Question

Critically discuss whether the Bretton Woods System has been based on Keynesian principles. Please give me main arguments for my essay in a qualitative prospective . Thank you!

Answer 1

At Bretton Woods, some envisaged an international monetary system that would ensure stability of the exchange rate, prevent competitive devaluations, and promote economic growth. Although the goals of the new system were agreed by all participants, plans to implement them differed. It was a huge international undertaking to reach a collective agreement. Preparation began more than two years before the conference, and numerous bilateral and multilateral meetings were held by financial experts to reach a common approach. While the main responsibility for international economic policy rests with the United States Treasury Department, the Federal Reserve has been involved in providing guidance and recommendations on the new system. The new system's main designers were John Maynard Keynes, British Treasury advisor, and Harry Dexter White, the Treasury Department's chief international economist.

Keynes, one of the most influential economists of the time (and perhaps even today), advocated for the establishment of a large institution with the power and authority to intervene when imbalances arise. His conviction that public institutions should be able to intervene in times of crisis was consistent with this strategy. The Keynes plan envisaged the Clearing Union as a global central bank. This bank will issue a new international currency, the "bancor," to resolve financial imbalances. Keynes suggested raising Clearing Union assets of $26 million

Through country would obtain a small credit line that would prevent it from running a deficit in the balance of payments, but each country would also be prevented from running surpluses by having to hand over excess banks to the Clearing Union. Keynes's worries about the international post-war economy are expressed in the program. He predicted that the United States will suffer another recession, leading other countries to run a deficit in the balance of payments and forcing them to choose between domestic stability and stability of the exchange rate.

In response to Keynes ' concerns, the plan adopted at Bretton Woods resembled the White plan with some concessions. If a country had a balance of payments surplus and its currency became scarce in world trade, a clause was added. The fund could ration the currency and allow the surplus country's limited imports. However, the Fund's overall assets have been boosted from $5 million to $8.5 million. The Bretton Woods system was in place before increasing US balance-of-payments deficits led to foreign-held dollars exceeding the US gold reserve, meaning that the US could not fulfill its obligation to redeem gold dollars at the official price. President Richard Nixon terminated the convertibility of the dollar to gold in 1971.