Bretton Woods system of monetary management

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MEANING:
In times of globalization the economic environment changes rapidly. Capital
movements become larger and at the same time less controllable. Therefore, the need for a
stabilizing system becomes more and more apparent. In the past such a system has been
established at the conference of Bretton Woods. Already in 1944 the British economist John
Maynard Keynes emphasized “the importance of rule-based regimes to stabilize business
expectations something he accepted in the Bretton Woods system of fixed exchange
rates.”1Recentlyleading industrial nations have been calling for a renewal of the purpose and the
spirit of this system in order to cope with the growing size of international trade and capital
flows. This essay gives a short overview of the system’s development from 1944 until today and
stress esespecially problems and obstacles. It identifies mistakes that have been made and points
out aspects that have to be taken into account when implementing a “new system of Bretton
Woods”.
INTRODUCTION:
The BrettonWoods system of monetary management established the
rules for commercial and financial relations among the world's major industrial states in the mid-
20th century. The Bretton Woods system was the first example of a fully negotiated monetary
order intended to govern monetary relations among independent nation-states. The chief features
of the Bretton Woods system were an obligation for each country to adopt a monetary policy that
maintained the exchange rate by tying its currency to gold and the ability of the IMF to bridge
temporary imbalances of payments. Also, there was a need to address the lack of cooperation
among other countries and to prevent competitive devaluation of the currencies as well.
Preparing to rebuild the international economic system while World War II was still raging, 730
delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods,
New Hampshire, United States, for the United Nations Monetary and Financial Conference, also
known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and
signed the Agreement on its final day. Setting up a system of rules, institutions, and procedures
to regulate the international monetary system, the planners at Bretton Woods established
the International Monetary Fund (IMF) and the International Bank for Reconstruction and
Development (IBRD), which today is part of the World Bank Group. These organizations
became operational in 1945 after a sufficient number of countries had ratified the agreement.

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On 15 August 1971, the United States unilaterally terminated convertibility of the US
dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar
a fiat currency. This action, referred to as the Nixon shock, created the situation in which the
United States dollar became a reserve currency used by many states. At the same time,
many fixed currencies (such as the pound sterling, for example), also became free-floating.

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INTERWAR PERIOD:
A high level of agreement among the powerful (nations) that failed to coordinate
exchange rates during the interwar period had exacerbated political tensions facilitated the
decisions reached by the Bretton Woods Conference. Furthermore, all the participating
governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded
several valuable lessons.
The experience of World War II was fresh in the minds of public officials. The planners at
Bretton Woods hoped to avoid a repeat of the Treaty of Versailles after World War I, which had
created enough economic and political tension to lead to WWII. After World War I, Britain
owed the US substantial sums, which Britain could not repay because it had used the funds to
support allies such as France during the War; the Allies could not pay back Britain, so Britain
could not pay back the US. The solution at Versailles for the French, British, and Americans
seemed to be, make Germany pay for it all. If the demands on Germany were unrealistic, then it
was unrealistic for France to pay back Britain, and for Britain to pay back the US. Thus, many
"assets" on bank balance sheets internationally were actually unrecoverable loans, which
culminated in the 1931 banking crisis. Intransigent insistence by creditor nations for the
repayment of Allied war debts and reparations, combined with an inclination to isolationism, led
to a breakdown of the international and a worldwide economic depression. The so-called "beggar
thy neighbor" policies that emerged as the crisis continued saw some trading nations using
currency devaluations in an attempt to increase their competitiveness (i.e. raise exports and lower
imports), though recent research suggests this de facto inflationary policy probably offset some
of the contractionary forces in world price levels.
In the 1920s, international flows of speculative financial capital increased, leading to extremes in
balance of payments situations in various European countries and the US. In the 1930s, world
markets never broke through the haphazardly constructed, nationally motivated and imposed
barriers and restrictions on international trade and investment volume.
The various anarchic and often autarkic protectionist and neo-mercantilist national policies –
often mutually inconsistent – that emerged over the first half of the decade worked inconsistently
and self-defeating to promote national import substitution, increase national exports, divert
foreign investment and trade flows, and even prevent certain categories of cross-border trade and
investment outright. Global central bankers attempted to manage the situation by meeting with
each other, but their understanding of the situation as well as difficulties in communicating
internationally, hindered their abilities. The lesson was that simply having responsible, hard-
working central bankers was not enough.

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Britain in the 1930s had an exclusionary trading bloc with nations of the British Empire known
as the "Sterling Area." If Britain imported more than it exported to, say, South Africa, South
African recipients of pounds sterling tended to put them into London banks. This meant that
though Britain was running a trade deficit, she had a financial account surplus, and payments
balanced. Increasingly, Britain's positive balance of payments required keeping the wealth of
Empire nations in British banks. One incentive for, say, South African holders of rand to park
their wealth in London and to keep the money in Sterling, was a strongly valued pound sterling.
Unfortunately, as Britain reindustrialized in the 1920s, the way out of the trade deficit was to
devalue the currency. But Britain couldn't devalue, or the Empire surplus would leave its
banking system.
Nazi Germany also worked with a bloc of controlled nations by 1940. Germany forced trading
partners with a surplus to spend that surplus importing products from Germany. Thus, Britain
survived by keeping Sterling nation surpluses in its banking system, and Germany survived by
forcing trading partners to purchase its own products. The US was concerned about a sudden
drop-off in war spending which might return the nation to unemployment levels of the 1930s,
and so wanted Sterling nations and everyone in Europe to be able to import from the US, hence
the US supported free trade and international convertibility of currencies into gold or dollars.
POSTWAR NEGOTIATIONS:
When many of these same expert observers reared on the
1930s debacle became the architects of a new, unified, post-war system at Bretton Woods, and
the watchwords became "no more beggar thy neighbor" and "control flows of speculative
financial capital." Preventing a repetition of this process of competitive devaluations was
desired, but in a way that would not force debtor nations to contract their industrial bases by
keeping exchange rates at a level high enough to attract foreign bank deposits. John Maynard
Keynes, wary of repeating the Great Depression, was behind Britain's proposal that surplus
nations be forced by a "use-it-or-lose-it" mechanism, to either import from debtor nations, build
factories in debtor nations or donate to debtor nations.
The US opposed Keynes' plan, and the brain at the US Treasury, Harry Dexter White, rejected
Keynes' proposals, in favor of an International Monetary Fund which would have enough
resources to counteract destabilizing flows of speculative finance. However, unlike the modern
IMF, White's proposed fund would have counteracted dangerous speculative flows
automatically, with no political strings attached—i.e., no IMF conditionality.

