Bretton Woods System of Monetary Management

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By the end of World War II the old global financial order was over once and for all. Global financial reforms have to be made. So, the representatives of 45 leading nations of the world met at Bretton Woods, the USA, in 1944, to create a new international monetary system.

Thus, for the international economy, all economists at Bretton Woods supported a regulated system, which would depend on a regulated market with strict controls on the value of currencies. All 45 countries-participants of the Bretton Woods conference agreed on the need for strict controls, in particular of currency exchange rates. Following the rules is always the best option. For example, in money management the same situation, you should follow 10 Forex money management rules.

Several crucial conditions were conducive for establishing the Bretton Woods System: the shared experiences of the Great Depression and the concentration of power in a small number of states (remember that the number of participants of Bretton Woods conference was 45). They drew up the agreements which created an international basis for exchanging one currency for another. The exchange rate stability was a prime goal. One of the main goals was also the economic stability for the major economic powers in the world. The purpose of the conference in Bretton Woods was to avoid worldwide economic disasters such as those which the world had in the 1930s, to free the international trade and fund postwar reconstruction. 

 

The results of the Bretton Woods conference were the following:

• Setting up a system of fixed exchange rate – the world currencies were tied up to dollar, which, in turn, became convertible into gold at $35 per ounce. Thus, the role of the world leading currency shifted from pound sterling to dollar, and the international economy became dollar-centered (which remains to be truth till the present day, actually). The golden age of the US dollar began. Most international transactions began to be denominated in USD.
• Central banks of other countries had to keep up fixed exchange rates between their currencies and dollar. They did this by means of interventions in foreign exchange markets. If a country’s currency appeared to be too expensive in relation to dollar, its central bank sold this currency in exchange for dollars, which decreased this currency’s value. And vice versa, if the country’s money were losing its value against the dollar, central banks bought their own currency, increasing its price this way.
• Beginning of Foreign exchange as we know today. It became possible due to fact that world currencies started to be pegged against one another.
• Establishing the International Monetary Fund (IMF), the main regulating monetary institution in the world. IMF was designed to monitor exchange rates and lend reserve currencies to nations with trade deficits. Now its role is also to be an advisor on monetary policies for the countries of the world and to finance trade deficits.
• Creating the International Bank for Reconstruction and Development (IBRD), now known as the World Bank, the most important agency of the World Bank Group. IBRD focused on promotion of world trade and financing the post war reconstruction of Europe. Now it is charged with making loans for economic development purposes.

The Bretton Woods system established the US dollar as the reserve currency of the reserve currency of the world. However, by the beginning of 1970s, inflation in the USA and the growing US trade deficit were weakening dollar’s value. The USA tried to press on Japan and Germany – the countries, whose payment balances were positive, to buy their own currencies in order to increase their value. But these countries didn’t want to take this measure, because increasing their currencies’ value would result in raising prices for their goods and harm its exports. This stage can be described as the return to convertibility of Western European and Japanese currencies. A high level of monetary interdependence was developed. Convertibility made possible and promoted the vast expansion of international financial transactions, which deepened monetary interdependence. These changes resulted in breakdown of international monetary management, since exchange rates could no longer be centrally regulated, or controlled by some external forces, like central banks or governments.

One more factor that damaged monetary management was the decay of U.S. hegemony. The U.S. was no longer the domineering economic power it had used to be for more than twenty years. By the mid-1960s, the European Economic Community and Japan had become international economic powers. With total reserves much greater than those that the U.S. had, with higher levels of growth and trade, and with income approaching that of the U.S., Europe and Japan were narrowing the gap between themselves and the United States.

The move toward a more pluralistic distribution of economic power led to increasing dissatisfaction with the privileged role of the U.S. dollar as the international currency.

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