The Facts

Blow by blow

1944 Bretton Woods, New Hampshire; Allied Powers agree to reorganise post-war world financial system.

1945 World War II ends.

1947 Marshall Plan for European recovery begins. International Monetary Fund (IMF) and World Bank begin operations. India and Pakistan gain independence from Britain.

1949 Fixed exchange rates set between major international currencies to stabilise world trade.

1950-53 Suez Crisis. European Economic Community founded.

1959-61 Cuban revolution establishes communist state under Fidel Castro, 90 miles from US shores.

1960-70 First UN Development Decade.

1962 US sends military advisers to South Vietnam.

1964 Group of 77 developing nations formed to press common interests of Third World. UN Conference on Trade and Development (UNCTAD 1). Focus on foreign aid; Rich nations adopt 1% GNP target for aid to Third World.

1965 US Marines deployed in Vietnam, first air raids on North Vietnam.

1966 President Johnson announces a $5.6 billion cut in federal programmes due to Vietnam war.

1967 Johnson asks Congress for tax increases to help pay for the Vietnam war.
Britain withdraws armed forces east of Suez Canal, announcing ‘end of the imperial era’. IMF proposes Special Drawing Rights (SDRs) as new form of ‘paper gold’.

1968 UNCTAD 2: Concentrates on trade issues and establishing Generalised System of Preferences for manufactured exports from South.
Speculative gold rush destabilises international currency markets.
Western nations agree to maintain official gold price of $35/oz by not trading in private market.

1969 Agreement reached for issuing SDRs, first internationally managed currency. Further realignment of European currencies as French Franc devalued and German Mark revalued against US dollar.
Pearson Report calls for more Third World aid.

1970-80 Second UN Development Decade.

1971 President Nixon announces US will no longer exchange dollars for gold. Smithsonian Agreement of ten major industrial powers; dollar devalued and its convertibility into gold formally abolished.

1972 UNCTAD 3: Principle of special aid and concessions for poorest. Least Developed Countries accepted.

1973 EEC enlarged with Britain, Denmark and Ireland.
Demand for New International Economic Order (NIEO) by Non-Aligned nations.
Fixed exchange rates between dollar and European currencies abandoned Bretton Woods system in ruins.
Official gold price raised to $42/oz. Central Banks sell gold again on private market.
OPEC increases crude oil price by 450%.
US withdraws from Vietnam. Provisional Revolutionary Government formed two years later.

1974 UN General Assembly places NIEO on agenda for international negotiation.

1975 General Assembly establishes plan of action for negotiation of NIEO.
IMF proposes abolition of official gold price and announces sale of one-sixth gold reserves over next four years

1976 UNCTAD 4: Agreed in principle to establish Common Fund to stabilise commodity prices and guarantee reasonable return to Third World producers.
Jimmy Carter elected US president with new emphasis on global human rights.

1977 Conference for International Economic Co-operation, Paris. North-South dialogue grinds to halt over North’s demand to include OPEC oil price in bargaining.

1979 Third World’s ‘Group of 77’ in Arusha, Tanzania, emphasises need for collective self-reliance through South-South co-operation.
UNCTAD 5 Ends in deadlock, no progress on North-South negotiations.
Non-Aligned nations propose (renewed) North-South dialogue.
Global tariff reductions agreed, with minimal gains for South.
UK elects Margaret Thatcher, rejects post-war ‘Keynesianism’ and introduces hard-line monetarism to fight inflation.

1980 Brandt Report published stressing importance of North-South dialogue and co-operation to jolt world economy out of global crisis.
Ronald Reagan elected on aggressive militaristic, anti-communist platform.

1981 Summit of North-South leaders proposed to review issues raised by Brandt Report. Agenda of Mexico meeting adjusted to US demands.

Born at Bretton Wood

In July 1944 the Allied Powers met at Bretton Woods, New Hampshire,to decide how the international monetary system should be reorganised at the war’s end. They agreed an orderly world system was essential, managed on clear principles to encourage the expansion of world trade. For stable economic growth the adjustment of persistent ‘balance of payments’ surpluses and deficits between countries was also crucial.

There were three essential planks:

• Fixed international exchange rates between currencies. (The foreign exchange rate is the amount of a foreign currency a specific national currency can buy).

• An international reserve currency, the dollar, would be convertible at the official ‘fixed rate’ into gold.

• Retention of a fixed dollar price for gold ($35 an ounce).

Two new international institutions were created to manage the plan.

