Introduction During the Second World War, there were concerns about instability in the exchange rate and disorders in international trade and the monetary system. These challenges therefore influenced the need for change in the existing international monetary system. Consequently, in despite of the fact that the Second World War was not complete, a conference was held in Mount Washington Hotel in Bretton Woods in order to develop a fresh monitory structure that was to govern the commercial and financial relations among the leading economies of the world (Hastedt, 2009).
The Bretton Woods Agreement was an international monetary system that was initiated in 1994 with the objective reconstructing the economic order after the war. This particular paper seeks to evaluate the most important features of the Bretton Woods Agreement. The scope of the analysis will also be grounded on evaluating why the Bretton Woods ‘system’ broke down and what has replaced it. One of the substantial features of the Bretton Woods agreement was the adoption of a semi-fixed exchange rate system that was referred to as the adjustable pegged exchange rate.
Carbaugh, (2011) discloses that the main feature of the adjustable peg system was that the currencies used by the members of the agreement were tied to each other in order to ascertain a stable exchange rate for financial and commercial transactions. Nevertheless, when the balance of payment shifted from its long term equilibrium position, a nation was allowed to repeg its exchange rate through revaluation or devolution policies. The member nations made a principle agreement to protect the existing par value even in the event of disequilibrium in the balance of payment.
Furthermore, under the adjustable pegged exchange rate, the member states were expected to utilize the monetary and fiscal policies in order to correct the existing payment imbalances. However, if reversing a persistent payment imbalance resulted to a severe interruption to the domestic economy, in terms of unemployment and inflation, then the member nations were obligated to correct the disequilibrium through reppegging their currencies up to 10% without getting permission from the IMF and by greater than 10% with the funds permission (Carbaugh, 2011). Another significant feature of the Bretton Woods agreement was the adoption of an exchange standard that was based on gold and the dollar.
Goddard (2006) highlights that; this particular proposal was advanced by the U. S delegation that was led by Harry Dexter White. According to the delegation, the integration of the gold exchange standard arose from the logic that there was need to revive the use of gold into the international monitory system. This is because as Bordo and Eichengreen, (2007) disclose, the gold standard had the lowest rate of inflation. Although during the First World War, many nations found it difficult to convert their currencies into gold and thus leading to the collapse of the gold standard, which further disrupted international trade.
The Second World War however ignited the need for an integrated monetary system which encompassed the use of gold and the dollar. McEachern, (2008) highlights that the dollar was selected as a major reserve currency based on the fact that the US had an economy that was stronger and was not affected by the war. Consequently, all the exchange rates were then fixed in terms of the dollar and the US which had the most of the reserves of gold, stood the opportunity to convert foreign dollar holdings into gold at a rate of $ 35 per ounce.