Framing New International Cooperation

An antagonistic peace, a deep and widespread anxiety in the global economy, conditioned states’ failure to resolve barriers to international participation and economic exchange, politicians’ inability to counteract burdens from their domestic political economies to transition costs of modification overseas and across borders, and an absence of mechanisms and strategies within states to shield their politicians from such pressures all contributed to the World War II scenario. This series of policy decisions and defaults resulted in social and political disputes within and between states, which helped the emergence of radical parties and authoritarianism, ultimately leading to the world’s most brutal war. The savagery of any previous human battle was dwarfed by the apparently civilized states of the industrialized world. The American Civil War saw the first use of modern weapons of mass destruction on the battleground, but its consequences in human lives, while high at the time, were limited by the fact that it was a civil war. On a worldwide scale, World Wars I and II displayed the severity of modern technological warfare. Given past international battles, the amount of human losses in World War I was staggering, but World War II was even more mind-boggling, as one military historian's inventory of the catastrophe demonstrates. John Keegan in his 1989 book The Second World War, pens down, “By far the most grievous suffering among the combat states was borne by the Soviet Union, which lost at least 7 million men in the battle and further 7 million citizens…Ukrainians and White Russians in the majority, died as a result of deprivation, reprisal and forced labor…The number of causalities, military and civilians, were far higher in Eastern than in western Europe.”

Allied policymakers began debating how to frame a post war society based on peace even before the war was over. They aimed to avoid past blunders and lay the groundwork for a sound global political economy that would limit global chaos and temptation which might turn to political, economic, and military aggression. Both the division of power and a fundamental ideological clash posed difficulties. The United States and the Soviet Union had disproportionate dominance at the top of the international power hierarchy which resulted into the World War II. David M. Kennedy in Freedom from Fear observes, “In the long sweep of time, America’s half- century long ideological, political and military face-off with the Soviet Union may appear far less consequential than America’s leadership in inaugurating an era of global economic interdependence…who could have foretold that the nation… would establish World Bank in 1945…and would create Monetary Fund in 1944?”

These states held opposing views on how to organize economic and political life, but Operation Barbarossa, Germany’s 1941 invasion on the Soviet Union, turned ideological foes into strategic partners. The United States’ industrial apparatus, still stuck in the midst of the Great Depression, went into high gear to produce war materials and serve as a barrier against Fascism. The enhanced industrial powers of the United States, shielded from the horrors of war, gave material help to the British and Soviets as they manned the front lines against the German aggressors. To assist them and later reverse the German onslaught, American trucks, tanks, aircraft, food, and other equipment flooded into the United Kingdom and the Soviet Union. American trucks gave Soviet forces better mobility and transport capacity than their adversaries, and boots developed in the United States protected Soviet soldiers’ feet from the bitterly cold Soviet winters. 

Having negotiations in Tehran and Potsdam, Joseph Stalin, Winston Churchill, and Franklin D. Roosevelt discussed the war’s conduct and began postwar planning. The end of the war raised great expectations for peace and prosperity, but experiences of the past, suspicion and conflicting interests and competition, born between the communist Soviet Russia and the democratic capitalism of United States and the United Kingdom, evolved the wartime alliance a fragile structure that would quickly unravel once the military conflict ended. To reduce the post War tensions, the United States and the United Kingdom preferred a system of decentralized market exchange with limited state intervention in the economy, whereas the Soviets preferred a system with extensive state intervention and state-directed allocation. These irreconcilable priorities would split the global political economy into two areas of influence, resulting in a cold war that would dominate international events for the next fifty years. Owing to these situations, policymakers in the United States and the United Kingdom began to devise a framework for avoiding past mistakes, promoting international economic cooperation, resolving conflicts, and embedding liberal economic interactions in a nation-state structure. 

