1 MEANING: In times of globalization the economic environment changes rapidly. Capital movements become larger and at the same time less controllable. Therefore, the need for a stabilizing system becomes more and more apparent. In the past such a system has been established at the conference of Bretton Woods. Already in 1944 the British economist John Maynard Keynes emphasized “the importance of rule -based regimes to stabilize business expectations something he accepted in the Bretton Woods system of fixed exchange rates.”1Recentlyleading industrial nations have been calling for a renewal of the purpose and the spirit of this system in order to cope with the growing size of international trade and capital flows. This essay gives a short overview of the system’s development from 1944 until today and stress esespecially problems and obstacles. It identifies mistakes that have been made and points out aspects that have to be taken into account when implementing a “new system of Bretton Woods”. INTRODUCTION: The BrettonWoods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid- 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well. Preparing to rebuild the international economic system while World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and signed the Agreement on its final day. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.
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1
MEANING:
In times of globalization the economic environment changes rapidly. Capital
movements become larger and at the same time less controllable. Therefore, the need for a
stabilizing system becomes more and more apparent. In the past such a system has been
established at the conference of Bretton Woods. Already in 1944 the British economist John
Maynard Keynes emphasized “the importance of rule-based regimes to stabilize business
expectations something he accepted in the Bretton Woods system of fixed exchange
rates.”1Recentlyleading industrial nations have been calling for a renewal of the purpose and the
spirit of this system in order to cope with the growing size of international trade and capital
flows. This essay gives a short overview of the system’s development from 1944 until today and
stress esespecially problems and obstacles. It identifies mistakes that have been made and points
out aspects that have to be taken into account when implementing a “new system of Bretton
Woods”.
INTRODUCTION:
The BrettonWoods system of monetary management established the
rules for commercial and financial relations among the world's major industrial states in the mid-
20th century. The Bretton Woods system was the first example of a fully negotiated monetary
order intended to govern monetary relations among independent nation-states. The chief features
of the Bretton Woods system were an obligation for each country to adopt a monetary policy that
maintained the exchange rate by tying its currency to gold and the ability of the IMF to bridge
temporary imbalances of payments. Also, there was a need to address the lack of cooperation
among other countries and to prevent competitive devaluation of the currencies as well.
Preparing to rebuild the international economic system while World War II was still raging, 730
delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods,
New Hampshire, United States, for the United Nations Monetary and Financial Conference, also
known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and
signed the Agreement on its final day. Setting up a system of rules, institutions, and procedures
to regulate the international monetary system, the planners at Bretton Woods established
the International Monetary Fund (IMF) and the International Bank for Reconstruction and
Development (IBRD), which today is part of the World Bank Group. These organizations
became operational in 1945 after a sufficient number of countries had ratified the agreement.
30 December 1998 1.673* Last day of trading; converted to Euro
(4 January 1999)
Note: GDP for 2012 is $3.123 trillion US Dollars.
Pound Sterling:
Date # pounds = $1 US
27 December 1945 0.2481
18 September 1949 0.3571
17 November 1967 0.4167
30 December 1998 0.598*
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5 December 2008 0.681*
Note: GDP for 2012 is $2.323 trillion US Dollars.
French Franc:
Date # francs = $1 US Note
27 December 1945 1.1911 £1 = 4.8 FRF
26 January 1948 2.1439 £1 = 8.64 FRF
18 October 1948 2.6352 £1 = 10.62 FRF
27 April 1949 2.7221 £1 = 10.97 FRF
20 September 1949 3.5 £1 = 9.8 FRF
11 August 1957 4.2 £1 = 11.76 FRF
27 December 1958 4.9371 1 FRF = 0.18 g gold
1 January 1960 4.9371 1 new franc = 100 old francs
10 August 1969 5.55 1 new franc = 0.160 g gold
31 December 1998 5.627* Last day of trading; converted to
euro (4 January 1999)
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Italian Lira:
Date # lire = $1 US Note
4 January 1946 225 Eur 0.1162
26 March 1946 509 Eur 0.2629
7 January 1947 350 Eur 0.1808
28 November 1947 575 Eur 0.297
18 September 1949 625 Eur 0.3228
31 December 1998 1,654.569* Last day of trading; converted to euro (4
January 1999)
Note: GDP for 2012 is $1.834 trillion US Dollars.
