Bretton Woods system

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well.

U.S. Trade Balance (1895–2015) and Trade Policies

Preparing to rebuild the international economic system while World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and signed the Bretton Woods agreement on its final day. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, these accords established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. The United States, which controlled two thirds of the world's gold, insisted that the Bretton Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but later declined to ratify the final agreements, charging that the institutions they had created were "branches of Wall Street".[1] These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency.[2] This action, referred to as the Nixon shock, created the situation in which the U.S. dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as the pound sterling) also became free-floating.

BankingCrises
Number of countries having a banking crisis in each year since 1800. The dramatic feature of this graph is the virtual absence of banking crises during the period of the Bretton Woods agreement, 1945 to 1971. This analysis is similar to Figure 10.1 in Reinhart and Rogoff (2009). For more details see the help file for "bankingCrises" in the Ecdat package available from the Comprehensive R Archive Network (CRAN).

Origins

The political basis for the Bretton Woods system was in the confluence of two key conditions: the shared experiences of two World Wars, with the sense that failure to deal with economic problems after the first war had led to the second; and the concentration of power in a small number of states.

Interwar period

There was a high level of agreement among the powerful nations that failure to coordinate exchange rates during the interwar period had exacerbated political tensions. This facilitated the decisions reached by the Bretton Woods Conference. Furthermore, all the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons.

The experience of World War II was fresh in the minds of public officials. The planners at Bretton Woods hoped to avoid a repeat of the Treaty of Versailles after World War I, which had created enough economic and political tension to lead to WWII. After World War I, Britain owed the U.S. substantial sums, which Britain could not repay because it had used the funds to support allies such as France during the War; the Allies could not pay back Britain, so Britain could not pay back the U.S. The solution at Versailles for the French, British, and Americans seemed to entail ultimately charging Germany for the debts. If the demands on Germany were unrealistic, then it was unrealistic for France to pay back Britain, and for Britain to pay back the US.[3] Thus, many "assets" on bank balance sheets internationally were actually unrecoverable loans, which culminated in the 1931 banking crisis. Intransigent insistence by creditor nations for the repayment of Allied war debts and reparations, combined with an inclination to isolationism, led to a breakdown of the international financial system and a worldwide economic depression.[4] The so-called "beggar thy neighbor" policies that emerged as the crisis continued saw some trading nations using currency devaluations in an attempt to increase their competitiveness (i.e. raise exports and lower imports), though recent research suggests this de facto inflationary policy probably offset some of the contractionary forces in world price levels (see Eichengreen "How to Prevent a Currency War").

In the 1920s, international flows of speculative financial capital increased, leading to extremes in balance of payments situations in various European countries and the US.[5] In the 1930s, world markets never broke through the barriers and restrictions on international trade and investment volume – barriers haphazardly constructed, nationally motivated and imposed. The various anarchic and often autarkic protectionist and neo-mercantilist national policies – often mutually inconsistent – that emerged over the first half of the decade worked inconsistently and self-defeatingly to promote national import substitution, increase national exports, divert foreign investment and trade flows, and even prevent certain categories of cross-border trade and investment outright. Global central bankers attempted to manage the situation by meeting with each other, but their understanding of the situation as well as difficulties in communicating internationally, hindered their abilities.[6] The lesson was that simply having responsible, hard-working central bankers was not enough.

Britain in the 1930s had an exclusionary trading bloc with nations of the British Empire known as the "Sterling Area". If Britain imported more than it exported to nations such as South Africa, South African recipients of pounds sterling tended to put them into London banks. This meant that though Britain was running a trade deficit, it had a financial account surplus, and payments balanced. Increasingly, Britain's positive balance of payments required keeping the wealth of Empire nations in British banks. One incentive for, say, South African holders of rand to park their wealth in London and to keep the money in Sterling, was a strongly valued pound sterling. Unfortunately, as Britain deindustrialized in the 1920s, the way out of the trade deficit was to devalue the currency. But Britain couldn't devalue, or the Empire surplus would leave its banking system.[7]

Nazi Germany also worked with a bloc of controlled nations by 1940. Germany forced trading partners with a surplus to spend that surplus importing products from Germany.[8] Thus, Britain survived by keeping Sterling nation surpluses in its banking system, and Germany survived by forcing trading partners to purchase its own products. The U.S. was concerned that a sudden drop-off in war spending might return the nation to unemployment levels of the 1930s, and so wanted Sterling nations and everyone in Europe to be able to import from the US, hence the U.S. supported free trade and international convertibility of currencies into gold or dollars.[9]