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According to economic historian Brad Delong, on almost every point where he was overruled by
the Americans, Keynes was later proved correct by events. Today these key 1930s events look
different to scholars of the era in particular, devaluations today are viewed with more
nuance. Ben Bernanke's opinion on the subject follows:
"... [T]he proximate cause of the world depression was a structurally flawed and poorly managed
international gold standard. ... For a variety of reasons, including a desire of the Federal
Reserve to curb the US stock market boom, monetary policy in several major countries turned
contractionary in the late 1920s—a contraction that was transmitted worldwide by the gold
standard. What was initially a mild deflationary process began to snowball when the banking and
currency crises of 1931 instigated an international "scramble for gold." Sterilization of gold
inflows by surplus countries [the USA and France], substitution of gold for foreign exchange
reserves, and runs on commercial banks all led to increases in the gold backing of money, and
consequently to sharp unintended declines in national money supplies. Monetary contractions in
turn were strongly associated with falling prices, output and employment. Effective international
cooperation could in principle have permitted a worldwide monetary expansion despite gold
standard constraints, but disputes over World War I reparations and war debts, and the insularity
and inexperience of the Federal Reserve, among other factors, prevented this outcome. As a
result, individual countries were able to escape the deflationary vortex only by unilaterally
abandoning the gold standard and re-establishing domestic monetary stability, a process that
dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries
finally left gold in 1936." —Great Depression, B. Bernanke
In 1944 at Bretton Woods, as a result of the collective conventional wisdom of the time,
representatives from all the leading allied nations collectively favored a regulated system of
fixed exchange rates, indirectly disciplined by a US dollar tied to gold—a system that relied on a
regulated market economy with tight controls on the values of currencies.
Flows of speculative international finance were curtailed by shunting them through and limiting
them via central banks. This meant that international flows of investment went into foreign direct
investment (FDI)—i.e., construction of factories overseas, rather than international currency
manipulation or bond markets. Although the national experts disagreed to some degree on the
specific implementation of this system, all agreed on the need for tight controls.

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PREVIOUS REGIME:
In the 19th and early 20th centuries gold played a key role in
international monetary transactions. The gold standard was used to back currencies; the
international value of currency was determined by its fixed relationship to gold; gold was used to
settle international accounts. The gold standard maintained fixed exchange rates that were seen
as desirable because they reduced the risk when trading with other countries.
Imbalances in international trade were theoretically rectified automatically by the gold standard.
A country with a deficit would have depleted gold reserves and would thus have to reduce
its money supply. The resulting fall in demand would reduce imports and the lowering of prices
would boost exports; thus the deficit would be rectified. Any country experiencing inflation
would lose gold and therefore would have a decrease in the amount of money available to spend.
This decrease in the amount of money would act to reduce the inflationary pressure.
Supplementing the use of gold in this period was the British pound. Based on the dominant
British economy, the pound became a reserve, transaction, and intervention currency. But the
pound was not up to the challenge of serving as the primary world currency, given the weakness
of the British economy after the Second World War.
The architects of Bretton Woods had conceived of a system wherein exchange rate stability was
a prime goal. Yet, in an era of more activist economic policy, governments did not seriously
consider permanently fixed rates on the model of the classical gold standard of the 19th century.
Gold production was not even sufficient to meet the demands of growing international trade and
investment. Further, a sizable share of the world's known gold reserves were located in
the Soviet Union, which would later emerge as a Cold War rival to the United States and
Western Europe.
The only currency strong enough to meet the rising demands for international currency
transactions was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the
dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars
into gold at that price made the dollar as good as gold. In fact, the dollar was even better than
gold: it earned interest and it was more flexible than gold.

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FORMAL REGIMES:
The Bretton Woods Conference led to the establishment of the
IMF and the IBRD which still remain powerful forces in the world economy.
A major point of common ground at the Conference was the goal to avoid a recurrence of the
closed markets and economic warfare that had characterized the 1930s. Thus, negotiators at
Bretton Woods also agreed that there was a need for an institutional forum for international
cooperation on monetary matters. Already in 1944 the British economist John emphasized "the
importance of rule-based regimes to stabilize business expectations"—something he accepted in
the Bretton Woods system of fixed exchange rates. Currency troubles in the interwar years, it
was felt, had been greatly exacerbated by the absence of any established procedure or machinery
for intergovernmental consultation.
As a result of the establishment of agreed upon structures and rules of international economic
interaction, conflict over economic issues was minimized, and the significance of the economic
aspect of international relations seemed to recede.
INTERNATIONALMONETARYFUND:
Officially established on 27 December 1945,
when the 29 participating countries at the conference of Bretton Woods signed its Articles of
Agreement, the IMF was to be the keeper of the rules and the main instrument of public
international management. The Fund commenced its financial operations on 1 March 1947. IMF
approval was necessary for any change in exchange rates in excess of 10%. It advised countries
on policies affecting the monetary system and lent reserve currencies to nations that had incurred
balance of payment debts.

