1 BRETTON WOODS

2 The story before Bretton woods The Gold Standard came to an end during the depression of The GS was not deliberately devised, it evolved with general practice. The Gold Standard came to an end during the depression of The GS was not deliberately devised, it evolved with general practice.

3 The great interruption of world trade eliminated the gains from trade, which hindered economic growth. When the war replaced the depression, no cooperation was possible.

It was in 1944 that the representatives of Great Britain, US and other allied powers met in Bretton Woods, New Hampshire, to hammer out a new international financial order to replace the failed gold standard. It was in 1944 that the representatives of Great Britain, US and other allied powers met in Bretton Woods, New Hampshire, to hammer out a new international financial order to replace the failed gold standard. 4

5 BRETTON WOODS A system was required that would keep countries from changing exchange rates for competitive advantage. This means that some control was needed, as well as reserve base for deficit countries.

The reserves were to be provided through an institutions created for this purpose. The IMF was established to collect and allocate reserves in order to implement the Articles of Agreement signed at Bretton Woods. The reserves were to be provided through an institutions created for this purpose. The IMF was established to collect and allocate reserves in order to implement the Articles of Agreement signed at Bretton Woods. 6

7 The Articles of Agreement required member countries to: Promote international monetary cooperation Promote international monetary cooperation Facilitate the growth of trade Facilitate the growth of trade Promote exchange rate stability Promote exchange rate stability Established a system of multilateral payments. Established a system of multilateral payments. Create a reserve base. Create a reserve base.

The reserve was contributed by the members countries according to a quota system. Of the original contribution, 25% was in gold and 75% was in the country’s own currency. The reserve was contributed by the members countries according to a quota system. Of the original contribution, 25% was in gold and 75% was in the country’s own currency. A country was allowed to borrow up to its gold tranche contribution without IMF approval. A country was allowed to borrow up to its gold tranche contribution without IMF approval. 8

9 The IMF lending ability took the form of: The Compensating Financing Facility The Compensating Financing Facility The Extended Fund Facility The Extended Fund Facility The Trust Funds The Trust Funds The Supplementary Financing Facility The Supplementary Financing Facility The Buffer Stock Facility The Buffer Stock Facility

The most important feature of the BWA was to have the values of other currencies fixed in USD. The most important feature of the BWA was to have the values of other currencies fixed in USD. J.M. Keynes prefer an international settlement system based on a new currency unit –BANCOR. But the US plan was accepted. J.M. Keynes prefer an international settlement system based on a new currency unit –BANCOR. But the US plan was accepted. 10

11 The inevitable collapse of the BW was recognized by a Yale economist Robert Triffin.

12 The Triffin Paradox In order for the stock of world reserves to grow along with world trade, the providers of reserves- the US, must run a BOP deficits. These deficits are the means by which other countries can accumulate dollar reserves.

The more deficit occur, the more the holder of dollars will doubt the ability of the Federal Reserve to convert dollar into gold at the agreed price. This build-in paradox means that the system is doomed. 13

France started converting their dollar holding into gold despite US objection. France started converting their dollar holding into gold despite US objection. This led other countries to worry about whether enough gold would be available for them after the French had finished selling their dollars. This led other countries to worry about whether enough gold would be available for them after the French had finished selling their dollars. 14

By 1968, the run on gold was of such a scale that a two tier gold pricing system was established. The official US gold price was fixed at $35 per ounce. By 1968, the run on gold was of such a scale that a two tier gold pricing system was established. The official US gold price was fixed at $35 per ounce. 15

After repeated financial crisis, some relief came in 1970 with the allocation of Special Drawing Rights(SDRs). After repeated financial crisis, some relief came in 1970 with the allocation of Special Drawing Rights(SDRs). 16

17 If the SDR had arrived earlier, it might have prevented or postponed the collapse of the Bretton Woods system. If the SDR had arrived earlier, it might have prevented or postponed the collapse of the Bretton Woods system. BY 1971 the fall was imminent. BY 1971 the fall was imminent.

On 15 th August 1971 the largest countries called the ‘group of Ten’ were called together for a meeting at Smithsonian Institute in Washington DC. On 15 th August 1971 the largest countries called the ‘group of Ten’ were called together for a meeting at Smithsonian Institute in Washington DC. 18

As a result of the Smithsonian Agreement, the price of gold increases i.e. the US devalued its dollar. As a result of the Smithsonian Agreement, the price of gold increases i.e. the US devalued its dollar. 19

By the next month most major currencies were floating. This was the unsteady state of the international financial system as it approached the oil crisis by the end of By the next month most major currencies were floating. This was the unsteady state of the international financial system as it approached the oil crisis by the end of

21 Gold was officially demonetized. Gold was officially demonetized. Half of the IMF’s gold holdings was returned to the members. The other half was sold, and the proceeds were used to help poor nations. Half of the IMF’s gold holdings was returned to the members. The other half was sold, and the proceeds were used to help poor nations.

22 In March 1979 the European ‘joint float’ was extended into a system known as European Monetary System (EMS). In March 1979 the European ‘joint float’ was extended into a system known as European Monetary System (EMS). EMS consists of the European common market countries, it was based on the newly created European Currency Unit (ECU). EMS consists of the European common market countries, it was based on the newly created European Currency Unit (ECU).

23 The ECU is like SDR except that it is designed for use within Europe and is therefore based on European currencies. The ECU is like SDR except that it is designed for use within Europe and is therefore based on European currencies. ECU are used as reserves to the central banks, which lend and borrow them. ECU are used as reserves to the central banks, which lend and borrow them.

Other Institutions IBRD, commonly known as the World Bank was also a product of the BW. IBRD, commonly known as the World Bank was also a product of the BW. It is a lending institution that borrows from govt. by selling them its bonds and than use the proceeds for development in underdeveloped nations. It is a lending institution that borrows from govt. by selling them its bonds and than use the proceeds for development in underdeveloped nations. 24

International Development Agencies (IDA) International Development Agencies (IDA) International Finance Corporation (IFC) International Finance Corporation (IFC) The Bank of International Settlements (BIS) The Bank of International Settlements (BIS) Organization for Economic Cooperation and Development (OECD). Organization for Economic Cooperation and Development (OECD). General Agreement on Tariff and Trade (GATT). General Agreement on Tariff and Trade (GATT). 25

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