The Bretton Woods System Analysis Economics Essay

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Most of the states tried to restore the gold criterion after World War I, but it had been wholly collapsed during the Great Depression in 1930s. Some economic experts said comply with the gilded criterion had prohibited pecuniary governments from increasing the money supply quickly plenty to retrieve the economic systems. Therefore, the representatives of most of the universe ‘s prima states met at Bretton Woods, New Hampshire, in 1944 to make a new international pecuniary system. The representatives had decided to associate the universe currencies to the dollar since the United States accounted for over half of the universe ‘s fabrication capacity and held most of the universe ‘s gold during that clip. At the concluding, they agreed should be exchangeable into gold at $ 35 per ounce.

What is Bretton Woods System? The Bretton Woods system is frequently refer to the international pecuniary government that prevailed from the terminal of World War II until 1971. The beginning of the name is from the site of the 1944 conference that had created the International Monetary Fund ( IMF ) and World Bank. Harmonizing to the history, the Bretton Woods system was the first illustration of a to the full negotiated pecuniary order intended to regulate currency dealingss among autonomous provinces. In rule, the government was designed to unite binding legal duties with many-sided decision-making conducted through an international organisation — the IMF, endowed with limited supranational authorization. In pattern the initial strategy, every bit good as its subsequent development and ultimate death, were straight dependent on the penchants and policies of its most powerful member — the United States.

The International Monetary Fund was officially established on 27th December 1945, when the 29 states who had participated in the conference of Bretton Woods signed the Articles of Agreement. It commenced its fiscal operations on 1st March 1947. The IMF is an international organisation, which consists of 183 member states today. The aims of the IMF are to advance international pecuniary cooperation by set uping a planetary monitoring bureau that supervises, consults, and collaborates on pecuniary jobs. It facilitates universe trade enlargement and thereby contributes to the publicity and care of high degrees of employment and existent income. Furthermore, the IMF ensures exchange rate stableness to avoid competitory exchange depreciation. It eliminates foreign exchange limitations and aids in making systems of payment for many-sided trade. Furthermore, member states with disequilibrium in their balance of payments are provided with the chance to rectify their jobs by doing the fiscal resources of the IMF available for them.

On the other manus, World Bank is the most important beginning of fiscal assistance for developing states in the universe. It provides about $ 16 billion of loans to its client states per twelvemonth. It utilizes its fiscal resources, extremely trained staff, and extended cognition base to assist each developing state to travel towards the way of stable, sustainable, and just growing in the order to contend against poorness. Its ends are to extinguish the worst signifiers of poorness and to better life criterions. It supports the reconstituting procedure of economic systems and provides capital for productive investings. Furthermore, it encourages foreign direct investing by doing warrants or accepting partnerships with investors. The World Bank ‘s purposes are to maintain payments in developing states balanced and to further international trade. It is active in more than 100 developing economic systems. It forms aid schemes by collaborating with authorities bureaus, non-governmental establishments and private endeavors. It offers fiscal services, analytical, consultative, and capacity edifice.

The conference that gave birth to the Bretton Woods System was organized in the American resort small town of Bretton Woods, New Hampshire. It was the apogee of some two and a half old ages of planning for postwar pecuniary Reconstruction by the Treasuries of the United Kingdom and the United States. Although attended by all 44 allied states, plus one impersonal authorities — Argentina, the conference treatment was dominated by two rival programs developed — Harry Dexter White of the U.S. Treasury and John Maynard Keynes of Britain repectively. The via media that finally emerged was much closer to White ‘s program than to that of Keynes, reflecting the overpowering power of the United States as World War II was pulling to a stopping point.

Although the spreads between the White and Keynes programs seemed tremendous during that clip, particularly with regard to the issue of future entree to international liquidness in retrospect it is their similarities instead than their differences that appear most dramatic. In fact, there was much common land among all the take parting authoritiess at Bretton Woods. All agreed that the pecuniary pandemonium of the interwar period had yielded several valuable lessons. All were determined to avoid reiterating what they perceived to be the mistakes of the yesteryear. Their consensus of judgement was reflected straight in the Articles of Agreement of the International Monetary Fund.

