The International Monetary System:

The Bretton Woods System:

1945-1973

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Beyza CINGILLI GUCLU
- In July 1944, to design an international
monetary system administered by an
international organization, delegates from 44
countries met in a small town named after the
conference Bretton Woods, New Hampshire
In the conference, the countries drafted and
signed the Articles of Agreement of the
International Monetary Fund (IMF), thus the
Bretton Woods system was created.

- Key actors: Harry D. White (U.S.) and J.M

Keynes (G.B.).
Both agreed that stable exchange rates foster
trade.
But both also saw that full-employment concerns
meant that a return to permanently fixed rates
was impossible

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 1. Exchange rate stability and
the IMF (27 December
1945),

2. Recovery and development

Three Pillars of the (International Bank for
Reconstruction and
Bretton Woods Development, now known
System as the World Bank),

3. Liberalization of trade via

the General Agreement on
Tariffs and Trade (GATT)
in 1947.

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 The Bretton Woods System
- A stable and fixed but adjustable exchange rates regime

- Allied countries to fix their exchange rates by tying their

currencies to the U.S. dollar (dollar-pegged exchange rate)

- The U.S. dollar to be linked to gold; per ounce at $35

- Currencies to be kept within 1% of the fixed rate

- Golden age of the U.S. dollar

- The systems stability required price stability in the US

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 - Through capital controls, the
countries would pursue the full
Expected employment and price stability (low
Benefit from inflation) and the external balance
(keeping exchange rates stable)
the New simultaneously.
System

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Source: 6
Broz, Lawrance, Bretton Woods System, 2005. Retrieved from http://weber.ucsd.edu
 - Pegged exchange rates

- Gold was the ultimate

Similarities to the numeraire (dollar
pegged to gold at $35
Gold Standard per ounce)

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 - Only U.S.dollar pegged to gold; all
others pegged to the U.S. dollar, none
of these currencies were convertible to
into gold.
Differences
with the Gold - Deflationary policy, which was a
classic medicine for chronic BOP
Standard deficits in the gold standard was no
longer a must, the adjustable peg was
an improvement over the gold
exchange standard with fixed parity.

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 - N-th currency problem: the change in
dollars value in terms of gold has no real
effect.

- Over-sighted national policies: Occasional

devaluations under the supervision of the
Problems IMF to remove fundamental disequilibria
in the balance of payments (BOP).

(Fundamental disequilibria: A country

suffering permanent adverse shifts in the
demand for its products. Without
devaluation, a long period of unemployment
and external deficits would be expected.)

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 - The reserves of most countries became a mixture of gold
and dollars.

- In 1958, countries in Europe completed the restoration of

convertibility.

-National interest rates were closely linked with each other

due to the opportunity to move funds across borders.
Evolution -Disguised Capital Flows increased (leads and lags).
and - Current Account deficits and surpluses also took
Breakdown attention. A country with large and persistent current
account deficit was suspected of being in fundamental
disequilibria, thus ready for a currency devaluation.
Suspicion of an impending devaluation could, in turn,
spark a balance of payment crisis. Balance of Payment
crisis were frequent in 1960s and early 1970s due to
speculative attacks. In 1970s the crisis were so massive
that finally countries couldnt keep up with the
adjustments, so the system collapsed and replaced with a
regime of floating exchange rates. 10
 EXAMPLE
If Britain devaluated pound due to a CA
deficit, the foreign currency value of pound
assets would decrease, thus savings would
shift into other currencies. In order to hold the
pounds exchange rate against the dollar
pegged, the Bank of England should sell
foreign assets to market and buy pounds
instead. Now, without enough reserves, the
foreign reserves loss might cause a
devaluation, if large enough.
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 References
- The Bretton Woods System. Retrieved from http://econ2.econ.iastate.edu

- Time Magazine, 21 October 2008, A Brief History of Bretton Woods System.

Retrieved from http://www.time.com/time/business/article/0,8599,1852254,00

- Broz, Lawrance, Bretton Woods System, 2005, retrieved from http:// weber. ucsd.edu

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