The Bretton Woods System By: Denise Davies

History Named for the Bretton Woods Monetary Conference which took place in New Hampshire, during July 1-22, 1944. 44 allied nations and one neutral US Treasury Harry Dexter White and Britain’s Treasury John Maynard Keynes collaborated for 2 1/2 years to formulate a plan for post-war recovery 44 allied nations and one neutral nation (argentina) attended the conference which was largely domnated by the UK and US

Events leading up to the conference Restrictive market practices which caused the devaluation, deflation and depression that defined the economy of the 1930s. World War II The gold standard

The Gold Standard A certain amount of currency is easily convertible into its equivalent of gold Towards the end of the war, many nations, such as Britain, did not want to return to the pre-war gold standard, and sought for a more stable standard

Goals of the Conference Intended to govern currency regulations and establish legal obligations (through the IMF) Set a standard for exchange rates Establish international monetary cooperation Money pool from which member nations can borrow funds Ultimately dependent on the policies and preferences of the most powerful member, the US Policy makers did not want the free-floating exchange rates of the 1930’s nor did they want to peg their money to the gold standard

Outcome: formally established December 27, 1945 1) “Adjustable peg” currency 2) Quotas embedded in the IMF which require member nations to pay a certain amount of money (to the Fund) 3) Members were forbidden to engage in discriminatory currency practices to prevent them from manipulating their price levels and exchange rates 4) The creation of the IMF and World Bank (International Bank for Reconstruction and Development) 5) The dollar standard * Policy-makers of each nation declare a par value (a 'peg') for their national money and to intervene in currency markets to limit exchange rate fluctuations within maximum margins (a 'band') one per cent above or below parity; and also retained the right, whenever necessary to alter their par value to correct a 'fundamental disequilibrium' in their *balance of payments * amount of money nations are required to pay is based on its economic importance; 25% of the payment must be made in gold or currency that is convertible to gold and 75% must be paid in the nation’s currency ** The only currency at the time convertible to gold was the US dollar * allocate voting rights among governments in proportion to IMF quotas. US had 1/3 of the total quotas, giving it great control over decision-making

Problems Post-war monetary relations were unstable The member nations underestimated the strength of their funds... after two years of lending, the IMF was drained of its money

Results: Dollar Hegemony This ultimately led to the U.S., the most powerful nation in the world, taking responsibility as global monetary manager 1) The US maintained an open market for imports and trade 2) Granted long-term loans and grants to other nations via the Marshall Plan and other aid programs 3) Established a liberal lending policy for short-term funds in times of crisis Soon, the gold exchange standard becomes the dollar exchange standard

The Implied Bargain US's allies acquiesce to this hegemonic system because it benefits their own economies The U.S. becomes a global hegemon due to strength of the dollar U.S. is able to act unilaterally to secure its own interests U.S. allows allies’ use of the system for their own benefit

The End of the Bretton Woods System Due to the costs of the Vietnam War and nations trading $ for gold, On August 15, 1971, President Nixon announced three changes in the U.S.’s economic policy…. (1) He imposed a 90-day wage-price freeze (2) He imposed a temporary tariff on imports. (3) The end of the Bretton Woods System

Results…. The link between gold and the dollar is severed Economies allow their currencies to float freely against the dollar Flexible exchange rates allow for countries to adjust to increased prices, as was seen in the oil price shocks of the 1970s The formation of the European Monetary System, to create fixed exchange rates between participating European nations Members of European Economic Community (now the EU) linked their currencies together

Bretton Woods II & Today’s World On September 24-25, 2009, President Obama met with the G20 nations where a realignment of currency exchange rates was proposed The World Bank and IMF are still active, although they have been severely criticized for some of their policies

Sources http://www.time.com/time/business/article/0,8599,1852254,00.html http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html http://www.imf.org http://www.globalpolicy.org/component/content/article/209/42675.html