Rebuilding World Economy Post-WWII
INTRODUCTION:
The Second World War (1939-1945) ended with victory for the Allies, but it left behind a devastated world economy. Two world wars within three decades had caused unprecedented death, destruction, and economic collapse. As the war ended, world leaders began planning how to rebuild the international economy and prevent future conflicts by creating new institutions and systems for economic cooperation. This section explores the post-war settlement at Bretton Woods, the creation of the IMF and World Bank, the fixed exchange rate system, the post-war economic boom, decolonization, and the rise of developing countries (G-77) demanding a fairer international economic order.
Post-War Settlement and the Bretton Woods Institutions
Why rebuild the international economy?
The Second World War ended in 1945, and economists and politicians across the world realized that for stable prosperity, full employment, and mass consumption, economic stability was essential. They wanted to prevent economic crises like the Great Depression and preserve peace.
The Bretton Woods Conference (1944)
Even before the war ended, the United Nations Monetary and Financial Conference was held in July 1944 at Bretton Woods in New Hampshire, USA. The Bretton Woods conference established the framework for post-war international economic order.
The main framework agreed upon at Bretton Woods included:
1. National governments would be responsible for preserving economic stability and full employment.
2. The International Monetary Fund (IMF) was set up to deal with external surpluses and deficits of member nations.
3. The International Bank for Reconstruction and Development (World Bank) was created to finance post-war reconstruction.
The International Monetary Fund (IMF)
The IMF's main role was to maintain a system of fixed exchange rates between national currencies. Under the Bretton Woods system, national currencies were pegged (fixed) to the US dollar at a fixed exchange rate, and the dollar itself was anchored to gold at a fixed price of $35 per ounce of gold.
This system meant:
· Exchange rates between currencies remained stable, making international trade predictable.
· If a country faced a temporary balance of payments deficit (importing more than exporting), it could borrow foreign currencies from the IMF.
The World Bank
The World Bank was initially created
to finance the reconstruction of war-torn Europe. Later, it shifted its focus
to funding development projects in former colonies that became independent
after the war.
Class 10 Science – Chapter 10: Light - Reflection and Refraction complete notes
The Early Post-War Years
Western industrial nations and Japan
The Bretton Woods system opened an era of unprecedented growth of trade and incomes for the Western industrial nations and Japan. Over the next 25 years (1950s-1970s), world trade grew annually at over 8%, and incomes at nearly 5%.
Why this growth happened
The growth was partly due to:
· Technology improvements and enterprise that increased productivity.
· The Bretton Woods system, which created stable exchange rates and allowed free movement of capital and goods between countries.
· US dominance: The dollar became the world's principal currency, and the US military presence across the globe helped maintain political stability needed for economic growth.
Rise of multinational corporations (MNCs)
A major feature of the post-war
economy was the spread of technology and enterprise across borders, often
through multinational
corporations (MNCs). US businesses began setting up factories
and offices in Europe, and European and Japanese firms also spread globally.
Section 3: THE INTER-WAR ECONOMYChapter 3: The Making of a Global World
Decolonization and Independence
End of colonial empires
The Second World War weakened European colonial powers. After the war, most colonies in Asia and Africa became independent nations.
But independence didn't automatically bring prosperity. Most developing countries were still producers and exporters of raw materials (agricultural products and minerals) and importers of manufactured goods from the richer industrial countries of Europe, North America, and Japan.
Unequal terms of trade
For
developing countries, the prices of raw materials (which they exported) were
low and unstable, while the prices of manufactured goods (which they imported)
were high. This created an unfair trading system that kept poor countries poor.
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Demands for a New International Economic Order (NIEO)
Formation of the G-77
By the 1950s and 1960s, most developing countries organized themselves into a group called the Group of 77 (G-77) to demand better terms of trade and fairer international economic relations.
What did the G-77 demand?
The G-77 called for a New International Economic Order (NIEO), which would give developing countries:
· Real control over their natural resources
· More development assistance
· Fairer prices for raw materials
· Better access to markets in developed countries for their manufactured goods
The G-77 countries were united in
their demand for a new system, but in reality they were very diverse. Some were
rich in oil and minerals (like the OPEC countries), while others were
desperately poor.
CLASS 10 HISTORY CH-3 | THE NINETEENTH CENTURY (1815-1914)
The OPEC Shock and the End of Bretton Woods
The oil crisis (1973)
In 1973, the Organization of Petroleum Exporting Countries (OPEC), led by Arab nations, decided to use oil as a political weapon and drastically increased the price of oil. Oil prices quadrupled (went up four times), causing a global economic crisis.
