The Bretton Woods AgreementIntroduction The Bretton Wood Agreement of 1944 features in international monetary policy as a key occurrence whose effects are being felt in the contemporary global economics. It is the precedent for the establishment of the International Monetary Fund (IMF), now a force to reckon with, in respect with international monetary oversight and control. It features as a reaction mechanism to the post World War exchange rate stability concerns. The challenges it sought to address were related to an ailing and eventual collapse of the gold exchange standard of the 1920s-30s.
Later on in the 1970s, the system, developed under the agreement collapsed. This collapse is indicated international economies as being the precedent for the haphazard evolution of the current monetary framework. This paper seeks to explore the Bretton Woods Agreement delineating the agreements most important features. It will also feature reasons for its failure and delineates the replacements frameworks. This is with reference to both international economics as well as the impacts on individual national economies. Features of the Bretton Woods Agreement The 1944 US-UK agreement was developed to establish a facsimile of the earlier gold standard of exchange but with a more keen focus on international exchange stability based on the integration of three tenets: capital mobility, free trade and currency convertibility (Landau, 2001).
These are the tenets of the main features of the agreement in establishing an economic order. They would be pursued by the IMF, International Trade organization (ITO) and the World Bank, and then called international Bank for Reconstruction and Development. Literature points out that the main feature of the agreement was the development of a system which incorporates fixed but rather adjustable exchange rates.
These rates would be based on the dollar whose value was majorly underpinned in the value of gold and would be managed by the IMF (Chowla et al. , 2009). In this system, individual country’s currency exchange rates were fixed with narrow limits against the dollar whose rating against gold was fixed. This fixing was run by the country’s central banks which collaborated with the IMF. As such, the national currencies were rated against gold standard, but through the dollar.
Signatories who felt either undervaluing or overvaluing of their currency against the standard were enabled to negotiate with the IMF. This system has important implications on central banks. Unlike in the previous gold standard system, the Bretton Woods system obliged them to be directly involved in foreign exchange market. In this involvement, they had a single role maintaining a demand-supply relationship for individual currency at perfect elasticity relative to the par value. This obligation meant that the system withdrew the banks’ role and discretion for reserves accumulation. Accumulation was done, only with respect to balance of payment equilibrium condition.
As such, (Montiel, 2009) indicates that the nominal exchange rate was a variable of an exogenous policy, on one hand, while on the other, the banks international reserves stock was endogenous. The agreement was a compromise between Keynes’ and White’s memoranda. However, White was more dominant. The signatories of the compromise committed themselves to maintaining currency inter-convertibility. In this commitment, national economies were required to value their currencies against the dollar or gold. This was a new exchange regime in which rates were to be set at a ±1 percent margin with the par values being expressed relative to US dollars or gold terms.
This rate was not permanent, as such, but allowed for devaluations of the currencies occasionally and on needs basis in order to take care of any fundamental disequilibria in signatories’ balance of payments. As such, the regime has been described as an adjustable peg system. The disequilibria and fluctuations not more than 1 percent would be addressed by adjusting the par value (Kevin, 2009). This would be done by national economies through market intervention.
Any variation in this excess required the consent of the IMF. A fundamental equilibrium exits when an economy faces balance of payment disequilibria, repeatedly specific to given rate. In the system, rates were controlled in a stepwise way in which their stability and flexibility were combined. In this integrative approach, care was taken to avoid devaluation. In this organization, the US economy was positioned to serve the role of the system’s epicenter with multiple roles. It served to balance of payments deficits, through the IMF, and providing international liquidity.
In addition, it was expected to absorb exports from all the other economies as a central market (Hall et al. , 2009). This led to undervaluing of economic peripheries in the name European and Asian market. This element features later in the 1970s as a key pressure point against the dollar.