They encountered the dilemma of how to best implement liberal economic relations in a self-help nation-state system, recognizing that laissez-faire market exchange in a nation-state system had attributed to the global economy’s downward spiral. Their solutions included the creation of cooperative inter-national agreements that would limit beggar-thy-neighbor tendencies, revive commerce, and establish an international monetary application depending on a stable exchange rate system. The military and economic capabilities of the U.S would play a crucial role in establishing a politically and militarily secure arena conducive to trade. This would help achieve cooperation from partners who might disagree on particular, as well as support institutional frameworks to limit harmful government decisions and finance the provision of vital collective goods, all of which could destabilize economic interchange and cooperation. The U.S took hegemonic responsibility for supplying critical communal goods that were vital for achieving the collaboration required for a functioning capitalist global economy. The U.S possessed both the capability and the desire to serve as a global stabilizer and leader.

Hegemonic Leadership and Inter Governmental Organizations (IGOs)

Policymakers recognized the need for international governmental organizations to support the United States' hegemonic efforts to make collective goods that benefit promote global macroeconomic stability, progress and international exchange, restricting the social barricades of the self-help nation-state system, aiding stable monetary interactions and plugging liberalism within it. Andrew C. Sobel in International Political Economy in Context: Individual Choices, Global Effects [1] enumerates, “These IGOs would supplement the international activities of US monic leadership. They would also complement the domestic strategies of Keynesian economic management and social safety nets, working as safeguards in case domestic strategies to protect liberal economic relations failed to insulate politicians from pressures to adopt beggar- thy- neighbor policies. By building IGOs to promote cooperation, policy makers sought to avert these dangerous choices by governments. But would sovereign government delegate enough of their authority to make such international organizations us”. High rising IGOs could help in establishing specialized networks of communication between governments, providing legal complaint and arbitral tribunal mechanisms, promoting greater familiarity between policymakers from various countries and enhance professional bureaucracies within governments with a stake in the international organization's objectives. 

Again, the United States’ leadership was crucial in the development of postwar IGOs. While the rest of the world was physically and economically devastated by World War II, the United States emerged from the conflict with unrivalled economic, technological and military superiority. In 1945, the United States generated 40% of the world’s total commodities and services, and it had 574 million ounces of gold in official reserves, out of a total of 965 million ounces. Because of this vast capability disparity and many countries’ need for US economic and security aid, the United States has unrivalled and disproportionate global influence. Without a hegemonic state constructed with the capabilities and will to act as the system’s stabilizer, by providing collective goods to foster constructive international collaboration, exchange and growth, the period following World War I revealed what could exactly happen. Policymakers in the United States then began taking up on the task of creating a framework for the global political economy. Their inclination to lead was motivated by a self-interested vision to improve a theory of international capitalism and liberal economic relations that would best match with domestic economic activity and security concerns in the United States. The interwar years had taught American policymakers the importance of such leadership in protecting liberal economic interchange, so they poured their resources into building a postwar system that would avoid the blunders that had followed World War 1. Furthermore, policymakers in the United States and the United Kingdom recognized the Soviet Union’s military might and desired to establish postwar global economic frameworks to confront the looming communist menace. They aimed to develop global economic systems that favored democratic capitalism political economies. 

Just as it had done in the Post – World War I, emerging from World War II as a major creditor nation, because the United States’ riches and economic skills had financed the struggle against the Axis forces, the Allied nations owed the U.S huge war debts once more. However, policymakers in the United States had learned a valuable lesson from the interwar years about the importance of liquidity in rebuilding economies and the harmful effects of heavy debt and reparations on reconstruction and economic activity. President Truman made a hasty decision to forgive the war debts while rejecting reparations. The United States demonstrated early leadership by hosting international conferences to debate the creation of the postwar global economic system in the midst of World War II. Some of these meetings were held in Bretton Woods, New Hampshire, when negotiations and agreements resulted in the Bretton Woods system’s structure. The United States and the United Kingdom dominated the talks. 

Policymakers debated how to build a market-oriented, non-discriminatory trading system that would lower trade barriers and prevent governments from using protectionist tactics, as well as how to establish a monetary system that would manage burdens on trading mechanisms and the balance of payments, and how to encourage reconstruction and development. Any accord that aspired to endure the demands of a self-help nation-state system and the challenges that could arise inside domestic political economies needed active leadership and resources from the United States. The three IGOs that became the core of the postwar global political economy best reflect the postwar system’s design, which began at Bretton Woods. The three organisational and institutional cornerstones that would integrate liberalism in a global political economy made up of nation-states were the General Agreement on Tariffs and Trade, the International Monetary Fund, and the World Bank.