Post war negotiations

When many of the same experts who observed the 1930s became the architects of a new, unified, post-war system at Bretton Woods, their guiding principles became "no more beggar thy neighbor" and "control flows of speculative financial capital". Preventing a repetition of this process of competitive devaluations was desired, but in a way that would not force debtor nations to contract their industrial bases by keeping interest rates at a level high enough to attract foreign bank deposits. John Maynard Keynes, wary of repeating the Great Depression, was behind Britain's proposal that surplus nations be forced by a "use-it-or-lose-it" mechanism, to either import from debtor nations, build factories in debtor nations or donate to debtor nations.[10][11] The U.S. opposed Keynes' plan, and a senior official at the U.S. Treasury, Harry Dexter White, rejected Keynes' proposals, in favor of an International Monetary Fund with enough resources to counteract destabilizing flows of speculative finance.[12] However, unlike the modern IMF, White's proposed fund would have counteracted dangerous speculative flows automatically, with no political strings attached—i.e., no IMF conditionality.[13] According to economic historian Brad Delong, on almost every point where he was overruled by the Americans, Keynes was later proved correct by events.[14]

Today these key 1930s events look different to scholars of the era (see the work of Barry Eichengreen Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 and How to Prevent a Currency War); in particular, devaluations today are viewed with more nuance. Ben Bernanke's opinion on the subject follows:

... [T]he proximate cause of the world depression was a structurally flawed and poorly managed international gold standard. ... For a variety of reasons, including a desire of the Federal Reserve to curb the U.S. stock market boom, monetary policy in several major countries turned contractionary in the late 1920s—a contraction that was transmitted worldwide by the gold standard. What was initially a mild deflationary process began to snowball when the banking and currency crises of 1931 instigated an international "scramble for gold". Sterilization of gold inflows by surplus countries [the U.S. and France], substitution of gold for foreign exchange reserves, and runs on commercial banks all led to increases in the gold backing of money, and consequently to sharp unintended declines in national money supplies. Monetary contractions in turn were strongly associated with falling prices, output and employment. Effective international cooperation could in principle have permitted a worldwide monetary expansion despite gold standard constraints, but disputes over World War I reparations and war debts, and the insularity and inexperience of the Federal Reserve, among other factors, prevented this outcome. As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936. —Great Depression, B. Bernanke

In 1944 at Bretton Woods, as a result of the collective conventional wisdom of the time,[15] representatives from all the leading allied nations collectively favored a regulated system of fixed exchange rates, indirectly disciplined by a US dollar tied to gold[16]—a system that relied on a regulated market economy with tight controls on the values of currencies. Flows of speculative international finance were curtailed by shunting them through and limiting them via central banks. This meant that international flows of investment went into foreign direct investment (FDI)—i.e., construction of factories overseas, rather than international currency manipulation or bond markets. Although the national experts disagreed to some degree on the specific implementation of this system, all agreed on the need for tight controls.

Economic security

CordellHull.jpeg
Cordell Hull, U.S. Secretary of State 1933–44

Also based on experience of the inter-war years, U.S. planners developed a concept of economic security—that a liberal international economic system would enhance the possibilities of postwar peace. One of those who saw such a security link was Cordell Hull, the United States Secretary of State from 1933 to 1944.[Notes 1] Hull believed that the fundamental causes of the two world wars lay in economic discrimination and trade warfare. Specifically, he had in mind the trade and exchange controls (bilateral arrangements)[17] of Nazi Germany and the imperial preference system practiced by Britain, by which members or former members of the British Empire were accorded special trade status, itself provoked by German, French, and American protectionist policies. Hull argued

[U]nhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war … if we could get a freer flow of trade…freer in the sense of fewer discriminations and obstructions…so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace.[18]

Rise of governmental intervention

The developed countries also agreed that the liberal international economic system required governmental intervention. In the aftermath of the Great Depression, public management of the economy had emerged as a primary activity of governments in the developed states. Employment, stability, and growth were now important subjects of public policy.

In turn, the role of government in the national economy had become associated with the assumption by the state of the responsibility for assuring its citizens of a degree of economic well-being. The system of economic protection for at-risk citizens sometimes called the welfare state grew out of the Great Depression, which created a popular demand for governmental intervention in the economy, and out of the theoretical contributions of the Keynesian school of economics, which asserted the need for governmental intervention to counter market imperfections.

