The Most Important Features of the Bretton Woods Agreement - Essay Example

The Bretton Woods Agreement Introduction According to studies, globalization has led to tremendous change in the economic environment. The capital movements continue to become bigger as well as less controllable with time (Wildand Wild, 2011). This as a result means that the necessity for stabilizing systems becomes apparent. Such a system was developed at the Bretton woods conference some years ago. John Maynard Keynes, a British economist in the year 1944 stressed on the significance of the rule based regimes to make the business expectations stable (Wild and Wild, 2011). This is something that he was in agreement with in the fixed exchange rates of the Bretton woods system. Over the current years, the leading industrial states have been advocating for the renewing of the reason and role as well as the spirit of the spirit of the Bretton, system to withstand the mounting size of capital flows and the global trade (Wild and Wild, 2011). Studies have indicated that most States have tried to resuscitate the gold standard following the First World War. However, this collapsed completely over the great depression of the 1930s (Wild and Wild, 2011). According to some economists, the compliance to the gold standard was a hindrance for the expansion of money rapidly by the monetary authorities to resuscitate the economic activity (Eichengreen, 1996). The representatives of the world’s leading nations held a meeting in New Hampshire to create a new international monetary system in the year 1944. This is because the US as at that time was responsible for more than half of the globe’s capacity to manufacture. In addition, it also held most of the gold from the universe (Eichengreen, 1996). The leaders therefore concluded that they needed to tie the currencies from the world to the dollar. After they agreed that, this should be converted into gold at a cost of around 35 dollars per ounce v. This essay aims at describing the main important features of the Bretton woods Agreement. It identifies the reasons as to why the Bretton woods system broke down and lastly what replaced it after its break down. Bretton Woods Agreement most important features Evidently, the term is used to refer to the breakthrough system for monetary as well as management exchange rate, which was developed in the year 1944 (Dormael, 1978). The agreement was established in a United Nations conference on monetary and financial, which was held at the Bretton woods, New Hampshire between 1st and 22nd July the year 1944. The main results of the conference comprised of the formation of International bank for development and reconstruction, International monetary fund, the suggested establishment of a modifiable pegged foreign exchange rate system (Dormael, 1978). It is apparent that the currencies were pegged to gold. In addition, the International Monetary Fund was bestowed with the mandate to intercede when there is an imbalance of trade (Wild and Wild, 2011). Studies indicate that the features were drafted by two different people one from the British Treasury, John Maynard Keynes and one from the American deputy secretary treasurer, Harry Dexter White. These two plans aimed at fulfilling the above named objectives (Wild and Wild, 2011). However, their manner of achieving them was contrasting. According to Keyne, a new financial institution known as the International Clearing Union was to be created. Its role was to be similar to that of the World Bank. The International Clearing Union was to introduce a universal currency known as Bancor. The value of this currency was supposed to be fixed in terms of gold. Nations would therefore set similar in terms of the Bancor as well as develop new accounts with the International Clearing Union that will be used to stabilize the trade. The countries that had surplus in terms of trade would get an interest. On the other hand, the states that experienced a deficit would receive an overdraft for which they would pay interest (James, 1996). Besides, Keynes memorandum also gave room for alterations in the exchange rate. Moreover, it allowed states to apply the trade controls as well as exchange rate in order for them to reunite full employment with the balance payments. Clearly, the clearing unions suggested by Keynes offered remarkable flexibility for the exchange rate. It also permitted a wide balance of payments financing (James, 1996). Keynes aimed at minimizing the issue of importing unemployment by curbing foreign deflationary policies, which were affecting local states. Furthermore, he argued that the establishment of the considerable would allow for a smooth operation, of the international monetary system. Apparently, Keynes also headed a strong campaign the comeback of the gold standard (James, 1996). The plan from America projected a globe that is free from the restrictions of trade as well as the currencies that were pegged and overseen by the universal institutions with remarkable authorities over the parity adjustments (Braithwaite and Drahos, 2000). Due to this reason, White’s draft emphasized on the development of a different institution referred to as United Nations Stabilization Fund (Hudson, 2003). It was necessitate that each state contributes a quota of the local currency as well as gold to UNSF (James, 1996). Moreover, they were supposed to fix their currency value in terms of the unit, which was worth approximately 10 US dollars of gold, which is particularly pegging to the dollar. The deficit state would therefore get resources as a sale of their domestic currency for the foreign currency. As a result of this, the balances of the deficit states at the UNSF were to heighten and those of the nations with surplus would reduce (Braithwaite and Drahos, 2000). The equality values were protected