There were four points being stand out which are listed as below:

Negotiators by and large agreed that every bit far as they were concerned, the interwar period had once and for all demonstrated the cardinal disadvantages of unrestrained flexibleness of exchange rates. The drifting rates of the 1930s were seen as holding discouraged trade and investing and to hold encouraged destabilizing guess and competitory depreciations. Yet in an epoch of more activist economic policy, authoritiess were at the same clip loath to return to for good fixed rates on the theoretical account of the classical gold criterion of the 19th century. Policy-makers intelligibly wished to retain the right to revise currency values on juncture as fortunes warranted. Hence a via media was sought between the polar options of either freely drifting or irrevocably fixed rates – some agreement that might derive the advantages of both without enduring the disadvantages of either.

What emerged was the ‘pegged rate ‘ or ‘adjustable nog ‘ currency government, besides known as the par value system. Members were obligated to declare a par value ( a ‘peg ‘ ) for their national money and to step in in currency markets to restrict exchange rate fluctuations within upper limit borders ( a ‘band ‘ ) one per cent above or below para ; but they besides retained the right, whenever necessary and in conformity with in agreement processs, to change their par value to rectify a ‘fundamental disequilibrium ‘ in their balance of payments. Unfortunately the impression of cardinal disequilibrium, though cardinal to the operation of the par value system, was ne’er spelled out in any item – a ill-famed skip that would finally come back to stalk the government in ulterior old ages.

All authoritiess by and large agreed that if exchange rates were non to drift freely, provinces would besides necessitate confidence of an equal supply of pecuniary militias. Negotiators did non believe it necessary to change in any cardinal manner the gold exchange criterion that had been inherited from the interwar old ages. International liquidness would still dwell chiefly of national stocks of gold or currencies exchangeable, straight or indirectly, into gold ( ‘gold exchange ‘ ) . The United States, in peculiar, was loath to change either the cardinal function of the dollar or the value of its gold militias, which at the clip amounted to three quarters of all cardinal bank gold in the universe. Negotiators did concur, nevertheless, on the desirableness of some auxiliary beginning of liquidness for shortage states. The large inquiry was whether that beginning should, as proposed by Keynes, be akin to a universe cardinal bank able to make new militias at will ( which Keynes thought might be called bancor ) ; or a more limited adoption mechanism, as preferred by White.

What emerged mostly reflected U.S. penchants: 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 state. Members were assigned quotas, approximately reflecting each province ‘s comparative economic importance, and were obligated to pay into the Fund a subscription of equal sum. The subscription was to be paid 25 per cent in gold or currency exchangeable into gold ( efficaciously the dollar, which was the lone currency so still straight gilded convertible for cardinal Bankss ) and 75 per cent in the member ‘s ain money. Each member was so entitled, when short of militias, to borrow needed foreign currency in sums determined by the size of its quota.

All authoritiess agreed was that it was necessary to avoid return of the sort of economic warfare that had characterized the decennary of the 1930s. Some adhering model of regulations was needed to guarantee that provinces would take bing exchange controls restricting currency convertibility and return to a system of free many-sided payments. Hence members were in rule forbidden to prosecute in prejudiced currency patterns or exchange ordinance, with merely two practical exclusions. First, convertibility duties were extended to current international minutess merely. Governments were to forbear from modulating purchases and gross revenues of currency for trade in goods or services. But they were non obligated to forbear from ordinance of capital-account minutess. Indeed, they were officially encouraged to do usage of capital controls to keep external balance in the face of potentially destabilising ‘hot money ‘ flows. Second, convertibility duties could be deferred if a member so chose during a postwar ‘transitional period. ‘ Members postponing their convertibility duties were known as Article XIV states ; members accepting them had alleged Article VIII position. One of the duties assigned to the IMF was to supervise this legal codification regulating currency convertibility.

