Bretton woods conference
1. Introduction
Bretton woods was a conference which was United Nations Monetary and Financial conference. It was gathering of 73 delegates from all 44 Allied nations at the Mount Washington Hotel in Bretton Woods, New Hampshrie. The conference was held from 1-22 July 1944. “It was to be the most important conference on international financial arrangements since the London Conference of 1933” (Assetto, 56).
2. History of Bretton Woods Conference
The Bretton Woods System of exchange rate management was set up, which remained in place until the early 1970s. The Bretton Woods Conference took place in July 1944, but did not become operative until 1959, when all the European currencies became convertible (Achetson, chant, Prachowny, xii). The conference was designed to set up the International Bank for Reconstruction and Development (IERD) and the International Monetary Fund (IMF) ( Krause, 5). The IMF was to be responsible for international payments. It was developed as a permanent international body. The IERD was for the transfer of resources to reconstructing and developing economies, it was created to speed up post-war reconstruction, and to aid political stability. Bretton Woods system established monetary management which was the rule for commercial and financial relations in the mid 20th century. The conference shaped international economic relations in the postwar period. The conference shaped international economic relations in the postwar period and has an important effect on modern economic system (Achetson, chant, Prachowny, Page xii).
3. Reasons for Bretton Woods Conference
a. Opening Market
After World War II, the global economy was resuscitated, to explore a broad of proposals for achieving more equitable, sustainable, and participatory development, particularly through the international financial institutions, the Bretton Woods Conference was created (Krause, 13). First of all, a relatively opening market was maintained important for the development of economy in a post-war world (“Postwar World Economic Progress”). Europe and East Asia had devastation in the wartime; they were economically exhausted by the war. They needed money to rebuild their domestic production and economy. They needed it to survive. The United States was the only country did not have devastation in World War II and became the most powerful country. To strengthen the role as an international financial center, the United States opened the global market. For rebuilding economy, Europe and East Asia needed the United States to finance their international trade; they also needed open the global markets. Under these circumstances, they needed an organization to make some rules for the world’s trade. After World War II, all the countries active on the latest international economy, the military trade active. The U.S needed to a new way to retain the “World Order” (“The American Economy during World War II”).
b. Cold War
“Cold War brought a big impact to the U.S. It was Conflict between the Soviet Union and the United States during 1947-1991” (Assetto, 53). The Soviet Union had a single-party political system dominated by the Communist Party. At that time, the Soviet Union was only community which had the ability to oppose the United States in military and economy areas. Facing the Soviet Union, whose power had also strengthened and whose territorial influence had expanded, the U.S. assumed the role of leader of the capitalist camp (Assetto, 57). In order to reduce the effect of Cold War and weaken the Soviet Union’ strength, the United States and other countries built capitalistic organization and rules to protect capitalistic market. After World War II, the opposition of ideology between capitalist and socialist camp appeared in the world (Assetto, 90).
4. World Financial System
The Bretton Woods Conference designed the world financial system. Under this system, the Conference drew up the plans for two international organizations-the international Monetary Fund and the IBRD.
a. IMF
IMF was created simultaneously at an international conference held in Bretton Woods. “Officially established on December 27, 1945, when the 29 participating countries at the conference of Bretton Woods designed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management” (Krause, 15). It advised countries on policies affecting the monetary system. “The basic structure given to the IMF was suggestive of a credit union to which member countries make their contributions of a size determined by the magnitude of their national wealth and economic activity, and from which they might borrow, should their national finances deteriorate to the point where a threat existed to their ability to maintain the agreed exchange rate of their currency” (Gunter, 19). In addition, IMF had an impact on exchange rates and balance of payments. The newly designed international monetary system designated the U.S dollar, backed by gold, as the anchor currency against which all exchange rates were calibrated. A major task for the IMF was to extend loans to enable borrowers to work out short-term imbalances in their current accounts. These loans were generally of short maturity and to enable its economy to return to a stable position. Should a member country find that it was facing a payments imbalance of such severity that, even with a loan, it could not continue to function with the prevailing exchange rate, the IMF could agree to a permanent change in that country’s exchange rate. In its early years, the principal borrowers were industrialized countries (Gunter, 17, Hazlitt, 62).
