The main features of the system are the following: an obligation for each country to adopt a monetary policy to main the exchange rate of its currency within a predetermined value, allowing only a fluctuation of 1% in terms of gold; and the establishment of the International Monetary Fund (IMF) which is tasked to curb and resolve temporary payment imbalances (Bretton Woods System 1-4). Recognizing that nations need a monetary reconstruction after the World War II, countries initially concur to implement the rules and policies as stipulated in the Bretton Woods Agreement. However, the large disparity among member nations in how they pursue economic development led to the eventual collapse of the system in 1971.
Each of the countries which signed their allegiance to the Bretton Woods indicates its recognition of four important factors. This uniformity becomes the cornerstone and the main factor which holds the international economy together. First, all the nations involved recognize and agree that "the interwar period had conclusively demonstrated the disadvantages of unrestrained flexibility of exchange rates" (Cohen 4). It can be recalled that the Great Depression in 1930s has become a grim reminder of how floating exchange rates discourages trade and investment while increasing the risk of destabilization and competitive depreciations. ...Show more