However, increased government intervention in domestic economy brought with it isolationist sentiment that had a profoundly negative effect on international economics. The priority of national goals, independent national action in the interwar period, and the failure to perceive that those national goals could not be realized without some form of international collaboration—all resulted in "beggar-thy-neighbor" policies such as high tariffs, competitive devaluations that contributed to the breakdown of the gold-based international monetary system, domestic political instability, and international war. The lesson learned was, as the principal architect of the Bretton Woods system New Dealer Harry Dexter White put it:

the absence of a high degree of economic collaboration among the leading nations will … inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale.

— Economic Security and the Origins of the Cold War, 1945–1950[Notes 2]

To ensure economic stability and political peace, states agreed to cooperate to closely regulate the production of their currencies to maintain fixed exchange rates between countries with the aim of more easily facilitating international trade. This was the foundation of the U.S. vision of postwar world free trade, which also involved lowering tariffs and, among other things, maintaining a balance of trade via fixed exchange rates that would be favorable to the capitalist system.

Thus, the more developed market economies agreed with the U.S. vision of post-war international economic management, which intended to create and maintain an effective international monetary system and foster the reduction of barriers to trade and capital flows. In a sense, the new international monetary system was a return to a system similar to the pre-war gold standard, only using U.S. dollars as the world's new reserve currency until international trade reallocated the world's gold supply.

Thus, the new system would be devoid (initially) of governments meddling with their currency supply as they had during the years of economic turmoil preceding WWII. Instead, governments would closely police the production of their currencies and ensure that they would not artificially manipulate their price levels. If anything, Bretton Woods was a return to a time devoid of increased governmental intervention in economies and currency systems.

Atlantic Charter

Prince of Wales-5
Roosevelt and Churchill during their secret meeting of 9–12 August 1941, in Newfoundland resulted in the Atlantic Charter, which the U.S. and Britain officially announced two days later.

The Atlantic Charter, drafted during U.S. President Franklin D. Roosevelt's August 1941 meeting with British Prime Minister Winston Churchill on a ship in the North Atlantic, was the most notable precursor to the Bretton Woods Conference. Like Woodrow Wilson before him, whose "Fourteen Points" had outlined U.S. aims in the aftermath of the First World War, Roosevelt set forth a range of ambitious goals for the postwar world even before the U.S. had entered the Second World War.

The Atlantic Charter affirmed the right of all nations to equal access to trade and raw materials. Moreover, the charter called for freedom of the seas (a principal U.S. foreign policy aim since France and Britain had first threatened U.S. shipping in the 1790s), the disarmament of aggressors, and the "establishment of a wider and more permanent system of general security".

As the war drew to a close, the Bretton Woods conference was the culmination of some two and a half years of planning for postwar reconstruction by the Treasuries of the U.S. and the UK. U.S. representatives studied with their British counterparts the reconstitution of what had been lacking between the two world wars: a system of international payments that would let nations trade without fear of sudden currency depreciation or wild exchange rate fluctuations—ailments that had nearly paralyzed world capitalism during the Great Depression.

Without a strong European market for U.S. goods and services, most policymakers believed, the U.S. economy would be unable to sustain the prosperity it had achieved during the war.[19] In addition, U.S. unions had only grudgingly accepted government-imposed restraints on their demands during the war, but they were willing to wait no longer, particularly as inflation cut into the existing wage scales with painful force. (By the end of 1945, there had already been major strikes in the automobile, electrical, and steel industries.)[20]

In early 1945 Bernard Baruch described the spirit of Bretton Woods as: if we can "stop subsidization of labor and sweated competition in the export markets," as well as prevent rebuilding of war machines, "...oh boy, oh boy, what long term prosperity we will have."[21] The United States [c]ould therefore use its position of influence to reopen and control the [rules of the] world economy, so as to give unhindered access to all nations' markets and materials.

Wartime devastation of Europe and East Asia

United States allies—economically exhausted by the war—needed U.S. assistance to rebuild their domestic production and to finance their international trade; indeed, they needed it to survive.[9]

Before the war, the French and the British realized that they could no longer compete with U.S. industries in an open marketplace. During the 1930s, the British created their own economic bloc to shut out U.S. goods. Churchill did not believe that he could surrender that protection after the war, so he watered down the Atlantic Charter's "free access" clause before agreeing to it.