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BACKGROUND:
The Bretton Woods system of monetary management established the rules
for commercial and financial relations among the world's major industrial states in the mid-20th
century. The Bretton Woods system was the first example of a fully negotiated monetary order
intended to govern monetary relations among independent nation-states. Preparing to rebuild the
international economic system as World War II was still raging, 730 delegates from all 44 Allied
nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United
States, for the United Nations Monetary and Financial Conference.

9
The delegates deliberated during 1–22 July 1944, and signed the Agreement on its
final day. Setting up a system of rules, institutions, and procedures to regulate the international
monetary system, the planners at Bretton Woods established the International Monetary Fund
(IMF) and the International Bank for Reconstruction and Development (IBRD), which today is
part of the World Bank Group. These organizations became operational in 1945 after a sufficient
number of countries had ratified the agreement. The chief features of the Bretton Woods system
were an obligation for each country to adopt a monetary policy that maintained the exchange rate
by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances
of payments. On 15 August 1971, the United States unilaterally terminated convertibility of the
US$ to gold. This brought the Bretton Woods system to an end and saw the dollar become fiat
currency. This action, referred to as the Nixon shock, created the situation in which the United
States dollar became a reserve currency used by many states. At the same time, many fixed
currencies (such as GBP, for example), also became free floating.
OBJECTIVESOF BRETTONWOODS SYSTEM:
Since the beginning of the 19th century,
globalization, international trade and free trade between countries became the new economic
order and several attempts have been made since then to develop policies and schemes to ensure
the stability of the international monetary system. It is safe to say that in truth, the world
economy has never been in a state of utopia, but nevertheless, we have never stopped trying to
attain such.
The Bretton Woods era of 1944 to 1977, one of the few fairly successful schemes the world
powers created in trying to achieve economic utopia, though existed for a short period, has been
accredited as being one of the most successful international monetary systems, so impressive was
the economic stability and growth of the era that there have been ongoing talks for a comeback
of the system.

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BACKGROUND AND INTENTEDOBJECTIVES:
At the end of the World War II, 44 allied
countries and Argentina came together in Mount Washington Hotel in the area of Bretton
Woods, New Hampshire, United States, with a major motive of correcting the ills of the post-war
I era which was characterized by International economic disorder, ‘beggar-thy-neighbor’
policies- where countries trying to come out of their depressed states do so, but at the expense of
other countries.
The overall intended objective was therefore stable exchange rate and possible promotion of
world peace. There was the recognized need for an institutional forum for International
cooperation on monetary matters, so that in the advent of a world-wide crisis, such as world
wars, there would be an internationally agreeable solution, rather than individual countries
adopting selfish policies.
BUILD UP OF THE SYSTEM:
This recognized need had prior to the conference in
1944, instigated discussions amongst the British and American governments, and their economic
experts, who had come up with different plans; Harry Dexter White of the U.S treasury on one
hand, and Lord Keynes of Britain on the other, and the conference was seen as merely
formalizing, and finalizing the agreements made. The final decisions which were agreed to at the
Bretton woods conference were influenced majorly by the U.S plans. This is evident of the
economic and military prowess of the United States at that time.
The concentration of power in the hands of few countries, the like-mindedness of the overall goal
(not necessarily the policies in achieving these goals) and the willingness and ability of one
country-the U.S to takeover leadership, allowed for the success of the Bretton Woods
conference.
THE DESIGN:
The system was designed to incorporate the advantages of both a fixed rate
system, such as the gold standard (stable exchange rate), and that of a flexible exchange rate
system (flexibility), and the resultant system was the adjustable peg rate system. The Peg and
Exchange Convertibility: The U.S dollar was pegged to gold at the fixed rate of $35 per ounce,
and every other country’s currency was then pegged to the dollar at a par value which had to be
maintained or defended by buying and selling the dollar in the foreign currency market.

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Though there was no International Central Bank to produce an International currency, and
control its supply, the U.S dollar became in effect, the world currency. With the fixed peg of $35
per ounce of gold, the rate at which countries could exchange their dollar for gold and vice-versa,
the U.S dollar became as good as gold, and this boosted faith in the U.S dollar.
This system afforded an opportunity for exchange rates amongst countries to be fixed in the short
run, within a 1% band around the pegged rate. A country could change the rate at which it was
pegged to gold, outside the 1% band, only if its balance of payment was in ‘fundamental
disequilibrium’. Why The U.S Dollars: The U.S was still the only currency being backed by
gold, and at that time held three-quarter of the world’s monetary gold (Gold had been transferred
to U.S by European nations during the war), leaving the $ the most appreciated currency to the
rest of the world. It was also the strongest economy after the World War II, and was considered
liquid enough to meet the demand of increasing Internationalization, and global trade.
Addressing Liquidity: To satisfy International liquidity, and to prevent the repeat of the gold
shortage of the 1920s, and the fallout of the fixed rate of the 1930s, another major decision to be
made was as regards adequate supply of official monetary reserves; This was very fundamental
to the effective running of an adjustable peg rate. The conference agreed to a system of
subscriptions and quotas which reflected each country’s economic strength. The quota of each
member country was made up of 25% of gold and the remaining 75% in the country’s domestic
currency. The quotas were important also because they determined the voting right, and the
amount of foreign currency each member country could borrow from the fund.
THE REASON FOR THE DEMISE:
According to economic historians, the Bretton
Woods system came to a halt in the 1970s leading to a switch from a state-led to a market-led
system of monetary control. Crucial events leading to its demise being the suspension of the
dollar's convertibility into gold in 1971, the United states abandonment of Capital Controls in
1974, and Great Britain's ending of capital controls in 1979 which was swiftly copied by most
other major countries, amongst other reasons enumerated below:
Balance of Payment: A major cause for the demise of the Bretton Woods system was its
dependence on the United States economy. The system was designed to remain strong as long as
the U.S economy remained strong. However, an excessive supply of US dollars on FOREX
markets in exchange for other currencies led to the US dollar depreciation and appreciation of
non-reserve currencies. To maintain the fixed exchange rate, non-reserve countries were required
to intervene on the private FOREX. For example, the British central bank was required to run a
balance of payments surplus, buy the excess dollars and sell pounds on the private FOREX
market.

