Chapter2_Postwar Development Theory

Chapter2_Postwar Development Theory - Chapter 2 Development...

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Chapter 2 Development Theory in the Postwar Period The Bretton Woods Conference of 1944 instigated the International Monetary Fund (IMF) and the International Bank for Reconstruction (the actual World Bank). The Bretton Woods Conference : a meeting between the Allied leaders that took place in a hotel in Bretton Woods, New Hampshire, in 1944. It lasted three weeks and was meant to discuss the structure of the future world economy. John Maynard Keynes made important contributions to this conference that will influence the postwar economic trend. In 1947, the Bretton Woods system was rounded by the General Agreement on Tariffs and Trade (GATT). What the Allies wanted to avoid in the postwar era is: - The monetary instability and the lack of credit - International trade being inhibited by those two factors - Government adopting protectionist policies when they could not pay for imports. GATT : treaty organization that aimed over time to reduce tariffs, or taxes on imports (i.e. lowering the barriers of trade among member states). IMF: organization set up to provide short-term loans to government facing balance-of-payment difficulties (i.e. when more money leaves a country’s economy through imports, capital flows and spending abroad than enters it. - It was meant to lend governments the money they needed to covert balance-payment deficits so those governments would no longer to the sort of tactics that had set off protectionist spirals, reducing trade. Those governments would pay on the IMF and draw on their deposits if necessary. When governments would show themselves unable to cover appropriately their balance-of-payment, the IMF would be allowed to demand, as price for further loans, government reforms to rectify structural problems in the economy. It was first created to reconstruct the countries of war-ravaged Europe. When it had completed this task, it turned its attention to the development of the third world. - The US dollar became the “official currency” (since the failure of the gold-standard system). Indeed, every thirty-five USD any individual or government accumulated could be exchanged for one ounce of gold, form US reserves held at Fort Knox. The impact of Keynes in the First World His vision of a smoothly running capitalist economy involved a much greater role for the state than had been tolerated in classical and neoclassical models of development (those were more concerned with the free market). The Great Depression led Keynes to believe that high unemployment could persist indefinitely (contrarily to the principles of classical political economy). He advocated the use of fiscal policy – government spending – to deal with recession. He also argued that this expansionary fiscal shock would not cause inflation, because increased investment would occur along increased demand. Following the “Keynesian consensus”, Western governments made full employment a priority,
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Chapter2_Postwar Development Theory - Chapter 2 Development...

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