Before the world war one and world war two, world economies were quiet apart, but there was intense factors of trade countries controlled their imports and exports. There was manipulation in currencies to shape the foreign trade and exchanges. Currency war fares were a common thing and restrictive market practices were almost the norm. This led to devaluations and deflections and the result was wanton depression which characterized most of the 1930s. It is safe to say that part of what fuelled the World War I as well as two was the desire top gain control over the worlds scare resources. Then came the Second World War and the whole global front changed completely. Countries came to appreciate that they needed one anotherâs and that to survive; they would rather pull together and not differently. The need to form a common front to tackle the issues of global economic importance is what led to the first world conference at the Britton Woods to forge this front in 1944 (Sawyer, & Sprinkle, 2008).
Prior to the war, the countriesâ currencies were operating on the gold standard. This meant that a currency floated was to have an equivalent of gold to back it up. It meant that each currency on the market had to have an equivalent value of gold in the volts. This therefore warranted the country with most deposit of gold would be much economically strong and this was the way United States arose to its super power status. Gold standard was a very strict standard that required countries all over the world be behaved very diligently in their handling of all their financial obligations. It required that before a country printed any more paper money she had to have an equivalent gold of the same value in its custody. Due to the limitations of gold, this limited the authority of countries to just produce money at whim. As world leaders grew greedy in terms of control of market forces to try and devalue their currencies to allow them export more while restricting the value of imports, some disquiet began among world leaders.
The strict gold standards became prohibitive this glutton nature and as such, they started to flaunt the very rules. What followed was a series of devaluations which culminated into a global financial crisis. Unfortunately the bitter wars did not help solve the problem.
The solution to this crisis and to try and stabilize world economies while rebuilding much of the devastated Europe from the aspects of the war required an urgent world attention. This forum was the culmination of a meeting in New Hampshire city of Britton woods to draw up a plan of action. It was at this meeting where 1000 countries were united in abided to create an international monetary system (Sawyer, & Sprinkle, 2008).
At the fore was the need to unite the western world. This was particularly important as courtiers were still reeling in the immediate aftermath of the Second World War. Second on the agenda was to ensure monetary stability. The previous fluctuations on various nationsâ currency were blamed by many as the reason behind most of the recessions of the late twenties to mid thirties. It was therefore apparent that the only way to achieve global financial stability was through the recognition and stability of the world currencies. The last agenda was the facilitation of international trade. The world realized that by leaving all forms of regulation of international trade, the insatiable nature of individual nations would always lead to the problems which had contributed to the crisis being faced. The governments were to be allowed to exercise the power of inflationary finance.
True to their spirit the end of the deliberation s resulted in the creation of the international bank for reconstruction, and the international monetary fund. The former has since been named the World Bank. Kits original mandate it was envisaged was to capitalize the underdeveloped nations of the world for quicker world satiability. The international monetary fund was mandated to monitor the exchange rates of each and every nation and lend reserves currencies to nation with trade deficits. In this arrangement about 44 countries present donated membership fee to facilitate the function of these word bodies. To ensure a stable currency the US dollar was chosen as the reserve currency. One us dollar was an equivalent of 35oz of bullion gold. All countries were to buy and sell only in terms of the United States dollar and to keep currencies within a 1% fixed rate.
This was the beginning of the golden age of the United States Dollar. Its not clear if the framers of the Britton Wood had ever imagined the very changes that would render their craft un-operational. The choice of the dollar was based on its economic might at the time. It was to be the reserve currency. The dollar was actually pegged to gold and committed to satiability and convertibility. Some say the dollar was to be as gold as gold itself and was to be treated as a reserve asset juts like gold. The implication was that gold was too limited to be able to provide for the financial demands of the world at that particular time particularly to do with the reconstruction work which was imminent in Europe after the devastations of the war. The second implication was that, paper asset could simply be increased as the demand for it arose. Third, that the US government through control of the US dollar could ensure equitable implementation of inflation. The last was that the paper money was not to be devalued only increased in accordance to demand.
This last case may actually be attributed to the later fall of the International Monetary Fund (IMF). So thus reined the Britton wood system from the 1944, when was framed to 1971, when it was eventually abolished by President Richard Nixon. During the early ears of the trade under Britton Wood agreement the Us economy improved as most of the dollars they lent to other nations were coming back to the us in terms of export of Us goods for development in the countries being reconstructed. The US operated a very healthy balance of trade and everything was just fine. But from the fifties, the demand for the dollar increased tremendously with a lot of the foreign nationâs hording of the dollar and resulting in a series of deficits of the US balance of trade. This was the culmination of the dollar glut of the dollar by 1557. Ever since the Britton Woods System, the foreign exchange market had been characterized by either, a dollar glut or shortages. This led to perpetual paralysis of the equilibrium (hot money). At the same time several currency depreciations were witnessed over the reign of the Britton wood system (Kenen, 1994).
