Feature of the Bretton Woods Agreement - Coursework Example

THE BRETTON WOODS AGREEMENT Feature of The Bretton Woods Agreement Name: Institution: Instructor: Subject: Date: Abstract The content of this document looks at The Bretton woods Agreement most important features, its break down and replacement. The Bretton woods Agreement got its establishment in 1944. It was established as a system for management of exchange rate as well as monetary management. Its development took place at a Monetary and Financial conference of the United Nations between July 1 and July 22, 1944 in New Hampshire, Bretton Woods. During the Bretton Woods Conference major outcomes were observed. These included a proposal to introduce an adjustable but pegged system of foreign exchange rate as well as the establishment of the International Bank for Development and Reconstruction and International Monetary Fund. It is during this conference that the pegging of currencies to gold and IMF was authorized to make intervention whenever there was an imbalance in payments. Immediately after the World War II in 1945, the world begun on a long task of reconstructing and recovering and developing the economy purposely to make recovery from the devastating situation brought by the war. Even though at the beginning gold was used as the base currency, the dollar from the U.S gained momentum and stability and become an internationally base and reserved currency. During the Bretton Woods Conference in 1944, delegates who were allied to the 44 nations came together, signed and passed the Bretton Woods Agreement. The agreement placed the U.S. dollar at the center of the monetary system internationally. It is in that conference that the establishment of a world’s capitalist monetary system known as Bretton Woods System took place. Through monetary management, the Bretton Woods System made establishment of rules for financial as well as commercial relations within the key industrial states in the world around the middle of the 20th century. The key feature in The Bretton woods System included an obligation to every nation to adopt or formulate a monetary policy that upheld the rate of exchange making ties between its currency and the U.S dollar as well as the IMF with the aim of bridging the imbalances of payment which were temporal. The United States unilaterally made termination of the convertibility of the U.S dollar to gold in 1971 (Stockman, 1987, p. 243). This action marked the end of the Bretton Woods System and brought about a situation where the U.S dollar was turned into a reserve currency in use by several states. At that time, several currencies that area fixed also turned into free floating currencies. For political reasons, the Bretton Woods System was confluence following two major conditions. These conditions included the Great Depression that were shared and the power concentration in a few states which was later improved by excluding several important nations due to the war. An agreement of a higher level among the great on the means and goals of the management of the international economy enhanced the decision arrived at by the Bretton Woods conference. The governments of the developed nations differed concerning the kind of capitalism that was preferable for the economies of their nations. An example is that of France that was in favor of state intervention and greater planning, whereas the U.S preferred state intervention that was relatively limited. Thus all basically relied on the privatized means of production ownership as well as the mechanisms of the market. (Triffin, 1960, p. 177) All the governments of the nation’s taking part at the Bretton Woods were in agreement that the monetary disruptions that took place during the period of interwar brought about several lessons that are valuable. The effects of the Great Depression were still new to the officials in the public. Those in charge of planning at The Bretton Woods were hoping to avoid a similar experience of the debacle that took place in 1930s. This took place when the creditor countries insisted on making of the repayment of the debts as a result of war and reparations brought about a breakdown of the financial system internationally as well as a global economic depression. Some policies that came about during the crisis caused some countries taking part in trading using devaluation of currencies in the process of attempting to raise their competitiveness. In spite of the policy on devaluation raising the national liquidity, these responses of the national policy were shallow and not well coordinated enough to bring back international trade volume. Over the last decade, global markets have not been able to break through the poorly laid down nationally imposed and motivated restrictions and barriers on the investment volume and international trade. Several anarchic and mostly autarkic protectionist as well as neo-mercantilist policies that are national that came up during the initial half of the decade even though performed with a lot of consistency and diligence to enhance substitution of national export, make a diversion work severally intended (Solomon, 1982, p. 177) When a lot of the expert and observers remained behind during the 1930s debacle turned into the founders of a new unifying system of post war at Bretton Woods, there were no begging neighboring nations. Preventing the happening of a similar process involving competitive devaluation became a big deal. Currently, the major 1930s events appear to be different to scholars of this era who are very careful. The proximate cause of global depression flawed in a structural manner and poorly coordinated. This happened for several reasons which included among others the wish of the Federal Reserve to curb the market boom stock of the United States. The financial policies in a number of key countries became contraction during the late 1920s. This contraction was channeled worldwide by the standard of the gold. Something that was at the beginning regarded as a mild deflationary procedure started to snowball at the time the currency and the banking crises of 1931 carried out investigations concerning an international scramble for gold. Making sterile the inflow of gold by surplus nations, using gold as substitute for exchanges of foreign reserves, as well as runs on commercially instituted banks all brought about the rising of the gold backing of money which resulted in great unexpected decrease in money supplies at national level. In turn, monetary contractions found strong association with the reducing prices, employment as well as output (Sims, 1980, p. 27) Efficient international coordination could principally have permitted a globally monetary extension even though gold standards were experiencing constraints. However, misunderstandings resulting from the First World War reparations, and the experience as well as the insularity of the Federal Reserve as well as other factors hindered this outcome. Consequently, individual states to avoid the vortex of the deflation just by unilaterally leaving the gold and making re-establishment of stability in domestic monetary, a process that brought about dragging through lack of proper coordination. This continued until France as well as other Gold Bloc nations finally abandoned gold. The policy circles of the elite, collected from all the top allied countries, were unanimously in favor of fixed exchange rate system that is regulated, indirectly taught a lesson by a United States dollar attached to gold. This system depended on a controlled market economy having tight regulations on currency values. Even though several experts at national level do not fully agree specifically with implementing the system, they were all in agreement when it came to