Module: 6 Bretton Woods System

International Monetary System: A system prevailing in world foreign exchange markets through which international trade and capital are financed and exchange rates (between international currencies) are determined. The Bretton Woods System (The backdrop): During the period preceding World War-I almost all the major national currencies were on a system of fixed exchange rates under the international gold standard. This system had to be abandoned during World War-I. There were fluctuating exchange rates from the end of World War-I to 1925. Efforts were made to return to the gold standard from 1925 onwards, but with no results. This was mainly because of the Great Depression (1930’s) and a following World War-II, during which countries resorted to protectionism & competitive devaluations – reducing the world trade substantially.

An international conference held at Bretton Woods, New Hampshire, USA, in July 1944 to discuss alternative proposals relating to postwar international payments problems put forward by the USA, Canadian and UK governments. The agreement resulting from this conference led to the establishment of: - The International Monetary Fund (IMF); - International Bank for Reconstruction & Development (IBRD); The Bretton Woods System: Under the agreement, a system was evolved wherein exchange rates (value of a country’s currency in international market) were pegged in terms of gold or the US dollar at $ 35 per ounce of gold. The exchange rate was allowed to vary within one percent above or below the par value.