b. IBRD
IBRD is the International Bank for Reconstruction and Development which today is part of the World Bank group. “IBRD is the part of the World Bank that works with middle-income and creditworthy poorer countries to promote sustainable, equitable and job-creating growth, reduce poverty and address issues of regional and global importance”(U.S department of Economy). Structured something like a cooperative, IBRD is owned and operated for the benefit of its 187 member countries (Hlalitt, 57). Delivering flexible, timely and tailored financial products, knowledge and technical services, and strategic advice helps its members achieve results. “Through the World Bank Treasury, IBRD clients also have access to capital on favorable terms in larger volumes, with longer maturities, and in a more sustainable manner than world financial markets typically provide” (World Bank). The IBRD also has been agreed that the bank should assist in providing capital through normal channels at reasonable rates of interest and for long periods for projects which will raise the productivity of the borrowing country. There is agreement that the Bank should guarantee loans made by others and that through their subscriptions of capital in all countries should share with the borrowing country in guaranteeing such loans (Hazlitt, 77).
c. U.S Dollar as the Center was Established
U.S dollar as the center officially was established in the international monetary system. The U.S dollar was the currency with the most purchasing power and it was the only currency that was backed by gold at that time. Under these circumstances, it is easy to understand how the dollar became a world currency with several distinguishing functions. First, other governments made extensive use of the dollar. Through the fund agreement, the dollar became the intervention currency. Other countries accumulated dollars in their reserves beyond transactions needs (Krause, 12). Why should countries convert interest-paying dollar assets into sterile gold when it was the dollar that gave gold its value rather than the other way around? “Some countries, such as France, the Netherlands, and Switzerland, had a preference for gold, but they were in the minority. Thus after the United States owned most of the world’s gold, there were few changes in the U.S gold stock. The system in reality became a hybrid gold-dollar system” (Furstenberg, 187). The dollar also became a working currency in private uses outside the United States. Exchange restrictions on other currencies and their lack of convertibility made their use very difficult in international transactions. The dollar, in contrast, had all the standard attributes of money abroad (Krause ,Page 44).
d. Fixed Exchange Rate System
The conference set up the fixed exchange rate system which is part of the Bretton Woods system. From late 1800’s to the early 1900’s, most major trading nations had their own fixed exchange rates under a system called international gold standard (Gunter, 74). “The government of nations on the gold standard guaranteed to redeem their currency for a specified amount of gold. In the early 1900’s, for example, the dollar was valued at about 26 grains of gold, and the pound at about 126 grains. The exchange rate of the pound was thus fixed at about $4.85. Most nations abandoned the gold standard during the 1930’s and adopted a system called pegging after World War II ended in 1945” (Krause, 13). Under this system, a government bought and sold enough U.S dollars in exchange for its own money to keep the exchange rate steady. If the Japanese yen fell, the Japanese government used its reserves of U.S dollars other international money to buy yen. The resulting increase in demand for yen caused the price to climb again, keeping the exchange rate pegged at the desired level (Acheson, Chant,Prachowny, Page57).
5. Influence
The Bretton Woods Conference was a double edged-sword. The Bretton Woods System helped to maintain the stability of the international financial market, and exerts positive influences on economic recovery after war, but there were some serious defects.
a. Advantages
It had beneficial effect on international economy in the mid 20th century. The Bretton Woods agreement near the end of World War II became an effective tool for reworking a shattered world economy. Many countries gradually increased international trade and economy when the Bretton Woods System was set-up (Hazlitt, 127). U.S through its loan, donations, international trade, labor export and other methods to deliberately encourage an outflow of dollars, from an objective point of view, the world purchasing power was increased at that time. “The United States set up the European Recovery Program-Marshall Plan to provide large-scale financial and economic aid for rebuilding Europe largely through grants rather than loans”(The Marshall Plan: Fifty Years After). From 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy. At the same time, The Bretton Woods System provided the institutional framework for exchange rate stability to eliminate exchange rate fluctuation, and is conducive to the development of international trade. International Monetary Fund and the World Bank form the "two pillars" to the world economy and contribute lots to the development to the order as well as the growth of world economy. On the one hand, The IMF set out to use the money to grant loans to member countries with financial difficulties. On the other hand, the International Bank for Reconstruction and Development (IBRD) was expected to make loans of its own funds to underwrite private loans and to issue securities to raise new funds to make possible a speedy postwar recovery and supported every member country in its economic recovery and development (Furstenberg, 189).
