Bretton Woods System
The Bretton Woods System generally refers to the international monetary regime designed in 1944 and implemented (in stages) from the end of the Second World War to the 1950s. The Bretton Woods agreement was meant to protect fragile currencies, provide increased stability and predictability to the world's economies, and, at the same time, encourage free markets. To these ends, the nations supporting the Bretton Woods agreements created the International Monetary Fund and the International Bank for Reconstruction (today known as the World Bank). Moreover, the U.S. Dollar was (in effect) pegged to gold at a set price of $35 an ounce and, further, was established as the world's reserve currency. Other currencies were then pegged to the dollar. Various other mechanisms were established to make currencies freely convertible, yet with pricing kept within predictable limits. The Bretton Woods System ultimately gave way to changes in the international financial system and was formally abandoned in the early 1970s. Yet, Bretton Woods is of far more than merely historical interest. The System created lasting institutions (the IMF, the World Bank) and provided the model for future international financial regimes.
Keywords Bretton Woods; Currency; Exchange rates; Gold; International Co-operation; International Finance; International Monetary Fund; World Bank
Business: Bretton Woods System
The Bretton Woods System generally refers to the international economic and monetary regime which operated in the free market economies from the end of the Second World War to the early 1970s. The regime grew out of a series of meetings between the Allied Powers during World War II, climaxing in a conference at the Mount Washington Hotel in Bretton Woods, New Hampshire-hence the name (Grabbe, 1996). There, the American and British delegations agreed on a general schema for a post-war monetary structure. In particular, the delegates called for a system where-in the U.S. dollar was made the world's reserve currency. Further, the U.S. Dollar was pegged to gold at a set price of $35 an ounce and then other nations' currencies were pegged to the dollar. The general intention was to create a situation in which world currencies were fully convertible with one another, but would not be subject to wide fluctuations in value-in effect, currencies would be fixed but fluid (Cohen, 2001).
In addition, The Bretton Woods agreement created the International Monetary Fund (IMF) and the International Bank for Reconstruction (today known as the World Bank). The IMF was meant to be a standing reservoir of gold and currency-provided by member states-that the members could borrow from when they found their reserves of foreign currency running short. The Bank, meanwhile, was intended to help the devastated economies of Europe and Asia rebuild after World War II.
The Bretton Woods System functioned with mixed results during the 1950s and 1960s. In many ways, it ceased to be a multinational effort and instead became the system by which the United States acted to provide currency stability to the world. However, in that role, it was reasonably successful, at least until the 1960s and early 1970s, when it became clear that the global economy was now too large to be effectively managed by any individual state, no matter how affluent, and particularly so in an age of increasing oil prices (Hammes, 2005). Bretton Woods was therefore gradually abandoned. Yet, Bretton Woods is of far more than merely historical interest. The System created lasting institutions (the IMF, the World Bank) and provided the model for future international financial regimes.
Knowledge of the Bretton Woods agreement is thus important to any individual who intends to participate in or study modern international finance and commerce. It is, quite simply, the foundation on which much else was built.
The Bretton Woods agreement grew directly out of the disasters of World War II and the Great Depression before it. Economists and other theorists argued that the horrors of the war could be traced at least in part to the collapse of the international economic system after 1919. These theorists held that in the aftermath of the Great War, the world more or less drifted into a period of protectionism, competitive devaluations (i.e., nations would devalue their currencies to make their own exporters cheaper than those of rival nations), "begger-your-neighbor" government policies, and more or less overt economic warfare (Ramsaran, 1998). Such policies led more or less inevitably to new wars-or so went the argument-in that nations were therefore forced to seek control over their own and other markets via armed conflict.
Determined not to repeat history, Britain and the United States elected to design post-war political and economic frameworks. The political framework came first, in the summer of 1941 (thus actually predating the entry of the United States to the war), and took form as the Atlantic Charter. This was a joint declaration by the USA and the United Kingdom, represented respectively by President Franklin D. Roosevelt and Prime Minister Winston Churchill, pledging the two nations to support world peace, the inviolability of national frontiers, global economic co-operation, and free markets (usinfo.state.gov, 2007). Following Pearl Harbor, the Atlantic Charter (the formal entry of the United States in the Second World War) became a potent psychological weapon; akin to Woodrow Wilson's "Fourteen Points," in that it seemed to presage a more just, prosperous era to come after what the Charter referred to as "the final destruction of the Nazi tyranny."
But, part of the appeal of the Charter was that it would be soon paired with a hard-headed vision of a new economic system. In 1944, the two countries convened a conference of all the Allied nations (plus Argentina) at the Mount Washington Hotel in Bretton Woods, New Hampshire (Cohen, 2001). There, the British delegation, headed by John Maynard Keynes, and the American delegation, headed by Harry Dexter White, worked out the details of the agreement with remarkable speed.
This is not to say that the Bretton Woods discussions were entirely without tension. While Keynes and White shared many goals and ideals, they did have significant differences. Keynes came to Bretton Woods with a plan for a world economic order that would include an international central bank, complete with the power to issue an international currency to be called the "bancor." In addition, Keynes envisioned a system uniquely favorable to rapid economic development (partly in an attempt to rebuild Europe after the war) and, so, in the process, softened the requirements to be leveled on creditor nations. White also came to the Woods with plans for something like a central bank, and something like an international currency, to be called the unitas. However, he differed from Keynes in that his planned economic order favored economic stability over rapid development.
The International Monetary Fund
Neither man got entirely what he wanted, and the bancor / unitas was a classic non-starter but in other ways both could claim some satisfaction from the discussion. The Bretton Woods agreement envisioned a...
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