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Bretton Woods system - Essay Example

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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. On the other hand, architects of the Bretton Woods are also reluctant in adopting permanently fixed exchange rate like the 19th century gold standard. Thus, avoiding both maxims, delegates agree on a "pegged rate" or "adjustable peg" currency regime or a par value system (Cohen 5). Thus, each country is obligated to choose a par value in their national currency and intervene in order to maintain the exchange rate within 1% above or below the preset rate. This par value can be changed only with the approval of the IMF and only if the country's balance of payment is in "fundamental disequilibrium."
Secondly, all nations hold that "if exchange rates were not to float freely, states would also require assurance of an adequately supply of monetary reserves (Cohen 6)." The financial hegemony held by the United States during the period significantly affected the final decision: "a system of subscriptions and quotas embedded in the IMF, which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country" (Cohen 7). Each nation is assigned its own quota commensurate to its economic situation. In time of need, each IMF member is allowed to borrow a certain amount of fund according to its quota.
Third, each nation holds that "it was necessary to avoid any recurrence of the kind of economic warfare that had characterized the decade of the 1930s" (Cohen 8). Thus, countries are obliged to commit into the elimination of the pre-existing exchange controls which limit currency convertibility and encouraged to return to a system of free multilateral payments. Members are strictly prohibited in engaging in discriminatory exchange practices or exchange regulation.
Lastly, all signatories of the Bretton Woods Agreement maintain that "there is a need for an international forum for international cooperation on monetary matters" (Cohen 9). This called for the establishment of the IMF which serves as an institution which provides the much needed procedure and machinery for governmental consultation. However, it can be seen that since the voting system ...Show more


While the World War II is still raging in 1944, 730 delegates from all 44 Allied nations gathered at Mount Washington Hotel in Bretton Woods, New Hampshire which become the venue for the birth, deliberation, and formal institution of the Bretton Woods Agreements…
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Bretton Woods system Essay
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