Yet U.S. officials were determined to open their access to the British empire. The combined value of British and U.S. trade was well over half of all the world's trade in goods. For the U.S. to open global markets, it first had to split the British (trade) empire. While Britain had economically dominated the 19th century, U.S. officials intended the second half of the 20th to be under U.S. hegemony.[22][23]

A Senior Official of the Bank of England commented:

One of the reasons Bretton Woods worked was that the U.S. was clearly the most powerful country at the table and so ultimately was able to impose its will on the others, including an often-dismayed Britain. At the time, one senior official at the Bank of England described the deal reached at Bretton Woods as "the greatest blow to Britain next to the war", largely because it underlined the way financial power had moved from the UK to the US.

— [24]

A devastated Britain had little choice. Two world wars had destroyed the country's principal industries that paid for the importation of half of the nation's food and nearly all its raw materials except coal. The British had no choice but to ask for aid. Not until the United States signed an agreement on 6 December 1945 to grant Britain aid of $4.4 billion did the British Parliament ratify the Bretton Woods Agreements (which occurred later in December 1945).[25]

For nearly two centuries, French and U.S. interests had clashed in both the Old World and the New World. During the war, French mistrust of the United States was embodied by General Charles de Gaulle, president of the French provisional government. De Gaulle bitterly fought U.S. officials as he tried to maintain his country's colonies and diplomatic freedom of action. In turn, U.S. officials saw de Gaulle as a political extremist.

But in 1945 de Gaulle—the leading voice of French nationalism—was forced to grudgingly ask the U.S. for a billion-dollar loan. Most of the request was granted; in return France promised to curtail government subsidies and currency manipulation that had given its exporters advantages in the world market.

Design of the financial system

Free trade relied on the free convertibility of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade.

The new economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard, but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency.

Informal regimes

Previous regimes

In the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk when trading with other countries.

Imbalances in international trade were theoretically rectified automatically by the gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend.

This decrease in the amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this period was the British pound. Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War.

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. Further, a sizable share of the world's known gold reserves were located in the Soviet Union, which would later emerge as a Cold War rival to the United States and Western Europe.

The only currency strong enough to meet the rising demands for international currency transactions was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.

Fixed exchange rates

The rules of Bretton Woods, set forth in the articles of agreement of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), provided for a system of fixed exchange rates. The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade.

What emerged was the "pegged rate" currency regime. Members were required to establish a parity of their national currencies in terms of the reserve currency (a "peg") and to maintain exchange rates within plus or minus 1% of parity (a "band") by intervening in their foreign exchange markets (that is, buying or selling foreign money).

In theory, the reserve currency would be the bancor (a World Currency Unit that was never implemented), suggested by John Maynard Keynes; however, the United States objected and their request was granted, making the "reserve currency" the U.S. dollar. This meant that other countries would peg their currencies to the U.S. dollar, and—once convertibility was restored—would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system.[26]

Meanwhile, to bolster confidence in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $35 per ounce. At this rate, foreign governments and central banks could exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, which defined all currencies in relation to the dollar, itself convertible into gold, and above all, "as good as gold" for trade. U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. As the world's key currency, most international transactions were denominated in U.S. dollars.

The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.

Member countries could only change their par value by more than 10% with IMF approval, which was contingent on IMF determination that its balance of payments was in a "fundamental disequilibrium". The formal definition of fundamental disequilibrium was never determined, leading to uncertainty of approvals and attempts to repeatedly devalue by less than 10% instead.[27] Any country that changed without approval or after being denied was then denied access to the IMF.

Formal regimes

The Bretton Woods Conference led to the establishment of the IMF and the IBRD (now the World Bank), which still remain powerful forces in the world economy as of the 2010s.

A major point of common ground at the Conference was the goal to avoid a recurrence of the closed markets and economic warfare that had characterized the 1930s. Thus, negotiators at Bretton Woods also agreed that there was a need for an institutional forum for international cooperation on monetary matters. Already in 1944 the British economist John Maynard Keynes emphasized "the importance of rule-based regimes to stabilize business expectations"—something he accepted in the Bretton Woods system of fixed exchange rates. Currency troubles in the interwar years, it was felt, had been greatly exacerbated by the absence of any established procedure or machinery for intergovernmental consultation.

As a result of the establishment of agreed upon structures and rules of international economic interaction, conflict over economic issues was minimized, and the significance of the economic aspect of international relations seemed to recede.

