Introduction
Bretton woods System is a management monetary rules which were established for both commercial and financial relations among the world’s industrial states. Ideally, this rules focused on rebuilding the international economic system during the Second World War. 730 delegates from 44 associated nations gathered at the Mount Washington Hotel located in Bretton Woods in the United States. During the Bretton Worlds Conference, which occurred between 1st and 22nd July 1944, an agreement was signed (Bordo & Eichengreen 64).
In order to come up with this rules, the delegates came up with the International Monetary Fund and the International Bank of Reconstruction and Development. These banks today form a portion of the World Bank Group. As a result, these banks became operational in the year 1945 following an agreement of various countries. There was a strong believe that the system would help the foreign trade equilibrium. Ideally, this could happen only if the countries with payment surpluses increase their imports from countries with the deficit.
Bretton Woods System could not work without the assistance of the International Monetary Fund. Ideally, the IMF was very crucial to act as the global central bank in order to regulate the amount of the money supply as well as to regulate the exchange rate. In addition, the system could not work since it would be affected greatly by the trade barriers or increased interest rates. Ironically, the member countries under the system decided not to give the IMF power of a global central bank. However, they gave the IMF the power to hold gold and a fixed pool of national currencies. Furthermore, they all agree that every member should have a limit in its contribution to the global bank. Al in all, the Wold bank and the IMF was of much importance to the development of the Bretton Woods System (Bordo & Eichengreen 124).
Bretton Woods System was established following the globalization that led to rapid economic changes. These economic changes led to capital movements that became more enormous and less controllable. Following these issues, a new system was required to stabilize the economic environment changes. Nevertheless, this system was adopted in order to cater for the growing size of the international trade and capital flows.
Bretton Woods System was developed by borrowing much from the two famous economists who are Harry Dexter White and Maynard Keynes. Ideally, this means that the delegates from allied countries who were present in the conference used the work of the above-mentioned economists in order to develop the Bretton Woods System. Ever since those years, the United States of America remains the dominant power of the Bretton Woods System. America got an upper hand since after the Second World War it had the biggest economic potential. The U.S. dollar remained the currency with the highest demand of all other nations. Ideally, this meant the USA currency to have the highest purchasing power, and it was also the only currency that was supported by the gold. As a result, the United States dollar became the standard world’s currency.
What is the goal and design of this system?
Bretton Woods System goal was to enhance the economic stability of the major economic powers of the world. Ideally, it was developed to address all the economic imbalances without upsetting the entire system. Bretton Woods System was born after the conference that was held in the American resort village in the New Hampshire. It took the planners almost two and half years to plan for the post-war monetary reconstruction. The planners where drawn from the treasuries of the United States and the United Kingdom. Although the conference involved all the 44 allied nations and Argentina as a neutral government, the conference discussions were dominated by two rivals’ plans one developed by John Maynard Keynes of Britain and the other developed by Harry Dexter White of the United States.
Throughout the entire discussion, there were gaps between the two plans as it regards to the issue of the future access international liquidity. However, there was also commonality in meaning among the government involved in the conference. As a result, these governments noted that the monetary issues of the interwar period brought forth various lessons to the nations of the world. Following this common understanding, these governments identified all the monetary chaos with an aim of preventing them from repeating themselves in the near future.
The negotiators thus came to an agreement that the interwar period had various disadvantages to the flexibility of exchange rates. Since 1930s, the floating rates discouraged trade and investment. Nevertheless, the governments agreed in the event that the exchange rates were unable to float freely, the states would need to have an adequate supply of monetary reserves. Moreover, the governments also agreed that it was important to avoid any recurrence of economic warfare. To support the idea, they came up with binding rules that ensured that the states remove the existing exchange controls that limit currency convertibility and go back to the system of free multilateral payments.
Finally, the negotiators also agreed that there was a great need to establish an institutional forum for international cooperation on all monetary matters. With all this four important points, the Bretton Woods system came to existence. As a result, the International Monetary Fund was also established. The IMF was established to serve three functions which include; providing a forum to enhance cooperation among governments, administering all the rules that govern the currency convertibility and values and supplying supplementary liquidity.
