The Bretton Woods system was developed as an international monetary

exchange arrangement. The system fixed currencies belonging to 44 countries

against the value of the US dollar. The US dollar itself was pegged against the
price of gold. Initially, one ounce of gold was worth $35. This system was
followed between 1945 and 1973.

On July 01, 1944, 730 representatives from 44 countries attended the United
Nations Monetary and Financial Conference. The conference was held at
Bretton Woods, New Hampshire. Providing consent to a new international
monetary system was the purpose of this conference. It was a collective strategy
to recover from the impact of World War II.

The representatives wanted to revitalize international trade by standardizing

exchange rates across the globe. The allied countries duly accepted the Bretton
Woods Agreement. Canada, Mexico, Russia, Brazil, China, India, Netherlands,
Poland, Belgium, Chile, and Czechoslovakia were the active member nations.

In December 1945, the Bretton Woods Agreement led to the formation of two
Bretton Woods Institutions—The International Bank for Reconstruction and
Development and The International Monetary Fund (IMF). The International
Bank for Reconstruction and Development is the lending arm of the World
Bank. These organizations hold great significance on the global front—they
facilitate international trade and finance nations.

The World Bank was established to help nations recover from World War II.
The International Monetary Fund regulates global exchange rates. The IMF also
facilitates economic cooperation internationally.

Features
Bretton Woods aimed to fix problems of the standardized monetary valuation.
Characteristics of Bretton Woods are as follows:

 Stabilizing international exchange rates was the primary objective of

Bretton Woods.
 It was an attempt to help nations recover economically post-World War
II.
 Bretton Woods was adopted by 44 countries—they agreed to peg their
currencies against the USD.
 The US Dollar was pegged against the price of gold—fixed at $35 per
ounce of gold.
 The US Dollar was considered—an international reserve currency.
 It provided a fixed exchange rate. However, this rate was adjustable.
 It standardized international monetary payments—by facilitating currency
conversion.
  Post Bretton Woods, allied countries did not have any control over the
international payment and settlement system.

Important Roles of International Monetary Fund

International Monetary Fund (IMF) played a significant role in stabilizing the
exchange rates thereby facilitating international payment adjustments.
Economists across the world have commended its role in enforcing monetary
discipline among its members.

1. IMF brings Stability in Exchange rate:

The IMF has laid down a clear guidance of exchange rate policies. Its policies
prevent the member countries from making competitive devaluation to boost up
exports. As a result of all these, the system of exchange under the IMF is stable.

2. IMF role in development of international trade:

The IMF has been instrumental to the growth of international trade. It acts as
the reservoir of the currencies of all the member countries. A borrowing country
can borrow the currency of another country out of this reservoir. It extends
loans in foreign exchange to the member countries for financing the current
transactions. 

3.IMF is strict on multiple exchange rates:

The IMF does not permit the member countries to adopt multiple exchange rates
leading to restrictive practices. The system of exchange rate combines the
element of stability with flexibility. It maintains stability in exchange rates.
4.5IMF’s Elaborate lending operations:
The main operation of the fund is lending to member countries. It has
introduced a variety of loan facilities to its members. Initially, the lending
operations were confined only for solving the problems of deficit payments. But
now they have been remarkably extended. Member countries can have regular
facilities, concessional facilities and special facilities. Credit Tranches and
extended fund facility are some of the regular facilities.

5. IMF role in Currency convertibility:

With the charges introduced after 1973 in the international monetary system, a
member can peg its currency to

 either a single major currency or

 a basket of currencies or
 allow it to float independently.
A currency is said to be floating when its is left free to find its own parity in the
international market. The IMF is the catalyst in the convertibility of currencies.

6. IMF is a Boon to developing countries:

The IMF is a boon to developing countries. Less developed c

ountries get enormous assistance from IMF like

 Financial assistance to get rid of balance of payment deficits

 concessional financial assistance for promotion of exports
 suggestions for overcoming constraints in the development process
 Assistance in the formulation of development oriented monetary,
fiscal, exchange and trade policies.