Negotiators agreed that there was a demand for an institutional forum for international cooperation on pecuniary affairs. Currency problems in the interwar old ages, it was felt, had been greatly exacerbated by the absence of any constituted process or machinery for inter-governmental audience. In the postwar epoch, the Fund itself would supply such a forum – in fact, an accomplishment of genuinely historic proportions. Even more path breakage was the determination to apportion vote rights among authoritiess non on a one-state, one-vote footing but instead in proportion to quotas. With tierce of all IMF quotas at the beginning, the United States assured itself an effectual veto over future decision-making.

With these four points, the definition of the Bretton Woods system is a pecuniary government fall ining an basically unchanged gold exchange criterion, supplemented merely by a centralised pool of gold and national currencies, with an wholly new exchange rate system of adjustable nog. At the centre of the government was to be the IMF, which was expected to execute three of import maps every bit stated as below:

Regulatory – administrating the regulations regulating currency values and convertibility,

Financial – providing auxiliary liquidness

Consultative – supplying a forum for cooperation among authoritiess.

Structurally, the government combined a regard for the traditional rule of national sovereignty – particularly, of class, that of the United States – with a new committedness to corporate duty for direction of pecuniary dealingss, expressed both in reciprocally agreed regulations and in the powers of the Fund.

Under the Bretton Woods system, cardinal Bankss of states other than the United States had to execute the undertaking of keeping fixed exchange rates between their currencies and the dollar by step ining in foreign exchange markets. If a state ‘s currency was excessively high relation to the dollar, its cardinal bank would sell its currency in exchange for dollars in order to cut down the value of its currency. Conversely, if the value of a state ‘s money was excessively low, the state would purchase its ain currency in order to raise the monetary value.

The Bretton Woods system had been lasted until 1971. The rising prices in the United States and a turning American trade shortage of that clip were deprecating the value of the dollar. Americans urged both Germany and Japan which had favourable payments balances to appreciate their currencies. But those states were loath to make so, since raising the value of their currencies would raise the monetary values for their goods and ache their exports. Finally, the United States abandoned the fixed value of the dollar and allowed it to “ drift ” , that is to fluctuate against other currencies. This caused the dollar fell dramatically. World leaders sought to resuscitate the Bretton Woods system with the alleged Smithsonian Agreement in 1971, but failed. By 1973, the United States and other states agreed to let exchange rates to drift.

Economists named the ensuing system as “ managed float government ” , which means that even though exchange rates for most currencies float, cardinal Bankss still can step in to forestall crisp alterations. As in 1971, states with big trade excesss frequently sell their ain currencies in an attempt to forestall them from appreciating and forestall them from aching exports. Conversely, states with big trade shortages frequently buy their ain currencies in order to forestall depreciation, which could increase domestic monetary values. But there are bounds to what can be accomplished through intercession, particularly for states with big trade shortages. Finally, a state that intervenes to back up its currency may consume its international militias, doing it unable to go on buttressing the currency and potentially go forthing it unable to run into its international duties.

2.5.2 Advantage and Disadvantage of Bretton Woods System

The benefits of the Bretton Woods system were a important enlargement of international trade and investing every bit good as a noteworthy macroeconomic public presentation: the rate of rising prices was lower on norm for every industrialised state except Japan than during the period of drifting exchange rates that followed, the existent per capita income growing was higher than in any pecuniary government since 1879 and the involvement rates were low and stable. It has to be noted that taking economic experts nowadays argue “ whether macroeconomic public presentation stableness was responsible for the successes of Bretton Woods, or the contention. ”

