From Bretton Woods to the new global economy
The global economy before 1914
 Free Trade and protectionism
 The classical economists and free trade: from Smith to
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Ricardo.
The growth of world trade
Foreign direct investment
The gold standard and the primacy of the poundsterling
The great overseas migrations
Technological innovation and the industrial revolutions:
railways, wireless telegraph, telephone, radio.
The disintegration of the world economy
(1914-1945)
 Early signals: late 19° c. protectionism.
 World War I and its consequences
 Soviet Revolution the USSR
 The decline of Britain and the uncertain rise of the US
as a global power
 The Great Depression (1929-1932) and its
consequences
 Nationalism and autarchy in the 1930s.
The rebirth of the world economy after
1945.
 Bretton Woods(1944)  the IMF and the World Bank.
 The Cold War.
 The Marshall Plan and the reconstruction of Western
Europe
 Liberalization through GATT
 The economic boom in Western Europe and Japan
Bretton Woods: a new architecture for the
international economic system
 Liberalization of trade and non discrimination principle
 Convertible currencies
 Fixed exchange rates against the dollar. The dollar linked to
gold.
 Free transfer of payments in current account, but
restrictions allowed to free flow of capital.
 International Monetary Fund as enforcer and regulator.
The IMF acts as lender of last resort through its reserves,
which are supplied by member states (gold and currencies)
 World Bank to supply investment finance.
Bretton Woods: how the system developed
 Huge post WW2 imbalances prevent the implementation of
currency convertibility
 The dollar gap. The American loan to the UK is followed by
the failure of sterling to remain convertible (summer 1947)
 The Marshall Plan: a new US route for the reconstruction of
Western Europe in the context of the Cold War.
Bretton Woods: how the system developed
 The US accept the temporary creation of a
preferential trade and payments area in Western
Europe.
 Trade: gradual liberalization within the OEEC
 Payments: the creation of the European Payments
Union, a multilateral payments system for European
currencies (1951-1958)
 Dollar convertibility is achieved in 1958 as the EPU
is wound down.
 Between 1958 and 1970 the Bretton Woods system
is operational.
Bretton Woods in action
 How the system worked:
- Countries hold dollars: the system is based on
confidence in the USA and on its military leadership in
confronting the USSR in the Cold War.
- US superiority overshadows any possible international
competition.
- The key role of the dollar as a reserve currency, confers to
the US a seignorage, i.e. the privilege of detaining a
currency backed by gold. Holding dollars, convertible in
gold, amounted to free interest loan to the Fed.
Bretton Woods: how the system
developed
- The international sphere is separated from the
national sphere. Single countries could run
independent economic policies. This is possible
because national economies were relatively
closed: especially international capital flows
were limited and controlled.
- Distinction between trade, finance and
industry, each moving in a separate sphere.
- Strong partnership between the USA and West
Germany. West Germany hold dollars and US
government securities.
Bretton Woods: factors undermining it in the
1960s.
 Growing weakness of US balance of payments, At the end
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of the 1960s it has fallen into the red (see increased
borrowing to finance ambitious welfare programs and the
Vietnam war)
Growing doubts on the dollar-gold fixed link.
Speculative movements on the price of gold.
Eurodollar market emerges. This gives rise to short term
speculative flows.
Short term money flows makes countries more dependant
on the international system. They are less able to separate
their domestic economic policies from their international
engagements.
Growing challenge by W. Germany, France and Japan to US
economic predominance.
The international trading system and the GATT
 At Bretton Woods it was decided to create an International
Trade Organization. However this was rejected by the US
Congress in 1950. It was decided to proceed in a piecemeal
fashion through the GATT / General Agreement on Trade
and Tariffs, created in Geneva in 1947.
 The GATT was not formally an international organization,
it had no powers or standing organization. It had no
dispute settlement mechanism. It was just a forum for
talks.
 The GATT was designed to bring about a concerted
reduction of tariffs on manufactured goods. It did not
concern itself with quotas. It had little influence over
agricultural products, services, investments and
intellectual property.
The GATT
 The GATT initiated multilateral negotiating sessions
known as GATT Rounds. Tariff reductions agreed by two or
more countries with each other were automatically
extended to all member states, according to the principle of
reciprocity.
 GATT Rounds taking place between 1947 and 1961
produced a considerable reduction of tariff barriers.
During the Kennedy Round (1963-7) in which the European
Community negotiated on behalf of its six member states,
there was a further reduction by 33% on tariffs on
manufactured goods.
The GATT
 The Tokyo Round (1973-1979) tackles for the first time
non-tariff barriers, but progress is uneven.
 In the 1970s services, FDI and intellectual property
rights become important and the rules of the GATT
were unable to cope with these issues.
Post WW2 growth and development:
different models.
 Economic boom in Western Europe and Japan. The
mixed economy. Factors accounting for economic
growth in the West.
 ISI (import substitution industrialization) in
developing countries and its mixed results
 Stalinism and the socialist bloc. High rates of growth
cover structural flaws.
The great boom in developed economies
 High rates of growth were the result of:
 Low cost of raw materials (see oil)
 Technological catch up with the US after 1945
 Large supply of cheap labour
 Stability due to unchallenged US leadership
 Labour-capital pact: no labour conflict in return for
employers sharing out productivity gains
 Commercial liberalization
The beginning of European integration
 The Europe of the Six:
 The European Coal and Steel Community
 The Treaties of Rome:
 The EEC and the Customs Union
 The EEC and common policies
The Cap
Common Commercial policy.
Developing countries after WW2
 Imports Substitution industrialization
 - See Latin America.
The Communist bloc after WW2
 Success - high rates of growth and industrialization
 Attempts at reform
 Failures in intensive growth