International liquidity and IMF solution for financial crisis – Refer notes
Meaning of Special Drawing Rights (SDRS):
Special Drawing Rights (SDRs), also known as the paper gold, are a form of
international reserves created by the IMF in 1969 to solve the problem of
international liquidity. They are not paper notes or currency. They are
international units of account in which the official accounts of the IMF are kept.

They are allocated to the IMF members in proportion to their Fund quotas and
are used to settle balance of payments deficits between them.

Uses of SDRs:
SDR is an international unit of account which is held in the Fund’s Special
Drawing Account. The quotas of all currencies in the Fund General Account are
also valued in terms of the SDR. As the international monetary asset, the SDR is
held in the international reserves of central banks and governments to finance
their deficits or surpluses of balance of payments. All transactions by the Fund
in the form of loans and their repayments, its liquid reserves, its capital, etc., are
expressed in the SDR.

SDRs are used as a means of payment by Fund members to meet balance of

payments deficits and their total reserve position with the Fund. They cannot be
used for any other purpose. Thus SDKs act both as an international unit of
account and a means of payment.
There are three principal uses of SDRs:
1. Transactions with Designation:
Under it, Fund designates a participant in the SDR scheme who has a strong
balance of payments and reserve position to provide currency in exchange for
SDRs to another participant needing its currency. The currency to be exchanged
for SDRs may belong to the designated participated or/ and to other
participants. Participants are allowed to accept SDRs in this way as long as their
holdings are less than three times their total allocations.

2. Transactions with General Account:

SDRs are used in all transactions with the General Account of the Fund.
Participants pay charges in SDRs to the General Account for the use of the Fund
resources and also to repurchase their own currency from it.

3. Transactions by Agreement:
The Fund allows sales of SDRs for currency by agreement with another
participant. In order to further widen the uses of SDRs, the Second Amendment
empowered the Fund to lay down uses of SDRs not otherwise specified.

Merits of SDRs:
Despite these weaknesses, the SDRs scheme possesses the following merits:
1. SDRs are a new form of international monetary reserves which have been
created to free the international monetary system from its exclusive dependence
on the US dollar.

2. They have rid the world of its dependence on the supply of gold and
fluctuations in gold prices.

They cannot be demonetized like gold or become scarce when the demand for
dollar increases in the world.

4. Unlike gold, SDRs are costless to produce because production of gold

requires resources to mine, refine, transport and guard it.

5. Last but not the least, SDRs act both as a unit of account and a means of
payment of international monetary system.5
EMU

 The European Economic and Monetary Union (EMU) integrates the

economies of its member states through the coordination of their
economic and fiscal policymaking and a common monetary policy with a
common currency – the euro.
 The Stability and Growth Pact (SGP) coordinates the fiscal policies
across member states through government deficit and debt limitations.
 The EMU was established to improve economic stability and provide
strong and sustainable growth.

Organizational Structure of EMU

There are seven major actors responsible for the economic governance in the
EMU as listed below:

1. The European Council is responsible for setting the policy orientations.

2. The Council of the EU (a.k.a. the Council) negotiates and adopts EU
laws, as well as coordinates policies together with the European
Parliament.
3. The Eurogroup coordinates the policy of currency and the common
interest across the eurozone member states.
4. The Member States set their own budgets and structure policies while
following the coordinated deficit and debt limits.
5. The European Commission is responsible for performance and
compliance monitoring.
6. The ECB is the central supervisor of the financial institutions within the
eurozone. As mentioned above, it sets the monetary policy with the
primary objective of price stability.
7. The European Parliament formulate legislation and establish budgets
together with the Council. It is also responsible for the democratic
scrutiny of all EU institutions.

Under the monetary and fiscal policies coordinated, adopted, and monitored by
the institutions, the EMU facilitates the member states with economic stability
and a more effective single market.
CHAP 3

Structure of bop – notes

CAC notes