Promoting Free Trade: General Agreement on Tariffs and Trade, 1994

The deliberations at Bretton Woods in 1994 on the General Agreement on Tariffs and Trade (GATT) recognized the importance of trade for economic progress and a healthy postwar system that could avoid the errors of the interwar years. Policymakers recognized that government intervention to safeguard home markets for domestic manufacturers and workers had been a key component of the beggar-thy-neighbor policies that drove the interwar economic and political disaster. The focus of the talks was on lowering trade obstacles and boosting its expansion. Negotiators compromised and developed a rule-driven structure that supported nondiscriminatory economic arrangements and initially emphasized tariff reductions after numerous conflicts and debates. A system based on rules that direct government policy making differentiates from a system that targets amounts in economic relations because it is more resilient in the face of change. 

Tariffs are levies that governments acquire and usually disperse in the form of government programmes, with at least a portion of the tariff penalty paid by consumers being returned to society. Other trade interventions, such as quotas, allow domestic producers to maintain the trade intervention’s cost to consumers; economists refer to such interventions as a total dead-weight loss to the economy. Trade policy can be used as a domestic policy instrument to encourage the growth of new industries in the midst of more competing foreign manufacturers, but it can also be used as a foreign policy tool to reinforce alliances and grant special advantages. Tariffs increase the cost of imported goods by imposing taxes on top of them. Import tariffs goods can sway customer preferences in favor of native items if they grow sufficiently high. Tariffs were an important aspect of economic growth schemes in the 1800s, and they were responsible for a large portion of government revenue. Ironically, economic theory argues that focusing on tariff reduction while ignoring other trade barriers like quotas, subsidies, and discriminatory trade blocs targets the least offensive government involvement while ignoring other, more bothersome interventions. Tariffs provide domestic producers an advantage in the domestic market, but the tariff earnings are rarely retained by the producers.

Prior to World War II, the government used trade policy to discriminate between possible trading partners, excluding some while including others. It caused distortions that reduced the profits from trade and the building of interdependence when used in this way. Nondiscriminatory trading agreements and institutions, on the other hand, strive to prevent governments from using trade as a policy tool to grant a benefit to one country but not to others. They want to shield trade policy tools from political meddling, which can lead to economic distortions in inter-national trade, which can lead to structural bottlenecks in productive endeavors and reduce trade benefits. The readiness of US policymakers to favor freer trade was a dramatic departure from the past, when US trade policy was based on a history of protectionism in order to safeguard US markets and encourage the rise of US manufacturers. By 1900, the United States had evolved into an economy with functioned in manufacturing and service industries that focused on export markets, but legislative change was slow. Only after the Great Depression hit did policymakers in the United States realize the dangers of beggar-thy-neighbor protectionism and the significance of more free trade for domestic economic prosperity. Protectionist forces stayed high in the United States, limiting Congress’ ability to lower tariffs. 

Congress created the Reciprocal Trade Agreements Act (RTAA) in 1934 as a backdoor method, delegating to the executive branch the authority to reduce tariffs by up to 50% through bilateral agreements that elicited similar concessions from other states. “Since this authority did not require the president to submit a bilateral agreement to Congress for approval, the delegation of authority provided congressional members with some insulation from protectionist pressures. Negotiations begun at Bretton Woods produced an agreement to form the International Trade Organization (ITO), but the ITO proved unacceptable to Congress because it reached far beyond the narrow bounds of trade policy to include mandates for full employment and economic development” (Sobel, 2013). The General Accord on Tariffs and Trade (GATT) was created as a temporary agreement in 1947 to replace the ITO. The GATT was signed by twenty-three countries at first, and it offered a multilateral system of principles to promote nondiscriminatory trade expansion and regulate what states could do to influence trade. 

From the start, the GATT discussions were dominated by lower tariffs on manufactured goods. This emphasis reflected the early GATT signatories' economic and political strengths, which included advantages in the production and sales of manufactured goods but were less viable in the manufacture and export of agricultural goods. However, because farmers in many industrialized countries wielded enormous political clout, negotiators were convinced to devise a system that reduced obstacles to manufactured goods while preserving protectionist measures like commodity price guarantees and subsidies for agricultural sectors.

