The International

Institution
The Bretton Wood
System
General Agreement on
GATT and The World
Trade Organization

Ysabella Aranas
Charles Ayala
Shanlane Coronel
An international financial institution (IFI) is a financial institution that has been established (or chartered)
by more than one country, and hence are subjects of international law. Its owners or shareholders are
generally national governments, although other international institutions and other organizations
occasionally figure as shareholders. The most prominent IFIs are creations of multiple nations, although
some bilateral financial institutions (created by two countries) exist and are technically IFIs. The
International finance is an important tool to find the exchange rates, compare inflation rates, get an idea
about investing in international debt securities, ascertain the economic status of other countries and
judge the foreign markets best known IFIs were established after World War II to assist in the
reconstruction of Europe and provide mechanisms for international cooperation in managing the global
financial system.

International Financial Institutions (IFIs), including the World Bank Group, other multilateral and regional
development banks, and national development banks with international objectives, are critical
development partners to address the Sustainable Development Goals (SDGs). In addition to policy
expertise, economic analysis and knowledge products, they bring to the table considerable development
resources and deep ties to national governments.
How IFIs work?
IFIs provide long-term, low-interest loans, credits, and grants to finance projects run by
governments or the private sector. They operate through shareholdings, trade services and bank
shares, and provide technical and policy advice to governments, private enterprises and civil
society.

IFIs are important in project finance because they play a significant role in supporting large scale
infrastructure projects in emerging markets. They can provide critical capital and catalyse the
participation of other players. IFI's provide a political risk umbrella for other lenders.
 With the world at war, participants from each of the Allied countries
convened on July 1, 1944 in Bretton Woods, New Hampshire to create
a new international monetary system

The breakdown of the inter-war gold standard, and the mutually

destructive economic policies that followed, convinced leaders that a
new set of cooperative monetary and trade arrangements was a
prerequisite for world peace and prosperity.

The outcome of the conference, known as the Bretton Woods Agreement, included the creation of
an adjustable peg exchange rate system (termed the par value system) and the establishment of
two international organizations (the IMF and the IBRD) that were created in the hopes of
maintaining economic cooperation among the participating countries.

The ITO (International Trade Organization) was also part of the original Bretton Woods plan. Its’
charter was never ratified, though GATT (and more recently the WTO) subsumed some of its
original goals.
 It wasn't until 1958 that the Bretton Woods System became fully functional. Once implemented, its provisions called for
the U.S. dollar to be pegged to the value of gold. Moreover, all other currencies in the system were then pegged to the
U.S. dollar’s value. The exchange rate applied at the time set the price of gold at $35 an ounce.

Benefits of Bretton Woods Currency Pegging

The Bretton Woods System included 44 countries. These countries were brought together to help regulate and
promote international trade across borders. As with the benefits of all currency pegging regimes, currency pegs are
expected to provide currency stabilization for trade of goods and services as well as financing.
All of the countries in the Bretton Woods System agreed to a fixed peg against the U.S. dollar with diversions of only
1% allowed. Countries were required to monitor and maintain their currency pegs which they achieved primarily by
using their currency to buy or sell U.S. dollars as needed. The Bretton Woods System, therefore, minimized
international currency exchange rate volatility which helped international trade relations. More stability in foreign
currency exchange was also a factor for the successful support of loans and grants internationally from the World
Bank.
Under the gold standard from 1870–1914 and after 1918 for some countries, each central bank fixed the
value of its currency relative to a quantity of gold (in ounces or grams) by trading domestic assets in exchange
for gold. For example, if the price of gold was fixed at $35 per ounce by the Federal Reserve while the price of
gold was fixed at £14.58 per ounce by the Bank of England, then the $/£ exchange rate must have been fixed
at $2.40 per pound.