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REASONS FOR FAILURE OF BRETTONWOOD SYSTEM:
As in the case of Gold Standard, this system also did not provide for any revision in
the price of gold. Due to inflation, it became uneconomical to produce gold. This led
to the suspension of gold production in various countries leading to stagnation of gold
reserves which had an adverse impact on international liquidity.
The system did not provide for any revaluation of parities due to which surplus countries
such as West Germany and Japan continued to enjoy export competitiveness against the US
economy. This aggravated the US trade deficit.
The system did not provide for a revision in the price of gold in terms of USD. Due to
this, it was not possible to devalue the US Dollar despite continued trade deficit. The
devaluation of the dollar would have adversely affected all countries having US reserves.
The continued trade deficit of the US created an over-supply of USD in the
international financial markets which reduced the acceptability of the USD. When the
Gold Convertibility Clause was invoked, the US authorities could not honor their
commitment to redeem USD against gold. This failure on the part of the US led to the
collapse of the system in 1971.
The free market program it has so strenuously promoted over the past 30 years has
intensified all the contradictions of the capitalist mode of production.
Thereafter, private investors were no longer allowed to redeem gold fro m the Federal
Reserve or other central banks.
Speculation about a devaluation of the dollar in terms of other currencies caused markets to
buy large quantities of foreign currency assets.
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ADVANTAGES AND LIMITATIONS OF BRETTONWOOD SYSTEM:
Most of
the countries tried to reestablish the gold standard after World War I, but it had been totally
collapsed during the Great Depression in 1930s. Some economists said comply with the gold
standard had prohibited monetary authorities from increasing the money supply rapidly enough
to recover the economies. Therefore, the representatives of most of the world's leading nations
met at Bretton Woods, New Hampshire, in 1944 to create a new international monetary system.
The representatives had decided to link the world currencies to the dollar since the United States
accounted for over half of the world's manufacturing capacity and held most of the world's gold
during that time. At the final, they agreed should be convertible into gold at $35 per ounce.
The International Monetary Fund was officially established on 27th December 1945, when the
29 nations who had participated in the conference of Bretton Woods signed the Articles of
Agreement. It commenced its financial operations on 1st March 1947. The IMF is an
international organization, which consists of 183 member countries nowadays. The objectives of
the IMF are to promote international monetary cooperation by establishing a global monitoring
agency that supervises, consults, and collaborates on monetary problems. It facilitates world
trade expansion and thereby contributes to the promotion and maintenance of high levels of
employment and real income. Furthermore, the IMF ensures exchange rate stability to avoid
competitive exchange depreciation. It eliminates foreign exchange restrictions and assists in
creating systems of payment for multilateral trade. Moreover, member countries with
disequilibrium in their balance of payments are provided with the opportunity to correct their
problems by making the financial resources of the IMF available for them.
On the other hand, World Bank is the most significant source of financial aid for developing
nations in the world. It provides approximately $16 billion of loans to its client countries per
year. It utilizes its financial resources, highly trained staff, and extensive knowledge base to help
each developing country to move towards the path of stable, sustainable, and equitable growth in
the order to fight against poverty. Its goals are to eliminate the worst forms of poverty and to
improve living standards. It supports the restructuring process of economies and provides capital
for productive investments. Furthermore, it encourages foreign direct investment by making
guarantees or accepting partnerships with investors.
The benefits of the Bretton Woods system were a significant expansion of international trade and
investment as well as a notable macroeconomic performance: the rate of inflation was lower on
average for every industrialized country except Japan than during the period of floating exchange
rates that followed, the real per capita income growth was higher than in a ny monetary regime
since 1879 and the interest rates were low and stable. It has to be noted that leading economists
nowadays argue “whether macroeconomic performance stability was responsible for the
successes of Bretton Woods, or the controversy.”
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Under the gold exchange standard, a country has to resort to the classical medicine of deflating
the domestic economy when faced with chronic BP deficits. Before World War II, European
nations often used this policy, in particular the Great Britain. Even though few currencies were
convertible into gold, policy makers thought that currencies should be backed by gold and
willingly adopted deflationary policies after World War I. Deflationary policy is not the only
option when faced with BP deficits. Devaluation is accepted in Bretton Woods. The adjustable
peg was viewed as a vast improvement over the gold exchange standard with fixed parity.