A notable example of such a policy is the Common Agricultural Policy (CAP) of what is now the European Union. The Common Agricultural Policy (CAP) is a legacy of farmers’ political strength in European countries. A considerable amount of EU money is used to subsidise unproductive European agricultural production under the Common Agricultural Policy (CAP). Other developed countries, such as the United States, support agricultural production as well, albeit to a lower extent. Farmers in poorer countries were thus discriminated against due to the GATT’s early omission of agriculture. This prejudice still exists today. Mexican farmers, who are descended from the prehistoric people who cultivated maize, find it difficult, if not impossible, to compete with corn growers in the United States. This cannot be due to differences in labor expenses. The GATT was based on three main strategies of using multilateralism and most-favored-nation status to lower tariffs, holding repeating rounds of negotiations to resolve trade obstacles, and resolving disputes. These tactics appear to have worked. Tariff levels dropped considerably, commerce grew, and states used the international organization's adjudication systems to resolve their differences rather than turning to unilateral responses. The GATT was superseded by the World Trade Organization in 1995, and as of July 2008, it has 153 members. Today, the WTO and the global trade system confront obstacles because the Westphalian state system's political geography assures that nations retain their sovereign authority to act unilaterally and can choose to deviate from the GATT’s principles at any time.

The Establishment of the International Monetary Fund: An Output of Bretton Woods

The Keynes and White missions aimed to minimize governments’ incentives and capacities to use monetary instruments to export unfavorable domestic economic circumstances to foreign countries. They devised two postwar monetary arrangements plans, one for the United Kingdom and the other for the United States, both of which attempted to utilize institutional architecture to shield monetary relationships from domestic political influences. The plans coincided, but they were also somewhat different. The final resolution of the gaps between the Keynes and White ideas set the groundwork for the International Monetary Fund's Articles of Agreement and the postwar system. 

The settlement between the U.S and the U.K resulted in a system that deviated from the gold standard in three key ways:

• Capital movement is subject to well-accepted restrictions

• A central coordinating institution, the IMF, with the authority to grant loans to support balance-of-trade deficits and to supervise national economies

• An exchange rate that can be adjusted

For starters, the gold standard was built from the ground up. States joined the gold standard as a consequence of decentralised policy decisions made by individual governments, rather than a consensus reached by negotiators at an international convention and coordinated by an international institution. The gold standard was not overseen by any international institution in order to smooth out discrepancies between states. The IMF was established to avoid some of the problems associated with excessive decentralization, to provide a set of instructions and staff to supply national policymakers with knowledge and skills, to provide a forum with rules and procedures to aid member states discuss dangers and collaborate their actions, and to try to limit policymakers’ economic nationalist proclivities in an anarchical nation-state system [2].

The IMF’s Articles of Agreement mandated that the institution decrease monetary barriers to trade, monitor member countries’ economic policies, and offer finance to offset transitory balance-of-trade deficits. By establishing a mechanism to finance transitory balance-of-trade deficits, governments were able to shield themselves from temptations to alter currency values and domestic economic policies. Temporary limitations were assumed to self-correct, but it was acknowledged that the pendulum might take some time to drift back and restore balance. The goal of the short-term funding facility was to give countries some breathing room, preventing them from resorting to measures like tariffs, trade barriers, and predatory devaluation to address their balance-of-trade deficits. A state’s temporary finance would be determined by a formula connected to its state quota, which was based on economic size. States were restricted in their ability to use their IMF quotas. As account deficits got greater, access to the IMF credit facility became increasingly problematic. This constraint provided the IMF with a tool to rein in states with recurrent balance-of-trade deficits. If a country’s balance-of-trade imbalance persists, the IMF may require the country to address specific national economic concerns identified by IMF experts as contributing to the problem as a condition of receiving assistance. Conditionality refers to the ability to set conditions on the issuance of additional credit. Imposing the correct conditions would necessitate the IMF receiving adequate expertise and information about member economies and policies, implying that the IMF would need to monitor its members.

