Hello again, in the last video we saw the stillbirth of the International Trade Organization. In its place, World Trade came under the remit of the GAT, which succeeded in reducing industrial protection. But, not much else. The efforts of less developed countries to link trade policy to development and UNCTAD also failed. And finally, we witnessed the emergence of the WTO with a wider remit and stronger capacities. It still has to demonstrate what it's capable of. But in this video, we're going to look at the attempts to manage the world's financial system. Now, in July 1944 delegates from 44 countries met at a resort hotel in New Hampshire and established a new regime for the world's financial system that still bears its name: The Bretton Woods system. It was designed to prevent a re-occurrence of the problems that bedeviled the 1930s, at least from the American viewpoint. Now, after the financial crisis in 1931, many countries had controlled access to foreign currency and this had allowed them to manipulate their trade for political purposes i.e. for warfare. So the first thing the Americans insisted upon was that all currencies become freely convertible into each other. At the same time, the dollar was made convertible to gold at an exchange rate of thirty two dollars an ounce. So, in this way all currencies were also linked to gold. The Americans were also obsessed for what they call competitive devaluation. When a dollar devalued in 1933, sterling which it devalued 1931, drifted downwards as well and so maintained its competitive advantage. So, the new system was to be based on fixed exchange rates. Parities were to be maintained within very small and very strictly defined limits. Any deviation from them, would only be allowed in exceptional circumstances. So, finally, to prevent companies being forced to devalue because of speculation against their currencies, A fund, an International Monetary Fund the IMF was established from which they could borrow. The fund was funded by contributions from the member states. So, this was the system that managed the world economy until the early 1970s. And in terms of managing exchange rates it seemed pretty successful at least between the main trading currencies: the dollar, the sterling and the main European currencies. After a massive exchange rate realignment and 1949, exchange rates remain remarkably stable. French devaluations 1957-58, a small German revaluation 1961, Sterling devaluation 1967, French devaluation, German revaluation 1969. But the rules had never been fully implemented. First of all, European countries had maintained currency controls even on commercial transactions until 1959 and controls over capital movements persisted until the 1980s. Secondly, from the early 1960s dollars began entering the system at a faster rate than central banks were willing to accumulate them. The causes of the dollar deficits were several: American inflation was higher than that of its main competitors, the government was spending more than it raised in taxes, American firms were investing abroad. But the effect was to allow the build up of stateless capital in the hands of financial institutions. Now, there's a nice little concept in institutional economics called credible commitment. Basically, it means that, "I will believe that you are going to do what you say you are doing, when I see that you are doing what you say." What happens next is a good example. Since American policies were quite plainly not consistent with those necessary to maintain the exchange rate, speculation built up against the dollar. 1971, the American suspended convertibility. And, a few months later devalued the currency as part of a currency realignment similar to that of 1949. For a while, it looked as though the system might just hold together. But by 1973, most countries had let their currency float against each other and the regime of fixed exchange rate came to an end. Now, the only part of the system that remained was the fund itself, intervening to help countries with foreign payments problems and helping them to get back on their feet towards a sustainable future, or at least that's the official version. Critics of the Fund, accused it to protecting the interests of international finance, bankers, and speculators and of pushing all the burden of re-adjustment onto the shoulders of those least able to bear it. What the IMF does is to offer financial assistance, negotiate a deal with creditors, and my pension fund is somewhere in that mixture, and insist on stabilizing fiscal and monetary policy. And often using the opportunity to impose some other reforms. All of these things involve some temporary surrender of sovereignty and that is generally resented. Certainly, when the conditions attached to the aid packages are painful. The IMF therefore, is seen as being undemocratic and bullying and seems itself to be unaccountable to anyone. On the other hand, time is not usually a luxury people have in crisis situations and financial crisis and no exception. Criticism is sharper when it extends to the measures imposed. In almost every crisis, government expenditure is too high and so is the level of inflation. The correction however is painful. The criticism is often that the IMF measures are too fast and too severe that the downward pressure placed on the real economy actually impairs recovery. The Criticism for example, is levy that measures imposed on Greece. Further criticism is that some of the measures imposed are much further and are actually necessary to restore equilibrium, but impinge on a country's freedom to choose their own development strategies. The funds pro-market policies often demand the sale of public assets and reforms in tax and subsidy structures. Now, I actually lived through the IMF reforms imposed on the United Kingdom in 1976. The currency was collapsing and inflation had reached an annual rate of 30 percent. As part of the measures to cut expenditure, the IMF forced the government to impose a public sector pay freeze. Real wages shrank. So did mine. In the winter of 1978 a reaction set in the form of a series of debilitating public sector strikes. The electricity workers, the dustmen, the firemen and other emergency services all ground to a halt. It was a thoroughly depressing experience and I resented every moment of it. But, I do admit it did mark a turning point. Let's sum up now. In this lecture we've seen how the management to the financial system was intended to avoid a re-occurrence of the 1930s. We reviewed its main features, we saw how it existed until the early 1970s. We then saw how the world switched to a regime of floating exchange rates and how the IMF was the only element to continue. To continue as a fund to relieve countries with acute payments problems. We then reviewed the criticisms levied at the fund of its operations. Now, in the next video, we'll pull together some of the ideas surrounding the effects of international organizations on state behavior.