By 1968, the two tier gold market established in the middle of the gold crisis was loosing favour and by 1971, the suspension was put on the convertibility and devaluation against multilateral revaluations of most major world currencies. The gold and the Britton wood standards had several implications in the world oil prices. To begin with, during the gold standard the demand in oil product was still low compared to then already known reserves of the commodity. But the apparent flaunting of the gold rule led to countries restraining imports while encouraging export a factor that led to some disability in market oil prices. Second, the reign of the gold standard saw a disjointed Asian and other world oil producers which enabled western countries to get cheap imports of oils and this greatly promoted the growth of the US economy particularly the auto mobile industry last the gold standard and the failure by governments to adhere by it is what led to the development of an overdependence culture particularly of the US on the oil commodity. As the Britton wood system begun to take effect, the world experienced some economic stability but only for a time (Skidelsky, 2005).
The issues that went wrong with the Britton wood agreement have been stated by many scholars and students of this subject. The first was the fixed rate of exchanges with flexible rules. The clause that allowed for the gold value to be altered as conditions dictated were a bane on the system from the start. In the gold standard no condition was ever allowed to affect the gold value. The money value in circulation was either gold or claims of gold and not less. This system proved to strict, with the Britton wood system countries were allowed to artificially increase money supply stimulate economy and this new era introduced foreign exchange with flexible rules. Any country willing to devalue would be allowed up to a 10 % provision only on condition that they got the approval of other countries. It can be argued that the Britton wood system institutionalize a method that condoned future currency depreciations. The devaluation was only to be used as a tool to allow countries gain their competitive edge once thy run a surplus decrease into deficit that lowered their exports.
The conduct of many countries during the Britton Wood system was to either export or devalues. The problem was that speculators created a âhot money bluesâ that enabled smart investors to move their money from any devalued economy to a strong one. Since any countries would never float their currencies during this time, the new par value of currencies was set and regulated by IMF. But like all experiences with all the case where governments fix prices, the result was a disintegration which was counterproductive. The excess supply of dollars led to a world flood of dollars producing inflation of a global magnitude. This was the last nail on the coffin of Britton Wood agreement. It disrupted trade, led to the gold crisis and finally the IMF crisis. The impact of this was a series of world recessions and currency realignments. The collapse of the Britton Wood system had some implications in the ensuing oil crisis. Countries panicked and the credibility of the dollar to act as a reserve currency was seriously undermined (Moggridge, 1980).
The countries of Europe and Asia were coming of age financially and had more wither withal to impose trade embargoes on the US exports leading to much deficit in Americasâ economy. As the leading consumer of the world oil, it was only a matter of time before, the organized league of the oil producers had their impact felt on the global scale. But the wait was not long. As with all major world money events, the drastic effects of the overdependence on US currency for international trade in the face of a dwindling actual gold reserves, was epitomized by a war. What followed was the worst oil crisis the world had ever experienced.
Up until, late 1960, the US government was comfortably relying on the major oil producers for cheap imports of oil. The dependence of the US citizens grew without them analysis much of the consequence. By 1970s, about 85% of the United States working class population was driving to work. All the major industries particularly the automobile was operating on petroleum products. Fortunately, Asia and major world oil producers were still in slumber, with most rebuilding ad trying to find their own footing after the world war and the immediate post world war era. This was also the era before the formation of the Organization of Petroleum Exporting Countries (OPEC) (World Without Oil, 2008).
Basically, the major oil Corporations of the West controlled petroleum trade. The need to form a common front and forge a block for negotiations and protection of their interest began in the late 1950s. Within the next decade, oil producing nations from across the globe, formed a cartel to cater for their welfare (World Without Oil, 2008). This move was initially only perceived by many from the point of view that such a corporation would lead to better trade agreements and even perhaps better pricing of crude oil products. Little did any one foresee the possible implication that such an organization with a monopolistic nature such as OPEC would have in the oil prices in the not so distant future? Currently, âOPEC is comprised of about twelve countries including Algeria, Indonesia and Iranâ (Bhagwati, 1991, p. 30). These are the major world oil producers. However, even other oil producers who are not under OPEC usually adopts the cartelsâ position at any given moment as they deem fit (Bhagwati, 1991).
From the start, âthe goal of the cartel was to formulate a united approach to negotiations with the oil companies who, up to that time were working very closelyâ (Bhagwati, 1991, p. 31). So looked at from this perspective, OPEC was only copying the pattern set forth by the oil importing companies of the west. OPEC in effect came up with a new method in which oil producing nations would finally hijack responsibilities of the corporations particularly with regards to production. This would allow the oil producing nations the ability retain much more of the revenues. In spite of this move, OPEC had very minimal impact particularly in the early years of it formation. Then the centre refused to hold and problems of imaginable magnitude began. Following the collapse of the Britton Wood agreement in 1971, the U.S and the rest of their westerly allies were in an inflationary twirl.
