The final point to make is a happy note on which to end — in contrast to the situation at the end of the Second World War, the global trading system has remained remarkably robust despite the shock of the global financial crisis. In this environment, resources were increasingly allocated on the basis of a system in which governments sought to procure preferential access to natural resources and protected markets. With the outbreak of hostilities, this “Schachtian system” (after German Finance Minister Hjalmar Schacht) was strengthened by coercion in occupied territories.

The depletion of U.S. gold reserves accompanying these deficits, while remaining modest due to other nations’ desire to hold some of their reserves in dollar-denominated assets rather than gold, increasingly threatened the stability of the system. With the U.S. surplus in its current account disappearing in 1959 and the Federal Reserve’s foreign liabilities first exceeding its monetary gold reserves in 1960, this bred fears of a potential run on the nation’s gold supply. But the Bretton Woods system did not become fully operational until 1958, when fourteen countries made their currencies convertible to the dollar at fixed exchange rates. In 1947, under pressure from the U.S., it removed exchange controls, allowing overseas holders of pounds to convert them to dollars.

Ratification of Bretton Woods Final Act and Savannah Conference

The lower interest rates and eventual inflation would lead to capital flight, creating pressure for the currency to depreciate. To avoid a devaluation, and hence to follow the fixity rule, the nonreserve country would have to contract its money supply to take pressure off its currency and to reverse the BoP deficits. To provide a safety valve for countries that may face this predicament, the International Monetary Fund (IMF) was established to provide temporary loans to countries to help maintain their fixed exchange rates. Each member country was required to maintain a quota of reserves with the IMF that would then be available to lend to those countries experiencing balance of payments difficulties.

1. The challenge for the next 70 years will be to preserve the system in the face of major “transitions” that will stress the system.
2. One of the problems that typically arises with a reserve currency standard is the persistence of balance of payments (BoP) deficits.
3. It is less clear that the rapidly-growing dynamic economies of the South have as much to fear.
4. In the absence of devaluation, the U.S. needed a concerted effort by other nations to revalue their own currencies.
5. The main threat to the system as a whole was the Triffin problem, which was exacerbated after 1965 by expansionary US monetary and fiscal policy which led to rising inflation.
6. According to Triffin when the tipping point occurred, the US monetary authorities would tighten monetary policy and this would lead to global deflationary pressure.

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.

These changes are likely to result in an increase in taxes, a decrease in what is meant by the bretton woods agreement class 10 government spending, a contraction of the economy, and a loss of jobs. The import surcharge meant that an extra 10 percent would be assessed over the existing import tariff. This was implemented to force other countries to the bargaining table where, presumably, they would agree to a multilateral revaluation of their currencies to the dollar. The tax was especially targeted to pressure Japan, which had not revalued its currency as others had done during the previous years, to agree to a revaluation. The 10 percent import tax effectively raised the prices of foreign goods in U.S. markets and would have a similar effect as a 10 percent currency revaluation. The expectation was that the average revaluation necessary to bring the system into balance would be somewhat less than 10 percent, thus an 8 percent revaluation, say, would be less painful to exporters than a 10 percent import tax.

Economic security

1. What resulted from the conference were the Bretton Woods Agreement and the Bretton Woods System.
2. Never before had international monetary cooperation been attempted on a permanent institutional basis.
3. The US Treasury, aided by the Federal Reserve, also engaged in sterilised exchange market intervention.
4. The United Nations Monetary and Financial Conference was held in July 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire, where delegates from forty-four nations created a new international monetary system known as the Bretton Woods system.
5. The U.S. dollar was fixed to a weight in gold, originally set at $35 per ounce.
6. The summit was also looking for policies and regulations that would maximize the potential benefits and profits that could be derived from the global trading system.

However, there was no obligation on the part of the nonreserve countries to exchange their currencies for gold. Instead, the nonreserve-currency countries were obliged to maintain the fixed exchange rate to the U.S. dollar by intervening on the foreign exchange (Forex) market and buying or selling dollars as necessary. In other words, when there was excess demand on the Forex for the home currency in exchange for dollars, the nonreserve central bank would supply their currency and buy dollars, thus running a balance of payments surplus, to maintain the fixity of their exchange rate.

Foremost on the delegates’ minds was the instability of the international economic system after World War I, including the experiences of hyperinflation as in Germany in 1922–1923 and the worldwide depression of the 1930s. One element believed necessary to avoid repeating the mistakes of the past was to implement a system of fixed exchange rates. Not only could fixed exchange rates help prevent inflation, but they could also eliminate uncertainties in international transactions and thus serve to promote the expansion of international trade and investment.

Bretton Woods Conference

The Bretton Woods agreement remains a significant event in world financial history. The two Bretton Woods institutions it created in the International Monetary Fund and the World Bank played an important part in helping to rebuild Europe in the aftermath of World War II. Subsequently, both institutions have continued to maintain their founding goals while also transitioning to serve global government interests in the modern-day. The unpopularity and internal difficulty of such fiscal and monetary prudence led the United States to resort to other options.

Commission I dealt with the IMF and was chaired by Harry Dexter White, Assistant to the Secretary of the U.S. Commission II dealt with the IBRD and was chaired by John Maynard Keynes, economic adviser to the British Chancellor of the Exchequer and the chief British negotiator at the conference. Commission III dealt with “other means of international financial cooperation” and was chaired by Eduardo Suárez, Mexico’s Minister of Finance and the leader of the Mexican delegation. Meeting in December 1971 at the Smithsonian Institution in Washington, D.C., the Group of Ten signed the Smithsonian Agreement. The U.S. pledged to peg the dollar at $38/ounce with 2.25% trading bands, and other countries agreed to appreciate their currencies versus the dollar.

Beginning in 1944, the Bretton Woods system played a major role in shaping the global economy in the post-war period. Nonetheless, legacies of the system, like the dollar standard, remain with us and will likely be with us for some time to come. When a country’s international obligations must be settled in a foreign currency, running persistent balance of payment deficits can create a risk of insolvency. Under the Bretton Woods system, therefore, it was possible for a country literally to run out of money if gold reserves were depleted. In the Great Depression that preceded World War II, most countries had abandoned the gold standard.