The system played a great role in the expansion of investments not forgetting a good microeconomic performance. Ideally, this system led to low inflation rates on average for many industrialised countries during the period of the floating exchange rate. Nevertheless, the system was of much benefit since it led to increased real per capita income. However, the system was subject to some weaknesses, and this led to its crisis. First, the system led to the restriction in the capital movement throughout all its years. Government were forced to limit capital flows in order to enhance certainty in extent control. Furthermore, Bretton Woods System had put a lot of pressure on the United States which was not ready and willing to supply the gold to entire world as per demand
Why has the gold standard been replaced by the Bretton Woods System?
Before the establishment of the Bretton Woods System, the world was following the gold standard. Ideally, this implied that the each nation would redeem its currency by using the gold value. Following adverse economic environment the exchange rates become more and more unstable. Hyperinflation was evident in many countries of the world. Nevertheless, the gold standard led to the imbalance in payments. As a result, there was a great need to establish monetary policies to overcome the problem (Braithwaite & Drahos 216).
What resulted in the collapse of Bretton Woods System?
In 1960s and 1970s, the Bretton Woods System was weakened by the increased imbalances of payments that were happening between the western industrialised countries. This problem had created a scenario in which the national currency that happened to be the U.S. dollar had also become an international reserve currency. As a result, the national monetary and fiscal policy of the U.S. became free from external economic pressures. However, it influenced to other external economies to a greater extend. To prevent the world inflation, the United States of America were forced to run deficits in their balance of payment (Bordo & Eichengreen 164).
As time passed, the reserves became insufficient to meet the demand for the currency. Nevertheless, many member countries were unwilling to accept high inflation rates that could be provided by the system. The dollar thus became more weak and unwanted among the member countries. Following this underlying issues, the Bretton Woods system collapsed. Apart from this issue, the collapse of the Bretton Woods System was caused by the delayed adjustments of the parties who were responsible to change in the economic environment of the countries. The governments were also subjected to a great political risk following the adjustment of parity. Any simple change in the major currency increased the degree of crisis for the whole system. To a great extent, it led to the lack of trust and destabilization speculations (Kenen 264).
At first, there was a good relationship between the gold and the dollar. The system could only function well when the mass of the US dollars circulating in the other parts of the world was supported by the dollar held in the US. However, the expansion of the international economy led to increase in the need for international liquidity with respect to the United States dollars. Ideally, this meant that as the global economy expanded more and more, the relationship between the dollar and the gold became shakier. As a result, the dollar overhanging in the year 1960. As a consequence, the US administration imposed policies whose aim was to restrict capital movements just as the British did in the past.
Many countries lost confidence thus putting strain on the U.S. monetary influence. The U.S. lost touch with its currency with other countries as far as currency was concerned. The return to convertibility of other currencies with respect to the dollar fell. As a consequence, the demand for the dollar in the international market currency falls drastically. The overall effect to the combination of the above mentioned causes led to the collapse of the Bretton Woods System.
Nevertheless, with the growth in global investments, the global economy expanded more and more. To accommodate this, there was growth in the international currency markets. There was a great need for the dollar that stood as the standard currency of exchange for all the countries of the world. The growth and expansion of the international currency market were so pronounced thus making it difficult for the Bretton Woods System to manage. As time passed by, the change became so pronounced and uncontrollable by the system. As a consequence, the Bretton Woods System collapsed (Onkvisit, Sak & Shaw 312).
Work Cited
Bordo, Michael & Eichengreen, Barry. A Retrospective on the Bretton Woods System. Chicago and London: The University of Chicago Press, 1993. Print.
Braithwaite, John & Drahos, Peter (2001). www.globalpolicy.org/socecon/ bwi-wto/ 2001
/braithwa.htm. Print
Kenen, Peter. Managing the world economy: fifty years after Bretton Woods. Washington DC.: Institute for International Economics, 1994. Print.
Onkvisit, Sak & Shaw, John. International Marketing: Analysis and Strategy. New
Jersey: Prentice Hall.1997, Print.
