TOWARDS A NEW BRETTON WOODS, Report by a Commonwealth Study Group, London, 1983.
THE ECONOMIC INSTABILITY experienced in the 1930's prompted the major capitalist powers to evolve in the following decade a system of world trade and payments that would ensure stability in the international economy. The new system that took shape at the Bretton Woods conference in 1944 had two main features:
(a) a partial reversal to the classical gold standard regime of fixed exchange rates and the acceptance of dollar as the reserve currency, and (b) liberalisation of trade in manufactures which went together with a re-consecration, at least in the various pronouncements, of the free trade doctrine. The Bretton Woods conference created two institutions (to which a third organisation was added in 1948) to supervise the maintenance of the system. The International Monetary Fund (IMF) was to look after the international monetary problems, to provide exchange rate stability; and for doing so it was entrusted with the powers to correct any short-term balance of payments imbalances in member-countries with the injunction that it should not resort to measures destructive of national or international prosperity. The International Bank for Reconstruction and Development (World Bank) was designed to put back on rails the war ravaged countries. ]ts main role subsequently became the protection of private investment and to act as an intermediary between the developing countries and the private investors. The third organisation which was included later was tlic General Agreement on Tariffs and Trade (GATT) and this also had the plans to set up an international trade organisation. GATT put down the priciples on which commodity trade was to take place. Its objective was to establish a non-discriminatory multilateral trading system. It sought to remove all trade barriers; and all tariff concessions negotiated bilaterally had to be extended to the others on an unconditional most favoured nation basis.
The Bretton Woods system functioned without major disruptions till about the early 1970's when the fixed exchange rate system was abandoned. The capitalist world adopted the flexible exchange rate system, but with a difference. In the new regime, the floating currencies remained, to a large extent, under the control of the national monetary authorities. The virtues of the floating exchange rate system which conventional macro-theory suggests were far less evident when the system started functioning. The exchange rate fluctuations were more volatile than anticipated. There was, however, a stronger destabilising element. The oil price rise in 1973 created large deficits in the balance of payments of the oil importing countries. The ensuing recession in the advanced capitalist countries forced unmanageable deficits on the