Unit: MM202 International Business Unit coordinator: Assignment: 02 Topic: Essay topic No.2 Describe the most important features of the Bretton Woods Agreement. Why did the Bretton Woods ‘system’ break down and what has replaced it? Due Date: 06 May 2013 Word Count: With Reference list 2,265 Without reference list 2,143
The Bretton Woods Agreement was an international monetary system based on the United States (US) dollar (Wild and Wild, 2012, p.294). The Bretton Woods agreement followed the gold standard (1879-1914) which nations linked the value of their currencies to specific values of gold. This new system was designed to monitor exchange rates and lend reserve currencies to ...view middle of the document...
By 1946 the system was in full operation through the newly established International Bank for Reconstruction and Development (IBRD/World Bank) and the International Monetary Fund (IMF)
which were both established under the Bretton Woods Agreement (Wiggin, 2006, para. 3). There were several main features of the Bretton Woods Agreement including, an adjustable pegged foreign exchange rate system, built in flexibility, the world bank, the IMF, tight capital control and a US dominated system with the US dollar the key currency (Wild and Wild, 2012; GRIPS, n.d). The most notable feature of the agreement was the introduction of an adjustable pegged foreign exchange rate system with fixed exchange rates and built in flexibility which meant that exchange rates could be adjusted from time to time under certain conditions. As a result, exchange rates were supposed to move in a stepwise fashion. This was an arrangement designed to combine exchange rate stability and flexibility, while avoiding mutually exclusive devaluation. Member nations were allowed to adjust their exchange rates when ‘fundamental disequilibrium’ existed. However there was no clear definition of what ‘fundamental disequilibrium’ was. Exchange rates were adjusted less often than it had been imagined with the major currencies only adjusting once or twice and some not at all (GRIPS, n.d, para. 8). The World Bank was formed to provide funding for countries’ efforts toward economic progress. The immediate purpose of the World Bank was to fund European reconstruction after WWII. Later the World Bank moved to focus on the general financial needs of third world countries ( Wild and Wild, 2012, p.295). The IMF was established to monitor and regulate the fixed exchange rates and enforce the rules of the international monetary system (Wild and Wild, 2012, p.295). The IMF now has three main objectives with the first being surveillance, the
IMF observes global trends and advises on macroeconomic issues. Secondly, the IMF today provides technical assistance by assisting low and middle income countries in managing their economies. Lastly the IMF provides support to help countries avoid balance of payment deficit and potential bankruptcy (University of Shed, 2011). Tight capital control is the biggest difference between the Bretton Woods Agreement and the classical Gold Standard of the late 1800’s and early 1900’s when there was free capital mobility. The US and Germany’s regulations were relatively relaxed compared to that of other countries that imposed severe exchange controls (GRIPS, n.d, para. 9). The Bretton Woods agreement was officially a gold based system that treated all countries equally and the IMF was responsible for the management of this system. In reality, it was a US dominated system with the US dollar they crucial currency. The US was the centre country that provided domestic price stability which other countries could ‘import’, but not actually participate in currency...