tight regulations (Alogoskoufis & Ron, 1991, p. 72) Economic security On the basis of the experience obtained during the inter-war period, planners in the United States came up with an economic security concept that an economic system which is liberally international would make enhancements of the probabilities of peace after the wars. Some economic experts in the U.S. believed that the key reason for the happening of both first and second world wars was actually found in economic discrimination as well as trade welfare. Specifically, exchange regulations and trade in Germany and also the preferred imperial system in Britain. An increase in governmental intervention The developed nations have been in agreement that the economic system that is liberal internationally actually needed intervention from the government. During the Great Depression aftermath, the management at public level in charge of the economy had come out as a basic activity performed by governments in the developed nations. Economic growth, stability and employment became important issues of the public policy. In turn, the role played by the government in the economy at national level became associated with the thinking that the state is responsible for making assurances to its citizens concerning the wellbeing of the economy. The welfare state arose from the Great Depression, which introduced a popular need for intervention by the governments in the economy as well as out of contributions made by various schools of economics, which agreed that indeed the government needed to counter the market intervention by intervening. However, a lot of intervention by the government in the economy at domestic level brought about sentiments of isolation that negatively impacted on the economics at international levels (Argy, 1981, p. 34) The most important of the national objectives, national action that is independent during the interwar period as well as the failure to make perception of the realization of the national objectives without introducing international collaboration have resulted in beggar policies such as political instability at domestic level, elevated tariffs, devaluation that is competitive and which has led to disorganization of the international monetary system that is gold-based, political domestic instability as well as war internationally. (Balke, & Robert, 1989, p. 65) The Bretton Woods System has been able to show that lack of high level of economic cooperation among the nations that are leading inevitably results in economic war situation that eventually instigates the military warfare or even worse than that. Fixed exchange rates According the rules and regulation of the Bretton Woods Agreement the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) made a provision for a fixed exchange rate system. The regulations and requirement further sought to promote a system that is open by making members to be committed to the ability to make conversions of their respective currencies to different several other currencies to freely trade. This brought about the emergence of an emergency regime of pegged rate. Members were required to make establishments of a parity belonging to their national currencies in form of reserve currency and also to contain the levels of the rates of exchange at plus or minus one percent of parity by making intervention in their markets dealing with foreign exchange. According to the Bretton Woods Agreement, the currency to be reserved would be a currency unit that has globally never been implemented. However, this was met with objections from the United States and they therefore made the U.S. dollar the reserve currency. This implied that other nations would have their currencies pegged to the U.S. dollar and as soon as the restoration of the convertibility took place, the U.S. dollar would buy and sell the United States dollars to maintain the rates at plus or minus one percent of parity. For that reason the U.S. dollar assumed the role that had been earlier on played by gold in the international financial system under the gold standard. Meanwhile to enhance the faith in the U.S. dollar, the United States came into an agreement separately to make a link between the dollar and gold, the rate being $ 35 per ounce of gold. This rate enabled central banks as well as foreign governments to exchange dollars for gold. A system of payment was established by Bretton Woods. The system was based on the U.S. dollar in which all other currencies were defined in relation to it. The United States currency was at this time an effective currency of the world and provided a standard to which all other currencies were pegged. The dollar therefore being a very important currency, a lot of transactions that were done internationally got denominated in the U.S. dollar. The purchasing power of the United States dollar went high as it was the only currency that got the backing of the gold. In addition to that, all the nations in Europe that played a role in the Second World War happened to be deeply in debt and made transfers of large amounts of gold into the U.S. this fact enhanced the supremacy of the United States. Appreciation of the U.S. dollar in the rest of the world therefore became a major currency of the Bretton Woods System. (Blanchard & Danny, 1989, p. 352) Countries who were members of the Bretton Woods Agreement could only make changes to the value of their pay by over 10 percent with the approval of IMF which only became contingent upon determination by the IMF that its payment balance was in a fundamental disequilibrium. The fundamental disequilibrium was never formally defined or determined. This lead to uncertainties in approval as well as in the attempts to make repeated devalues by less than 10 percent instead. Any nation that, however, made changes without being approved or after receiving denial was then not given access to the IMF. Formal regimes A major feature of common ground Of the Bretton Woods Agreement was the aim to prevent a repeat of the happening of the closed economic warfare and market that became popular in the 1930s. Thus, those negotiating at the Bretton woods Conference came to an agreement that it was need for coming up with a forum for international cooperation concerning monetary maters. The last phase of the Bretton Woods System involved several crises which took place between November 1967 and March 1973. These included; the devaluation of the sterling, the suspension of the convertibility of the dollar into gold, the floating of the sterling and then the second devaluation of the dollar and generalized floating. Every one of the crises that befell the monetary system internationally brought down the confidence and faith in the international monetary system. (Fishlow, 1989, p. 90) The crisis involving the sterling made sure contributions to the tribulation process of the reserve junior currency which certainly brought about complications to the Bretton Woods System. The implementation of the Smithsonian Agreement in December 1971 came as a replacement to the Bretton Woods Agreement. There were similarities between the Bretton woods Agreement and this new agreement. However, the new agreement allowed fluctuations in the currency within a wider range. In the end, the efforts that had been put in by European and U.S. dollar were outside binding. The European Monetary System was established in July 1978 and therefore some of the present changes were no longer related to the currency movements. References Alogoskoufis, G, & Ron S. (1991). The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange Rate Regimes. American Economic Review 8 1 1254-75. Argy, V. (1981). The Postwar International Monetary Crisis. 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