The paper 'Features of the Bretton Woods Agreement" is a good example of a macro and microeconomics case study. Bretton Woods System is a term used to refer to the 20th-century system of monetary management. This system consisted of rules that defined commercial and financial relationships among member countries; that were mostly industrial countries of the time. The Bretton woods system is a classical example of an agreed monetary relations order governing countries. Background When the First World War came to an end, countries tried to stabilize their economies to the way they were before the war.
Nations needed to go back to the old financial order as soon as possible. Leading economies across Europe got together to discuss possible solutions, and one of their proposals for getting back to financial security was the gold system. Under this system, a country was to have gold reserves, in addition to the foreign currency, and monies in circulation. The gold system, however, collapsed in 1929 because of the great depression, which led to overvaluation or undervaluation of the participating currencies (Bordo, Michael D. & Eichengreen, Barry, 1993: 124). Existing financial relations were affected, and countries worked individually by increasing their exports so as to reduce their deficits.
Nations that managed to deflate their currencies quickly while maintaining their strength in the market succeeded greatly. The result of the deflation competition was the failure of credit institutions due to bankruptcy, high unemployment and high inflation rates. Conferences were held to address the economic failures that caused the great depression, but none yielded a solution. It was not until the final times of the Second World War that considerable steps were made towards addressing the economic failures.
Negotiations towards the formation of a reliable monetary system were initiated; together with a supervisory institution to monitor it once it was in place (Onkvisit, Sak & Shaw, John, 1997: 63). In July 1944, an international conference with delegates from 44 countries met in the United States in the district of Bretton Woods in New Hampshire. Delegates attending the conference discussed the course to recovery after the Second World War. The previous period had been market by unstable exchange rates and unfavourable trade rules among other monetary troubles.
The American and British government explored the possibility of attaining stable exchange rates through multilateral payment systems. The two governments drew plans of how the new monetary order should operate. Maynard Keynes, a renowned economist and advisor to the British government treasury drew up the plan proposed by the British government. The American government’ s draft was written by a panel of experts led by the then deputy secretary of the American treasury, Harry Dexter White. Features of the Bretton Woods Agreement Maynard Keynes Proposal His plan advocated for the formation of an international financial institution which would work as a central bank to all the member countries.
This institution was to facilitate an international currency called Bancor, whose value was to be fixed to the value of gold. The member countries would then set their currencies to function under a par value system using their account at the International Clearing Union so as to facilitate the settlement of trade (Moggridge, 1980: 207). Countries that attain a trade surplus will be eligible to receive interest while those with trade deficits will be able to overdraft with an interest.
Keynes plan allowed countries to change exchange and trade controls so as to enable reconciliation of full employment with the payment balance. He suggested a certain degree of flexibility by the clearing union on the exchange rates. He also wanted to address the problem of imported unemployment by limiting foreign deflationary policies affecting member countries. Keynes wanted the international monetary system to have substantial liquidity of around $23 billion to allow for its smooth running (Onkvisit, Sak & Shaw, John J, 1997:80).
Keynes draft was against going back to the gold standard which had failed in the 1920s.
Bordo, Michael D. & Eichengreen, Barry (1993). A Retrospective on the Bretton Woods System. Chicago and London: The University of Chicago Press
Council on Foreign Relations. (1972). Smithsonian Agreement and its Aftermath: several views.
Kenen, Peter B. (1994). Managing the world economy: fifty years after Bretton Woods. Washington DC: Institute for International Economics
Moggridge, Donald (1980). Activities 1941 - 1946: shaping the post-war world, Bretton Woods and reparations. London: Macmillan
Onkvisit, Sak & Shaw, John J. (1997). International Marketing: Analysis and Strategy. New Jersey: Prentice Hall