Britton Woods SystemIntroductionEconomic environment has changed over time. There is increasing capital movements and is increasingly becoming uncontrollable. This requires stabilising systems. Such a system was developed at the Britton woods conference some years ago (Lavelle, 2011). The system that evolved from the 1944 UN monetary and financial conference became to be known as the Britton Woods System (Palicki, 2009). The Britton Woods agreement was signed during the conference and was aimed to create Britton Woods System that had fixed exchange rates (Cherunilam, 2007). The system delayed in its implementation until late 1950s and collapsed in 1971 due to various factors (Froyen, 2008).
In recent years, the leading industrial countries have been advocating for the revival of the reason and role as well as the spirit of the Britton, system to withstand the mounting size of capital flows and the global trade. Prior to 1944, many countries tried to resuscitate the gold standard following the First World War. However, this collapsed completely over the great depression of the 1930s (Larry, & Dan, 2008). The main cause of the failure was attributed to inability of the system to allow rapid expansion monetary system to necessitate economic activity (Lavelle, 2011).
This resulted in the convention of the representatives of the world’s leading industrialised nations held a meeting in New Hampshire to create a new international monetary system in the year 1944 (Adrews, 2008). This is because the US as at that time was responsible for more than half of the globe’s capacity to manufacture (Fangerau, 2005). In addition, it also held most of the gold from the universe. The leaders therefore concluded that they needed to tie the currencies from the world to the dollar (Herr & Kazandziska, 2011).
This essay will discuss the main features of the Britton Woods System. It will also discuss the main causes of the collapse of the system and what replaced the system. Important features of the Britton Woods AgreementThe Britton Woods Agreement was signed in 1944 during a United Nations conference on monetary and finance. The conference was held in Britton Woods. The plans for agreement were an amalgamation of the American White memorandum and the British Keynes memorandum.
The Keynes plan was based on the idea that a new international financial institution, International Clearing Union, would be created that play a role similar to that of a bank (Lien, 2008). The International Clearing Union (ICU) was to provide an international currency whose value would be fixed in terms of gold (Gray, 2007). Other countries would then set par values in terms of this currency and open accounts with ICU that would be utilized for settling trade (Lavelle, 2011). The ICU would extend interest to countries with surplus and overdraft to countries with deficit.
Countries receiving overdraft were to pay an interest on such arrangement (Hagele, 2010). The Keynes memorandum also allowed countries to alter exchange rates and to apply exchange and trade controls. This was aimed at reconciling full employment with payments balance (Palicki, 2009). the memorandum also suggested creation of liquidity that would allow smooth running of the international monetary system (Hagele, 2010).