1. The Bretton Woods System
By: Denise Davies

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. Sources