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This Balance of payment surplus had inflationary problems because of the excess supply of the
non-reserve country’s currency. The U.S. economy also faced inflationary pressure from
operating a balance of payment deficit, the federal government expenditure rose from financing
the Vietnam War and social programs. The U.S used expansionary monetary policies, printing
more money, in order to finance those huge expenses. This increased money supply, which led to
U.S goods becoming more expensive than foreign goods due the rise in prices and caused a large
demand for foreign currency.
Dollar overhang occurred when the amount of U.S dollar assets held by non-reserve central
banks exceeded the total supply of gold in the U.S treasury at the exchange rate of $35 per
ounce. Dollar overhang occurred in the system by 1960 and continued to worsen throughout the
decade of the 1960s. By 1971, foreign holdings of U.S dollars stood at $50 billion while U.S
gold reserves were valued at only $15 billion. This led to speculation on the U.S dollar,
devaluing the dollar and holding gold became the safe route. In a gold exchange standard this
linkage between gold and the reserve currency is believed to provide the constraint that prevents
the reserve currency country from disproportionate monetary expansion and its ensuing
inflationary effects.
In the face of balance of payment deficits leading to a severe depletion of gold reserves, the U.S
had several adjustment options open. One option was a devaluation of the dollar. However, this
was not an option easy to implement. The only way to realize the dollar devaluation was for
other countries to revalue their currencies with respect to the dollar, as the currencies were fixed
to the dollar. The other devaluation option open to the US was devaluation with respect to gold.
In other words, the U.S could raise the price of gold to $40 or $50 per ounce or more. However,
this change would not change the fundamental conditions that led to the excess supply of dollars.
At most, this devaluation would only reduce the rate at which gold flowed out to foreign central
banks. Also, since the U.S gold holdings had fallen to very low levels by the early 1970s and
since the dollar overhang was substantial, the devaluation would have had to be extremely large
to prevent the depletion of U.S gold reserves.
DISCUSSION TO INTRODUCE ANEW SYSTEM:
The last 10 years have been
followed by many public discussions about Bretton Woods’s system with different controversial
opinions. According to S.Dammasch (2000, p.11-12) “Human rights activists argue that the
programmed for the structural adjustment (SAP) of the developing countries initiated by the
World Bank and the IMF has led to increase poverty of the East-bloc states. In contrast,
however, major industrialized nations have begun to worry about the implications of the growing
size and the speculative nature of financial movements in times of increasing globalization
trends. Thus, calls for a “new system of Bretton Woods” have been heard in almost every
industrialized country”.

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Several calls have been made over the years for a refurbished international system to tackle the
problem of uncontrolled capital flows amongst nations. Several Financial journalists have also
noted that Financial crises since 1971 have been preceded by large capital inflows into affected
regions. It wasn't until late 2008 that this idea began to receive substantial support from leading
politicians.
There has been a call by French President Nicolas Sarkozy during the World Economic Forum in
Davos in 2010, for the reinvention of the Bretton Woods system of currency valuations in order
to remove volatility and monetary manipulation by some nations to enhance their export
successes. (Diane Francis, 2010)On October 13, 2008, British Prime Minister Gordon Brown
(APT Team, 2008) said “world leaders must meet to agree to a new economic system: ‘We must
have a new Bretton Woods, building a new international financial architecture for the years
ahead.’”
Generally the industrial nations experienced much slower growth and higher unemployment in
the post Bretton Woods era, and according to Professor Gordon Fletcher in retrospect the 1950s
and 60s when the Bretton Woods system was operating came to be seen as a golden age.
Financial crises are seen to have been more extreme and have increased in frequency with the
emerging economies bearing the brunt of it before the most recent global financial crisis which
started in 2007.
Chief amongst these strengths of the old Bretton Woods as noted by Anna J. Schwartz (2000)
was that there were low and stable inflation rates on the average for most industrialized countries
except for Japan during the Bretton woods era. More so, considerable expansion of international
trade and investment and the real per capita income growth was higher than in any monetary
regime since 1879.
CHALLENGES TO A NEW BRETTONWOODSYSTEM:
Various factors have been
identified as clogs in the wheel of the advancement of a new Bretton Woods system, some of
them are:
Evolution of the World Economy: One of the major reasons why a new Bretton Woods system
might not work is because of how evolved the global economy has become in terms of
international trade and monetary management. After the demise of the old Bretton Woods
system, the following structural changes have taken place in world economies. Growth of
international currency markets: due to the instability and lack of certainty in the financial world,
having a fixed exchange rate became difficult and thus rational expectations and predictions
were fuelled with uncertainty.