The adjustable-pegged exchange rate set by the IMF’s Articles of Agreement was the second divergence from the gold standard's fixed exchange rate. There are a variety of adjustable-rate systems available, ranging from free-floating rates to more rigid adjustable pegs. In order to reduce volatility, the IMF’s Articles of Agreement established an adjustable peg, which allowed for changes in the exchange rate of a currency only in exceptional situations [3]. 

The Bretton Woods system allowed for exchange rate adjustments when a country’s economy and balance of payments were fundamentally out of balance, but only after notifying the IMF for modifications of up to 10% depreciation. Larger modifications required authorization from the IMF. Establishing an orderly and legal method for a government to alter currency rates in the event of a fundamental imbalance in order to maintain growth and boost employment. Chronic unemployment or economic woes that could inspire unilateral beggar-thy-neighbor policies were preferred to devaluation. Orderly devaluation under international supervision provided an escape strategy for governments, as well as a check on national policymakers’ predisposition to see monetary and exchange-rate adjustments as a quick fix for domestic economic problems. 

The IMF’s Articles of Agreement allowed for an adjustable peg while also aiming to maintain currency volatility to a minimum and keep trading ranges tight. The United States was required by the Articles of Agreement to announce a dollar par value. The dollar’s value was fixed to gold as a result of this. One ounce gold then was valued and fixed at $35. The US committed to providing the common benefit of convertibility, persuading others to store dollars as a reserve asset gladly as long as they trusted in US commitment-par values. The dollar became the major currency and deposit asset in the system as a result of this arrangement and the US commitment to convert dollars into gold on demand. The dollar is still used for pricing and settling the majority of international transactions more than sixty years later, and it accounts for more than 60% of hard currency reserves in national treasuries. The dollar’s significant role in the post-war system benefited the United States, but it also limited policymakers in the United States. As long as others were eager to retain dollars instead of gold, the US could sustain balance-of-payments deficits. Because dollars pouring from the United States produced reserves and liquidity elsewhere, other nations and the IMF ignored US balance-of-payments deficits. The system’s liquidity was reliant on dollars. Others’ desire to amass dollar reserves permitted US policymakers to avoid the balance-of-payments mechanism’s discipline, allowing the country to finance its deficits at low interest rates and with little exchange-rate risk. It also provided the US enormous influence over other governments’ policy decisions. Although French President Charles de Gaulle would later denounce this extravagant luxury, it maintained. On the downside, policymakers in the United States have significantly less flexibility in changing the value of their currency than policymakers in other countries. Because the par values of all other currencies are established in dollars, any variation in the dollar’s price will affect prices throughout the system, potentially causing price volatility internationally, which could jeopardise economic activity. Because the dollar is the world’s most important reserve currency, the US could only use the exchange rate mechanism as a last resort to alleviate domestic economic instability. Power and privilege come with benefits, but they also come at a cost [4].

The willingness of the new monetary system to constrain capital movement was the third departure from the gold standard. White advocated for complete capital mobility, but Keynes contended that governments should be able to regulate capital flows that could cause destabilising volatility and jeopardise balance-of-payments situations and full employment. The British opinions took precedence. They used the 1929 financial strategies in New York, which swiftly travelled throughout the world, to highlight the disruptive potential of fluctuating capital flows. They were also concerned that capital outflows in the following of the conflict would deplete an economy’s liquidity, making it difficult to reconstruct and create jobs. Governments were expected to implement inflationary policies in order to stimulate rebuilding, which may result in capital outflows if investors lost faith in a currency’s worth. Governments that sought to boost growth and employment had no choice because more financially conservative measures would lead to deflation, stagnation, and more unemployment.

With governments unable to limit government spending and hurdles to adjusting exchange rates, unrestricted capital flows would act as a balance-of-payments adjustment mechanism. This condition may jeopardize employment. To avoid capital account losses, limit the unpleasant downside of financial markets, foster growth, and support the full-employment objective of the postwar social contract in many countries, the Bretton Woods agreement allowed, even promoted, capital mobility restrictions. Following the interwar period's experience of rating downgrades, intense currency risk and uncertainty, and beggar-thy-neighbor free-for-all exchange-rate interactions, the Bretton Woods monetary system encapsulated currency risk, encouraged inter-state cooperative monetary relations, and supplied a stable international monetary system conducive to the expansion of international trade. The Bretton Woods system was at the centre of postwar international collaboration and globalization, which fuelled economic growth, provided jobs, and increased social welfare.

