Thursday, April 13, 2017

Money Matters: An IMF Exhibit -- The Importance of Global Cooperation. Conflict and Cooperation (1871-1944)

The Golden Era

From the 1870s until World War I, the United Kingdom served as the leading financial and banking center of the world, while gold ruled as the monetary standard of all the major trading countries. Each country pegged its currency to gold at a constant and unchanging rate. The international gold standard system ushered in a period of unprecedented stability and prosperity - at least for the middle and upper classes in the industrial countries.

Gold and Stability

Gold and Stability
The gold standard provided monetary discipline. Because governments were required to convert domestic currency into gold on request, the amount of currency they could print was limited by the amount of gold in their reserves.

Exchange rates never varied in the classical gold system. This made exchanging money much easier for travelers. American Express even printed the exact amount of foreign currency exchange right on its traveler's cheques.

Industrial Revolution

Technological advances in the nineteenth century produced more goods and created more efficient ways of transporting them across national borders. Governments increasingly recognized the need for easy and convenient currency convertibility. The United Kingdom, economic and financial leader of the world, had based its currency on gold since the early nineteenth century. In the 1870s, Germany and other major trading countries followed its lead and converted to the gold standard.


Economic Consequences of the PeaceWorld War I marked the end of an economic era. Faced with an urgent need for more liquidity, the combatant countries took their currencies off the stabilizing gold standard and printed more money. This triggered high inflation, which persisted after the war.

Economic Consequences of the Peace

The postwar settlement, known as the Treaty of Versailles, exacerbated tensions and economic instability rather than fostering growth and cooperation. The European allies, especially France and the United Kingdom, felt that the losers should compensate them for the cost of the war by paying reparations. In 1921, Germany's reparations alone were fixed at 132 billion gold marks almost twice its prewar national income.

Cost of the World War

Cost of the World War
As this contemporary illustration graphically shows, the cost of the "World War" was staggering when compared with the costs of earlier hostilities. Governments were forced to stop redeeming their currencies for gold, since they had to print so much paper money to pay for the war.

Postwar Conundrum

  • The defeated countries had no gold to pay their reparations. Their economies were exhausted, and the peace terms offered little hope of earning gold through exports.
  • Without the reparations money, the allies could not repay their war loans from the United States.
  • The United States refused to cancel the allies' debts, insisting that the loans represented commercial transactions. 

What will "the next war" cost?

Impossible Debt

Finally, the German, Austrian, Hungarian, Polish, and Bulgarian monetary systems collapsed under runaway inflation called hyperinflation. The United States loaned money to Germany through the Dawes Plan. This loan, along with private investment, enabled the defeated countries to make scaled-down reparations payments. However, the victors collected only a small fraction of the reparations, and the United States eventually had to cancel the remaining debts of its allies.

Global Depression

Normalcy returned with the reestablishment of the gold standard in the mid-1920s, but imbalances plagued the monetary system. The prewar fixed exchange rates no longer reflected the relative economic strengths of the major countries:

  • The U.K. pound was greatly overvalued.
  • The U.S. dollar and French franc were undervalued.

The Great Depression Arrives

Global DepressionBy the end of the decade, economic and financial troubles had spread around the world. Many factors contributed:

  • A decline in prices of primary products devastated the economies of such countries as Argentina, Australia, and Chile.
  • Beginning in 1928, Americans cut back on their investments abroad to capitalize on the booming U.S. stock market. The loss of capital hurt first Germany, which counted on US investments to pay its war reparations, and then the European victors, who relied on Germany’s reparations to repay their own war debts.
  • The 1929 US stock market crash left the United States in financial chaos and accelerated the withdrawal of capital from abroad.

Trade, production, and employment rates fell throughout the world in a dizzying spiral. The Great Depression had arrived. How would the world respond?

International Response:

Beggar-Thy-Neighbor Policies

Instead of cooperating with one another, countries tried to solve their economic problems unilaterally.

To protect domestic industry:

  • Governments devalued their currencies to make their exports cheaper for foreign buyers and to make imports more expensive for their own citizens.
  • Governments also raised tariffs to make imports more expensive for their own citizens.

By selling more and buying less abroad, countries should have created jobs at home and improved their balance of payments positions. But one country’s exports are another’s imports, so these policies, adopted by many countries at the same time, only succeeded in drastically decreasing world trade and worsening the depression.

