Rebuilding the world economy: Bretton Woods to globalisation

Detail

The Second World War and the ruin it left

• Two sides. The Axis powers — Nazi Germany, Japan, Italy — fought the Allies — Britain, France, the Soviet Union and the US.
• Scale. The war ran six years and was fought on many fronts, on land, sea and air.
• Deaths. At least 60 million people were killed — about 3% of the world's 1939 population.

• More civilians died than soldiers. This was new. Bombing, hunger and mass killing hit ordinary people at home.

• Damage. Huge parts of Europe and Asia were flattened — cities, factories, roads, ports.

• Rebuilding had to be paid for and planned. The job was enormous.

Two powers shaped the rebuilding

• The United States. It came out of the war as the clear boss of the Western world. Its land was untouched and its industry was huge.
• The Soviet Union. Before the war it was a backward farming country. It turned itself into a world power during the very years when capitalist countries were stuck in the Great Depression.
• This mattered politically. Planning and state control looked like they worked, while free markets had failed in the 1930s.

Two lessons learnt from the inter-war years

Economists and governments looked back at the 1920s–30s and drew two conclusions.

• Lesson 1 — mass production needs mass consumption.
• If factories make goods in huge numbers, huge numbers of people must be able to buy them.
• Buying power needs high and stable incomes.
• Stable incomes need steady, full employment — jobs for all, all the time.

• Markets on their own cannot promise this. So governments must step in.

• Lesson 2 — full employment needs control over flows.

• A government can only keep everyone employed if it has the power to control the movement of goods, capital (money) and labour (people) across its borders.

The Bretton Woods conference, 1944

• The new framework was agreed at the United Nations Monetary and Financial Conference, held in July 1944 at Bretton Woods, New Hampshire, USA.
• Delegates from 44 nations met at the Mount Washington Hotel; the conference sat from 1 July to 22 July 1944 [2][3].
• The two guiding minds were John Maynard Keynes (adviser to the UK Treasury) and Harry Dexter White (US Assistant Secretary of the Treasury) [2].
• The conference produced the Articles of Agreement of both the IBRD and the IMF; the IMF Articles were adopted on 22 July 1944 and were first accepted by 29 countries [2][3].

The Bretton Woods twins

Institution	Mandate
IMF (International Monetary Fund)	Deal with the external surpluses and deficits of member nations — that is, whether a country earns more or less from the outside world than it pays out
IBRD / World Bank (International Bank for Reconstruction and Development)	Finance post-war reconstruction — lend money to rebuild wrecked countries

• The two together are called the Bretton Woods twins.
• Financial operations began in 1947.
• Who decided things? The Western industrial powers controlled decision-making. The US held an effective veto — nothing big could pass against it.

The Bretton Woods monetary system

• Fixed exchange rates. A currency could not move up and down freely against others.
• National currencies — for example the Indian rupee — were pegged to the US dollar at a set rate.
• The dollar itself was anchored to gold at $35 per ounce. A government holding dollars could ask the US for gold at that price.
• So gold backed the dollar, and the dollar backed everybody else. The whole system stood on US gold.

The post-war boom, 1950–70

• World trade grew over 8% a year between 1950 and 1970.
• Incomes grew nearly 5% a year.
• Growth was mostly stable — few big crashes.
• Unemployment averaged under 5% in most industrial countries. This was the full employment the planners wanted.
• Technology spread worldwide. Developing countries imported industrial plant and equipment from the rich world to catch up.

Decolonisation and the new nations

• In the two decades after the war, most colonies in Asia and Africa became independent.
• These new nations were poor and resource-starved. Colonial rule had drained them and left them handicapped.
• The institutions did not fit them. The IMF and World Bank were designed for industrial countries, not for development.
• From the late 1950s, once Europe and Japan were rebuilt, the twins turned their attention to developing countries.
• But real power over resources had not moved.
• Ex-colonial powers still controlled vital resources — minerals, land.
• Western corporations got cheap rights to those resources.

MNCs — the new global firms

• MNC (multinational corporation) = a firm that runs production in several countries at once.
• The first MNCs were set up in the 1920s.
• They spread fast in the 1950s and 1960s.
• Why? Countries had put up high import tariffs (taxes on foreign goods). To get past the tariff wall, a firm set up a factory inside each country and became a "domestic producer" everywhere.

The G-77 and the demand for a new order

• Left out of Western growth, developing countries organised as the Group of 77 (G-77).
• The G-77 was formed on 15 June 1964, taking its name from the 77 countries that signed the "Joint Declaration of the Seventy-Seven" at the close of the first UNCTAD (United Nations Conference on Trade and Development) in Geneva [4][5].
• They demanded a New International Economic Order (NIEO), meaning:
• Real control over their own natural resources.
• More development assistance.
• Fairer prices for raw materials they sold.

• Better access to Western markets for the manufactured goods they made.

