The International Monetary System:
The Bretton Woods System:
1945-1973
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Beyza CINGILLI GUCLU
- In July 1944, to design an international
monetary system administered by an
international organization, delegates from 44
countries met in a small town named after the
conference “Bretton Woods”, New Hampshire
In the conference, the countries drafted and
signed the Articles of Agreement of the
International Monetary Fund (IMF), thus the
Bretton Woods system was created.
- Key actors: Harry D. White (U.S.) and J.M
Keynes (G.B.).
Both agreed that stable exchange rates foster
trade.
But both also saw that full-employment concerns
meant that a return to permanently fixed rates
was impossible
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1. Exchange rate stability and
the IMF (27 December
1945),
Three Pillars of the
Bretton Woods
System
2. Recovery and development
(International Bank for
Reconstruction and
Development, now known
as the World Bank),
3. Liberalization of trade via
the General Agreement on
Tariffs and Trade (GATT)
in 1947.
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The Bretton Woods System
- A stable and fixed but adjustable exchange rates regime
- Allied countries to fix their exchange rates by tying their
currencies to the U.S. dollar (dollar-pegged exchange rate)
- The U.S. dollar to be linked to gold; per ounce at $35
- Currencies to be kept within 1% of the fixed rate
- Golden age of the U.S. dollar
- The system’s stability required price stability in the US
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Expected
Benefit from
the New
System
- Through capital controls, the
countries would pursue the full
employment and price stability (low
inflation) and the external balance
(keeping exchange rates stable)
simultaneously.
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Source:
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Broz, Lawrance, Bretton Woods System, 2005. Retrieved from http://weber.ucsd.edu
- Pegged exchange rates
Similarities to the
Gold Standard
- Gold was the ultimate
numeraire (dollar
pegged to gold at $35
per ounce)
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- Only U.S.dollar pegged to gold; all
others pegged to the U.S. dollar, none
of these currencies were convertible to
into gold.
Differences
with the Gold
Standard
-
Deflationary policy, which was a
classic medicine for chronic BOP
deficits in the gold standard was no
longer a must, the adjustable peg was
an improvement over the gold
exchange standard with fixed parity.
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N-th currency problem: the change in
dollar’s value in terms of gold has no real
effect.
-
Problems
- Over-sighted national policies: Occasional
devaluations under the supervision of the
IMF to remove “fundamental disequilibria”
in the balance of payments (BOP).
(Fundamental disequilibria: A country
suffering permanent adverse shifts in the
demand for its products. Without
devaluation, a long period of unemployment
and external deficits would be expected.)
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- The reserves of most countries became a mixture of gold
and dollars.
- In 1958, countries in Europe completed the restoration of
convertibility.
-National interest rates were closely linked with each other
due to the opportunity to move funds across borders.
Evolution
and
Breakdown
-“Disguised Capital Flows” increased (leads and lags).
- Current Account deficits and surpluses also took
attention. A country with large and persistent current
account deficit was suspected of being in “fundamental
disequilibria”, thus ready for a currency devaluation.
“Suspicion of an impending devaluation could, in turn,
spark a balance of payment crisis”. Balance of Payment
crisis were frequent in 1960s and early 1970s due to
speculative attacks. In 1970s the crisis were so massive
that finally countries couldn’t keep up with the
adjustments, so the system collapsed and replaced with a
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regime of floating exchange rates.
EXAMPLE
If Britain devaluated pound due to a CA
deficit, the foreign currency value of pound
assets would decrease, thus savings would
shift into other currencies. In order to hold the
pound’s exchange rate against the dollar
pegged, the Bank of England should sell
foreign assets to market and buy pounds
instead. Now, without enough reserves, the
foreign reserves’ loss might cause a
devaluation, if large enough.
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References
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The Bretton Woods System. Retrieved from http://econ2.econ.iastate.edu
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Time Magazine, 21 October 2008, A Brief History of Bretton Woods System.
Retrieved from http://www.time.com/time/business/article/0,8599,1852254,00
-
Broz, Lawrance, Bretton Woods System, 2005, retrieved from http:// weber. ucsd.edu
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