How a Fixed Exchange Rate Works

• To fix the exchange rate, a central bank influences the quantities supplied and
demanded of currency by trading domestic and foreign assets, so that the exchange
rate (the price of foreign currency or gold in terms of domestic currency) stays
constant.
• In other words, the central bank must adjust the domestic money supply until the
domestic interest rate equals the foreign interest rate.
• Because the central bank must buy and sell foreign assets to keep the exchange rate
fixed, monetary policy is ineffective in influencing output and employment.
Devaluation and Revaluation

Devaluation refers to a change in a fixed exchange rate caused by

the central bank.
• a unit of domestic currency is made less valuable, so that more
units must be exchanged for 1 unit of foreign currency (or gold).

Revaluation is also a change in a fixed exchange rate caused by the

central bank.
• a unit of domestic currency is made more valuable, so that
fewer units need to be exchanged for 1 unit of foreign currency
(or gold).
How Does a Central Bank Devalue?

For devaluation to occur, the central bank buys foreign

assets or gold (using domestic currency), so that the
domestic money supply increases, and interest rates fall,
causing a fall in the return on domestic currency assets.

• Domestic goods are cheaper, so aggregate demand and

output increase.
• Official international reserve assets (foreign assets
and/or gold holdings) increase.
Why Did Countries “Competitively Devalue” in the Inter-
War Period?
• A devaluation is designed to cheapen a nation's currency
and thereby increase its exports at other countries'
expense (and reduce imports).
• Such devaluations are often described as “beggar thy
neighbor” policies.
• If all countries try to devalue at the same time (as they
did during the inter-war period), they will all be
expanding their money supplies, resulting in higher
world- wide inflation (and few devaluation benefits).
How Was the New (Par-value) System Supposed to Work?

• The idea was to set up a “cooperative” fixed exchange rate system which
avoided the incentive to “beggar thy neighbor”. Countries were to seek
financial assistance from the IMF, rather than devalue, if they found that
their imports exceeded their exports.
• Each central bank fixed the value of its currency relative to the US dollar
by buying or selling domestic assets in exchange for dollar assets.
• The dollar, in turn, was fixed to gold (at $35 an ounce).
• The system was asymmetric, in that only the US could decide its own
monetary policy.
The Bretton Woods System’s Collapse

In 1971, concerned that the U.S. gold supply was no longer adequate to cover the number of dollars in circulation,
President Richard M. Nixon declared a temporary suspension of the dollar’s convertibility into gold. By 1973 the Bretton
Woods System had collapsed. Countries were then free to choose any exchange arrangement for their currency, except
pegging its value to the price of gold. They could, for example, link its value to another country's currency, or a basket of
currencies, or simply let it float freely and allow market forces to determine its value relative to other countries'
currencies.

The Bretton Woods Agreement remains a significant event in world financial history. The two Bretton Woods Institutions
it created in the International Monetary Fund and the World Bank played an important part in helping to rebuild Europe
in the aftermath of World War II. Subsequently, both institutions have continued to maintain their founding goals while
also transitioning to serve global government interests in the modern-day.
The General Agreement on Tariffs and Trade was a free trade
agreement between 23 countries that eliminated tariffs and
increased international trade. It was the first worldwide multilateral free trade
agreement. It was in effect from January 1, 1948 until January 1, 1995. It ended
when it was replaced by the more robust World Trade Organization.

The purpose of GATT was to eliminate harmful trade protectionism. That had sent global
trade down 65 percent during the Great Depression. GATT restored economic health to
the world after the devastation of the depression and World War II.
GATT had three main provisions. The most important requirement was that each member must
confer most favored nation status to every other member. All members must be treated equally when it
comes to tariffs. It excluded the special tariffs among members of the British Commonwealth and
customs unions. It permitted tariffs if their removal would cause serious injury to domestic producers.

Second, GATT prohibited restriction on the number of imports and exports. The exceptions were:
• When a government had a surplus of agricultural products.
• If a country needed to protect its balance of payments because its foreign exchange reserves were low.
• Emerging market countries that needed to protect fledgling industries.

In addition, countries could restrict trade for reasons of national security. These included protecting
patents, copyrights, and public morals.