International Monetary Fund (IMF)
The role of the IMF is to monitor and help manage the operation and adjustment of the international monetary system. Under the Bretton Woods agreement the IMF was to support fixed exchange rates and ensure governments undertook to adjust a persistent surplus or deficit on their balance of payments. The IMF is also a ‘lender of last resort’ to its 130 member nations if they experience balance of payments difficulties.

The World Bank
The Bank was set up to channel funds for ‘reconstruction and development’ to the War-damaged economies of Europe. Since the mid-1950s the Bank has directed most of its funds to Third World governments for their national development programmes. There are 132 member countries each of whom subscribes to the Bank’s capital base. The US has 21 per cent of voting power which constitutes effective veto.

...conceived in Washington

The role of the United States in the Bretton Woods system was crucial. Since each country declared a par value for its currency in both dollars and ounces of gold the US dollar was effectively ‘as good as gold’.

National central banks outside the US were consequently prepared to hold part of their international reserves in dollars, because dollars were a generally acceptable form of payment These ‘exported’ dollars provided an extra source of international money to finance the growth and development of the world economy.

This system had the drawback of tying the stable operation of the international monetary system to the success of the US economy, especially to the ability of the US to maintain a balance of payments surplus.

1950s The recovery of Europe continued by World Bank loans and US investment under the ‘Marshall Plan.’ The founding of the European Economic Community (EEC) and the European Free Trade Association signalled the determination of European countries to strengthen their trading position.

1960s The decade opened with US temperatures running over the emergence of a pro-Soviet, socialist government in Cuba. Appalled that Third World nations might decide to join the ‘Communist Camp’, Washington stepped up attempts to counter the possibility.

The Organization of American States was set up to pour more American money into conservative Latin American regimes. In 1965, the US Marines invaded the Dominican Republic to stop a socialist victory at the polls. And by the late 60s the US was deeply mired in the protracted, bloody and expensive Vietnam war.

The first hairline cracks in the post-war economic system appeared with the forced devaluation of British sterling in 1967. More seriously, the following year a crisis of confidence — due to the reckless printing of dollars to pay for the Vietnam war — led to a mass conversion of dollars to gold. The system was beginning to crumble. Central banks, to avoid a devaluation of the dollar, agree not to sell their gold on the private market

As more nations gained independence a genuine Third World political interest was forged with the formation of the ‘Group of 77’ at the first UN Conference on Trade and Development in 1964.

1970s The dollar crisis of the early 70s led to the complete breakdown of the Bretton Woods system. By 1971, many governments and large corporations felt the dollar was overvalued and started exchanging their dollars for gold. The drain on US gold reserves was enormous. In a surprise move US President Nixon suspended the convertibility of dollars into gold in August 1971.

In December the dollar was devalued — breaking its link with the price of gold. Instability continued and the system of fixed exchange rates finally collapsed.

Gold, the only reserve asset increasing in value, enjoyed heavy demand. By 1975 central banks were again selling gold to the private market. Now they sold gold for profit, not as under the Bretton Woods arrangement, to maintain the low official price.

The Golden Rule

At Bretton Woods all currencies were valued in terms of gold to facilitate international trade and convertibility from one currency to another.

When the US dollar was strong gold’s low price restricted its use. But as the US economy weakened in the late 60s the dollar lost its attraction and the demand for payment in gold increased.

In 1971, the US broke with Bretton Woods, ending the convertibility of US dollars into gold. In 1975, the official gold price was finally abandoned. The booming price of gold during the 1970s reflects a growing lack of confidence in the world economy — especially during crises like the Soviet intervention in Afghanistan and the seizing of the US hostages in Iran.

The North on the rocks...

The performance of Northern economies in employment, inflation, production and economic growth has deteriorated steadily over the last decade. Estimates for 1981/82 suggest no improvement.

The unpredictable ‘free market’ now prevailing in the international monetary system has failed to encourage the expansion of the world economy. Recession and stagnation are the main economic features of the North

...and no Southern comfort

The outlook for the South is equally bleak. External public debt, measured as a percentage of GNP, has almost doubled in the last decade. The rate of inflation has more than tripled and the terms of trade are moving against all developing countries.

The South has demanded a New International Economic Order (NIEO), which they claim will stimulate more equitable development. But by the end of the 70s North-South discussions on the NIEO were in disarray. Worsening economic conditions in the North made them even less willing to make concessions.

The deterioration of the world economy is matched by increasing international tension. The world has tottered from crisis to crisis over the last two years — first Iran, then Soviet intervention in Afghanistan and the Iran-Iraq war.

Now the US is stepping up support for the military-backed regime in El Salvador. The election of Ronald Reagan has led to the abandoning of detente and a return to the philosophy of cold war.