Under the Bretton Woods policy, large market fluctuations were essentially removed. This was “to ensure that domestic economic objectives were not subordinated to global financial disciplines but, on the contrary, took precedence over them” (Held 200). Using the combination of domestic control of interest rates and fixed exchange rates, foreign currencies were linked to the dollar at a fixed rate, allowing for miniscule vacillations. Essentially, the foreign exchange markets ceased to exist under this agreement. Countries could trade their currency for a fixed amount of gold according to Held, was $35 an ounce, which meant money was only a means of exchange (200). Before this agreement, money had three purposes:
- A means of exchange
- A speculative commodity
- A store of value.
By only having one purpose, governments could control financial matters much more easily. With a fixed exchange rate, countries kept shifting their domestic interest rates in efforts to support and defend that fixed rate. With the great fluctuations in interest rates, governments essentially kept the laws of supply and demand in check. With the strict controls placed upon exchange rates, the exchange of foreign currencies was tightly regulated by the governments. The central bank of the countries granted requests to purchase another currency. For example, a request to change American Dollars for a foreign currency was sent to the Federal Reserve, which would permit the transaction. This eliminated the foreign exchange market completely with the help of the fixed rate. In addition to creating this new financial system, the Bretton Woods agreement also created the World Bank and the International Monetary Fund. The period of which the Bretton Woods agreement was in effect was known as the “golden age of capitalism with steady economic growth and low inflation” (Class Notes). This age would not have been possible without the involvement of the institutions created to govern the countries who signed the Bretton Woods.
The International Monetary Fund was the mechanism through which the policies created at the conference were implemented. The International Monetary Fund set the guidelines that enacted the policies and made sure countries complied. Also, using the funds the countries placed in the World Bank, the International Monetary Fund was able to help debtor countries restore their balance of payments. Offering help to the debtor countries allowed the governments in these countries reduce their debts and to rebuilt their economies. According the first article of the World Bank’s articles of agreements, the purpose was
to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes" and "to promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment ... thereby assisting in raising the productivity, the standard of living and conditions of labor in their territories ().
While the Bretton Woods agreement later collapsed, the International Monetary Fund and the World Bank continue operations today.
The Bretton Woods agreement collapsed in 1971 after President Nixon needed to free international trade as there was a loss of confidence in the dollar. The United States needed to reduce its debt and fix its balance of payments. To achieve these necessary goals, President Nixon took three steps,
- A 90-day freeze on wages and prices
- A 10% surcharge on dutiable imports
- The suspension of the dollar’s convertibility into gold
These actions caused the collapse of the Bretton Woods agreement. The dollar devalued and the foreign currencies appreciated. This allowed the United States to get the money it needed rather than the strict limitations of Bretton Woods. While the fixed rate system collapsed, it did not create chaos like the Gold Standard collapse- it simply allowed globalization to occur.
With the collapse of the Bretton Woods agreement, globalization took off running. The restrictions placed upon the foreign currency exchange were lifted and the foreign exchange market took off. Worldwide corporations had a much easier time with transactions and became much more powerful. Governments no longer ruled trade, corporations did. The most important factors were the new freedom to trade and the alacrity at which money was sent around the world. The technology that is used to exploit this freedom and speed at which money travels was already in existence before Bretton Woods collapsed- it was just never fully exploitable. With the restrictions removed, the technology was able to be fully exploited and corporations greatly benefited. Transactions can occur almost instantly. On a small scale, a person with a debit card can withdraw money from their account, no matter where they are and get the foreign currency they need. On a much larger scale, corporations can keep abreast of necessary information and execute transactions instantly around the world. This has lead to the overwhelming growth of the role of corporations in international trade. With corporations playing such a large role in international trade, it is necessary to understand the different types of international corporations and how they conduct business, specifically the multi-national and transnational corporations.
A multi-national corporation essentially clones itself in different locations. The way the original factory was set up is the model for future factories and the same processes and policies are followed. These corporations have evolved from the large hierarchal corporations through a process described by Alfred Chandler,
It was essential first to recruit a team to supervise the process of production, then to build a national and very often international sales network, and finally to set up a corporate office of middle and top managers to integrate and coordinate the two. Only then did the enterprise become multinational. Investment in production abroad followed, almost never preceded, the building of an overseas marketing network (147).
