The 1944 agreement defined a new monetary system concerning the dollar.The current economic crisis would be raising a new agreement, says the IMF.

The executive director of the International Monetary Fund (IMF) Kristalina Georgieva said that the global health crisis and the growing economic problems place the world in a new “Bretton Woods moment”. Georgieva referred to the agreements that took place in July 1944, at Bretton Woods, New Hampshire, United States.

The IMF published Georgieva’s speech on October 15 in which he outlined an action plan based on three guidelines: The creation and execution of policies to address the growing public debt, targeting policies towards the people, and putting more efforts on climate change, targeting to zero CO2 emissions by 2050.

The reference to Bretton Woods provoked numerous reactions, most of them skeptical that a similar agreement could curb the record growth of debt that overwhelms the major economies of the world. The IMF recognizes the alarming levels of the increase in the debt of the countries as a result of the fiscal and monetary measures in response to the health crisis.

The 1944 agreements by 44 countries stabilized the exchange rates of world currencies against the US dollar, which in turn took gold as the main back-up. The price of gold, under the agreements, was about $ 35 an ounce.

Right now, Georgieva is speaking out for “strong medium-term frameworks for financial, monetary and fiscal policies” that can boost economic activity and competitiveness.

It is noticeable that the IMF puts the Bretton Woods agreements on the table, which achieve was very healthy at a moment when the United States possessed a strong economy in its favor, compared to those of the European countries that were directly facing the consequences of the Second World War. The majority of the world’s gold reserves also helped the US, pushing the dollar to consolidate as the world’s reserve currency.

The important agreements served as the basis for the creation of the IMF, which could theoretically help a country with loans if it entered an economic crisis. Bretton Woods also led to the creation of the International Bank for Reconstruction and Development (IBRD), which would later become the main agency of the World Bank.

Among those who criticized the agreement since its inception was the journalist Henry Hazlitt, who covered economic issues for the New York Times from 1936 to 1946, and was responsible for several editorials that harshly criticized the agreement. His articles are collected in the book From Bretton Woods to World Inflation, A Study of Causes and Consequences, published in 1984, and which is available on the Mises Institute website.

Hazlitt argued that the agreement relied on governments to maintain consistent monetary policies but that no guarantee would happen. He claimed that it was not a viable system, that it would produce inflation, and predicted that it would collapse over time.

Hazlitt had already anticipated the failure of the agreement in which the thesis of the United States, elaborated by the economist Harry Dexter White, was imposed on the proposal of the United Kingdom, led by the famous John Maynard Keynes. The economic hegemony of the United States was remarkable in 1944 but it was accentuated after the end of the world war when it became the provider of liquidity for the reconstruction of Europe.

An oversupply of dollars in international markets intensified in the 1960s due to various factors, including US aid to other countries, military spending, and the growth of foreign investment in the United States.

This was a move against the Bretton Woods agreement, mainly because the United States did not have enough gold to cover the volume of dollars if the rate of 35 dollars an ounce was maintained.

 Various measures by the Kennedy and Johnson administrations to maintain the dollar and the Bretton Woods agreements failed, as the perception that the dollar was overvalued was imposed. Fearing a devaluation of the dollar, traders of the Forex markets promoted periodic phases of strong dollar sales.

By: Jenson Nuñez.

 

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