and parity alterations were only made when UNSF was consulted or whenever there was a fundamental disequilibrium. Unluckily, the term fundamental equilibrium was left undefined. Seemingly, Keynes draft was opposed by the American plan. White’s plan provisioned for only $5 billion of drawing rights with the U.S. obligation limited to $2 billion (Dooley and Landau, 2003). Due to the conflicting issues evident from the two plans, the experts were forced to amalgamate the two plans. Evidently, the American plan dominated the last agreement (Donald, 1980). The British accepted to lose the International Clearing Union as well as the decline in the substantial offering of liquidity from $23 billion to $8.8 billion, as compared to the White plan’s suggested $5 billion (Dooley and Landau, 2003). Nevertheless, the Americans approved permitting high state controls over the exchange rate as well as capital controls, despite the fact that equality changes would only be made after consulting with the new developed International Monetary Fund (Bordo and Eichengreen, 1993). The objectives of the International Monetary Fund included upholding settled exchange rates as well as permitting multilateral payments system in order to enable full employment, a quick economic growth and enhance the cooperation of international monetary (James, 1996). Past studies reveal that the delegates from, Britain were not at ease with the Americans running a great surplus like it had done over the inter war period. And as a result, this compelled deflationary pressures on other states. As a result of this, a scarce currency clause was established (Brown, 1949). The clause meant that if a currency was termed rare, the International Monetary fund had the authority to portion the use of the currency through exchange controls (James, 1996). However, some scholars have revealed that the scares currency clause was not put into use when it was supposed to. According to the Bretton Agreement members were supposed to convert their currencies into the dollar or gold. Moreover, it was necessitated to declare equality with the dollar or gold as well as uphold the equality within a range of either plus or minus one per cent. Evidently, an illegal alteration of the equality led to the denial of a state to use the funds resources (Edward and Robert, 1973). However, this was a threat, which was so empty since the adoption of the multiple exchange rates by France in the year 1948 leading the International Monetary Fund to remove the nations' drawing rights until 1952. The inter-war monetary system which is commonly referred to as the gold exchange standard, was facing characteristic as well as irreversible variability consequential partially from the unsteadiness of gold itself as well as the timidity of the improvement in gold of the gold standard currencies. The gold exchange standard operated on the foundation of the price-specie stream contrivance created by David Hume (Edward and Robert, 1973). The model aims at explaining the flow of gold as well as the outcomes of inflows and outflows into an economy of a state. The break down Bretton Woods ‘system’ With system of the fixed exchange rates of the currencies and the support of the nations, which ran into difficulties of balance of payments of the 1944, Bretton woods agreement in conjunction with the Marshall plan for the economic reestablishment of Europe? They placed a down basis of a quarter century of the expansion, which had not previously been noted (Hudson, 2003). It is apparent that never before had the global economy grown so rapidly and the living standards of those in the working class in the countries, which have advanced (Eirc, 1996). However, the Bretton woods system was not in a position to withstand the substantial conflicts of the capitalist economy. In the fact economic expansion it assisted establish helped them come to the surface and as a result, it led to the demise of the order of regulated post war (Cassel, 1936). It is of paramount to accentuate the fact that the stability of the post war era in the face of assertions by exponents of the Keynesian regulation which there could be a reoccurrence to the steadiness of the after war period as well as the social activist policies that complemented it, if the agreement could be attained on a form of reviewed Bretton Woods Agreement (Gavin, 2003). The reformists of this program, nonetheless, did not assess the reasons why the original system collapsed (Eirc, 1996). Apparently, the breakdown history entails two interconnected procedures (Copeland, 2000). This involves the establishment of a progressively universal system of finance and production, and the comparative deterioration of the United States in the order Bretton woods (Copeland, 2000). In addition, it comprised of the movement towards a new regime founded on the free movement of capital, in order to maintain its place within the global hegemony (Beams, 2001). According to studies, the initial cracks within the order of the economy were less. They arose from the development of the euro dollar market in late 1950s. Evidently, the first agreement on the currency values gave room for the free convertibility. However this became impossible until the year 1958 (Glenn, 2007). The free conversion deadline approach led to the development of a conflict of sterling in the year 1957 to which the government of British reacted to (Beams, 2001). This was because it was mandated under the system of Bretton woods with limitations on the capital movements. This is a decision that cut across the British ranks operations. With the Fear of being eclipsed by their rivals if the government rivals compelled them to draw back on the international lending, they were forced to circumvent the limitations (Glenn, 2007). Rather than using the sterling to finance the global