The Bretton woods system
It was a system of monetary management that set financial and commercial rules among countries across the world such as the United States, Canada, UK and Japan. This system was one of a kind because it is a fully-funded monetary order intended to govern monetary relations among the independent states. At the time the Bretton woods conference happened, there was a need to address the lack of cooperation that existed between the nations, as a whole.
World War II
After the first World War, Europe, especially Britain, owed the United States of America substantial sums of money, which Britain found difficult to repay. Finally, the winning countries, which included Britain, France and the USA decided that the blame and the onus of payment would rest with Germany- a country who was considered to be the main cause of the war and who had lost the war, with severe repercussions. This resulted in the signing of the treaty of Versailles. However, the war left the resources of all the participating countries relatively drained. In the 1920s, there was an extreme imbalance in the balance of payment situation across the various countries. The USA suffered a period of the great depression in the late 1920s.
The Bretton woods conference
It was called the United Nations Monetary and Financial conference, it was held in July 1944, at Bretton Woods, New Hampshire, specifically at the Mount Washington Hotel. This conference was seen as an opportunity for a brand-new international system after the disasters of World War II. The conference drew a great deal of attention because it was unprecedented. Nations had previously never attempted such levels of cooperation. In fact, more barriers had been set up the decade prior to the conference that ever before.
The aim was to create a system that would avoid the rigidity of the previous international monetary systems, such as ensuring that there is rate stability but at the same time, economic growth. However, reaching a consensus took forever. Reports state the preparations for such a system began at least two years before the conference. Finally, the 730 delegates at the conference agreed on the creation and establishment of two institutions- The international Monetary funds and the International Bank for Reconstruction and Development (now known as the World Bank).
Each of these institutions was set up for a specific purpose.
- The IMF would be responsible for monitoring exchange rates and lending reserve currencies to nations that have a balance of payment deficit.
- The World Bank, on the other hand, was focused on providing assistance to the countries that were less developed, especially in the aftermath of the Second World War.
In the year 1958, the Bretton woods system became fully functional as the currencies became convertible. The countries started to settle the international system in dollars. The United States was left with the responsibility of keeping the gold price fixed. It was only in 1972 that President Richard Nixon ended the dollar’s convertibility to gold. The Bretton Woods system included 44 countries. The advantage of Bretton wood’s system is that it minimalized the international currency rate volatility, which further led to an increase in international trade relations.
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