The Most Important Features of the Bretton Woods System - Assignment Example

Running Header: The Bretton Woods System Client Inserts His/ Her Name Tutor’s Name Name of Institution Course Title Date of Submission Introduction According to Van (1978), the Bretton woods system involved management of money. The system established regulations and control systems that could guide both commercial and financial relations. This was majorly among the major industrial states in the world in the middle of the 20th century. The independent nation states were therefore expected to comply fully with the obligations of the Bretton woods system. It was the first system which comprised of an entirely initiated monetary order which was aimed at governing the monetary relations among the chosen independent nations. The Bretton Woods Agreement was signed and sealed in July 1944 in Bretton woods, New Hampshire and the United States. The agreement was made to assist in reconstructing the world economic system which was destroyed by the raging World War 11. The representatives included 730 delegates from the 44 allied nations who gathered in the United Nations Monetary and Financial Conference. With a common concern, they deliberated upon the Bretton Woods Agreement. (Van, 1978) In regards to the Bretton woods agreement, the developed nations agreed over the US vision of improving the international economic systems. This was possible through integrating currencies such that a single currency system was in use. The system therefore was designed basically for the purpose of establishing, controlling and sustaining an international monetary system that could allow for easy trading transactions within the nations. This also aimed at fostering free flow trade ventures and eliminating the discriminatory trade barriers to ensure free flow of capital. The US dollar was the currency to be used by all nations which was reallocated through international trade transactions. (Senior Official of the Bank of England, 1944) During this venture, the International Monetary Fund and the International Bank for Reconstruction and Development were established with the aim of planning and managing the entire project. Besides, a system of rules was established, institutions created and procedures to regulate the functioning of the project was set. After various nations ratified the program and agreed upon the set system, the organizations started operating by the year 1945. (Mason & Asher, 1973). Features of the Bretton Woods Agreement The most significant feature of the Bretton woods system was the compulsion for each member country to apply the monetary policy that was supposed to guide and maintain the rate of exchange by tying its currency to the standard currency which was the U.S dollar. In addition, the IMF was given accountability to manage the imbalances of payments for a specified period of time. The United States dollar officially became the reserved standard currency used my many states who adopted the Bretton Woods System. (Michael, 2003) Secondly, due to the great depression the agreement among the economically powerful nations was based on the strategy of attaining a well managed international economic system. The goals and means were based on the collective belief in the philosophy of capitalism. Some nations however objected this idea such as France which preferred planning and intervention by the state. The US on the other hand was not for the idea of great state intervention. It was very limited instead. All in all, the main feature dwelt in primary marketing mechanisms and the private ownership of the various means of production. (Van, 1978) In regards to Mason & Asher (1973), all the members who embraced the Bretton Woods Agreement agreed that the monetary chaos of the Second World War period yielded various lessons that could help the countries to develop economically. The experience of the devastating period was very clear in the officials’ minds. The officials were very considerate in planning such that they avoid the same occurrences in the future. They intended to begin by repaying the war debts and reparations which could move the nations towards worldwide economic progression and renovation. Harold (1996) suggests that the policies entailed some trading nations using currency devaluations which were aimed at increasing the competitiveness. This included exporting more and importing less to the nations. This prevented currency wars among the member nations by eliminating the major contractionary forces or barriers. However, the devaluation policy did not control trade appropriately since it increased national liquidity rates which were not adequately coordinated to restore the previous volumes of trade. Another national policy included various trading blocs, currency zones and bilateral barter mechanisms. The groups of nations used an equivalent currency. The nations together slowed the recovery of the nature of international trade. This congested the traverse edge of the flow of capital and the nature of foreign investment. Therefore, the national policies were incongruous forcing investment to stagnate because the entire system was uncoordinated. The idea of a better global economic system was shunned. The common quote during this time was "no more beggar thy neighbor." (Senior Official of the Bank of England, 1944) Another important feature entailed monetary contractions were strongly associated with the reduction of prices, increasing level of output and creating employment. The principle of the Bretton Woods Agreement was based on effective international collaboration which permitted a global expansion of monetary systems despite the gold standard limit that created a great challenge. In this regard, the individual countries were able to evade the impact of the war be agreeing to abandon the gold standard and resort to apply a domestic monetary stability. The great depression came into being because of the uncoordinated system which forced some countries such as France to pull out of the Gold Bloc. (Van, 1978) According to the Senior Official of the Bank of England (1944), it