BRETTON WOODS AGREEMENT

BRETTON WOODS AGREEMENT

BRETTONWOODS AGREEMENT

BrettonWoods Agreement is a major system established in 1944 to manage andregulate monetary and exchange rate. It was created at the UnitedNations Monetary and Financial Conference at Bretton Woods, NewHampshire (Meier, 1971). This agreement enacted the rules governingthe financial and commercial relations for the main industrial statesin the mid-20thcentury (Meier, 1971). It became an initial example of a monetaryorder that was fully negotiated and focus to manage the monetaryrelations for independents nation-states. In this agreement the mainconcern was to set a mandate for each country to implement themonetary policy by keeping the exchange rate through linking itscurrency to gold (Meier, 1971).

Thesignificant milestone of this agreement was the creation of theInternational Monetary Fund and the International Bank forReconstruction and Development (Amadeo, 2015). It further went to setthe proposed development of a variable pegged foreign exchange ratesystem. Through the system, the currencies were pegged to gold andthe IMF body received the mandate to take appropriate action when anyimbalance of payment occurred.

Inaddition, it enacted provision that enable IMF to bridge thetemporary imbalances of payments. This agreement set to establishsolution to the prevailing problem of poor cooperation among othercountries and in effect prevent the competitive devaluation of thecurrencies (Amadeo, 2015). Structurally, the regime was developed tobring together binding legal obligations with a diversedecision-making done through IMF, an established international bodytasked to oversee the supranational authority. The initial agreementson financial regulations ultimately collapsed because it was directlydependent on the policies and preferences of the United States, itsmajor member state.

Theconference that gave rise to this agreement saw the development oftwo and a half years of planning for the reconstruction of postwarmonetary by the Treasuries of the United States and the Unitedkingdom. The member nations at the attendance of the conference wasforty four allied nations with an addition of Argentina, a neutralgovernment (Amadeo, 2015). Despite the presence of all its membernations, the conference was dominated two major plans from tworivals’ nations, the United States and the Britain.one plan wasadvocated by Harry Dexter White from U.S Treasury and John MaynardKeynes form Britain (Amadeo, 2015).

In the end they reach a compromise which inclined more to Whites’plan than that of John, this indicated that the United Statesinfluenced the outcome of this agreement during the last stages ofthe world war II. Before the formation of the agreement, the twoplans had significant differences particularly with respect to thefuture access of the international liquidity at last it is theresimilarities that emerged as the striking fact between the plans. The nations in attendance of the conference had a common ground thatthe financial chaos experienced during the periods of interwar hasserved to provide invaluable lessons (Amadeo, 2015). In effect allthe nations were focused at addressing the factors in the past whichfacilitated the occurrence of financial problems. Many of theagreement made was reflected in the provisions envisaged under theIMF body.

Fourmajor concerns stood out. First the nations in attendance agreedthat the period of interwar resulted in lethal unrestrainedflexibility of exchange rates (Amadeo, 2015). From the floating ratesexperienced in 1930s indicated that it was detrimental to investmentand trade and in the process promoted competitive depreciations anddestabilizing speculation. Throughout the process the nationsunanimously resort to seek the alternatives of either fixed rates orfreely floating rates.

Secondly,the nations agreed that in the event they would not adopt the freefloating of rates, they would instead seek to obtain an assurance ofenough supply of monetary reserves (Goldenweiser at al., 2000). Thethird point is that all governments agreed as an essentialrequirement to avoid the repeat of economic recession experienced in1930s. The final agreement reached involved the need to create aninstitutional forum for international cooperation on monetarymatters.

Theprocess of formation of this agreement faced several challenges whichinclude the decline by the soviet representatives to ratify the finalagreements terming the institutions they developed to be branches ofWall Street and dominated by the United States.

Thegold standard was perceived as the standardize medium fortransactions by the mid-1800s during the booming world trade market. Therefore, any amount of money was redeemed by the government for itsvalue in gold. The use of gold standard was dropped during 1960 whenit was realized the continual use led to the economic decline. Thatis, as the Americans purchased more of imported goods in dollars theU.S economy improved and consequently economic growth (Goldenweiserat al., 2000) . Nevertheless, gold still remain an important asset ofreal value.

Conclusion

Itis apparent that the formation of the Bretton Woods Agreement hasdeveloped appropriate regulation and governance of monetary andfinancial matters among the different nations. In effect it led tothe creation of such bodies as IMF and International Bank forReconstruction and Development which has stabilize the globalmonetary issues.

References

Meier,G. (1971). The Bretton Woods Agreement — Twenty-Five Years After.Stanford Law Review, 23(2), 235. http://dx.doi.org/10.2307/1227663

Amadeo,K. (2015). When the Dollar Was Backed By Gold. About.com News &ampIssues. Retrieved 20 September 2015, fromhttp://useconomy.about.com/od/monetarypolicy/p/gold_history.htm

Goldenweiser,E. A., &amp Bourneuf, A. (2000). Bretton Woods agreements.Washington, D.C: Federal Reserve System.