The Bretton Woods System Essay -- Economics

The theme of this essay outlines two things. One, the key elements of Bretton woods system and second, the characterisation of Bretton woods system by Ruggie as ‘embedded liberalism’, and how far he succeeds in it. The Bretton woods system is widely referred to the international monetary regime, which prevailed from the end of the World War 2 until the early 1970s. After the end of the World War 2, the need of international monetary framework to boost trade and economic; growth and stability, was important. Taking its name from the site of the 1944 conference, attended by all forty-four allied nations; the Bretton Woods system consisted of four key elements. First, to make a system in which each member nation has to fix or peg his currency exchange rate against the gold or U.S. dollar, as the key currency. Secondly, the free exchange of currencies between countries at the established and fixed exchange rate; plus or minus a one-percent margin. Thirdly, to create an institutional forum, so-called International Monetary Fund (IMF), for the international co-operation on money matters: to set up, stabilize, and watch over exchange rates. Fourth, to remove all the existing exchange controls limiting (protectionism) policies by the members, on the use of its currency for international trade. In practice the first scheme, as well as its later development and final demise, were directly dependent on the preferences and policies of its most powerful member, the United States. According to John Gerard Ruggie, 1982, this Bretton woods system of monetary co-operation represented the type of liberalism which characterise â€Å"domestic social economic stability along with a liberal trading order.† He referred this system as ‘embed... ...aracterised Bretton woods system as ‘embedded liberalism’ to show how market forces were surrounded by social and political constraints. Embedded liberalism thus signifies a compromise between the excessive free international market economics and the excessive domestic protectionist policies. Ruggie embedded liberalism represented an enclosed international liberal trade within the post-war consensus of fixed exchange rates and capital controls. The fixed exchange rate helped to promote stable liberal trade by removing any future uncertainty in exchange rate movements. Whereas for domestic social and economic stability, national government would use capital controls. All these practices were the key elements of Bretton woods system and also constitute the institution of embedded liberalism. Hence, Bretton woods system can be characterised as ‘embedded liberalism’.