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Bretton Woods Agreement Essay


Any country in the world cannot achieve economic growth and stability if it does not have an economic system which can provide the necessary liquidity to the economy and surveillance and control in the various indicators that reflect economic performance.

As well at the international level, there cannot be any booming trade and commercial relations between developed countries, unless there is a monetary system that is available with rules and mechanisms, which ensure the stability of international monetary and liquidity of international payments and overseeing the organization of international transactions (Dorrucci & McKay, 2011, p. 1). The aim of the development of the international monetary system is to be the source of the international monetary stability.

However, its history shows that it was faced with unrest and economic instability of the international community because of its inability to accommodate international changes. An international monetary system must have three elements: the availability of the pay method, which has international acceptance, the availability of the institutional organization, which can supervise the work and facilitate exchanges and the availability of the central command of the system to achieve set goals.

The Bretton Woods Agreement was developed to revitalize the global capitalist economy through the establishment of international financial stability and to avoid any return to a state of economic chaos and depression for the time between the two world wars (Kenen, Papadia & Saccomanni, 1994, p. 20). This essay explores the concept of the international monetary system, its history, the Bretton Woods Agreement, its important features, reasons for its collapse and the fixed exchange rate system.

The international monetary system

Monetary system and international financial system is defined as the manner in which money is used to settle an international payment that enriches international economic relations. In other words, it can be defined as a set of rules, mechanisms and regulations that provide for the conduct of matters of monetary relations between countries in a manner that supports the effectiveness of international trade (Pfeiffer, 2012, p. 20).

Each system of monetary systems is unique to the global structure of the peerless rules of regulations and mechanisms. This helps to bear the cost of ensuring stability of international relations and the growth of international trade with expelled rates, without the consequent of unrest and economic turmoil in the various states that make up the global economy.

History of the international monetary system

Throughout history, precious metals such as gold and silver have been used for trade, termed bullion, and since early history, the coins of various issuers generally kingdoms and empires, have been traded: “The earliest known records of pre coinage use of bullion for monetary exchange are from Mesopotamia and Egypt, dating from the third millennium B.C” (Frenkel & Goldstein, 1996, p. 1). This is a time when the significance of money was of less value.

Barter trade was more recognized but towards the end of the seventh century trading by means of trade started to develop. England was the first country that adopted this system in 1816 and then spread later to Germany in 1873, France and Belgium 1873 – 1874, Russia and Japan in 1897 and the United States in 1900. Under this system, the gold coins made up the bulk of the money traded.

Despite the numerous attempts that emerged in bilateral or regional cooperation in the monetary area, they did not entail any actual effects of its value. This led to the establishment of a new financial system by allied countries, forming the basis for international relations for the financial world after World War II (Crockett & Goldstein, 1987, p. 20).

Features of the Bretton Woods Agreement

The idea of the International Monetary Fund was a framework for economic cooperation in response to the chaos that engulfed the international monetary system. After the application of both gold and exchange gold, and under this convention, rules were identified to form the basis of determining the exchange rate of different countries represented in the fixed exchange rates (Farhi, Gourinchas & Rey, 2011, p. 1).

In December 1945, the International Monetary Fund came into existence when 29 countries signed the convention on the foundation. It is a specialized agency of the United Nations system agencies, which was established to work on enhancing the safety of the global economy. The headquarters of the Fund is in Washington, DC, and it is managed by its members. The IMF is the central institution in the international monetary system.

The fund targets the prevention of crises in the system by encouraging individual countries to adopt sound economic policies. It can also take advantage of its members who need temporary funding to address their financial problems. The Fund focuses primarily on the macroeconomic policies of countries, the balance of government policies and cash management, credit and exchange rates, including the organization of banks and other financial institutions and their control (Bordo, 1993, p. 20).

Bretton Woods system of exchange rates prevailed in the years starting from 1945 to 1971: “The countries that joined the Fund between 1945 and 1971, agreed to keep exchange rates attached at adjustable in one case is the correct “radical disruption” in the balance payments and the approval of the International Monetary Fund” (Hagele, 2010, p. 1).

This is called the Bretton Woods system of exchange rates, which continued to prevail until 1971, with its terms having been changed in 1969. The purpose of this amendment was to establish special drawing rights, and the amendment became effective on July 28 of 1969). The Special Drawing Rights gave the owner the right to a credit facility in convertible currencies of the member states (Hagele, 2010).

The unit SDR of 1969 was equivalent to the dollar, but they broke up after the allocation of exchange rates, also known as gold (35) and the withdrawal of a special unit for an ounce. The administrative structure of the International Monetary Fund consists of Board of Governors, Executive Board, Managing Director and the Fund’s staff who are selected by the fund manager, because he is competent to appoint staff and he has to take into account maximum efficiency when selected.