This oil shock had two major effects:
1. It showed that developing countries (resource-rich ones like OPEC) could influence the global economy.
2. It contributed to the collapse of the Bretton Woods system.
Collapse of Bretton Woods
The Bretton Woods system based on fixed exchange rates collapsed in the early 1970s. Several reasons contributed:
1. The US dollar, which was the system's anchor, came under pressure because the US was spending heavily on the Vietnam War and welfare programs.
2. Rising inflation in the US made it difficult to maintain the fixed price of $35 per ounce of gold.
3. In 1971, the US abandoned the gold standard (meaning the dollar was no longer convertible to gold at a fixed rate).
4. By 1973, the system of fixed exchange rates was replaced by a system of floating exchange rates, where currency values were determined by market forces.
Consequences of the collapse
The collapse of Bretton Woods and the oil crisis led to:
· High inflation
· Unemployment in industrial countries
· Lower growth rates
· Increased financial instability worldwide.
Class 10 Science – Chapter: How Do Organisms Reproduce?
Globalization Since the 1970s-1980s
Rise of China and East Asia
From the mid-1970s, the international financial system became more integrated, but also more unstable. Developing countries were encouraged to borrow from Western banks and private lenders.
Meanwhile, China and several East Asian economies (like South Korea, Taiwan) began to grow rapidly by exporting manufactured goods to Western markets. By the 1980s-1990s, these countries became new economic powers.
Shift in global economic power
The decades after the collapse of Bretton Woods saw:
· The rise of China as the "world's factory"
· MNCs relocating production to low-wage countries
· Growing inequality: some developing countries became rich, while many remained poor
Quick Revision Table
|
Topic |
Key Points for Exams |
|
Bretton Woods (1944) |
Conference to rebuild post-WWII economy; created IMF & World Bank. |
|
IMF |
Maintains fixed exchange rates; provides short-term loans to countries with balance of payments problems. |
|
World Bank |
Finances post-war reconstruction and development projects in former colonies. |
|
Fixed exchange rates |
Currencies pegged to US dollar; dollar pegged to gold at $35/ounce. |
|
Post-war growth |
1950s-70s: world trade grew 8% annually; driven by technology, Bretton Woods system, US dominance, MNCs. |
|
Decolonization |
Most Asian/African colonies became independent after WWII; remained exporters of raw materials. |
|
G-77 |
Group of developing countries demanding New International Economic Order (NIEO) for fairer trade. |
|
1973 Oil crisis |
OPEC raised oil prices 4x; global economic crisis; showed power of resource-rich developing countries. |
|
End of Bretton Woods |
System collapsed early 1970s; US abandoned gold standard (1971); shift to floating exchange rates. |
THE PRE-MODERN WORLD (Before 1800s)Chapter 3: The Making of a Global World
MCQs PYQ
1.
The
Bretton Woods Conference was held in:
A. 1939
B. 1944
C. 1950
D. 1971
Answer:
B
2.
The
IMF was created to:
A. Fight wars
B. Maintain fixed exchange rates and provide short-term loans
C. Stop migration
D. Control trade in oil
Answer:
B
3.
Under
the Bretton Woods system, the US dollar was pegged to gold at:
A. $10 per ounce
B. $25 per ounce
C. $35 per ounce
D. $50 per ounce
Answer:
C
4.
The
World Bank was initially created to:
A. Finance wars
B. Finance post-war reconstruction
C. Stop inflation
D. Control currencies
Answer:
B
5.
The
G-77 is a group of:
A. Industrial nations
B. Developing countries
C. Oil-exporting countries only
D. European nations
Answer:
B
6.
The
New International Economic Order (NIEO) was demanded by:
A. USA
B. Europe
C. G-77 developing countries
D. Japan
Answer:
C
7.
The
1973 oil crisis was caused by:
A. Natural disasters
B. OPEC raising oil prices
C. World War II
D. Collapse of banks
Answer:
B
8.
The
Bretton Woods system collapsed in:
A. 1950s
B. Early 1970s
C. 1980s
D. 1990s
Answer:
B
9.
After
Bretton Woods collapsed, the world shifted to:
A. Fixed exchange rates
B. Floating exchange rates
C. Gold standard
D. Barter system
Answer:
B
10.
Which
country became known as the "world's factory" from the 1980s-1990s?
A. USA
B. Britain
C. China
D. Germany
Answer:
C
Short
Answer Questions (PYQ)
Q1. What were the main features of the Bretton Woods system?
