This essay aims to discuss the post-WWI economic disaster, the impacts this had on the international scale and the methods used by the world's economic leaders to implement and establish a new world economy

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This essay aims to discuss the post-WWI economic disaster, the impacts this had on the international scale and the methods used by the world’s economic leaders to implement and establish a new world economy, before the end of WWII in the hope of preventing the catastrophe from being repeated. Focus will also be granted to the establishment of the multilateral institutions such as the World Bank, the General Agreement on Tariffs and Trade (WTO) and the International Monetary Fund, the principle roles that each of these institutions play and how the Bretton Woods System coped in the years following.

World War I saw unexpected and severe changes to the international economy, although each nation involved continued in their commitments to the gold standard and the system of fixed exchange, they effectively left the gold standard one way or another. Evidently some countries printed new currency, not supported by the gold standard, or cancelled the circulation of gold coins, resulting in phenomenal increases of inflation, in many countries prices had almost doubled in the years between 1913-1919. Most of the Allies had looked towards the United States as a potential supplier for munitions, weapons and other supplies. It was not long before the U.S. government was assisting these nations to sell bonds to private investors to obtain further much needed dollars to support the growing cost of the war.

In a period of less than five years the U.S. saw their gold stocks more than doubled to about 40 percent of the world’s monetary gold. This enabled them, when they joined the war in 1917, to make loans directly to the Allies. This reversed the role, which they had played throughout the nineteenth century, from net debtor to creditor, a position they would hold well into the 1980s. The greater economic impacts of the war were astonishing, entire nations saw their budgets interrupted, the previous thoughts about spending and taxes were torn apart and industrial production and patterns of international trade were permanently distorted. Some countries experienced growth in markets formerly dominated by the European nations, such as the Canada, Australia and Argentina in the agricultural market, the United States in both industrial and agriculture and Japan who had became a major exporter to other Asian countries.

Four years of armed conflict left a range of problems to the international economy, which would never completely be solved. The period of economic reconstruction following the end of the war witnessed many countries willing to return to the gold standard, the Allied nations, primarily Britain, Belgium and France demanded that Germany make reparations of 132 billion gold marks for their war losses. The United States though opposed to the reparations demands, refused to absolve the debts incurred by the Allies before and during the war. As a result, with an already grossly unstable economy, increasing government deficits and a command to the Reichsbank to print more money in order to finance the shortfalls, Germany experienced probably the worst case of hyperinflation history has ever seen.

Jumping from 4.2 marks per dollar in January 1913 to 4.2 trillion in November 1923. It was not until late 1923, that the German government began to finally gain control of its budget, reduce the deficit and altogether stop monetising through the Reichsbank. By 1924 there was a general agreement that the scheduled payments were unrealistic, resulting in the formation of a committee, headed by Charles Dawes, to re-evaluate the problem. The Dawes Plan, scaled back the reparations to about 1 percent of the German national income in 1924, along with scheduled increases up to 1929 as long as the German economy could support them. In the mid to late 1920s countries started to return to the gold standard, however due to the lack of agreement there were a number of strategies used, some chose to return with less than the pre-war parities, a few chose to raise interest rates, while others underwent a process of deflation. However gold parities were not consistent with the distribution of gold, trade patterns and price levels in various countries. While there were countries unwilling to adjust their exchange rates or to undergo the necessary deflation, the exchange standard could only be maintained by the coordinated efforts of central banks to offset the destabilising gold flows and with the continual flow of dollars out of the United States through foreign lending.

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Some twenty years later, the end of another world war was looming ever nearer, the much wiser world leaders sought to prevent a repeat of the chaos post-WWI. In 1944 delegates from more than forty countries met in Bretton Woods, New Hampshire, to establish a new more manageable international economic system. With the Roosevelt administration’s belief, that the economic collapse during the inter-war years was a direct result of Washington’s unwillingness to play the lead role in international economic relations, the U.S. delegation was convinced that it would be in their best interests to lead the major powers’ construction of ...

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