Brettonwoods System

Brettonwoods System Evolved in response to the dire necessity of: i) ii) Stability of Exchange Rate & Availability of adequate International Reserves. .

U.A undertaken free convertibility of U.S.S. U.July 1.S. . 1944 Brettonwoods Agreement. fixed gold parity as $ 35 for one ounce of gold. dollar for gold. Fixed Parity of global currencies against US $.

+ or ± 1% fluctuation band allowed. . Values of other currencies fixed in U. gold as collateral. Exchange rate maintained within 1 percent on either side of official parity.S.S.Global currencies backed by U. $ official parity.

to maintain gold backing its $ currency.S. Allowed a revision of 10 percent within a year of initial selection of the exchange rate.This required U. Other member countries to maintain $ reserves. .

Establish a system of multilateral payments 5.Create reserve base.Facilitate the growth of trade 3.The Articles of Agreements requires IMF members countries to : 1.Promote international monetary co-operation 2.Promote exchange rate stability 4. .

For ensuring adequate reserves flow maintaining Exchange Rate stability & avoiding competitive depreciation of currencies. .ACTIVITIES OF I M F Surveillance ± process of monitoring & consultation handled by I M F. Financial assistance of different kinds.

Special Drawing Rights (SDRs) Created in 1969. To augment world liquidity. SDRs allocation to members in proportion to their contribution to funds. Taking into account shortage of $ and gold supply in response to increase world trade / other global transactions & consequent shortage of world liquidity. .

What is SDRs ? SDRs => Not currency => Not claim on I M F => is sanction of credit limit to member countries. . Is potential claim on freely usable currencies of I M F members.

Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: i) Through arrangement of voluntary exchanges between member countries. Deficit countries can use them to purchase stronger currencies which can be used to pay off B. .P. debts. ii) An arrangement by I M F fordesignating members with strong external positions to purchase SDRs from members with weak external positions.O.

S. . deficits growing reserve requirements. Break-down of Brettonwoods system General Force Specific Forces French Policy Reaction to dominance of $ Tiffin's paradox continuing and growing U.Brettonwoods system ended in 1973 By 1973 ± many countries moved to flexible exchange rates.

S.S. Central Banks met at Smithsonian Institute on December 17 & 18.50%.25% and for some currencies 4. BOP => loss of confidence in U. 1971 to resolve the crisis.S. Currency fluctuation band widened from 1% to 2.A revised the gold parity against $ as $38 per ounce of gold. Holland & Germany came out of fixed rate parity. $. U.Huge Deficit in U. .

´ .Prospects of the International Financial System. ³The International Financial System evolves in response to the environment it serves.

. 1914 ± 1918 => 1944 ± 1973 The shift from classical Gold Standard to the Standard adopted at Brettonwoods came in response to i) Beggar-thy-neighbour.I. ii) Protectionist exchange rate policies ± competitive devaluations ± during the depression and World war. In reaction to the above environment the system chosen was characterised by extreme rigidity of exchange rates. ³cut-throat competition´.

II. Rigidity of Brettonwoods System did not provide adjustment needed between oil using and oil producing countries. 1960s ± 1970s Oil shocks of the 1960s and the early 1970s. In response to the above environment. . the system of flexible exchange rate has emerged.

Growing financial & economic interdependence. Financial deregulation & growth in trade. Since 1980s The environment emerged subsequently was characterised by: i.III. Massive structural imbalances of trade & fiscal deficits. iii. . ii.

. the unfettered flexibility of the 1970s & early 1980s was replaced by the more co-operative arrangements of Plaza Agreement and Louvre Accord.In response to the above scenario.

S. economic hegemony to a shared U. The review of the above two burning issues suggest the possible direction of the International Finance System. .S. Where do we go from here ? A broad answer to this question can be discovered from review of the following challenging questions: a) The Third World Debt Problem.IV. & b) The shift from U. ± Japanese ± European balance of Economic Power.

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