Under the gilded exchange criterion, a state has to fall back to the classical medical specialty of deflating the domestic economic system when faced with chronic BP shortages. Before World War II, European states frequently used this policy, in peculiar the Great Britain. Even though few currencies were exchangeable into gold, policy shapers thought that currencies should be backed by gold and volitionally adopted deflationary policies after World War I. Deflationary policy is non the lone option when faced with BP shortages. Devaluation is accepted in Bretton Woods. The adjustable nog was viewed as a huge betterment over the gilded exchange criterion with fixed para. Currencies were exchangeable into gold, but unlike the gold exchange criterion, states had the ability to alter par values. For this ground, Keynes described the Bretton Woods system as “ the exact antonym of the gilded criterion. ”

On the contrary, failings of the system were capital motion limitations throughout the Bretton Woods old ages ( authoritiess needed to restrict capital flows in order to hold a certain extent of control ) every bit good as the fact that paras were merely adjusted after bad and fiscal crises. Another negative facet was the force per unit area Bretton Woods put on the United States, which was non willing to provide the sum of gold the remainder of the universe demanded, because the gold militias declined and eroded the assurance in the dollar.

In the post-World War II scenario, states devastated by the war needed tremendous resources for Reconstruction. Imports went up and their shortages were financed by pulling down their militias. At that clip, the US dollar was the chief constituent in the currency militias of the remainder of the universe, and those militias had been spread outing as a effect of the US running a continued balance of payments shortage ; other states were willing to keep those dollars as a modesty plus because they were committed to keep convertibility between their currency and the dollar.

The job was that if the short-term dollar liabilities of the US continued to increase in relation to its retentions of gold, so the belief in the credibleness of the US committedness to change over dollars into gold at the fixed monetary value would be eroded. The cardinal Bankss would therefore hold an overpowering inducement to change over the bing dollar retentions into gold, and that would, in bend, force the US to give up its committedness. This was the Triffin Dilemma after Robert Triffin, the chief critic of the Bretton Woods system. Triffin suggested that the IMF should be turned into a ‘deposit bank ‘ for cardinal Bankss and a new ‘reserve plus ‘ be created under the control of the IMF. In 1967, gold was displaced by making the Particular Drawing Rights ( SDRs ) , besides known as ‘paper gold ‘ , in the IMF with the purpose of increasing the stock of international militias. Originally defined in footings of gold, with 35 SDRs being equal to one ounce of gold ( the dollar-gold rate of the Bretton Woods system ) , it has been redefined several times since 1974. At present, it is deliberate daily as the leaden amount of the values in dollars of four currencies ( euro, dollar, Nipponese hankering, and lb sterling ) of the five states ( France, Germany, Japan, the UK and the US ) . It derives its strength from IMF members being willing to utilize it as a modesty currency and utilize it as a agency of payment between cardinal Bankss to interchange for national currencies. The original installments of SDRs were distributed to member states harmonizing to their quota in the Fund ( the quota was loosely related to the state ‘s economic importance as indicated by the value of its international trade ) .

Structural job besides exist in this system. Over clip the universe economic system grew and needed more liquidness, which meant that US had to keep increasing trade shortages. But the US was non able to devaluate the dollar. The dollar was the numeraire of the system, i.e. , it was the criterion to which every other currency was pegged. Consequently, the U.S. did non hold the power to put the exchange rate between the dollar and any other currency. Changing the value of dollar in footings of gold has no existent consequence, because the values of other currencies were pegged to the dollar. This job would non hold existed if most of other currencies were pegged to gold. However, none of these currencies were pegged to gold because they were non exchangeable into gold with the limited supply of gold.

The dislocation of the Bretton Woods system was preceded by many events, such as the devaluation of the lb in 1967, flight from dollars to gold in 1968 taking to the creative activity of a two-tiered gold market ( with the official rate at $ 35 per ounce and the private rate market determined ) and eventually in August 1971, the British demand that US guarantee the gold value of its dollar retentions. This led to the US determination to give up the nexus between the dollar and gold.

