traditional international debtors were building up large amounts of international reserves to avoid making the same mistakes twice. This collection was a defense against attacks from speculators and a big promise to their pegs, which are now often hidden as controlled floats. The economic way to keep this process going is to build up approved reserves in the form of assets that are worth dollars. The goal of setting up these reserves is to serve as legal collateral for foreign investors, since there aren't any other ways to make sure the developing country doesn't stop paying its debts or take over the new businesses. The only way to build up these funds is to have a current account surplus, which ensures a net flow of foreign currency that is positive. To do this, it is suggested that developing countries tie their currencies to the U.S. dollar at a devalued rate, which is backed by a larger amount of savings than investments (Bordo, 2020).

It is imperative for Asia to increase its financial investment in the realm of higher education. In order to attract knowledge workers, it will be necessary to allocate additional funds towards housing and urban infrastructure. In order to achieve this, an increase in the actual exchange rate will be necessary. One effective approach is to increase the real rate while maintaining price stability is to refrain from intervening in the foreign exchange market. In the event that one or more Asian nations come to the realization that export-oriented growth is no longer as effective as it once was and subsequently cease their intervention, the coalition of central banks responsible for bolstering the value of the dollar and preventing the appreciation of Asian currencies will begin to disintegrate. It is conceivable that a gradual transition from the use of dollars to other reserve assets may occur, similar to the shift that occurred post-1968. Given the relatively low yields associated with yen-denominated investments, it may be a rational decision for individuals to transition towards investing in the euro. Moreover, the inclination of Asian governments to facilitate the establishment of a regional bond market may prompt them to allocate a greater proportion of their reserve holdings towards assets that possess monetary value denominated in the respective currencies of their counterparts (Balasubramanian & Raghavan, 2018).

The contemporary era presents greater challenges compared to the early 1970s due to the increased interconnectedness of the global economy and the amplified role of developing nations. It is also plausible that deflation may emerge as the norm instead of growth. In the wake of the 2008 financial crisis, developed nations have adopted a zero interest rate policy, thereby constraining their ability to take action. In developed nations, there exist numerous constraints on the utilization of economic policy. As a result, the argument for collaborating on matters pertaining to foreign policy has become more compelling compared to four decades ago. Given the persistent imbalance and susceptibility to market disruptions in the global economy, it is imperative to undertake concerted efforts to manage exchange rate regimes. This holds significant importance as China gradually transitions towards a currency that is convertible to other currencies. This is a domain that requires further attention, and the G20 ought to address it with resolute measures (Campos, 2018). 

The monetary system established at Bretton Woods remained in effect until 1971. The majority of the responsibility for the decline in the value of the dollar was placed on inflation and the widening trade imbalance, both of which were major contributors to the breakdown of the economic system. Both Germany and Japan have been asked by the United States to increase the value of their currencies, but neither country has complied with this request. The United States proposal to strengthen Germany's and Japan's currencies was rejected because Germany and Japan were concerned that it would be detrimental to their exports. At this time, the United States had no alternative but to allow free market forces to determine the value of the dollar. The occurrence was responsible for a great deal of anxiety all around the world, which resulted in the formulation of the Smithsonian Agreement in 1971 as a response to the problem. By 1973, the majority of people had come to the conclusion that exchange rates should be determined by the market, despite the fact that attempts had been made to alter the current course of events; however, these attempts had been unsuccessful. It is essential to keep in mind that prior to the implementation of the floating exchange rate system, the movement of currencies was not totally unrestricted because central banks continued to exercise some degree of influence on the value of their respective currencies. This occurred frequently whenever significant shifts in the prices of several currencies were anticipated. It was seen to be a clever strategy to defend the economy and prevent it from collapsing completely. The Smithsonian Agreement increased the likelihood that currency exchange rates would be subject to government oversight (Monnet & Puy, 2020).

Countries that had substantial trade deficits sold their currencies in order to prevent them from rising, which would have been detrimental to their export industries. In a similar manner, nations that have significant deficits frequently buy their own currencies in order to prevent a decline in their value. This, in turn, drives up prices within their own nations. However, it is important to note that there are limits to the amount of aid that can be provided through intervention, particularly for nations with significant trade deficits. A nation that intervenes to maintain its currency may, in the long run, consume up all of its global savings, leaving it unable to sustain its currency anymore and possibly unable to meet its international obligations. This situation might arise if the nation does not take into account the long-term consequences of its actions. In many respects, the accord involving the Smithsonian Institution was comparable to the agreement reached at Bretton Woods. The Smithsonian Agreement was distinct from the Bretton Woods agreement in that it permitted a larger range of fluctuation in currency values than the latter. In 1972, there was a determined effort made to remove the constraints that were associated with the use of the dollar (Pentland, Lipton & Hardjono, 2021).

 The nations that lacked reserves agreed to peg their currencies to either the dollar of the United States or gold in order to maintain some level of financial stability. With greater accuracy, nations agreed to establish a set exchange rate, sometimes known as a "par value," in reference to the US dollar and to maintain the exchange rate within a small margin of 1 percent around the established par value. Additionally, nations committed to keep the exchange rate within the narrow margin of 1 percent around the established par value. Despite this, this particular facet does not constitute a vital component of the story that is to follow. However, the non-reserve nations were under no obligation to exchange their currencies for gold at any point. That duty was entirely the responsibility of the reserve country. Non-reserve currency nations were expected to maintain a stable exchange rate in relation to the United States dollar through the use of foreign exchange market interventions. These interventions could involve the purchase or sale of dollars depending on the circumstances. To clarify, when there was an excess demand for the domestic currency in the foreign exchange market in return for US dollars, the non-reserve central bank would step in and interfere by buying dollars and supplying their own currency. This would occur in situations where there was a surplus demand for the domestic currency. This would result in a deficit in the balance of payments due to the provision of dollars as payment for the purchase of the domestic currency on the foreign exchange market (Campos, 2018). 

Conclusion

The Bretton Woods agreement utilised the dollar of the United States of America as its primary currency. The value of one United States dollar was first established to be equivalent to a certain quantity of gold, which was valued at $35 per ounce. The United States Federal Reserve agreed to let other countries' central banks trade their currency for gold on demand, but they stipulated that this right could only be exercised by national central banks and not by private companies or individuals.

In the case that such a thing were to take place, the entity in issue would no longer be able to maintain the currency valuation it had previously established. The most likely outcome would be a devaluation of the currency, which would run counter to the goals of the system, which are to maintain the status quo of the exchange rate and to forestall inflationary tendencies. This would be a move that would work against the goals of the system.

References

Balasubramanian, A., & Raghavan, S. (2018). Present at the creation: India, the global economy, and the Bretton woods conference. Journal of World History , 29 (1), 65-94.

Bordo, M. D. (2020). The imbalances of the bretton woods system 1965 to 1973: US Inflation, the Elephant in the Room. Open economies review , 31 , 195-211.

Campos, N. F. (2018). Bretton Woods, Brussels, and Beyond: Redesigning the Institutions of Europe .

Medhora, R. P., & Owen, T. (2020). A Post-COVID-19 Digital Bretton Woods. Project Syndicate, April , 17 .

Monnet, E., & Puy, D. (2020). Do old habits die hard? Central banks and the Bretton Woods gold puzzle. Journal of International Economics , 127 , 103394.

Pentland, A., Lipton, A., & Hardjono, T. (2021). Time for a new, digital bretton woods. Barron’s .

Zoeller, C. J. (2019). Closing the gold window: The end of Bretton Woods as a contingency plan. Politics & Society , 47 (1), 3-22.

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