Worldwide Financial Chaos

Austria’s largest bank, the Vienna Kreditanstalt, collapsed in May 1931. Banking panic spread into Germany and Hungary and eventually forced the United Kingdom off the gold standard. Other countries soon followed in abandoning gold.

Failure to Cooperate

A World Monetary Conference was held in London in the summer of 1933, in hopes that a cooperative effort to restore prosperity might succeed where unilateral attempts had failed. The organizers sought agreement on:

  • Restoring the gold standard
  • Reducing tariffs, import quotas, and other barriers to trade
  • General international coordination of economic policies

Unfortunately, the conference failed. Participants could not come to any significant agreement.

Depression Lingers

The results of the world’s failure to cooperate were devastating. Continued unilateral efforts by individual countries only succeeded in deepening and prolonging economic woe.

  • World unemployment peaked at nearly 30% in 1932 and remained in double digits through the decade.
  • German and US production dropped to 53% of their 1929 levels.
  • One nation after another abandoned the gold standard in the 1930s.
  • Regional trading blocs and bilateral clearing arrangements replaced multilateral trade, making international trade more difficult.
  • Closed currency blocs replaced the international gold standard, further inhibiting trade.

At its lowest point, total world trade sank to just 35% of its 1929 value.

Keynesian Revolution

To help alleviate the Great Depression, some countries adopted policies based on the theories of economist John Maynard Keynes. Keynes argued that during slow economic times, the government should jump-start the economy by spending money to create jobs and boost demand.

The Works Progress Administration (WPA) in the United States was an example of the Keynesian approach. In the end, massive military spending finally succeeded in stimulating the global economy and ending the Great Depression.

Political Consequences

The political consequences of the mistakes made after World War I and during the Depression included the rise of totalitarianism and the outbreak of World War II.

The End of the War is in Sight. . .

Road to Cooperation

The End of the War is in Sight
The desire for economic cooperation stemmed from fear of repeating the post-World War I mistakes that had led to inflation, financial instability, and the Great Depression. While World War II still raged, Allied policy makers debated several plans for international monetary stability:

  • The U.S. proposal by Harry Dexter White
  • The U.K. proposal by John Maynard Keynes
  • Proposals from France and Canada

Keynes called for an International Currency Union, which would function as a "central bank" for the central banks of each country. White, on the other hand, called for a fund to which all member countries would contribute. Both agreed on fixed, but adjustable, exchange rates based on gold.

Bretton Woods

Travel to the United States was difficult and treacherous in the midst of the war, but, incredibly, representatives from 44 countries managed to gather for a conference at Bretton Woods in New Hampshire. Their ambitious goal - to design the framework for postwar international economic cooperation. D-Day had taken place three weeks previously, giving the delegates hope that the war would soon end.

How Could Leaders Ensure a Future of Global Peace and Prosperity?

New Economic World Order

The Bretton Woods meeting was a smashing success. After much delicate negotiation and hard work, the delegates agreed on the fundamental principles of a new monetary system to encourage economic stability and prosperity. Two intergovernmental institutions were created to further these principles:

  • The International Monetary Fund
  • The World Bank

Soon after, delegates meeting at Dumbarton Oaks in Washington, D.C., set up the United Nations, the political counterpart to the Bretton Woods institutions.

International Monetary Fund and World Bank

Bretton Woods: July 1-22, 1944

The Bretton Woods meeting resulted in the founding of the IMF and the World Bank, twin intergovernmental pillars supporting the structure of the world's economic and financial order. The World Bank finances economic development, while the IMF oversees the international monetary system.


The founders felt that a fundamental condition for international prosperity was an orderly monetary system that would encourage trade, create jobs, expand economic activity, and raise living standards throughout the world. The IMF was charged with:

  • Helping each country set a fixed, but changeable, exchange rate for its currency based on gold
  • Assisting members that have temporary balance of payments difficulties by providing short- to medium-term credit
  • Overseeing the international monetary system

United Nations

Dumbarton Oaks: August 27-October 7, 1944

The Dumbarton Oaks meeting resulted in proposals to create the United Nations, an intergovernmental forum for solving international problems and disputes. The proposals were adopted at the subsequent meeting in San Francisco in 1945.

John Maynard Keynes (1944):
"All of us here have the greatest sense of elation. All in all, quite extraordinary harmony has prevailed. As an experiment in international cooperation, the conference has been an outstanding success."

By International Monetary Fund

Source: International Monetary Fund

gold leaf

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