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Thus, for countries to make well informed decisions based on prevailing economic conditions,
they adopted a floating exchange rate system, so that the true value of the economy could be
revealed at all times.
A major reason the Bretton Woods system was successful was because of its fixed exchange rate
system. Thus, with the current increase in trade and volatility of the monetary system, a fixed
rate system might be difficult to implement.
Lack of Dominant Currency: During the Bretton woods era the U.S. dollar was the most stable
and powerful currency. It was also the only currency strong enough to be exchanged for gold.
Since it was the strongest currency, countries traded mostly in the dollar. Although currently, due
to the prevailing economic conditions, the dollar and other currencies like the Chinese RMB,
euro, yen are unstable and not strong enough to be dominant currencies.
The Old Bretton Woods was successful because it only had one currency to measure by. The
lack of a dominant currency would therefore pose challenges to the development of a new
system and multiple currencies will only be more destabilizing.
Derivative trading: with the emergence of the international currency markets, derivative trading
has been a popular favorite of the financial market traders. Speculation, hedging, derivatives and
arbitrage trading in the financial system have significant impact on the level of international
prices and exchange rates, that it cannot be ignored. Integrating these in a new monetary system
would involve complex controls which might be difficult to implement.
Conflicts of Interest: Different nations have different levels of growth, different objectives, and
different currency policies. For some countries adopting a fixed exchange rate is more
convenient, while for others, especially developing countries having a flexible exchange is more
profitable. Due to the varying preferences and objectives of each nation, being cooperative and
following a particular policy could be quite inconvenient and disadvantageous for most.
Floating Exchange Rate System: The fixed exchange rate system of the old Bretton Woods was
advantageous but had limitations. Though it encouraged price stability and was anti-inflationary,
its restrictive nature prevented necessary adjustments to economic disequilibrium. Presently, the
exchange rates worldwide for most countries are flexible. This flexibility makes trade between
developing and developed countries bearable and profitable. When fixed, trade is expensive for
most developing countries. And with the current economic recession, flexibility is what the
economy needs to make profitable trade.
The Original vs. A Sequel: According to G. Ranchman (2008, Financial times), a new bretton
woods will flop. Reason being that; like most sequels, Bretton Woods II is not going to be nearly
as good as the original. The first reason for this is that the global financial crisis, bad as it is, is
not as bad as the Second World War. The war destroyed the established order and so the world
leaders who drew up the postwar institutions on a blank slate.

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Second, there isn’t enough time. The original Bretton Woods conference benefited from two
years of preparation, and not a few weeks. Finally, there are conflicts of interest and U.S has
neither the power nor the inclination to impose a new set of arrangements on the rest of the
world. Of course his opinion is subjective, but in truth, given an ill prepared plan and conflicts of
interests, a new Bretton Woods is most likely to fail.
Inefficient Governance: Creating a Bretton Woods system that takes account of the complex
intrinsic and extrinsic framework of the global economy is quite difficult. The economy has
evolved a lot since the 1944 when the first Bretton woods system was made. There are more
world leaders now, and the more the world leaders are, the higher the differences in preferences.
Creating a Bretton Woods that could possibly integrate the objectives of all nations is not only
difficult but if created will require high maintenance.
LESSON FROM OLD BRETTONWOOD SYSTEM:
U.S Deficit budget During
the Bretton woods era, the U.S ran deficit budget. Due to the nation’s constant lending to other
nations, they experienced a severe deficit in their balance of payments which strongly affected
their international financial position and status negatively. This deficit made the dollar weak and
undependable. Due to the large scale of economic activities globally, the exchange rate is always
adjusting to reflect the real value of the economy. Thus having just one currency pegged to gold
in this present time is no longer reasonable. Currencies need to be flexible against each other, so
that when a nation runs a deficit, and its currency looses value, the whole economy will not lose
at the same time.
Bretton Woods Policies: When the policy of a fixed exchange rate system was established, the
financial strength of developing countries was not adequately taken into consideration. In the
short run, the fixed exchange rate worked well for the developed countries, but as the developing
countries claimed independence and began to evolve into the global economy, trade with the
developed economies at a fixed rate was definitely too expensive for them.
Moreover, polices imposed by the World Bank and IMF on developing countries like SAP i.e.
structural adjustment program didn’t work out well on the developing countries, it has been
argued that it worsened their level of poverty, S.Dammasch.
The Slide to breakdown: The breakdown of the Bretton Woods system occurred via the failure of
the dollar as the dominant currency, the rules of cooperation for its convertibility into gold and
the exchange rates regime. The lack of a backup currency to resolve the issue or at least
minimize the losses incurred contributed to the demise of the system.
Thus the Bretton Woods dependence on the dollar been the only currency that could be
convertibility to gold was too risky.

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Short run vs. Long run functions: Another problem with the Old Bretton Woods was that the
same plan was made for the short run and long run. Right after World War II, the international
monetary system was only concerned with their present predicament of how to get the economy
back on track. Given the destruction caused by the war, addressing the pressing need of the
economy was appropriate but during evaluations in the short run, proper schemes and policies
should have been arranged to counter what could go wrong in the long run.
The undoing of the Bretton woods system was that the plans for the short run were allowed to
run indefinitely into the long run until they could no longer hold. Thus the system defaulted.
RECOMMENDATONS:
The worst banking crisis since the Great Depression strongly
suggests that a global rules-based system is necessary to oversee financial markets and
coordinate economic management. Hence, this has led to the ongoing discussions to reintroduce
the Bretton woods system. As discussed in the earlier part of this paper, this is not going to be an
easy task as the world’s market economy has drastically changed and thus cannot be compared to
mid 90’s. This has led us to suggest some recommendations which should be helpful if this
vision of reintroducing the Bretton Woods system is to be realized.
A new Bretton woods system is plausible as long as it can adapt to varying economic conditions
as the global economy evolves. Thus the following:
Stronger monetary policy: Given the current system of floating exchange rates, the World Bank
should advise the governments of each country to implement monetary policies that ensure that
their currency is not undervalued or overvalued.
Inflation targeting: Plans to prevent the occurrence of repetitive financial crises should be made;
one defect that is common in all financial crises is inflation. Inflation is good for the economy,
but when this inflation is excessive, the growth is one-sided. Thus as economic growth occurs for
some sectors of the economy, other sectors are worse off accumulating loss and debt. There is a
huge case of inequality in the economy and no real economic development ever occurs. Thus a
new Bretton Woods system should take considerate account of the inequality caused by inflation.
Regulation for derivatives: From the recent financial crisis, derivative trading has been seen to
have played a huge role in increasing the negative impact of the crisis. If possible, a special
regulation body or committee should be tasked with responsibility of monitoring and regulating
the derivatives market. Because most derivatives are OTC, there is no public information as to
their transactions, but since it has proven through the recent crisis that it has a strong hold in the
market. Such activities should be divulged to the government. So, that to a certain extent an
adequate regulatory framework can be established and financial loss minimized.

