Important Features of the Bretton Woods Agreement - Case Study Example

Surname: Presented to Institution Name, Location Date Bretton Woods Agreement Introduction The Bretton Woods conference is the name that was given to the conference that was held at Breton Woods in the city of New Hampshire, the conference intentions were to form an international monetary system that was meant to manage money by establishing rules to be used for the mercantile and economic relation among the chief industrial countries in the mid 20th century. The Breton Woods system was among the initial example of fully negotiated monetary order that was proposed to manage the relationship among the independent nations in terms of financial status (Schwartz, 2003). Seven hundred and thirty delegates from about forty four nations met at mount Washington hotel that was in Bretons woods I united states in a bid to prepare for the rebuilding of the international economic system, this was happening while the world war two was raging fiercely. The delegated, who attended the meeting deliberated during 22nd of July the year 1994.the they signed the agreement on the last day of the delegate meeting (Mason & Asher, 2008). The international monetary fund and the international bank for reconstruction and development were the two organisation who came up with the rules, regulation and the procedures that were being used in the in the management of the monetary system. These two planners are today members of the World Bank group. These organisations started being functional in the year 1945 this was after many nations had ratified the agreement (Schwartz, 2003). The most important feature of the Breton woods system was that it was compulsory for all member states obligation to adopt the policy on monetary and maintain the rates of exchange by Comparing their currency to the United States dollar and the capability of the international bank for reconstruction and development to bring together the temporary differences in the payments (Mason & Asher, 2008). Important features of the Breton Woods Agreement The most important features of the bretton woods agreement are the articles of agreement that were made by the IMF, the articles of agreement define the newly made international monetary system of fixed rates of exchange. In spite of the breakdown of the gold standard in the recent past, the delegates of the forty four countries that had attended the meeting in bretton wanted to still have system in which the rates of exchange were fixed (Kirshner, 2004). The system that was brought up by harry white before the commencement of the conference was to re-establish the system of having fixed rate of exchange, but the fixed exchange regime at the moment was to allow economic adjustment for a very short term. The main anchor to the new system that was formulated the United States dollar; this currency would be convertible to gold at the rate of $35 per ounce (Mason & Asher, 2008). The countries that participated in the agreement would then list their exchange rates in concurrence to the United States dollar, of which it would then be converted to gold. After the Second World War the United States held highest amount of gold supply in the world due its renowned dominance in first position in the world economy, this made the United States dollar the most appropriate currency to be used in the bretton woods system. The dollar also became known to be the international reserve currency, it also acted as a sign of global economic interdependency and without forgetting the strength of the United States economy (Kirshner, 2004). The main articles of IMF gave a clear distinction of the agreement of that was consisted in the new international monetary system that was characterized by the fixed rates of exchange agreements. The most pronounced difference between the Bretton woods agreement and the gold standard is the ability to make the short term economic adjustments, this occurred especially when the country is faced with the most fundamental disequilibrium. Fundamental disequilibrium in this meticulous context is used to explain the perseverance of deficit or surpluses in a country’s balance of payments at the fixed rate of exchange (Kirshner, 2004). The solution that was reach on by the delegates at the bretton woods conference was the international monetary fund IMF. The IMF was to do work as the lender of the last resorts and as a watchdog to see that the policies that were put in place to be always in consistency with the stability of the exchange rates (Mason & Asher, 2008). Another major development of the bretton woods conference was the international bank for reconstruction and development (IBRD). In spite of the fact that this bank is not related to the international monetary system directly. I was intended by the founders who were the delegate in the bretton woods agreement that the bank promote the economic development in the world. Therefore the bank was formed to establish the long term goals of the developing countries by helping them build their good standard infrastructure (Schwartz, 2003). After the conference which ended on the 21st July 1944, the delegates approved the participation of the United States in the IMF and IBRD, this decision was to make the United States the main player fin the agreement and make the agreement a reality. The IMF could only have been made if the other participating nation had agreed to the articles that were presented by the IMF. These other nations had to therefore wait until the United States had agreed on their participation in the fund. In the fear of rejection the secretary of the bretton woods agreement and other planners from the United States informed the public of the great things to be gained by the formation of the IMF and IBRD by forming the radio scripts, articles and other pamphlets. This action of taking their arguments to the public was bold and brilliant (Kirshner, 2004). Instead of telling the American public of the intricate details of the agreement they told them that IMF and IBRD was planning to attend to the world’s security and expansion of trade. The treasury officials to the organisation claimed that IMF was very essential to American future prosperity and employment; they also claimed the idea would make America the leader of the international cooper ration in the post war world. In July 31st 1945 the president of the United States at the time the agreement contract of bretton woods system. Other countries signed the contract and this gave life immediately to the IMF (Kirshner, 2004). The countries that participated in the bretton woods agreement had made a commitment that their countries central banks would maintain fixed rates of exchange between their currencies and the United States dollar, and if their currency value became too low in comparison to the value of the dollar they would buy up their currency in the foreign exchange markets. On doing this it will lead to an increase of their supply which would automatically rise the price of the currency and if their currency went high in relation to the dollar they would print mare of their currency increasing their supply and therefore lowering their price(Schwartz, 2003). The members of the Britton woods agreement reached a consensus too that no trade warfare was to be heard of, for example intentional lowering of the lowering of a country’s currency with an