The third provision was added in 1965. That was because more developing countries joined GATT, and it
wished to promote them. Developed countries agreed to eliminate tariffs on imports of developing
countries to boost their economies. It was also in the stronger countries' best interests in the long run. It
would increase the number of middle-class consumers throughout the world.
GATT grew out of the Bretton Woods Agreement. The summit at Bretton Woods also created the World Bank and
the International Monetary Fund to coordinate global growth.

The summit almost led to a third organization. It was to be the highly ambitious International Trade Organization. The 50
countries that started negotiations wanted it to be an agency within the United Nations that would create rules, not just on
trade, but also employment, commodity agreements, business practices, foreign direct investment, and services. The ITO
charter was agreed to in March 1948, but the U.S. Congress and some other countries' legislatures refused to ratify it. In 1950,
the Truman Administration declared defeat, ending the ITO.

At the same time, 15 countries focused on negotiating a simple trade agreement. They agreed on eliminating trade restrictions
affecting $10 billion of trade or a fifth of the world’s total. Under the name GATT, 23 countries signed the deal on October 30,
1947. It was put into force on June 30,1948. GATT didn’t require the approval of Congress. It was technically just an agreement
under the provisions of U.S. Reciprocal Trade Act of 1934. It was only supposed to be temporary until the ITO replaced it.

Throughout the years, rounds of further negotiations on GATT continued. The main goal was to further reduce tariffs. In the
mid-1960s, the Kennedy round added an Anti-Dumping Agreement. The Tokyo round in the seventies improved other aspects of
trade. The Uruguay round lasted from 1986 to 1994 and created the World Trade Organization.

GATT and WTO

GATT lives on as the foundation of the WTO. The 1947 agreement itself is defunct. But, its provisions were incorporated into the
GATT 1994 agreement. That was designed to keep the trade agreements going while the WTO was being set up. So, the GATT
1994 is itself a component of the WTO Agreement.
The World Trade Organization is a global organization made up of 164 member countries that deals with the rules
of trade between nations. Its goal is to ensure that trade flows as smoothly and predictably as possible.

The WTO was born out of the General Agreement on Tariffs and Trade (GATT), which was established in 1947. GATT
was part of the Bretton Woods-inspired family, including the International Monetary Fund (IMF) and World Bank. A
series of trade negotiations, GATT rounds began at the end of World War II and were aimed at reducing tariffs for
the facilitation of global trade. The rationale for GATT was based on the most favored nation (MFN) clause, which,
when assigned to one country by another, gives the selected country privileged trading rights. As such, GATT aimed
to help all countries obtain MFN-like status so no single country would hold a trading advantage over others.
The WTO replaced GATT as the world's global trading body in 1995, and the current set of governing rules stems
from the Uruguay Round of GATT negotiations, which took place from 1986 to 1994. GATT trading regulations
established between 1947 and 1994 (and in particular those negotiated during the Uruguay Round) remain the
primary rule book for multilateral trade in goods. Specific sectors such as agriculture have been addressed, as well
as issues dealing with anti-dumping.
The purpose of the WTO is to ensure global trade commences smoothly, freely and predictably. The WTO creates and embodies
the ground rules for global trade among member nations, offering a system for international commerce. The WTO aims to
create economic peace and stability in the world through a multilateral system based on consenting member states (in
2017 there were 164 members) that have ratified the rules of the WTO in their individual countries as well. This means WTO
rules become part of a country's domestic legal system. The rules, therefore, apply to local companies conducting business in
the international arena.
If a company decides to invest in a foreign country by, for example, setting up an office in that country, the rules of the WTO
(and hence, a country's local laws) will govern how that can be done. Theoretically, if a country is a member of the WTO, its
local laws cannot contradict WTO rules and regulations, which currently govern approximately 97% of all world trade.

How It Functions
The current director-general of the World Trade Organization is Roberto Azevêdo from Brazil. Decisions are made by consensus,
though a majority vote may also rule (this is very rare). Based in Geneva, Switzerland, the Ministerial Committee, which holds
meetings at least every two years, makes the top decisions. There is also a goods council, services council, and intellectual
property rights council, which all report to a general council. Finally, there are many working groups and committees.