Growing Pressures on the Dollar-Gold Relationship Threaten the Bretton Woods Monetary System 

Other changes during the end of the 1950s and early 1960s weakened confidence in the US economy, expressed doubts about the dollar's link to gold, and put the Bretton Woods monetary system in jeopardy. The US economy had a brief but severe recession in the late 1950s. To foster growth, the Federal Reserve dropped interest rates, but this reduced the incentives to hold dollars or dollar-denominated financial instruments and raised the incentives to change dollars into gold or other currencies in order to pursue higher rates of return. As a result, in 1958, the United States lost nearly 10% of its official gold reserves. Then, as the recession eased, interest rates rose, reducing the incentive to exchange dollars for gold or other currencies, but the loss of gold reserves and the dollar's run had impressed financial market traders. They started to be concerned about the relationship between dollars and gold. Sobel further observes, “The United States continued to lose gold reserves over the next several years, but at a slower rate than in 1958. However, in October 1960, just before the tightly contested presidential election between Kennedy and Nixon…The price of gold in private markets shot up to $40/ounce, although its official par value remained at $35/ounce. Such a disparity between the public and private values of gold had never happened before under the Bretton Woods system. It reflected growing uncertainty over the relationship between the dollar and gold, and uncertainty about the policies a Democratic president might adopt in regard to the exchange rate and convertibility… the dollar was overvalued at $35/ounce of gold. Was there a fundamental disequilibrium? If so, an overvalued dollar made U.S. commodities in the tradable sector relatively expensive vis-à-vis foreign commodities and acted as a drag on U.S. growth”.

A Democratic president would be more likely to represent commercial development that prioritized development over price stability, whereas a Republican president would prioritise price stability over growth. In fact, during his campaign, Kennedy supported for more aggressive growth plans. If the disparity persists, it could lead to a run-on official reserve, because economic traders could buy gold for $35/ounce from governments committed to transfers and then sell it for $40/ounce in private markets, creating an arbitrage opportunity with an extremely attractive rate of return. Recognizing that concerns over the dollar’s link with gold could harm his electoral prospects, Kennedy reacted quickly, proclaiming his unwavering support for the dollar’s present par value. The market turmoil stopped when gold recovered to $35/ounce in private markets, but the seeds of uncertainty planted in 1958 had been entrenched. Financial traders began paying more attention to the US economy for symptoms of Vulnerability that may indicate an impending Triffin disaster. They did not have to search for very long.

Suspension of Dollar-Gold Convertibility 

With confidence in the dollar-gold connection diminishing, doubts developing about the US attempt to keep convertibility at $35/ounce, and questions about the sustainability of the US economy, the US declared its first balance-of-trade deficit since World War II in the late 1960s. Since the war, the United States’ balance-of-payments deficits have been tied to the capital account rather than the current account, as the country has enjoyed a trade surplus during that time [5]. With the US running a capital-account and current-account deficit, confidence in the US economy, as well as the assumption that the dollar was as good as gold, was jeopardized. Except in circumstances of a fundamental disequilibrium that exposes structural difficulties in an economy, countries cannot run balance-of-payments deficits without the political pendulum back to surpluses. Despite the logic of the economic system, the United States had been running such deficits for the majority of the time since World War II. 

This was due to the country's unique position as the world's leading currency, the dollar’s function as the strategically vital asset, and the necessity for dollars to support rebuilding and postwar expansion. The United States was encouraged to boost its monetary supply and run balance-of-payments deficits as the system’s liquidity provider and lender of last resort. As a result, policymakers in the United States might pursue policies that would signify weak economic management and fundamental disequilibrium in other countries. Policymakers in other countries and the International Monetary Fund (IMF) happily turned a blind eye because the system required dollar outflows and they believed in the underlying soundness of the US economy. Dollar outflows have given the cash needed to keep the economy afloat. The sustained success of US producers in the global economy, as measured by the US balance-of-trade surplus, was interpreted by policymakers as an indication of the country’s economic vitality and health. Despite the fact that the current and capital accounts did not balance, they both pointed in the right direction, easing concerns about US balance-of-payments adjustment pressures. However, beginning in the late 1960s, concerns about pressures on US leaders to address a fundamental imbalance, either by changing the dollar exchange rate or by adopting other policies like as protectionism, arose. This potential attempted to put the system into turmoil, increasing pressure on policymakers in the United States to amend the regulations. The system was gaining momentum for change like a snowball rolling down a hill.