Currencies were convertible into gold, but unlike the gold exchange standard, countries had the
ability to change par values. For this reason, Keynes described the Bretton Woods system as "the
exact opposite of the gold standard."
On the contrary, weaknesses of the system were capital movement restrictions throughout the
Bretton Woods years (governments needed to limit capital flows in order to have a certain extent
of control) as well as the fact that parities were only adjusted after speculative and financial
crises. Another negative aspect was the pressure Bretton Woods put on the United States, which
was not willing to supply the amount of gold the rest of the world demanded, because the gold
reserves declined and eroded the confidence in the dollar.
In the post-World War II scenario, countries devastated by the war needed enormous resources
for reconstruction. Imports went up and their deficits were financed by drawing down their
reserves. At that time, the US dollar was the main component in the currency reserves of the rest
of the world, and those reserves had been expanding as a consequence of the US running a
continued balance of payments deficit; other countries were willing to hold those dollars as a
reserve asset because they were committed to maintain convertibility between their currency and
the dollar. There were four points being stand out which are listed as below:
Negotiators generally agreed that as far as they were concerned, the interwar period had
conclusively demonstrated the fundamental disadvantages of unrestrained flexibility of exchange
rates. The floating rates of the 1930s were seen as having discouraged trade and investment and
to have encouraged destabilizing speculation and competitive depreciations. Yet in an era of
more activist economic policy, governments were at the same time reluctant to return to
permanently fixed rates on the model of the classical gold standard of the nineteenth century.
Policy-makers understandably wished to retain the right to revise currency values on occasion as
circumstances warranted. Hence a compromise was sought between the polar alternatives of
either freely floating or irrevocably fixed rates - some arrangement that might gain the
advantages of both without suffering the disadvantages of either.
What emerged was the 'pegged rate' or 'adjustable peg' currency regime, also known as the par
value system. Members were obligated to declare a par value (a 'peg') for their national money
and to intervene in currency markets to limit exchange rate fluctuations within maximum
margins (a 'band') one per cent above or below parity; but they also retained the right, whenever
necessary and in accordance with agreed procedures, to alter their par value to correct a
'fundamental disequilibrium' in their balance of payments.
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All governments generally agreed that if exchange rates were not to float freely, states would
also require assurance of an adequate supply of monetary reserves. Negotiators did not think it
necessary to alter in any fundamental way the gold exchange standard that had been inherited
from the interwar years.
What emerged largely reflected U.S. preferences: a system of subscriptions and quotas
embedded in the IMF, which itself was to be no more than a fixed pool of national currencies
and gold subscribed by each country. Members were assigned quotas, roughly reflecting each
state's relative economic importance, and were obligated to pay into the Fund a subscription of
equal amount. The subscription was to be paid 25 per cent in gold or currency convertible into
gold (effectively the dollar, which was the only currency then still directly gold convertible for
central banks) and 75 per cent in the member's own money. Each member was then entitled,
when short of reserves, to borrow needed foreign currency in amounts determined by the size of
its quota.
All governments agreed was that it was necessary to avoid recurrence of the kind of economic
warfare that had characterized the decade of the 1930s. Some binding framework of rules was
needed to ensure that states would remove existing exchange controls limiting currency
convertibility and return to a system of free multilateral payments. Hence members were in
principle forbidden to engage in discriminatory currency practices or exchange regulation, with
only two practical exceptions. First, convertibility obligations were extended to current
international transactions only. Governments were to refrain from regulating purchases and sales
of currency for trade in goods or services. But they were not obligated to refrain from regulation
of capital-account transactions. Indeed, they were formally encouraged to make use of capital
controls to maintain external balance in the face of potentially destabilizing 'hot money' flows.
Second, convertibility obligations could be deferred if a member so chose during a postwar
'transitional period.' Members deferring their convertibility obligations were known as Article
XIV countries; members accepting them had so-called Article VIII status. One of the
responsibilities assigned to the IMF was to oversee this legal code governing currency
convertibility.
