End of Bretton Woods and the Beginning of ‘Globalisation’

We all have seen the tag ‘Made in China’

Many phones, clothes, toys or even machines have it.

This is because producing things is cheaper in China.

And this has happened due to many events in the past.

Let’s go back in past to post World War II era

World War II (WWII) was the war of many countries. The result was mass destruction of life and property.

After the war, two institutions were set up to help rebuild the economies which were affected.

They were the International Monetary Fund and World Bank.They were known as Bretton Woods Institutions.

These institutions at first helped to rebuild economies and finance industries.

Later on they helped to remove unemployment and poverty in many countries.

They set up the various exchange systems to aid in trading on the global level.

This was known as exchange rates. Exchange rates linked all the currencies of the world for the purpose of trade.

Every currency had a different value in the market.

There were broadly two exchange rates.

One was fixed exchange rate.

Here, the government of every country fixed the currency rate against another major currency (generally US Dollar).

The US Dollar was then fixed for the price of gold reserves in the country.

But this started creating problem in the valuation of currencies as some countries had more gold than other.

So some currencies had low value of currency even when their trade was high just because of low gold reserve.

This situation led to the change in exchange system and a new system was introduced .

The new system was Floating or Flexible exchange rate.

Under this system the value of currency depended on two things.

It depended on the market conditions in the economy.

As in if the trade relations are good and inflow of income is good then there are chances that the value of currency shall rise.

Therefore, if the demand for the currency is high, the value will increase. If demand is low, this will drive that currency price lower.

This shall happen even if the gold reserves are low. This is the benefit of Flexible or Floating exchange rates.

Even though everything started to smoothen in the 1950s, things started going down in 1960s.

US economy weakened due to oversea relations and trades and the value of dollar declined.

From the mid 1970s many more changes took place in the economic system.

Earlier developing countries went to international organisations for loans.

Now they had to go to the Western commercial banks and private lending organisations.

This also led to a situation of debt crisis in the world, lower incomes and increased poverty.

Africa and Latin America were the main victims of these situations.

Unemployment also started rising.

From the mid 1970s, unemployment rose and remained high till early 1990s.

This was the time when Multinational Corporations (MNC) started shifting to other nations for production.

They shifted production operations to low-wage Asian countries.

In 1949 China had a revolution and was cut off from the post-war world economy.

But new economic policies came up in China and Soviet Union fell around the same time.

This brought back many countries in contact with the world economy again.

In countries like China wages were quite low, which attracted MNCs to China.

Thus, investment in such countries grew and the competition to capture the world market started.

Countries like India, China and Brazil had rapid development during these times.

This led to the flow of money to various countries and circulation of money on a global level.

The End.