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Sunday, July 28, 2019

Breton Woods Monetary System, Oil Embargo and International Political Essay

Breton Woods Monetary System, Oil Embargo and International Political Economy - Essay Example Furthermore, scholars utilize a mixture of empirical data and theories to arrive at an understanding of IPE at different points in time. This essay looks into the major events that had an impact on the International Political Economy or simply International Relations, namely, the Breton Woods Monetary System and the Oil Embargo of 1973. Discussion What was the Bretton Wood Monetary System (BWMS)? The process of monitoring the exchange rates between the dollar and other foreign currencies by World Bank (WB) and the International Monetary Fund (IMF) and lending reserve money supply for developing nations, wherein the US dollars were linked to gold with $ 1 equals 35 oz. of gold, was well known as the BWMS. In nearly 150 pages the National Bureau of Economic Research (NBER) publicized the history of Bretton Woods, from its origin to its demise, and concluded by saying (1992, p. 61) â€Å"The defects and dramatic collapse of Bretton Woods have discouraged nations from seeking to restore a system like it.† The system collapsed as soon as the dollar link to gold was severed and instead, the value of foreign currencies was made to float against the US dollar. It derived its name from the American resort where a conference of national economic leaders agreed on a plan to reconstruct out of the war damages, by following the international monetary rules. 730 delegates from 44 nations then allied with the USA and UK had agreed to link the foreign exchange (FX) rates to the dollar which corresponded to a gold standard value. The international transactions were then aimed to reconstruct countries damaged by World Wars. They decided to fix the FX rates against the dollar. The currency of each country was given a par value against the dollar. They agreed on not allowing the foreign currencies to float and to maintain adequate supply of monetary reserves and to avoid any economic warfare. FX currency should not be controlled to regulate purchases or sales of currencies intended for trade of goods and services. As for the purpose of having a forum wherein members can vote on certain decisions pertaining to the monetary rules, the USA maintained a veto power. By August 15, 1971, seeing that dollars were headed towards a proportion which could not be backed by gold, the standard of convertibility of the dollar to gold was suspended. Both the par value and gold standard ended. That was the end of the Breton Woods Monetary System. Currencies of industrial countries were made to float for consideration during FX transactions. In place of gold standard value of the dollar, the basis became whatever promises were made by the government. The events after Britton Woods saw USA and UK suffering in terms of deficits in its Balance of Payments and high unemployment rates. This has made economists suggest that the economic system should once again be created or modified similar to the way it was done when the Bretton Woods Monetary System began. But there have been major changes in the world market, particularly the rising prices of oil which caused great damages

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