Structural problem also exist in this system. Over time the world economy grew and needed
more liquidity, which meant that US had to maintain increasing trade deficits. But the US was
not able to devalue the dollar. The dollar was the numeraire of the system, i.e., it was the
standard to which every other currency was pegged. Accordingly, the U.S. did not have the
power to set the exchange rate between the dollar and any other currency. Changing the value of
dollar in terms of gold has no real effect, because the values of other currencies were pegged to
the dollar. This problem would not have existed if most of other currencies were pegged to gold.
However, none of these currencies were pegged to gold because they were not convertible into
gold with the limited supply of gold.
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The breakdown of the Bretton Woods system was preceded by many events, such as the
devaluation of the pound in 1967, flight from dollars to gold in 1968 leading to the creation of a
two-tiered gold market (with the official rate at $35 per ounce and the private rate market
determined) and finally in August 1971, the British demand that US guarantee the gold value of
its dollar holdings. This led to the US decision to give up the link between the dollar and gold.
THE FUTURE OF BRETTONWOOD SYSTEM:
During the last five to ten years
especially the system of Bretton Woods has been topic of many public discussions with
controversial opinions. Human rights activists argue that the
Programmed for the structural adjustment of the developing countries initiated by the World
Bank and the IMF led to a “third world” of the East-bloc states, which means that they
dramatically increased poverty in those countries. Large-scale agrarian and industrial projects
destabilized national economies destroyed the environment and social patterns. It is pointed out
that the inner structure of the Bretton Woods institutions, where the right to say is proportional to
the amount of money that each country contributes, is symbolic of the capitalistic ideology,
which completely ignores the interests of the people living in developingcountries.12 Thus,
human rights activists demand that the IMF and the World Bank stop interfering in national
policies of sovereign countries. The World Bank is well aware of the problems that can be
caused by projects in less developed areas. It reacted by providing the possibility to file requests
to an Inspection Panel. A person that files a request to the World Bank has to show that he/she
lives in the project area and will most likely be affected negatively by activities related to the
project. These negative effects must be caused by failure from the World Bank to follow its
policies and procedures. Additionally, the request must have been discussed with the Bank
management with an unsatisfactory outcome.
In contrast to these discussions the major industrialized nations have begun to worry about the
implications of the growing size and the speculative nature of financial movements in times of
globalization. Calls for a “new system of Bretton Woods” could be heard in almost every
industrialized country. In 1996, Michel Camdessus, the Managing Director of the IMF, stated
that even though the monetary system had changed since 1944 the goals of Bretton Woods were
as valid today as they had been in the past. He underlined that international cooperation would be
required to create a new Bretton Woods system, which in his point of view means that “
countries must make a greater effort to understand the economic policies of other countries and
that they must listen to the judgments of others about their own national policies.
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It also means that they must take a more enlightened view of their own national interests,
recognizing that it is in their own self-interest to take the interests of other countries into account.
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CONCLUSION:
As a conclusion, the Bretton Woods System of 1944 with its fixed exchange rates does not exist anymore today. Its institutions and procedures had to adjust to
market forces to survive but still its goals are as valid today as they have been in the past. Today many large developed countries allow their currencies to float freely, which means that only supply and demand at the market determine what it is worth.
Some nations try to influence this process by buying and selling their own currency. Another
method is to peg the value of the money to one of the main currencies. The system of Bretton Woods of 1944 with its fixed exchange rates does not exist anymore today. Its institutions and procedures had to adjust to market forces to survive but still its goals are as valid today as they
have been in the past. The benefits of the Bretton Woods system were a significant expansion of international trade and investment as well as a notable macroeconomic performance: the rate of
inflation was lower on average for every industrialized country except Japan than during the period offloading exchange rates that followed, the real per capita income growth was higher than in any monetary regime since 1879 and the interest rates were low and stable.14 It has to be
noted that leading economists nowadays argue “whether macroeconomic performance stability was responsible for the successes of Bretton Woods, or the controverse.”15Weaknesses of the
system were capital movement restrictions throughout the Bretton Woods years (governments needed to limit capital flows in order to have a certain extent of control) as well as the fact that parities were only adjusted after speculative and financial crises.
Another negative aspect was the pressure Bretton Woods put on the United States, which was not
willing to supply the amount of gold the rest of the world demanded, because the gold reserves declined and eroded the confidence in the dollars.
31
REFERENCES: Following below are the references from information have been collected. http://en.wikipedia.org/wiki/Bretton_Woods_Conference.