17
BRETTENWOODSYSTEM AFTER 2008CRISIS:
Dooley, Folkerts-Landau and
Garber have referred to the monetary system of today as Bretton Woods II.They argue that in the
early 2000s (decade) the international system is composed of a core issuing the dominant
international currency, and a periphery. The periphery is committed to export-led growth based
on the maintenance of an undervalued exchange rate. In the 1960s, the core was the United
States and the periphery was Europe and Japan. This old periphery has since graduated, and the
new periphery is Asia. The core remains the same, the United States.

18
The argument is that a system of pegged currencies, in which the peripheries export capital to the
core that provides a financial intermediary role, is both stable and desirable, although this notion
is controversial.
In the wake of the Global financial crisis of 2008, policymakers and others have called for a new
international monetary system that some of them also dub Bretton Woods II. On the other side,
this crisis has revived the debate about Bretton Woods II. On 26 September 2008, French
president, Nicolas Sarkozy, said, "We must rethink the financial system from scratch, as at
Bretton Woods."
On 24–25 September 2009 US President Obama hosted the G20 in Pittsburgh. A realignment of
currency exchange rates was proposed. This meeting's policy outcome could be known as the
Pittsburgh Agreement of 2009, where deficit nations may devalue their currencies and surplus
nations may revalue theirs upward.
In March 2010, Prime Minister Papandreou of Greece wrote an op-ed in the International Herald
Tribune, in which he said: "Democratic governments worldwide must establish a new global
financial architecture, as bold in its own way as Bretton Woods, as bold as the creation of the
European Community and European Monetary Union. And we need it fast." In interviews
coinciding with his meeting with President Obama, he indicated that Obama would raise the
issue of new regulations for the international financial markets at the next G20 meetings
in June and November 2010.Over the course of the crisis the IMF progressively relaxed its
stance on "free market" principles such as its guidance against using capital controls.
In 2011 the IMF's managing director Dominique Strauss-Kahn stated that boosting employment
and equity "must be placed at the heart" of the IMF's policy agenda. The World Bank indicated a
switch towards greater emphases on job creation.
However, Deutsche Bank's Sanjeev Sanyal has argued that the insistence on global balance is
fundamentally flawed and that sustained economic growth has always relied on symbiotic-
imbalances. This means that the world will eventually have to accept a return to new period of
imbalance that he calls Bretton Woods.

19
PEGGED RATES:
Japanese Yen:
Date # yen = $1 US
August 1946 15
12 March 1947 50
5 July 1948 270
25 April 1949 360
20 July 1971 308
30 December 1998 115.60*
5 December 2008 92.499*
19 March 2011 80.199*
3 August 2011 77.250*
Note: GDP for 2012 is $4.525 trillion US Dollars.

20
Deutsche Mark:
Date # Mark = $1 US Note
21 June 1948 3.33 Eur 1.7026
18 September 1949 4.20 Eur 2.1474
6 March 1961 4 Eur 2.0452
29 October 1969 3.67 Eur 1.8764
30 December 1998 1.673*
Last day of trading; converted to Euro
(4 January 1999)
Pound Sterling:
Date # pounds = $1 US
27 December 1945 0.2481
18 September 1949 0.3571
17 November 1967 0.4167
30 December 1998 0.598*

21
5 December 2008 0.681*
French Franc:
Date # francs = $1 US Note
27 December 1945 1.1911 £1 = 4.8 FRF
26 January 1948 2.1439 £1 = 8.64 FRF
18 October 1948 2.6352 £1 = 10.62 FRF
27 April 1949 2.7221 £1 = 10.97 FRF
20 September 1949 3.5 £1 = 9.8 FRF
11 August 1957 4.2 £1 = 11.76 FRF
27 December 1958 4.9371 1 FRF = 0.18 g gold
1 January 1960 4.9371 1 new franc = 100 old francs
10 August 1969 5.55 1 new franc = 0.160 g gold
31 December 1998 5.627*
Last day of trading; converted to
euro (4 January 1999)

22
Italian Lira:
Date # lire = $1 US Note
4 January 1946 225 Eur 0.1162
26 March 1946 509 Eur 0.2629
7 January 1947 350 Eur 0.1808
28 November 1947 575 Eur 0.297
18 September 1949 625 Eur 0.3228
31 December 1998 1,654.569*
Last day of trading; converted to euro (4
January 1999)

23
REASONS FOR FAILURE OF BRETTONWOOD SYSTEM:
 As in the case of Gold Standard, this system also did not provide for any revision in
the price of gold. Due to inflation, it became uneconomical to produce gold. This led
to the suspension of gold production in various countries leading to stagnation of gold
reserves which had an adverse impact on international liquidity.
 The system did not provide for any revaluation of parities due to which surplus countries
such as West Germany and Japan continued to enjoy export competitiveness against the US
economy. This aggravated the US trade deficit.
 The system did not provide for a revision in the price of gold in terms of USD. Due to
this, it was not possible to devalue the US Dollar despite continued trade deficit. The
devaluation of the dollar would have adversely affected all countries having US reserves.
 The continued trade deficit of the US created an over-supply of USD in the
international financial markets which reduced the acceptability of the USD. When the
Gold Convertibility Clause was invoked, the US authorities could not honor their
commitment to redeem USD against gold. This failure on the part of the US led to the
collapse of the system in 1971.
 The free market program it has so strenuously promoted over the past 30 years has
intensified all the contradictions of the capitalist mode of production.
 Thereafter, private investors were no longer allowed to redeem gold from the Federal
Reserve or other central banks.
 Speculation about a devaluation of the dollar in terms of other currencies caused markets to
buy large quantities of foreign currency assets.