An offshoot overseas facility of a multinational corporation follows the same policies regarding hiring, production, management and marketing- making it an exact copy of the original. Although this new facility is in a different country with a different culture, the corporation often does not make an effort to alter its policies and practices to the practices of the host country. According to Howard Perlmutter, “Multinational companies may pursue policies that are home country-oriented,” this allows the corporation to essentially benefit its home country, and may possibly improve the corporation’s relationship with the country.( ). An example of a multinational corporation is IBM or Daimler-Chrysler.
In contrast to a multinational corporation, a transnational corporation is one that has its main base of operations and then subsidiaries where stages of production take place. Each facility is not an exact replica of the original unlike the clones of the multinational corporation’s original facility. For example, a car is no longer made in the same factory, much less the same country. Henry Ford’s idea of the assembly line has been taken to a new level- one where the car is assembled efficiently and inexpensively as possible, but no longer in the same facility. Toyota has been assembling cars in this manner for quite some time with Japanese parts, but a factory in Kentucky. Transnational corporations ship unfinished goods around the world, whereas multinational corporations simply ship finished goods around the world. Transnational corporations have altered the means through which international trade is conducted and countries no longer have complete control over trade.
The majority of international trade is no longer between countries, but within a corporation itself. This shift has caused much alarm for countries as they have lost control of trade and the transfer of unfinished goods affects the gross domestic product (GDP). Gross Domestic Product counts the transfer of finished goods, not unfinished. The large amount of transactions now is unfinished goods within the corporation. The laws enacted in terms of worker’s rights and taxes have caused corporations to expand their global horizons to minimize their costs.
On the whole, corporations are wary of value added tax rates. Goods are taxed where the value is added, i.e. where a car is fully assembled or a computer assembled. To avoid paying high taxes, corporations have begun assembling their goods in countries where the tax rates are significantly lower. Parts are often made in an expensive area, but then fully assembled in a less expensive area. Current areas of lower taxation are Latin America and Asia and assembly has moved to these areas. The issue of the cost of labor has also pushed corporations out of their home bases. In Germany, a state known for its high level of welfare and extensive labor unions and worker’s rights, Daimler-Chrysler the corporation that produces Mercedes-Benz cars, believes it needs to cut costs in one factory. According to Stephen Power, a Wall Street Journal reporter,
If a deal on cost-cutting measures isn't reached, the company said, it would boost production of the C-Class in Bremen, in northern Germany, and in South Africa. Its Sindelfingen plant, which is in southern Germany and at 89 years is one of the company's oldest, would come away empty-handed. Terms for workers at the company's Bremen plant aren't as generous as those for workers in the Baden-Wuerttemberg region, where Sindelfingen is located.
Corporations will move their operations elsewhere to secure cheaper labor and production costs if they can not get the conditions they want. This is also happening in the United States, where many corporations have left seeking countries with lower taxes and cheaper labor. They feel that the workers in the United States demand too much in terms of wages, benefits and insurance. The countries of Latin America, Africa and Asia provide a steady stream of cheap labor and low taxes for corporations.
With so many corporations seeking to lower the costs and enhance their profit margins and leaving their bases to do so, governments are faced with a difficult question, “Do we lower our corporate and value added taxes and decrease worker’s rights? Many countries do not wish to follow this course of action, fearing of decreasing their revenues and angering citizens. However, countries need to entice corporations to stay and keep the jobs within the country. This is an issue over which much debate has taken place in the United States and will surely be an election issue.
The rise of globalization truly took place once Bretton Woods collapsed. Globalization, itself, centers on the freedom and the speed at which money travels around the world. Corporations have risen to the forefront of international trade, with countries trailing behind. Corporations are always looking to increase their profits and will take measures to do so, including moving facilities to cheaper countries, causing thousands to lose their jobs. This takes us back to the typical American husband wondering what globalization really is. He now knows that corporations are ruling the trade arena, transferring money and goods faster than ever before and that in a measure to curb costs, his company is giving his job to a man in Guatemala because he will work for less and demand less benefits. Now, how will he tell his family about why he lost his job?
Works Consulted
Chandler, Alfred. “The Emergence of Managerial Capitalism.” The Sociology of Economic Life. Ed. Mark Granovetter and Richard Swedberg. Boulder: Westview Press, 1992.
Held, David, McGrew, Anthony, Goldblatt, David and Perrattion, Jonathan. Global Transformations. Cambridge: Polity Press, 1999.
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Power, Stephen. “Daimler Warns of Cuts.” The Wall Street Journal. http://online.wsj.com/article/0,,SB108964372272361256,00.html?mod=home_wh ats_news_us. Accessed July 13, 2004.
