ECO342H1 Lecture 3: 03 - European Reconstruction
ECO342 – European Reconstruction
03 European Reconstruction:
- Golden Age period was the lowest in terms of inflation, money supply growth, interest rates
and fluctuations in exchange rates
- Bretton Woods itself was not sufficient, EPU and Marshall Plan were needed as well; this
eliminated contractionary pressures felt from before Bretton Woods
- Europeans cashed in most of their assets after the war and needed US to provide it capital
goods
- People thought a dollar shortage was permanent because Europe could never grow to outsize
and repay USA
- EPU and Marshall Plan made it so that the balance of payments problem disappeared
- USA gave them the money to produce but also bought their currencies
- Fear of Europe falling to the USSR
European Payment Union:
- Reduced the amount of payments required by acting as a clearing house; Bank of International
Settlement helped
Marshall Plan:
- delivered $13B in loans to Europe and then $8B from IMF provided the liquidity required for
growth
Britain and the Sterling Crisis:
- Britain would balance its payments due to large inflows from colonies overseas
- This largely ends in 1945 after the war and it is left with a lot of debt from colonies (imports >
exports)
- It leads to a balance of payments crisis and a subsequent devaluation of the Sterling
- It loses reserve currency status after this event (USD$ is the only real accepted currency)
- This creates a PROBLEM: It means there is no alternative to the USD to control its over-issue
The reconstruction of Europe:
- Possible explanations of the exceptional growth of the Golden Age: trade liberalization, Bretton
Woods, catch-up, Keynesian policies and full employment measures; European community
instead of a nation-state
Eichengreen v. Milward:
- Disagreement over the stability of Bretton Woods and its cause of stability
- Eichengreen says BW, along with MP and EPU helped keep prices stable and fostered stability
- They did this by various ad hoc solutions to various crises
- This in turn helped trade liberalization and growing world demand for goods; welfare state also
helped create and foster demand and attract investment
- High levels of investment More growth
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Document Summary
Golden age period was the lowest in terms of inflation, money supply growth, interest rates and fluctuations in exchange rates. Bretton woods itself was not sufficient, epu and marshall plan were needed as well; this eliminated contractionary pressures felt from before bretton woods. Europeans cashed in most of their assets after the war and needed us to provide it capital goods. People thought a dollar shortage was permanent because europe could never grow to outsize and repay usa. Epu and marshall plan made it so that the balance of payments problem disappeared. Usa gave them the money to produce but also bought their currencies. Fear of europe falling to the ussr. Reduced the amount of payments required by acting as a clearing house; bank of international. Delivered b in loans to europe and then b from imf provided the liquidity required for growth. Britain would balance its payments due to large inflows from colonies overseas.