Answer: The Bretton Woods system (1944) created the IMF to maintain fixed exchange rates between currencies (pegged to the US dollar, which was anchored to gold at $35/ounce). The World Bank was created to finance post-war reconstruction and later development projects. National governments were made responsible for maintaining economic stability and full employment.
Q2. What was the role of the IMF?
Answer: The IMF was established to deal with external surpluses and deficits of member nations by maintaining a system of fixed exchange rates. It provided short-term loans to countries facing temporary balance of payments problems (when imports exceeded exports). This helped stabilize international trade and currency values.
Q3. What was the G-77? What did it demand?
Answer: The G-77 was a group of developing countries formed in the 1950s-60s to demand a New International Economic Order (NIEO). They wanted real control over natural resources, fairer prices for raw materials, better terms of trade, and access to developed country markets for their manufactured goods.
Q4. Why did the Bretton Woods system collapse?
Answer: The system collapsed in the early 1970s because the US dollar came under pressure due to heavy spending on the Vietnam War and welfare programs, causing inflation. In 1971, the US abandoned the gold standard (dollar no longer convertible to gold at $35/ounce). By 1973, fixed exchange rates were replaced by floating exchange rates determined by market forces.
Q5. What was the 1973 oil crisis?
Answer: In 1973, OPEC (Organization of Petroleum Exporting Countries) drastically raised oil prices, which quadrupled (went up four times). This caused a global economic crisis with high inflation and unemployment in industrial countries. It showed that resource-rich developing countries could influence the global economy.
Long Answer Questions (PYQ)
Q1. Explain the Bretton Woods system and its institutions.
Answer: The Bretton Woods Conference (July 1944) established the framework for the post-WWII international economic order to preserve economic stability, full employment, and prevent another Great Depression. It created two key institutions: the International Monetary Fund (IMF) to maintain fixed exchange rates and provide short-term loans to countries with balance of payments deficits, and the International Bank for Reconstruction and Development (World Bank) to finance post-war reconstruction and later development projects in former colonies. Under this system, national currencies were pegged to the US dollar at fixed rates, and the dollar was anchored to gold at $35 per ounce, ensuring stable and predictable exchange rates. National governments were made responsible for maintaining economic stability. This system opened an era of unprecedented growth in trade and incomes for Western industrial nations and Japan from the 1950s to 1970s.
Q2. Why did developing countries demand a New International Economic Order?
Answer: After gaining independence following WWII, most developing countries remained exporters of raw materials (agricultural products and minerals) and importers of manufactured goods from richer nations. The prices of raw materials they exported were low and unstable, while the prices of manufactured goods they imported were high, creating unfair terms of trade. By the 1950s-60s, these countries organized themselves into the Group of 77 (G-77) to collectively demand a New International Economic Order (NIEO). They wanted real control over their natural resources, more development assistance, fairer prices for raw materials, and better access to developed country markets for their manufactured goods. Though united in demands, G-77 countries were diverse—some were resource-rich (like OPEC nations) while others were desperately poor.
Q3. Explain the causes and consequences of the collapse of the Bretton Woods system.
Answer: The Bretton Woods system of fixed exchange rates collapsed in the early 1970s due to multiple pressures. The US dollar, which anchored the system, came under strain because the US was spending heavily on the Vietnam War and domestic welfare programs, leading to rising inflation. This made it difficult to maintain the fixed gold price of $35 per ounce. In 1971, the US abandoned the gold standard, meaning the dollar was no longer convertible to gold at a fixed rate, and by 1973 the system of fixed exchange rates was replaced by floating exchange rates determined by market forces. The collapse, combined with the 1973 OPEC oil crisis (which quadrupled oil prices), led to high inflation, unemployment in industrial countries, lower growth rates, and increased financial instability worldwide.
Conclusion
The post-WWII period saw the creation of new international institutions (IMF
and World Bank) at Bretton Woods to rebuild the global economy and prevent
future depressions. The system of fixed exchange rates brought unprecedented
growth to Western nations and Japan in the 1950s-70s, but developing countries
remained trapped in unfair trade patterns as raw material exporters. The G-77
demanded a fairer New International Economic Order, while the 1973 oil crisis
and the collapse of Bretton Woods in the early 1970s ushered in a new era of
floating exchange rates, financial instability, and the rise of new economic
powers like China. For board exams, focus on Bretton Woods institutions, fixed
vs. floating exchange rates, G-77 demands, and reasons for the system's
collapse—these are frequently tested.
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