intention to increase trade. However, they arranged to adjust their currencies if the foreign direct investments begun to stream into their different countries in such a manner that they can destabilise the economy of the country (Kirshner, 2004). The gold standard system and the countries who had attended the world monetary conference had never reached an agreement due to the real fact that the world had never experienced a depression of very high intensity like the great depression or even the thread of the Second World War. When the Second World War begun and the great depression intensified the world was in danger or fear of experiencing the very bad economic horrors, this was expected to worsen due to lack of monetary coordination amongst the nations (Schwartz, 2003). Two decades after the signing of the bretton woods agreement, the monetary system seemed to work very well, the exchange rates were very stable and the economics of various countries grew rapidly and the rates of unemployment in the nations reduced and stayed low(Hull, 2006). The rate o inflation in every industrialised nation was low except for Japan, it was also noted that the inflation variability and persistence was very low. Due to the reason that have been highlighted, the two decades after the end of the world war two which were called the golden age due to the unparalleled level of trade and expansion. However, there were innate problems that existed with the bretton woods system which caused eventual end of existence (Kirshner, 2004). The adjustable part of the system meant that currency could be revalued or either devalued if the officials considered to be in trouble. This part of the system elicited confidential speculations by giving the audience with the inducement to put on the market their currency. This was thought to be in need of changes an explanations had it that the speculations meant that it was next to not possible for the monetary establishment to seize the fixed rates of exchange (Gray, 2007). Another problem that arouse within the system was that some countries such as Japan and Germany begun operating large balance of costs surpluses as they begun accumulating the international reserves. Japan and Germany could have liked their currencies and that way they could have brought down the surpluses (Schwartz, 2003). Therefore appreciating their currencies would mean their products for exports were not really very interesting to the global market. Since the two countries Japan and Germany were pushing so hard for the economic growth that is led by exportation of products, hence, they did not have an incentive for them do so. The IMF also did not have the power in their governing regulation to force both Germany and Japan to love and appreciate their currency (Kirshner, 2004). The dollar which was us as a reference currency had dominated surplus in other parts of the world and this showed a growing shortfall in the United States deficit. The balance of payments that is the dollar conquered the asset to other nation’s liabilities to the United States. The united state gave a trail in attempting to solve the problem of draining dollars by enacting three major policies the include the tied aid, the interest equalization of taxes, and finally the voluntary capitol control program. The program that was tied aid program collectively used credits, loans, and guarantees’ that were being made accessible by the import-export bank it was based in the United States with concessional financing or gifts in order or organize for the sell abroad of the united states and services. The interest equalisation taxes were made to be so high such that no country apart from the United States was able to afford the bonds, buy the stocks, or borrow the United States dollars. The program meant to control and prevent the United States businesses from investing in the countries abroad or even spending there. This program worked for a very short time and in 1965 the balance of payment deficit was very low this was happening for the first time since the establishment of the bretton woods agreement (Schwartz, 2003). In an attempt to reduce the balance of payments by the United States government failed due to several event that happened at the same time that leaked the US dollar abroad. The involvement of the US with the Vietnam led to more citizens of the country travelling abroad this made the trade surplus of the US to fade causing the dollar to go down in value and therefore the united state payment deficit to intensify further (Schwartz, 2003). After some time and in 1968 the United States ceased from saving the confidentially held dollars for the gold and freely left their determination of the price of gold to the market itself. This led to the two-tier gold price determination system, which did not effectively solve the problem and the US current deficit continued to intensify. In the year 1971 the asset in terms of dollars that were held by the US foreign central banks three times more compared to the holding that the US held per $35 per ounce of fold rate. The US had only one choice to take and that was to shrink its economy or either way imposes exchange controls. However, the US decided to change the regulations of the international monetary system completely, the US president suspended the ability of the dollar being converted into gold and this ended the Breton woods system of the adjustable fixed rates of exchange (Kirshner, 2004). Conclusion In spite of the fact that the bretton woods system era came to an end, one must conclude that it proved to be effective and it did achieve its goals successfully. The main aim of the bretton woods meeting was to prevent the occurrence of another economic crisis like the one that happened during the period between the world war one and the occurrence of the world war two by creating a strong stability in the global economy by creating and promoting international cooperation. Without any doubt the Bretton was very successful in making this a reality. After the agreement the economy of the world grew at very good rates after the world war two and there has never existed the world war since the existence of the Bretton woods conference. In addition to the success in avoiding the repetition of the economic crisis they also led to global interdependency through the creation of the international monetary fund and the international bank for reconstruction and development (World Bank). The two institution IMF and the IBRD, made sure that happiness was spread throughout the world, today even though the agreement collapsed the IMF continues to stabilise the international financial status and up to date the world bank makes sure poverty is maintained and long term economic growth seen through. References Garritsen de Vries, M. (London). The Bretton Woods Conference and the Birth of the International Monetary Fund. The Bretton Woods-GATT System. Ed , 3-18. Gray, W. G. (2007). Floating the System: Germany, the United States, and the Breakdown of Bretton Woods,. Diplomatic History , 295–323. Hull, C. (2006). The Memoirs of Cordell Hull. New York: Macmillan. Kirshner, O. (2004). Introduction. The Bretton Woods-GATT System. London: M.E. Sharpe. Mason, E. S., & Asher, R. E. (2008). The World Bank Since Bretton Woods. Washington, D.C: The Brookings Institution. Schwartz, A. J. (2003). Do We Need a New Bretton Woods. Cato Journal , pg.21. Read More