• The UN General Assembly adopted the Declaration on the Establishment of a New International Economic Order as resolution 3201 (S-VI) on 1 May 1974, at its Sixth Special Session — pushed by the Non-Aligned countries and by OPEC's actions on oil [6].

The end of Bretton Woods

• From the 1960s the US overspent abroad. Rising overseas costs weakened its finances.
• The dollar could no longer hold its value against gold. Too many dollars were out in the world and too little gold sat in US vaults.
• The fixed exchange rate system collapsed. It was replaced by floating exchange rates — currency values now set by the market, changing day to day.
• Dates for the collapse: on 15 August 1971 US President Richard Nixon suspended the dollar's convertibility into gold — the "closing of the gold window" — driven by a balance-of-payments crisis linked to spending on the Vietnam War and the Great Society programmes [7]. The Smithsonian Agreement of 17–18 December 1971, signed by the Group of Ten in Washington, tried to fix new pegged rates but did not last; by early 1973 the major currencies were floating [7][8].

Debt crises in the developing world

• From the mid-1970s, developing countries could no longer get cheap official money. They had to borrow from Western commercial banks and private lenders.
• Result: periodic debt crises — borrow, fail to repay, borrow again on worse terms.
• Poverty deepened, worst of all in Africa and Latin America.
• Meanwhile, in the industrial world, unemployment stayed high from the mid-1970s to the early 1990s — the long full-employment run was over.

Industry moves to Asia — the start of 'globalisation'

• From the late 1970s, MNCs shifted production to low-wage Asian countries. Making things where wages were low raised profits.
• China re-entered the world economy.
• China had been cut off from the world economy since its 1949 revolution.

• New economic policies brought it back in.

• Post-Soviet Eastern Europe joined the same pool.

• Low wages made these countries magnets for foreign investment.
• Effects:
• Relocation of industry stimulated world trade and capital flows.
• The economic geography of the world changed — India, China and Brazil went through rapid transformation.

Prelims Hooks

• The Second World War killed at least 60 million people — about 3% of the 1939 world population, with more civilians than soldiers dead.
• The Bretton Woods framework was agreed at the United Nations Monetary and Financial Conference, July 1944, Bretton Woods, New Hampshire, USA — 44 nations, 1–22 July 1944 [2][3].
• The IMF Articles of Agreement were adopted on 22 July 1944 and initially accepted by 29 countries; Keynes and Harry Dexter White were the leading figures [2][3].
• IMF handles external surpluses and deficits; IBRD (World Bank) financed post-war reconstruction — together the Bretton Woods twins; operations began in 1947.
• Under Bretton Woods, currencies were pegged to the dollar and the dollar was fixed to gold at $35 per ounce; the US held an effective veto in decision-making.
• 1950–70: world trade grew over 8% a year, incomes nearly 5%, unemployment under 5% in most industrial countries.
• The first MNCs appeared in the 1920s; they spread in the 1950s–60s largely because high import tariffs forced firms to produce inside each market.
• The G-77 was founded on 15 June 1964 by the 77 signatories of the Joint Declaration at UNCTAD I, Geneva [4][5].
• The NIEO Declaration was adopted as UN General Assembly resolution 3201 (S-VI) on 1 May 1974 [6].
• Nixon suspended dollar–gold convertibility on 15 August 1971; the Smithsonian Agreement (17–18 December 1971) failed, and major currencies floated from early 1973 [7][8].

Mains Points

• The post-war order was built on a diagnosis of the 1930s, not on free-market faith. The planners concluded that mass production needs mass consumption, that stable incomes need full employment, and that markets cannot deliver full employment alone. Bretton Woods was therefore a managed system — fixed rates, capital controls, an IMF to police balances — and its twenty-year boom (8% trade growth, under 5% unemployment) is the strongest evidence offered for state-managed capitalism. Its collapse after 1971 is the strongest evidence offered against.
• Political independence did not bring economic independence. Asian and African colonies won freedom in the 1950s–60s but inherited drained economies while ex-colonial powers still controlled minerals and land and Western firms held cheap resource rights. The IMF and World Bank were designed for industrial reconstruction, not development, and only turned to poorer countries from the late 1950s. The G-77 (1964) and the NIEO (resolution 3201, 1974) are best read as an attempt to complete decolonisation on the economic side [4][6].
• The 1970s break links three chains at once. US overseas spending → dollar loses its gold anchor → floating rates; end of cheap official finance → borrowing from private Western banks → debt crises in Africa and Latin America; high Western wages and unemployment → MNCs relocate to low-wage Asia. The same decade that impoverished one group of countries created the conditions for the rise of China, India and Brazil.
• Globalisation after 1980 was not a return to the 19th-century free market. Capital and goods moved freely, but labour did not. Firms moved to where cheap workers were, instead of workers moving to where wages were high — a structural asymmetry that explains both Asia's manufacturing rise and persistent high unemployment in the industrial world from the mid-1970s to the early 1990s.