THE BRETTON WOODS AGREEMENTThe most important features of Bretton Woods AgreementWhen the World War II was over, the Bretton Woods System was the successor of the gold standard monetary system (Orin Kirshner, 1996). As a new system adopted the top mast industrialized countries had to come together and come up with an agreement which came up with the following features: -The International Monetary Fund (IMF) –This IMF was had a responsibility of supervision over the policies and rules of a new fixed exchange rate regime and also had to ensure that stability of other countries was maintained thus promoting foreign trade (Uzan, 1996).
Also the World Bank was created as part during the comprehensive plan for starting a new IMS. The U. S dollar turned out to be the only currency supported by gold, after it reinstated gold as the vital convertibility standards for currencies all over the world (Kim, 2011). During the agreement, there was establishment of an exchange rates system which was fixed on the modifiable peg system-Here, there were gold fixed dollars whereby, the fixed rates were relatively expressed to the dollar since the rates of exchange were fixed and not favoring the gold (Orin Kirshner, 1996).
Sterling was pegged from 1949 to 1967 at two point eight. During this time the involved countries were grateful to interfere with the markets of foreign exchange hence maintain the authentic rates at one percent of the two point eight. The IMF rules permitted the governments to modify the pegged rate- Pegging of a currency is connected to stability, mostly in the urbanizing countries whereby a country may come up with a decision of pegging its currency thus creating a constant impression for foreign investment (Michael D.
Bordo, 2003). In addition, investors having a peg are able to know their investment values are thus reducing worries about the daily fluctuations. When currencies are pegged, inflation rates are lowered thus generating demand due to high confidence in currency stability (Primer, 2003). This was done to cause an effect of either devaluing or revaluing the currency, if and if only when the country experienced surplus or deficit on balance of payments of an elementary nature. They also agreed to make the dollar the most important worldwide reserve asset- If there was any need of conversion of currency into gold, only the USA did the conversion.
However in 1950’s the largest gold stocks were held by USA and this was worldwide thus dollar becoming valuable as much as the gold hence making other countries willingly and majorly use the dollar (Michael, 2003). During this time the agreement seemed to work very well and in the 1950’s the world trade growth was at record rates thus the world experiencing the golden age of capitalism.
All in all, the Bretton Woods System collapsed due to certain problems which urbanized in two decades time (Uzan, 1996). Reasons why Bretton Woods Systems Broke DownThe US were expected to process a number of deficits in a balance of payment in more than 25 oncoming years after the down fall of the system, so that the currency could be reserved for the world (Kim, 2011). The reserves of U. S. gold had depleted by early 1970s whereby it led to minimal gold in its treasury that could cover all the dollars for U. S.
preserved in central banks of foreign countries. Finally, in the year 1971 all the gold windows were closed meaning that they had closed the chapters of exchanging their gold which was held in the other foreign countries’ reserves for the U. S dollar (James, 2009). The following are some of the reasons of the Bretton Wood Brake down: -