The IMF practiced its activities on the basis of resources available to it from the member countries’ quotas in the fund. Other resources include loans, and proceeds from gold sales and of its resources from which the operations of the Bank’s capital is determined in accordance with the share of each country in the International Monetary Fund, and the description of this plan is an economical indicator of the ability of each country (Joerges, Straith & Wagner, 2005, p. 12).

At the time, it was the founded, the Bank of USA had more than 37% of the voting rights. It is worth mentioning that the goals envisaged by the Legal Fund today are the same objectives that were formulated in 1944.

At the same time, when the International Monetary Fund was established, the International Bank for Reconstruction and Development was established, known as the World Bank. World Bank can be defined as a global economic Foundation responsible for managing the financial system. It is also interested in the application of economic policies to achieve economic development of member states (Czinkota, Ronkainen & Moffett, 2008, p. 1).

Therefore, its responsibility mainly focused on development, investment and structural reform policies, and the allocation of resources in the public and private sectors. In addition, the World Bank is interested mainly creditworthy because it depends on the financing of borrowings from international financial markets. The countries that participated in the Bretton Woods conference endorsed the World Bank officially on 28 Dec 1945.

After three months, they held the first meeting on 8 March 1946 for Governors of the Bank in Savannah, Georgia, USA. It developed internal regulations of the Bank and the appointment of the bank manager and his deputies and managers executive extending the time limit to states that had not ratified the convention, so that they could have the opportunity of joining the World Bank membership.

Washington was chosen to be the headquarters of the World Bank. The bank appeared to exercise its activities on 25 of June 1964 (Andrews, 2008, p. 25). Since its foundation, it has entrusted the mission that it is financing the reconstruction of nations devastated by World War II and then its phase to finance development in the world so much that it funded infrastructure projects, which improved the welfare of people in developing countries.

The beginning of 1946 was the starting point for the emergence of the GATT, when the Economic and Social Council of the United Nations decided to convene an international conference to discuss the formation of international trade. The first session of the Preparatory Committee of the Conference was held in the capital of Britain in October 1946 (Zeiler, 1999).

The second session of this Committee was held in Geneva in April to October in 1947, and ended up preparing a draft charter for international trade, including the construction of an international organization of trade. These negotiations resulted from the birth of what is known as the General Tariffs and Trade (GATT), which was concluded in 1947 and came into force in January 1948, and several countries accepted it out in the initial 23 countries.

These included the United States, France, and England. This convention, which was replaced by the World Trade Organization, proposed for an international conference on Trade, which was held in Havana from November 21 to March 24 1948, and preceded by a series of meetings for preparation. Despite the Havana Charter involving 55 countries, the then Soviet Union did not attend it.

The most prominent trends in trade policies of the member states were characterized by equality of tariff treatment to be reduced annually by negotiation (Schnell, 2007, p. 1). Furthermore, there was the establishment of customs unions and free-trade zones, which became the Charter of the Global Framework III designated trade, as well as the International Monetary Fund and the World Bank.

The main objective of the establishment of GATT was to liberalize international trade, and was made during the first years of its inception. All efforts to achieve this purpose and the focus was initially on the reduction of customs duties or be installed at least, so it conducted several rounds of negotiations between the contracting parties within the scope of GATT to achieve this purpose (Petersmann, 1997, p. 20).

During the period between 1947 and 1967, it held seven sessions of trade negotiations with the countries. It was the most important tour of Geneva Foundation, which resulted in the First Geneva Round negotiations, resulting into 45 thousand from customs franchise at a cost of ten billion dollars of trade, or nearly a fifth of total world production in those days.

Moreover, 23 participating countries agreed on the need to accept some trade rules in the draft Charter of the Organization of International Trade and felt the need to accomplish this quickly and unconditionally to protect the value of tariff concessions that negotiated them. This came into force in January 1948, while the Charter of the Organization of International Trade was still under negotiations, and became the 23 states.

It was a founding member of the languages ​​(Contracting Parties), which focused on the negotiations during the tour and other tours to: Annecy 1949, Torquay 1951, Geneva 1956, Dillon 1961, Kennedy 1967, Tokyo 1979 and Uruguay in 1993 and are the most important rounds to have led to the establishment of the World Trade Organization (Diane Publishing Company, 1993, p. 20).

This is because it had reached a positive outcome on the abolition of quantitative restrictions on imports, not only to regulate trade in goods but also included trade in services and intellectual property rights, and has produced new mechanisms related to settling commercial disputes, which lasted more than seven years.

