Bretton Woods System

sunandaC

New member
Bretton Woods System

During the world wars, economies of almost all the countries suffered. In order to correct the balance of payments disequilibrium, many countries devalued their currencies.

Consequently, the international trade suffered a deathblow. In 1944, following World War II, the United States and most of its allies ratified the Bretton Woods Agreement, which set up an adjustable parity exchange-rate system under which exchange rates were fixed (pegged) within narrow intervention limits (pegs) by the United States and foreign central banks buying and selling foreign currencies.

This agreement, fostered by a new spirit of international cooperation, was in response to the financial chaos that had reigned before and during the war.

In addition to setting up fixed exchange parities (par values) of currencies in relationship to gold, the agreement established the International Monetary Fund (IMF) to act as the "custodian" of the system.
Under this system,

 Each member country set a parity value for its currency against the dollar and gold, and undertook to use central bank intervention to maintain the exchange rate within 1% of its parity
 The dollar’s value against gold was fixed at $35 an ounce, and the US government undertook to buy and sell gold in exchange for dollars at this fixed rate.

 Member governments were obligated to defend the exchange rates within a narrow band of about 1 percent above or below parity (the official exchange rate).

 The revaluation or devaluation of a currency was called for only in the case of "fundamental disequilibria" (chronic surpluses or deficits in a nation's balance of payments).

 In case of insufficiency of the reserve amount available with a member country, the Monetary Fund could draw from their quota through Special drawing Rights (SDRs) with the IMF.

Despite the fact that the IMF expressed currencies in terms of gold, in practice currencies were expressed in terms of dollars, and the Bretton Woods Agreement became a rigid dollar standard. This situation arose because the United States was the only country that agreed to redeem its currency for gold.

Naturally, the dollar could not serve as both a national and an international currency, since under these conditions international liquidity (total trade financing potential) could be expanded only through larger balance-of-payments deficits on the part of the United States.

The ensuing massive United States balance-of-payments deficits led to an erosion of confidence in the dollar as a store of wealth, the cancellation of the gold convertibility of the dollar in August 1971 by the United States, and the signing of the Smithsonian Agreement in December 1971 by the major trading nations, referred to as The Group of Ten. This was an attempt to restore monetary order by devaluing the dollar and establishing a wider parity band (plus or minus 2.25 percent). The Smithsonian agreement was reached wherein USA agreed to devalue its currency provided Germany and Japan revalued their currencies.

Despite this effort, the United States continued to experience balance-of-payments deficits. In early 1973, an additional 1 percent devaluation of the dollar, along with agreement of several European Economic Community (EEC) member nations to let their currencies float against the dollar, dealt the death knell to the Bretton Woods and Smithsonian Agreements.

Allowing exchange rates to float in the midst of financial chaos was like setting a boat adrift in the middle of a storm--smooth sailing was next to impossible. To make matters worse, the tripling of oil prices by the Organization of Petroleum Exporting Countries (OPEC) during 1973 hit the foreign exchange markets like a hurricane, causing global inflation to raise with the tide.

However, the circumstances under which floating exchange rates were introduced are by no means the only problem with the system. The lack of an official common denominator and the diminished authority of the IMF have not helped matters. Money has become a commodity that is bought and sold at market prices.

In the international economic sense, money has become a circular concept--defined only in terms of the price that each currency will bring in other currencies.
In addition, three important trends developed that contributed to the problem.

1. There was a persistent increase in liquid resources available to the private sector relative to the monetary reserves held by the central banks. (The money supply was no longer tied to a country's gold reserves and the multiplier effect allowed for this growth.)

2. There were constantly improving techniques permitting market participants to shift large amounts of capital rapidly from one currency to another.


3.There were improving communication methods making information available instantaneously to a growing number of analysts throughoutthe world. Thus with the uncontrollable capital flows, major countries suspended their obligation to intervene in the market and the Bretton Wood System, with its fixed parities, was effectively buried.
 

rosemarry2

MP Guru
Bretton Woods System

During the world wars, economies of almost all the countries suffered. In order to correct the balance of payments disequilibrium, many countries devalued their currencies.

