Rebuilding A World Economy: The Post – War Era

Rebuilding A World Economy: The Post – War Era

The Second World War started in 1939 and continued upto 1945. The two warring camps were:

(i) The Allies consisting of Britain, France, Russia and the U.S.A.

(ii) The Axis Power consisting of Germany, Italy and Japan.

Once again death and destruction was enormous. At least 60 million people are believed to have been killed, directly or indirectly, as a result of the war. Millions more were injured. Many more civilians than soldiers died from war-related causes. Vast parts of Europe and Asia were devastated, and several cities were destroyed by aerial bombardment or relentless artillery attacks. The war caused an immense amount of economic devastation and social disruption. Two crucial influences shaped post-war reconstruction. The first was the US's emergence as the dominant economic, political and military power in the Western World. The second was the dominance of the Soviet Union.

POST-WAR SETTLEMENT AND THE BRETTON WOODS INSTITUTIONS:

Economists and politicians drew two key lessons from inter-war economic experiences.

First, an industrial society based on mass production cannot be sustained without mass consumption. But to ensure mass consumption, there was a need for high and stable incomes. Incomes could not be stable if employment was unstable. Thus stable incomes also required steady, full employment. But markets alone could not guarantee full employment. Therefore governments would have to step in to minimize fluctuations of price, output and employment. Economic stability could be ensured only through the intervention of the government.

The second lesson related to a country’s economic links with the outside world. The goal of full employment could only be achieved if governments had power to control flows of goods, capital and labour.

Thus the main aim of the post-war international economic system was to preserve economic stability and full employment in the industrial world. Its framework was agreed upon at the United Nations Monetary and Financial Conference held in July 1944 at Bretton Woods in New Hampshire, USA.

Bretton Wood’s twins

The Bretton Woods conference established the International Monetary Fund (IMF) to deal with external surpluses and deficits of its member nations. The International Bank for Reconstruction and Development (popularly known as the World Bank) was set up to finance postwar reconstruction. The IMF and the World Bank are referred to as the Bretton Woods institutions or sometimes the Bretton Woods twins. The post-war international economic system is also often described as the Bretton Woods system.

The IMF and the World Bank commenced financial operations in 1947. Decision-making in these institutions is controlled by the Western industrial powers. The US has an effective right of veto over key IMF and World Bank decisions. The international monetary system is the system linking national currencies and monetary system. The Bretton Woods system was based on fixed exchange rates. In this system, national currencies, for example the Indian rupee, were pegged to the dollar at a fixed exchange rate. The dollar itself was anchored to gold at a fixed price of $35 per ounce of gold.