For US policymakers, the balance-of-trade deficit suggested a looming domestic challenge. Current-account deficits revealed that the dollar's value was hurting U.S. manufacturers and labour in the tradable sector due to a structural imbalance. With postwar reconstruction and economic prosperity, foreign producers had become more competitive than American producers. Their gains were aided by a dollar that was overpriced. When American producers controlled trade by large proportions, this condition was less troublesome because there was a buffer to cushion the blows of creative destruction. However, as the effects of the inflated currency were felt in US labour markets, the trade imbalance marked the end of this buffer and increased challenges for US lawmakers. In order to maintain price stability in the system, the United States, as the leading currency country, wished to prevent changing the value of the dollar. 

A devaluation would cause a major shock, potentially undermining trust in the currency and US leadership. Politicians in the United States were presented with a difficult situation. By 1971, policymakers in the United States could no longer withstand the dynamics and preserve the Bretton Woods monetary system. By at least 10%, the dollar was intrinsically overvalued. A devaluation would cause a major shock, potentially undermining trust in the currency and US leadership. Politicians in the United States were presented with a difficult situation. By 1971, policymakers in the United States could no longer withstand the dynamics and preserve the Bretton Woods monetary system. By at least 10%, the dollar was intrinsically overvalued. Only a restructured monetary system and a realignment of currency rates that addressed the basic disequilibrium and made U.S. corporations more competitive would restore convertibility. Rather than devaluing the dollar, Nixon sought to revalue the currencies of the US's major trading partners. The economic repercussions for the United States would be similar, but the political ramifications would be different because the blame for the system's dysfunction would rest more largely on others. Obviously, policymakers in other countries favoured dollar depreciation to currency revaluation. The talks were tense, and they threatened to derail global collaboration, but thirty years of postwar cooperation had laid a solid foundation. The Smithsonian Agreement was signed in December 1971 as a result of the discussions.

Bretton Woods’s architects established the groundwork for a liberal global political economy. They built a framework of national agreements, domestic regulatory frameworks and safety nets, and international governmental organisations to shield politicians from domestic political pressures to shift the costs of economic misalignments abroad, having learned from the mistakes of the interwar years. They would learn a lot about how to utilize fiscal and monetary policy to keep their economy stable and avoid disruptive swings. Because the Bretton Woods designers were skeptical of policymakers’ ability to resist unilaterally the beggar-thy-neighbor stresses from their domestic constituencies, they created IGOs such as the World Bank, the GATT, and the IMF to limit national policymakers’ policy mobility and provide assets and pathways for guaranteeing and reinforcing liberal exchange of goods and services in a self-help nation-state system. By providing crucial common goods and bankrolling the system at a time when other countries were damaged and destitute by war, the United States operated as the hegemonic leader and system stabilizer. All of this contributed to the development of a liberal global political economy, which grew stronger in the years following the war. This expanding economy, allied with political-military measures, served as a bulwark against the Soviet sphere’s communist political economies. Despite the Bretton Woods monetary system’s eventual and unavoidable collapse, the planners’ efforts were far more successful than they could have expected when they first gathered in the New Hampshire Mountains.

1. Andrew, C.S. International political economy in context: Individual choices, global effects. SAGE, 2013.
2. Kennan, G.F. American diplomacy. The University of Chicago Press, 1985.
3. Keylor, W.R. The twentieth-century world and beyond: An international history since 1900. Oxford University Press, 2006.
4. Collier, P. The bottom billion: Why the poorest countries are failing and what can be done about it. Oxford University Press, 2007.
5. Easterly, W. The elusive quest for growth: Economists' adventures and misadventures in the tropics. The MIT Press, 2002.