transactions, they used the deposited dollars and this gave them a means to go ahead with their global operations irrespective of the sterling controls. In addition, the administrators form the United States had an ambivalent attitude towards the Euro dollar market (Beams, 2001). Whilst in an attempt to limit the capital outflows to settle the deficit of the balance of payments, the survival of the Euro dollar market designated that the investors would in a position to maintain the dollar thereby easing the compelling forces on the United States currency (Beams, 2001). What replaced the Bretton woods system? The Australian dollar which is designated by A$ or AUD, is the certified currency used by the Commonwealth of Australia. This includes the Antarctic Territory of Australian, Christmas Island, Heard Island, Cocos Islands, and Mc Donald Islands. Moreover, the sovereign Pacific island states of Nauru, Kiribati as well as Tuvalu. The Australian dollar was initially established in the year 1966. This is when the dollar replaced the Australian pound as well as presented a decimal system to the state. The Australian prime minister, Robert Menzies, at that time, was wishing to give the currency the name Royal. Other suggested names included the Koala and the Austral. They settled on the name Royal initially. However, this demonstrated an exceptionally ostracized midst the multitudes as a result the strange name replaced with the dollar. As indicated by the Australian history, Australia upheld a pin to the British pound replicating its historic ties and a perspective on the settlement in the value of the British pound maintained under the Bretton Woods System, a peg to the United States dollar form the year 1946 to 1971. After the Bretton Woods system breakdown in 1971, Australia replaced the frequently fixed peg to a sterling peg contrary to the United States’ dollar. Australia enthused to a peg counter to a basket of currencies known as the trade weighted index (TWI) in an attempt to minimize the fluctuations linked to its peg to the United States’ dollar in September 1974. The peg to the trade-weighted index was in November 1976 transformed to a moving peg whereby the peg’s definite value was occasionally altered. The Australian government in December 1983 was compelled to float the Australian dollar. This meant that it could no longer manage its value to any foreign currency by reference (Eichengreen, 1996) Conclusion The essay has encompassed the description of the main important features of the Bretton woods Agreement. It has identifies the reasons as to why the Bretton woods system broke down and lastly what replaced it after its break down. It is apparent from the essay that over the current years, the leading industrial states have been advocating for the renewing of the reason and role as well as the spirit of the spirit of the Bretton, system to withstand the mounting size of capital flows and the global trade. The agreement was established in a United Nations conference on monetary and financial, which was held at the Bretton woods, New Hampshire between 1st and 22nd July the year 1944. The main results of the conference comprised of the formation of International bank for development and reconstruction, International monetary fund, the suggested establishment of a modifiable pegged foreign exchange rate system. It is apparent that the currencies were pegged to gold. In addition, the International Monetary Fund was bestowed with the mandate to intercede when there is an imbalance of trade. In conclusion, after the Bretton Woods system breakdown in 1971, Australia replaced the frequently fixed peg to a sterling peg contrary to the United States’ dollar. References Beams, N. (2001). When the Bretton Woods system collapsed. Accessed on March 23, 2012, http://www.wsws.org/articles/2001/aug2001/bw-a16.shtml Bordo M.D. and Eichengreen, B. (1993). A Retrospective on the Bretton Woods system: lessons for international monetary reform. Chicago: University of Chicago Press Braithwaite, J. and Drahos, P. (2000). Global Business Regulation. Cambridge: Cambridge University Press. Brown, W. (1949). Gold as a Monetary Standard, 1914-1918. The Journal of Economic History, vol. 9, Supplement: The Tasks of Economic History, pp.39-49 Cassel, G. (1936). The Downfall of the Gold Standard. Oxford: The Clarendon Press Copeland. L. (2000). Exchange Rates and International Finance, 4th Ed. London: Prentice Hall. pp. 10–35. Donald, M. (1980). Activities 1941 - 1946: shaping the post-war world, Bretton Woods and reparations. London: Macmillan Dooley, G. and Landau, F. (2003). An Essay on the Revived Bretton Woods System NBER Working Papers Dormael, A. (1978). Bretton Woods: birth of a monetary system. London: MacMillan Edward S. M., Robert E. A. (1973). The World Bank since Bretton Woods. Washington, D.C.: The Brookings Institution, pp. 105–107, 124–135. Eichengreen, B. (1996). Globalizing Capital: a history of the international monetary system. Princeton: Princeton University Press Eirc, H. (1996). Bretton Woods and the Endorsement of Capital Controls. States and the re-emergence of global finance. Cornell: Cornell University Press. Gavin, F.J. (2003). Gold, Dollars, and Power – The Politics of International Monetary Relations, 1958–1971. Carolina: The University of North Carolina Press Glenn, G.W. (2007). Floating the System: Germany, the United States, and the Breakdown of Bretton Woods, 1969–1973. Diplomatic History, 31(2), 295–323 Hudson, M. (2003). Super Imperialism: The Origin and Fundamentals of U.S. World Dominance, 2nd ed. London and Sterling, VA: Pluto Press James, H. (1996). International Monetary Cooperation since Bretton Woods. USA: Oxford University Press Wild, J.J. and Wild, K.L. (2011). International Business: The Challenges of Globalization, 6th Edition. London: Prentice hall Read More