is indicated that in 1944 at Bretton Woods, the policy circles of the elite gathered a collective kind of wisdom which supported the regulated system of exchange rates that were standard. The system also relied on the controlled economy within the market level. Additionally, tight controls over the value of currency were granted. Although some level of divergence was experienced based on some aspects of implementation of the system, there was a common agreement on the establishment of strict control measures. Considering the extreme experience created by the interwar years, economic security was a global concern for the US planners. A liberal global system of economy was necessary and it aimed at improving the peace that ensued after the world war. Peter et. al (2009) argues that Cordell Hull of the United States identified the fact that the causes of the war laid the foundation for discrimination in terms of the economy and trade which greatly impacted the economic position of the involved nations. The protectionist policies were placed for selfish reasons where some limited nations benefited. One feature of the Bretton woods system was to integrate the economic needs of the various nations into the systems such that they are revived from what they had become in the past. Harold (1996) argues that the Bretton woods agreement involved eliminating the high tariffs, trade barriers and unfair competition by establishing systems of free flow of trade within the global arena and among the member nations. This included creating wide opportunities for participation by librating nations from the fear of discriminations and hindrances. In this way, the living standards of citizens in the countries could rise uniformly. Lasting peace could be achieved since each nation could achieve strong economic bases and thus kill economic dissatisfaction which is used as a weapon in international wars. (Senior Official of the Bank of England, 1944) Finally, the structure of the Bretton woods system aimed at governmental intervention. For the developed countries, a common idea of government intervention was put across due to the establishment of a liberal international economic venture as indicated by Van (1978). Public management was necessary as a means of reviving the economic recession that came as a result of the war. Economic stability, creation of employment and overall economic growth was the major concern of the policies agreed upon in the Bretton Woods System. Through the Bretton woods system, the role of the government in the growth of national economy was acknowledged. It was thus the responsibility of the state to cater for the citizen’s wellbeing and assure them of an economically stable nation. This could be of great significance in regulation global market imperfections. Additionally, national goals could be prioritized in this regard and thus reduce the negative impacts on the domestic economy. Independent national action could also be strengthened before engaging in international collaborations. Through the Bretton woods system, a nation was meant to curb the factors that lead to emergency of war and thus eliminates its economic impacts. (Peter et. al, 2009) To accelerate economic stability, member states resorted to encourage one another in achieving political peace. They could closely cooperate so as to regulate and control the factors of production. Moreover, management of individual currencies was necessary such that they came up with a common currency to maintain fixed exchange rates between the countries. This could facilitate international trade and it formed the basis for the United States’ vision of liberal trade. Lowering tariffs was one way through which free trade could be successful in addition to maintaining exchange rates and keeping them fixed to cultivate a balanced trade system within the nations. This lead to an ideal capitalist control system. (Mason & Asher, 1973). Through the Bretton woods system, the years of turmoil could be placed behind. The government could not interfere with the currency system in use for trade and thus controlling international trade collectively among the member nations. Moreover, it was impossible for a nation to manipulate the price levels because the policy of currency production was not personal. All in all, the features of the Bretton woods system explored indicate that the system offered great returns although there was much interference by government intervention systems especially in their economies and the currency systems. (Harold, 1996) Why did Bretton woods 'system' breaks down? Despite the organization of the Bretton woods system, it finally broke down in 1971 when the United States terminated the dollar’s convertibility to gold. The system ended and the dollar ceased to be a reserved currency. It instead became a fiat currency. Due to the numerous structural changes, between 1960 and 1970, the international monetary structure could no longer be maintained. The nations developed high levels of own monetary therefore resorted to management of own currencies. However, interdependency was high by the convertibility system which facilitated advancement in the international trade. (Van, 1978) Michael & Barry (1993) argue that monetary interdependency was deepened in this regard. The international currency markets extended more and more. The international banking systems were established creating global shareholders. Multinational banks allowed for global transactions thus and international exchange of capital. Investments could be made anywhere and also speculations for exchange rate fluctuations were made possible. Huge capital flows were observed because of the interdependence in the monetary control systems. A country could not alter exchange rates at will because such interferences could have adverse impacts on some domestic groups economically. Official exchange rates sometimes could pose a risk for political leaders as they remained unrealistic in the market terms sometimes. They could shift from one currency to another depending on its strength with the aim of getting profits. This feature of speculation