Failure of Bretton Woods System

The Bretton Woods system lasted until 1971. Inflation and trade deficit were significant responsible for the failure of the system as they greatly undermined the worthiness of the dollar. A request was made by the US that Germany and Japan should appreciate their respective currencies in vain (Roubini & Setser, 2005).

The request by the US to have the currencies of Germany and Japan appreciated was turned down because these countries feared that such an action would be harmful to their export business. At this point, the US had no alternative left but letting the dollar float. This is led to a major global panic and the Smithsonian Agreement in 1971 was drafted to save the day. All the efforts that were channeled towards changing the trend failed and by 1973 there was a general consensus that exchange rates were to be left on their own.

Replacement of Bretton Woods System

It should be noted that the floating system which came in was not absolutely floating as central banks still manipulated the currencies in some ways. This occurred frequently when sharp changes in currencies were imminent; it was taken as a safe protection measure to guard the economy from crashing (Dammasch, n.d., p. 1). With the Smithsonian Agreement, a trend of controlling the exchange rates developed:

Countries with large trade surpluses sold their own currencies in an effort to prevent them from appreciating, thus hurting exports. By the same token, countries with large deficits often buy their own currencies in order to prevent depreciation, which raises domestic prices.

But there are limits to what can be accomplished through intervention, especially for countries with large trade deficits. Eventually, a country that intervenes to support its currency may deplete its international reserves, making it unable to continue buttressing the currency and potentially leaving it unable to meet its international obligations. (Stephey, 2008, p. 1)

The Smithsonian Agreement was quite similar to the Bretton Woods agreement. The difference between the two was that the Smithsonian Agreement allowed a fluctuation of currencies in a wider range unlike the Bretton Woods agreement which did not create this allowance. Later in 1972, an attempt was made to rid the dollar of its binding conditions.

This was accomplished through the adoption of a European common floating exchange rate: “The agreement was very similar to the Bretton Woods agreement, but allowed the currency value to float in a wider context” (Wiggin, 2006, p. 1). It has been noted that these systems (Smithsonian Agreement and the European common floating exchange rate) had the same mistakes as the Bretton Woods System and consequently their collapse was witnessed in 1973. This collapse was the dawn of a free floating exchange rate:

This shift was entirely accidental, since there was no other new agreement that could be used to replace it. The Government was free to bind their currencies, semi-bound to allow their currencies or completely free of exchange rate fluctuations. In 1978, a free-floating exchange rate regime was officially started and accepted for use. (Wiggin, 2006, p. 1)

A floating exchange rate also referred to as the flexible exchange rate is whereby a currency value is allowed to change in value against other currencies freely. Most economists advocate for the free floating exchange rates and most countries have adopted this system. The system is however not left completely floating but rather managed in its floating state (Wiggin, 2006, p. 1). In a managed state of floating system, central banks fixes two limits beyond which a currency cannot fall and above which it cannot go.

This is accomplished either a purchase or sell of a significant amount of foreign currency depending on the change that is desired: “The meeting of the members of the International Monetary Fund in Jamaica in January 1967 formalized a system of floating exchange rate, which was followed a fixed exchange rate. The purpose of the Jamaica meeting was to revise the IMF’s Articles of Agreement to reflect the new reality of floating exchange rate” (Reis, 1995, p. 20).

Decisions that came in the reforms of the International Monetary System were: abolition of the exchange rate and leave full freedom to banks in dealing with gold and determine prices, cancellation of the role of gold as a reference for the evaluation of special drawing rights, as well as a basis to evaluate the national currencies of the member states and cancellation of any provision of the convention provides for the gold but it did not lose its importance as it can find it has been used by countries as collateral for loans.

In April 1977, the State of South Africa borrowed from international banks to ensure some gold reserves (Reis, 1995). The second amendment was done in order to develop the SDR, to have weight in the international reserve assets and retain its place as an asset of gold reserves to the monetary authorities in the world despite the end of the role of cash in the framework of the international monetary system.


This analysis has shown that the international monetary and financial system is variable and renewable according to the latest developments in the situation of the global economy. It is a gold, which was formally launched in 1870, taking the form of a gold coin to turn in the form of gold coins in 1914 due to the circumstances of World War I, where pursued states system of gold coins in the interwar period of 1914 to 1925 adopted a state system of exchange with gold in the period between 1925 to 1944 and the latter known gold last forms and collapsed because of world War II.

At the end it was thought that the world had succeeded in the development of a system to control international payments (Dorrucci & McKay, 2011, p. 1). This system was known to have exchange rate fixed with gold, but this did not last long and collapsed in 1971 to replace the drainage system, Smithsonian.

The main objective of finding them was to look for ways to end the crisis in the global system in 1971. However, the latter view of the developments that took place for the global economy failed to pursue a system for the world floating exchange rates, succeeding Smithsonian since 1973.


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