Bretton Woods AgreementIntroduction Bretton Woods Agreement is a milestone platform for financial and exchange rate management founded in 1944. It was established at the United Nations Monetary and Financial forum that took place at Bretton Woods, New Hampshire in July, 1944 (Van, 1978). The conference was attended by delegates from 44 United Nations whose mandate was to complete programs for the post-war financial order and currency support that was circulating amongst the Allied nations. Under this system the rules were made for commercial and monetary relations amongst the world's key industrial nations in the mid-20th century.
This system was the initial example of a completely consulted monetary order meant to oversee monetary relations amongst sovereign nation-states. Van (1978) claims that Nations tried to revitalize the gold principle subsequent to World War I; however it collapsed completely at the time of the Great Depression that happened in the 1930s. Various economists maintained that observance to the gold principle had checked monetary authorities from increasing the money supply quickly enough to revitalize economic activity. Beginning with the economic state following the World War I, this paper outlines the significant features of the Bretton Woods Agreement, Why the Bretton Woods ‘system’ broke down and what has replaced it. Significant features of the Bretton Woods Agreement In the Bretton Woods arrangement, the central banks of the states except for the United States were offered the duty of retaining fixed exchange rates between their the dollar and their currencies.
This was done by dominating the markets for foreign exchange. If a state's currency was very high in relation to the dollar, the central bank would trade its currency in return for dollars, compelling down the price of its currency (Harold, 1996).
On the other hand, if the worth of a state's money was very low, the state would purchase its own currency, thus compelling up the price. A high degree of agreement amongst the influences on the objectives and means of international economic management enabled the decisions agreed upon by the Bretton Woods Conference. Its underpinning was based on a common capitalism belief. The developed nation's governments disagreed on the form of capitalism they favored for their national economies.
For instance, France favored better planning and state involvement, while the US preferred fairly limited state intervention. According to Wild & Wild (2012), all depended heavily on private ownership and market systems of the production means. It is the comparison as opposed to differences that look more outstanding. Every government that was taking part at Bretton Woods’s conference approved that the monetary turmoil of the interwar phase had created many important lessons. There were four major features of the Bretton Woods Agreement. First, the exchange rates were often defined as the ‘freely floating’, created by market demand and supply for currencies.
There were different plans set out. Critics claimed that the freely floating rate of exchange remains ate the optimal level, stopping overvaluation or undervaluation, and could in hypothesis offer great stability while enabling the states a great degree of deciding their personal fiscal policies. In normal practice, though, floating rates of exchange have been marred by huge volatility, with extensive swing on month and yearly routine and considerable conflicts from fundamental economic dynamics (Gray & William, 2007 p.
302). All the key states have got involved mostly in the market for foreign exchange to secure their currencies with a divergence level of achievement.