In the post-World War II, countries devastated by the war needed enormous resources for reconstruction. Imports went up and their deficits were financed by drawing down their reserves. At that time, the US dollar was the main component in the currency reserves of the rest of the world, and those reserves expanded as a consequence of the US running a continued balance of payments deficit. Other countries were willing to hold those dollars as a reserve asset because they were committed to maintain convertibility between their currency and the dollar (Krause, 28). “The problem was that if the short-run dollar liabilities of the US continued to increase in relation to its holdings of gold, then the belief in the credibility of the US commitment to convert dollars into gold at the fixed price would be eroded” (Bretton Woods II). The central banks would thus have an overwhelming incentive to convert the existing dollar holdings into gold, and that would, in turn, force the U.S to give up its commitment. “In 1967, gold was displaced by creating the Special Drawing Rights (SDRs), also known as ‘paper gold’, in the IMF with the intention of increasing the stock of international reserves. Originally defined in terms of gold, with 35 SDRs being equal to one ounce of gold, it has been redefined several times since 1974” (“Bretton Woods II”). “At present, it is calculated daily as the weighted sum of the values in dollars of four currencies (euro, dollar, Japanese yen, pound sterling) of the five countries (France, Germany, Japan, the UK and the US)” (Krause, 28). It derives its strength from IMF members being willing to use it as a reserve currency and use it as a means of payment between central banks to exchange for national currencies. The original installments of SDRs were distributed to member countries according to their quota in the Fund. The breakdown of the Bretton Woods system was preceded by many events, such as the devaluation of the pound in 1967, flight from dollars to gold in 1968 leading to the creation of a two-tiered gold market, and finally in August 1971, the British demand that US guarantee the gold value of its dollar holdings. This led to the US decision to give up the link between the dollar and gold. After the collapse of the Bretton Woods system, the exchange rate and interest rate fluctuated seriously in financial markets, financial institutions and corporations faced great risk (Hazlitt, 151).
6. Conclusion
This Conference at Bretton Woods, representing nearly all the peoples of the world, has considered matters of international money and finance which are important for peace and prosperity. The Conference has agreed on the problems needing attention, the measures which should be taken, and the forms of international cooperation or organization which are required. The agreements reached on these large and complex matters are without precedent in the history of international economic relation.
Source
1. Acheson, A. K. Bretton Woods Revisited. 1th Edition.
University of Toronto Washington D.C.
The Brookings Institution. Toronto. 1971
2. Bretton Woods System. Http://polsci.edu/faclty/cohen/inpress/bretton.html
3. Bretton Woods II. http://10.%20krause%2c%20l.%20b.%20sequel%20to%20bretton%20woods.%202th%20edition.%20university%20of%20toronto%20press.%20washington%20d.c.%20%201922/
3. Bretton Woods II. http://10.%20krause%2c%20l.%20b.%20sequel%20to%20bretton%20woods.%202th%20edition.%20university%20of%20toronto%20press.%20washington%20d.c.%20%201922/
4. Conference at Bretton Woods. Http://ibiblio.org/pha/policy/1944.html
5. Furstenberg, G. M. International Money and Credit: The Policy Roles. 2th Edition.
International Monetary Fund. Washington D.C.
6. Hazlitt, H. From Bretton Woods to World Inflation. 5th Edition.
Regenery Gateway. Chicago
7. Gunter, B. G. The world’s Monetary System. 3th Edition.
Pluto Press. London
9. Assetto, V. J. The Soviet Blocin the IMF and the IERD. 1th Edition.
Westview Press. New York
10. Krause, L. B. Sequel to Bretton Woods. 2th Edition.
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