25
ADVANTAGES AND LIMITATIONS OF BRETTONWOODSYSTEM:
Most of
the countries tried to reestablish the gold standard after World War I, but it had been totally
collapsed during the Great Depression in 1930s. Some economists said comply with the gold
standard had prohibited monetary authorities from increasing the money supply rapidly enough
to recover the economies. Therefore, the representatives of most of the world's leading nations
met at Bretton Woods, New Hampshire, in 1944 to create a new international monetary system.
The representatives had decided to link the world currencies to the dollar since the United States
accounted for over half of the world's manufacturing capacity and held most of the world's gold
during that time. At the final, they agreed should be convertible into gold at $35 per ounce.
The International Monetary Fund was officially established on 27th December 1945, when the
29 nations who had participated in the conference of Bretton Woods signed the Articles of
Agreement. It commenced its financial operations on 1st March 1947. The IMF is an
international organization, which consists of 183 member countries nowadays. The objectives of
the IMF are to promote international monetary cooperation by establishing a global monitoring
agency that supervises, consults, and collaborates on monetary problems. It facilitates world
trade expansion and thereby contributes to the promotion and maintenance of high levels of
employment and real income. Furthermore, the IMF ensures exchange rate stability to avoid
competitive exchange depreciation. It eliminates foreign exchange restrictions and assists in
creating systems of payment for multilateral trade. Moreover, member countries with
disequilibrium in their balance of payments are provided with the opportunity to correct their
problems by making the financial resources of the IMF available for them.
On the other hand, World Bank is the most significant source of financial aid for developing
nations in the world. It provides approximately $16 billion of loans to its client countries per
year. It utilizes its financial resources, highly trained staff, and extensive knowledge base to help
each developing country to move towards the path of stable, sustainable, and equitable growth in
the order to fight against poverty. Its goals are to eliminate the worst forms of poverty and to
improve living standards. It supports the restructuring process of economies and provides capital
for productive investments. Furthermore, it encourages foreign direct investment by making
guarantees or accepting partnerships with investors.
The benefits of the Bretton Woods system were a significant expansion of international trade and
investment as well as a notable macroeconomic performance: the rate of inflation was lower on
average for every industrialized country except Japan than during the period of floating exchange
rates that followed, the real per capita income growth was higher than in any monetary regime
since 1879 and the interest rates were low and stable. It has to be noted that leading economists
nowadays argue “whether macroeconomic performance stability was responsible for the
successes of Bretton Woods, or the controversy.”

26
Under the gold exchange standard, a country has to resort to the classical medicine of deflating
the domestic economy when faced with chronic BP deficits. Before World War II, European
nations often used this policy, in particular the Great Britain. Even though few currencies were
convertible into gold, policy makers thought that currencies should be backed by gold and
willingly adopted deflationary policies after World War I. Deflationary policy is not the only
option when faced with BP deficits. Devaluation is accepted in Bretton Woods. The adjustable
peg was viewed as a vast improvement over the gold exchange standard with fixed parity.
Currencies were convertible into gold, but unlike the gold exchange standard, countries had the
ability to change par values. For this reason, Keynes described the Bretton Woods system as "the
exact opposite of the gold standard."
On the contrary, weaknesses of the system were capital movement restrictions throughout the
Bretton Woods years (governments needed to limit capital flows in order to have a certain extent
of control) as well as the fact that parities were only adjusted after speculative and financial
crises. Another negative aspect was the pressure Bretton Woods put on the United States, which
was not willing to supply the amount of gold the rest of the world demanded, because the gold
reserves declined and eroded the confidence in the dollar.
In the post-World War II scenario, 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 had been expanding 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. There were four points being stand out which are listed as below:
Negotiators generally agreed that as far as they were concerned, the interwar period had
conclusively demonstrated the fundamental disadvantages of unrestrained flexibility of exchange
rates. The floating rates of the 1930s were seen as having discouraged trade and investment and
to have encouraged destabilizing speculation and competitive depreciations. Yet in an era of
more activist economic policy, governments were at the same time reluctant to return to
permanently fixed rates on the model of the classical gold standard of the nineteenth century.
Policy-makers understandably wished to retain the right to revise currency values on occasion as
circumstances warranted. Hence a compromise was sought between the polar alternatives of
either freely floating or irrevocably fixed rates - some arrangement that might gain the
advantages of both without suffering the disadvantages of either.
What emerged was the 'pegged rate' or 'adjustable peg' currency regime, also known as the par
value system. Members were obligated to declare a par value (a 'peg') for their national money
and to intervene in currency markets to limit exchange rate fluctuations within maximum
margins (a 'band') one per cent above or below parity; but they also retained the right, whenever
necessary and in accordance with agreed procedures, to alter their par value to correct a
'fundamental disequilibrium' in their balance of payments.