By 1973, the United States prices for most commodities were rising past the 8% mark. The rest of the nations allied to America were doing much worse in this front because they had efficiently pegged their currencies on the value of the US dollars. President Nixon, in his programme aimed at reigning on the use of the oil, had put forth controls on oil in March 1973. This was to reduce the demand of the US dollars for purchase of oil. This exercise was only an epitome of even bigger problems. On October 6, 1973, months after President Nixon had imposed the restrictions on use of oil; Egyptian soldiers ambushed Israel from across the Suez Canal. This event coincided with the Jewish holy day of Yom Kippur. At the same time; Syrian authorized their soldiers to attack Israel at the Golan Heights in an ambush offensive.
This called for the intervention of the other world nations. Israel, with help from the United States, made progress defeating the Arab troops and a few months later a cease fire agreement was reached. Despite this gain, the die had been cast. The Arab world had identified their enemies and had decided they would act using the only weapon they had left; the black gold. It was only a matter of time. A month later the Arab Nations reacted by imposing an oil embargo on the America; this was like hitting below the belt. The US government was caught flat footed. But the Arab world vacation did not just stop there; it was also imposed on the other US allies. The crude oil prices were increased by 70% to America’s Western European collaborators (World Without Oil, 2008). With this, the worst oil crisis ever experienced by the US was conceived. But the OPEC nations were not done yet and in 1974, they raised the oil prices further to $11.65.
America and the Dutch were particularly targeted for their support of Israel during this conflict, which had the ramifications of attracting this bans. Back in the US the situation continued to deteriorate. We were directly under the prerogative of the Arab nationalism. The situation was characterized by Arab nations directly saying no to the demands and whims of the American companies. The tide had turned. To most US citizens, it was difficult trying to comprehend how their existence depended on the hands of Oil producing nations due to the conflicts in very remote parts of the world they had previously conveniently ignored or just did not know existed.
President Nixon was then forced to institute a number of legal moves to help Americans bear with this bizarre situation. Nixon took one of the major legal initiatives of the century by bringing to Congress a bill for the construction of Trans-Alaskan supply line. This pipeline was designed to avail 2Million barrels of oil daily. This massive project was finally concluded six years later. A serious economic hardship hit much of the Western nations, inclusive the United States. The United States (US) consumer was most hard hit. The queues at gasoline stations began to snarl and became longer by day. The impact was a devastated population. Driving to work was no longer automatic. Heating and lighting became a problem. The price at the pump had risen by over 1000% at the height of the crisis (World Without Oil, 2008).
As with most of the crisis that grip the attention of the world, conspiracy theories abounded. Oil stock shares performed marvelously during this time. The profits were the best they had been in a long time. But the fears and the decreased demand in other commodities led to a decline in the performance of the rest of the market. It is estimated that the rest of the market shrunk to 15% between October 1973 and the end of November of the same year. It was safe to imagine that the world must have learnt her lesson from the devastating effects of the oil crisis of the 1973. Many observers correctly point out that the 2008 oil crisis would have been creatively averted (Sawyer, & Sprinkle, 2008).
However all warnings to head off the current crisis were ignored, not headed or just blocked. This is a view shared across the divide. In fact, according to analysts, of the oil and automobile industries, this was own self inflicted disaster in the making. The surprise was on how high oil prices rose. Fears for the future arose as the idea sunk in that; this is one crisis people were warned about.
From the lessons of the 1970s, many reports have warned continuously over the bane of the US dependence on oil. This warning was either not being taken seriously or just conveniently ignored. The result, the real value of America automobile production fell by $44 billion between within months of the crisis: Most Continental Airlines had plans to cut over three thousand jobs following difficulties arising from this crisis. The US major motor vehicle manufactures were engaged in a series of labour cuts and down sizing. This resulted in serious impacts on all major industries across the US economy. The prices of oil were at an all time high. âThe political or geological, impediments to harmonious oil company existence and undisturbed mega profit are dealt with in time, and always to the petro-giants’ satisfactionâ (Ruffin, 2002, p. 727).
References
Bhagwati, J. (1991). The World Trading System at Risk. Princeton, NJ: Princeton University Press.
Kenen, P.B. (1994). Managing the world economy: fifty years after Bretton Woods. Washington DC.: Institute for International Economics.
Moggridge, D. (1980). Activities 194-1946: shaping the post-war world, Bretton Woods and reparations. London: Macmillan.
Ruffin, R.J. (2002). David Ricardo’s Discovery of Comparative Advantage. History of Political Economy, 34, 727-748.
Sawyer, C., & Sprinkle, R.L. (2008). International Economics (3rd ed.). London: Prentice Hall.
Skidelsky, R. (2005). Keynes, Globalisation and the Bretton Woods Institutions in the Light of Changing Ideas about Markets. World Economics, 6(1), 15-30.
World Without Oil. (2008). World Without Oilâserious game for the public good. Web.