that is free of any risks as well as availability of great profits was greatly declining thus lead to the breakdown of the Bretton woods system of control. (Michael, 2003) According to Michael & Barry (1993), the US influenced much the decline of the Bretton woods system. The structural change of the US monetary system undermined the overall monetary management structure. The United States ceased to be the economic power that it used to be previously. Japan and E.E.C had taken over the economic prowess in the mid 1960s whose total economic reserves exceeded those in US. The nations narrowed the gap between their economic position and that of US. It was thus inevitable for a more pluralist distribution of economic power which made many nations to be dissatisfied with the US of the dollar as an international currency. It ceased to influence the economic conditions in Europe and Japan because it no longer determined the nature of international liquidity. The shift affected the common factors such as the US spending on massive foreign expenditures, military activities and foreign aid. With the coming up of other super powers, the us could no longer stand the threat of balance of payment constraints and thus impacting the Bretton woods agreement adversely. (Michael & Barry, 1993) Above all, numerous nations were not appreciating the dollar system whose implication was felt during the war between the US and the Soviet Union. The Soviet Union was a very basic force in maintaining the monetary system. On the other hand, the US security dominance made the American economy dominant over Europe and Japan. Trade however grew in European countries due to gross production within the domestic arena. The interruption creates economic tensions thus cutting down the strengths of the Bretton Woods Agreement which eventually resulted into its break down. By the year 1976, all the main international currencies were floating and the exchange rates were no longer appreciated as the key methods used by the nations to administer the monetary policies. (Francis, 2003) What has replaced it? According to Gray (2007), the Smithsonian Agreement followed the 1971 fall with the aim of establishing a system that could develop a multilateral monetary system. The development of the agreement was basically an effort of the US leadership that wanted to replace the previous Bretton woods agreement. A group of ten delegates met at Smithsonian institution in Washington which led to creation of an agreement which declined the value of the dollar. The attempt was to strike a balance in the world financial system using the SDRs only. It was designed as a temporary agreement and it was criticized at that time. The agreement failed a great deal since it was not able to contain the US government in regards to international monetary discipline thus creating much pressure against the dollar. (Michael, 2003) Gold remained a floating asset which kept increasing in terms of value throughout 1971 up to 1972. Currencies abandoned the peg against the devalued dollar which took almost ten years for the industrialized nations to do so. The Bretton Woods currency exchange markets came to a close in February 1973 after the last dollar devaluation gap. It again reopened later when some level of advancement was observed. This later developed into the current monetary control system which is termed as the Bretton woods system 11. This system entails numerous currencies applied in the international market in addition to the US dollar that existed in the past before the decline. (Francis, 2003) Conclusion The Bretton woods system declined completely and was faced out in 1971. This is the time when the single currency structure was abandoned with the Americans urging other European nations to appreciate their currencies due to great deficits in trade. Japan and Germany were at a better position to take the bold step since their payments and balances were favorable. The nations however could not take the step since they feared the risk of increasing the prices of their goods and bringing down the level of exports by raising the value of their currencies. The decline resulted from the US abandoning the dollars fixed value by allowing it to float thus fluctuates against the other currencies. Finally, exchange rates were allowed to float since the Smithsonian agreement could not work. (Gray, 2007) Even to date, various exchange rates float because of the managed float regime. Central banks in many nations come into intervention during such crises to control the extreme changes. Because of the ever impending trade deficits, nations must intervene to support the economic position of its currency. It is evident that despite the numerous advantages derived from a centralized monetary control system; the developing nations may suffer great economic crises if they don’t undertake government interventions where the situation seems wanting. References Francis, J. (2003) Gold, Dollars, and Power – The Politics of International Monetary Relations, 1958–1971. The University of North Carolina Press. Gray, W. (2007) Floating the System: Germany, the United States, and the Breakdown of Bretton Woods, 1969–1973, Diplomatic History 31 (2): 295–323 Harold, J. (1996) International Monetary Cooperation since Bretton Woods; Oxford University Press, USA Mason, E. & Asher, R. (1973). The World Bank since Bretton Woods. Washington, D.C.: The Brookings Institution. pp. 105–107, 124–135. Michael, D. & Barry, E. (1993) A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform. Michael, H. (2003) Super Imperialism: The Origin and Fundamentals of U.S. World Dominance, 2nd ed. London and Sterling, VA: Pluto Press. Peter, C., Barbara, S. & Jesse, G. (2009). Dollars, devaluations and depressions: how The international monetary system creates crises. Bretton Woods Project. Senior Official of the Bank of England (1944) In the Bretton Woods Sequel will flop by Gideon, Ranchman. The Financial Times, retrieved April, 13 2012 from http://www.relooney.info/0_New_3860.pdf. Van, D. (1978) Bretton Woods: Birth of a Monetary System. London: MacMillan Read More