27
All governments generally agreed that if exchange rates were not to float freely, states would
also require assurance of an adequate supply of monetary reserves. Negotiators did not think it
necessary to alter in any fundamental way the gold exchange standard that had been inherited
from the interwar years.
What emerged largely reflected U.S. preferences: 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. Members were assigned quotas, roughly reflecting each
state's relative economic importance, and were obligated to pay into the Fund a subscription of
equal amount. The subscription was to be paid 25 per cent in gold or currency convertible into
gold (effectively the dollar, which was the only currency then still directly gold convertible for
central banks) and 75 per cent in the member's own money. Each member was then entitled,
when short of reserves, to borrow needed foreign currency in amounts determined by the size of
its quota.
All governments agreed was that it was necessary to avoid recurrence of the kind of economic
warfare that had characterized the decade of the 1930s. Some binding framework of rules was
needed to ensure that states would remove existing exchange controls limiting currency
convertibility and return to a system of free multilateral payments. Hence members were in
principle forbidden to engage in discriminatory currency practices or exchange regulation, with
only two practical exceptions. First, convertibility obligations were extended to current
international transactions only. Governments were to refrain from regulating purchases and sales
of currency for trade in goods or services. But they were not obligated to refrain from regulation
of capital-account transactions. Indeed, they were formally encouraged to make use of capital
controls to maintain external balance in the face of potentially destabilizing 'hot money' flows.
Second, convertibility obligations could be deferred if a member so chose during a postwar
'transitional period.' Members deferring their convertibility obligations were known as Article
XIV countries; members accepting them had so-called Article VIII status. One of the
responsibilities assigned to the IMF was to oversee this legal code governing currency
convertibility.
Structural problem also exist in this system. Over time the world economy grew and needed
more liquidity, which meant that US had to maintain increasing trade deficits. But the US was
not able to devalue the dollar. The dollar was the numeraire of the system, i.e., it was the
standard to which every other currency was pegged. Accordingly, the U.S. did not have the
power to set the exchange rate between the dollar and any other currency. Changing the value of
dollar in terms of gold has no real effect, because the values of other currencies were pegged to
the dollar. This problem would not have existed if most of other currencies were pegged to gold.
However, none of these currencies were pegged to gold because they were not convertible into
gold with the limited supply of gold.

28
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 (with the official rate at $35 per ounce and the private rate market
determined) 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.
THE FUTURE OF BRETTONWOOD SYSTEM:
During the last five to ten years
especially the system of Bretton Woods has been topic of many public discussions with
controversial opinions. Human rights activists argue that the
Programmed for the structural adjustment of the developing countries initiated by the World
Bank and the IMF led to a “third world” of the East-bloc states, which means that they
dramatically increased poverty in those countries. Large-scale agrarian and industrial projects
destabilized national economies destroyed the environment and social patterns. It is pointed out
that the inner structure of the Bretton Woods institutions, where the right to say is proportional to
the amount of money that each country contributes, is symbolic of the capitalistic ideology,
which completely ignores the interests of the people living in developingcountries.12 Thus,
human rights activists demand that the IMF and the World Bank stop interfering in national
policies of sovereign countries. The World Bank is well aware of the problems that can be
caused by projects in less developed areas. It reacted by providing the possibility to file requests
to an Inspection Panel. A person that files a request to the World Bank has to show that he/she
lives in the project area and will most likely be affected negatively by activities related to the
project. These negative effects must be caused by failure from the World Bank to follow its
policies and procedures. Additionally, the request must have been discussed with the Bank
management with an unsatisfactory outcome.
In contrast to these discussions the major industrialized nations have begun to worry about the
implications of the growing size and the speculative nature of financial movements in times of
globalization. Calls for a “new system of Bretton Woods” could be heard in almost every
industrialized country. In 1996, Michel Camdessus, the Managing Director of the IMF, stated
that even though the monetary system had changed since 1944 the goals of Bretton Woods were
as valid today as they had been in the past. He underlined that international cooperation would be
required to create a new Bretton Woods system, which in his point of view means that “
countries must make a greater effort to understand the economic policies of other countries and
that they must listen to the judgments of others about their own national policies.

29
It also means that they must take a more enlightened view of their own national interests,
recognizing that it is in their own self-interest to take the interests of other countries into account.

30
CONCLUSION:
As a conclusion, the Bretton Woods System of 1944 with its fixed
exchange rates does not exist anymore today. Its institutions and procedures had to adjust to
market forces to survive but still its goals are as valid today as they have been in the past. Today
many large developed countries allow their currencies to float freely, which means that only
supply and demand at the market determine what it is worth.
Some nations try to influence this process by buying and selling their own currency. Another
method is to peg the value of the money to one of the main currencies. The system of Bretton
Woods of 1944 with its fixed exchange rates does not exist anymore today. Its institutions and
procedures had to adjust to market forces to survive but still its goals are as valid today as they
have been in the past. The benefits of the Bretton Woods system were a significant expansion of
international trade and investment as well as a notable macroeconomic performance: the rate of
inflation was lower on average for every industrialized country except Japan than during the
period offloading exchange rates that followed, the real per capita income growth was higher
than in any monetary regime since 1879 and the interest rates were low and stable.14 It has to be
noted that leading economists nowadays argue “whether macroeconomic performance stability
was responsible for the successes of Bretton Woods, or the controverse.”15Weaknesses of the
system were capital movement restrictions throughout the Bretton Woods years (governments
needed to limit capital flows in order to have a certain extent of control) as well as the fact that
parities were only adjusted after speculative and financial crises.
Another negative aspect was the pressure Bretton Woods put on the United States, which was not
willing to supply the amount of gold the rest of the world demanded, because the gold reserves
declined and eroded the confidence in the dollars.

31
REFERENCES:
Following below are the references from information have been collected.
 http://en.wikipedia.org/wiki/Bretton_Woods_Conference.
 http://www2.econ.iastate.edu/classes/econ355/choi/bre.htm
 http://www.bankofgreece.gr/BogEkdoseis/Paper2010112.pdf
 https://www.essex.ac.uk/economics/documents/eesj/au08/ONeill245.pdf
 http://www.ukessays.com/essays/economics/objectives-of-the-bretton-woods-system-
economics-essay.php

Bretton Woods system of monetary management

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