Consequently, the international trade suffered a deathblow. In 1944, following World War II, the United States and most of its allies ratified the Bretton Woods Agreement, which set up an adjustable parity exchange-rate system under which exchange rates were fixed (pegged) within narrow intervention limits (pegs) by the United States and foreign central banks buying and selling foreign currencies.

This agreement, fostered by a new spirit of international cooperation, was in response to the financial chaos that had reigned before and during the war.

In addition to setting up fixed exchange parities (par values) of currencies in relationship to gold, the agreement established the International Monetary Fund (IMF) to act as the "custodian" of the system.
Under this system,

 Each member country set a parity value for its currency against the dollar and gold, and undertook to use central bank intervention to maintain the exchange rate within 1% of its parity
 The dollar’s value against gold was fixed at $35 an ounce, and the US government undertook to buy and sell gold in exchange for dollars at this fixed rate.

 Member governments were obligated to defend the exchange rates within a narrow band of about 1 percent above or below parity (the official exchange rate).

 The revaluation or devaluation of a currency was called for only in the case of "fundamental disequilibria" (chronic surpluses or deficits in a nation's balance of payments).

 In case of insufficiency of the reserve amount available with a member country, the Monetary Fund could draw from their quota through Special drawing Rights (SDRs) with the IMF.

Despite the fact that the IMF expressed currencies in terms of gold, in practice currencies were expressed in terms of dollars, and the Bretton Woods Agreement became a rigid dollar standard. This situation arose because the United States was the only country that agreed to redeem its currency for gold.

Naturally, the dollar could not serve as both a national and an international currency, since under these conditions international liquidity (total trade financing potential) could be expanded only through larger balance-of-payments deficits on the part of the United States.

The ensuing massive United States balance-of-payments deficits led to an erosion of confidence in the dollar as a store of wealth, the cancellation of the gold convertibility of the dollar in August 1971 by the United States, and the signing of the Smithsonian Agreement in December 1971 by the major trading nations, referred to as The Group of Ten. This was an attempt to restore monetary order by devaluing the dollar and establishing a wider parity band (plus or minus 2.25 percent). The Smithsonian agreement was reached wherein USA agreed to devalue its currency provided Germany and Japan revalued their currencies.

Despite this effort, the United States continued to experience balance-of-payments deficits. In early 1973, an additional 1 percent devaluation of the dollar, along with agreement of several European Economic Community (EEC) member nations to let their currencies float against the dollar, dealt the death knell to the Bretton Woods and Smithsonian Agreements.

Allowing exchange rates to float in the midst of financial chaos was like setting a boat adrift in the middle of a storm--smooth sailing was next to impossible. To make matters worse, the tripling of oil prices by the Organization of Petroleum Exporting Countries (OPEC) during 1973 hit the foreign exchange markets like a hurricane, causing global inflation to raise with the tide.

However, the circumstances under which floating exchange rates were introduced are by no means the only problem with the system. The lack of an official common denominator and the diminished authority of the IMF have not helped matters. Money has become a commodity that is bought and sold at market prices.

In the international economic sense, money has become a circular concept--defined only in terms of the price that each currency will bring in other currencies.
In addition, three important trends developed that contributed to the problem.

1. There was a persistent increase in liquid resources available to the private sector relative to the monetary reserves held by the central banks. (The money supply was no longer tied to a country's gold reserves and the multiplier effect allowed for this growth.)

2. There were constantly improving techniques permitting market participants to shift large amounts of capital rapidly from one currency to another.


3.There were improving communication methods making information available instantaneously to a growing number of analysts throughoutthe world. Thus with the uncontrollable capital flows, major countries suspended their obligation to intervene in the market and the Bretton Wood System, with its fixed parities, was effectively buried.

Hi there,

Here I am up-loading Overview on The Bretton Woods International Monetary System, please check attachment below.
 

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