2.5.3 Crisis of Bretton Woods System

The digesting instabilities of payments between the Western industrialized countriesIn the sixtiess and 1970s had weakened the Bretton Woods System. The chief job was that one national currency which is the U.S. dollar had to be an international modesty currency at the same clip. This made the national pecuniary and financial policy of the United States free from external economic force per unit areas, while earnestly impacting those external economic systems. The U.S. was forced to run shortages in their balance of payments in order to guarantee international liquidness which had been caused universe rising prices. In the 1960s, there was a tally of really inflationary policy which limited the convertibility of the U.S. dollar since the militias were deficient to run into the demand for their currency. Yet, the other member states were non willing to accept the high rising prices rates that the par value system would hold caused and “ the dollar ended up being weak and unwanted, merely as predicted by Gresham ‘s jurisprudence: Bad money drives out good money. ” The Bretton Woods System had collapsed. Another cardinal job was the delayed accommodation of the paras to alterations in the economic environment of the states. It was ever a great political hazard for a authorities to set the para and “ each alteration in the par value of a major currency tended to go a crisis for the whole system. ” This led to a deficiency of trust and destabilizing guesss.

End of Bretton Woods System dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon announced the “ impermanent ” suspension of the dollar ‘s convertibility into gold. While the dollar had struggled throughout most of the sixtiess within the para established at Bretton Woods, this crisis showed the symptom of the dislocation of the system. An effort to restore the fixed exchange rates failed, and by March 1973 the major currencies began to drift against each other. In March of 1973, the par value system was abandoned and the member states agreed on allowing different sorts of ways for finding the exchange value of a state ‘s money. Since the prostration of the Bretton Woods System, IMF members have been free to take any signifier of exchange agreement they wish except nail downing their currency to gold: leting the currency to drift freely, nail downing it to another currency or a basket of currencies, following the currency of another state, take parting in a currency axis, or organizing portion of a pecuniary brotherhood.

Many feared that the prostration of the Bretton Woods system would convey the period of rapid growing to an terminal. In fact, the passage to drifting exchange rates was comparatively smooth and it was surely seasonably: flexible exchange rates made it easier for economic systems to set to more expensive oil, when the monetary value all of a sudden started traveling up in October of 1973. Floating rates have facilitated accommodations to external dazes of all time since. The IMF responded to the challenges created by the oil monetary value dazes of the 1970s by accommodating its loaning instruments. To assist oil importers trade with awaited current history shortages and rising prices in the face of higher oil monetary values, it set up the first of two oil installations.

From the mid-1970s, the IMF sought to react to the balance of payments troubles facing many of the universe ‘s hapless states by supplying concessional funding through what were known as the Trust Fund. In March of 1986, the IMF created a new concessional loan plan called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December of 1987.

As a decision, the Bretton Woods System of 1944 with its fixed exchange rates does non be any longer today. Its establishments and processs had to set to market forces to last but still its ends are as valid today as they have been in the yesteryear. Today many big developed states allow their currencies to drift freely, which means that merely supply and demand at the market find what it is deserving. Some states try to act upon this procedure by purchasing and selling their ain currency. Another method is to nail down the value of the money to one of the chief currencies.

What are the deductions of the Bretton Woods experience for future international pecuniary dealingss? The most of import deduction is that merely stabilising exchange rates is non sufficient to automatically present the benefits trumpeted by the advocates of such an enterprise. It is important that national economic policies, for instant, budget shortages, and economic results, for instant, rising prices, converge to a certain extent before states decide to repair exchange rates. However, a short term divergency of policies is non damaging for the operation of such a system ; it is instead a believable committedness to fixed exchange rates that ensures its stableness. It can be concluded that ambitious international pecuniary reforms like the Bretton Woods System can merely work if they are integrated into broad economic and political convergence. With this fact in head it is easy to understand how far the universe with its assorted states and life criterions, policies, and economic systems is from a “ new system of Bretton Woods ” , that can get the better of its old failings.