International Monetary Fund

Officially established on 27 December 1945, when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management. The Fund commenced its financial operations on 1 March 1947. IMF approval was necessary for any change in exchange rates in excess of 10%. It advised countries on policies affecting the monetary system and lent reserve currencies to nations that had incurred balance of payment debts.

The big question at the Bretton Woods conference with respect to the institution that would emerge as the IMF was the issue of future access to international liquidity and whether that source should be akin to a world central bank able to create new reserves at will or a more limited borrowing mechanism.

WhiteandKeynes
John Maynard Keynes (right) and Harry Dexter White at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Georgia, U.S., March 8, 1946

Although attended by 44 nations, discussions at the conference were dominated by two rival plans developed by the United States and Britain. Writing to the British Treasury, Keynes, who took the lead at the Conference, did not want many countries. He believed that those from the colonies and semi-colonies had "nothing to contribute and will merely encumber the ground."[28]

As the chief international economist at the U.S. Treasury in 1942–44, Harry Dexter White drafted the U.S. blueprint for international access to liquidity, which competed with the plan drafted for the British Treasury by Keynes. Overall, White's scheme tended to favor incentives designed to create price stability within the world's economies, while Keynes wanted a system that encouraged economic growth. The "collective agreement was an enormous international undertaking" that took two years prior of the conference to prepare for—it consisted of numerous bilateral and multilateral meetings to reach common ground on what policies would make up the Bretton Woods system.

At the time, gaps between the White and Keynes plans seemed enormous. White basically wanted a fund to reverse destabilizing flows of financial capital automatically. White proposed a new monetary institution called the Stabilization Fund that "would be funded with a finite pool of national currencies and gold… that would effectively limit the supply of reserve credit". Keynes wanted incentives for the U.S. to help Britain and the rest of Europe rebuild after WWII.[29] Outlining the difficulty of creating a system that every nation could accept in his speech at the closing plenary session of the Bretton Woods conference on 22 July 1944, Keynes stated:

We, the delegates of this Conference, Mr President, have been trying to accomplish something very difficult to accomplish.[...] It has been our task to find a common measure, a common standard, a common rule acceptable to each and not irksome to any.

— The Collected Writings of John Maynard Keynes[Notes 3]

Keynes' proposals would have established a world reserve currency (which he thought might be called "bancor") administered by a central bank vested with the possibility of creating money and with the authority to take actions on a much larger scale.

In the case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries, build factories in debtor nations, or donate to them—and thereby create a foreign trade equilibrium.[10] Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary.

But the United States, as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, used White's plan but targeted many of Keynes's concerns. White saw a role for global intervention in an imbalance only when it was caused by currency speculation.

Although a compromise was reached on some points, because of the overwhelming economic and military power of the United States the participants at Bretton Woods largely agreed on White's plan.

What emerged largely reflected U.S. preferences: a system of subscriptions and quotas embedded in the IMF, which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country, as opposed to a world central bank capable of creating money. The Fund was charged with managing various nations' trade deficits so that they would not produce currency devaluations that would trigger a decline in imports.

The IMF is provided with a fund composed of contributions from member countries in gold and their own currencies. The original quotas were to total $8.8 billion. When joining the IMF, members are assigned "quotas" that reflect their relative economic power—and, as a sort of credit deposit, are obliged to pay a "subscription" of an amount commensurate with the quota. They pay the subscription as 25% in gold or currency convertible into gold (effectively the dollar, which at the founding, was the only currency then still directly gold convertible for central banks) and 75% in their own currency.

Quota subscriptions form the largest source of money at the IMF's disposal. The IMF set out to use this money to grant loans to member countries with financial difficulties. Each member is then entitled to withdraw 25% of its quota immediately in case of payment problems. If this sum should be insufficient, each nation in the system is also able to request loans for foreign currency.

In the event of a deficit in the current account, Fund members, when short of reserves, would be able to borrow foreign currency in amounts determined by the size of its quota. In other words, the higher the country's contribution was, the higher the sum of money it could borrow from the IMF.

Members were required to pay back debts within a period of 18 months to five years. In turn, the IMF embarked on setting up rules and procedures to keep a country from going too deeply into debt year after year. The Fund would exercise "surveillance" over other economies for the U.S. Treasury in return for its loans to prop up national currencies.

IMF loans were not comparable to loans issued by a conventional credit institution. Instead, they were effectively a chance to purchase a foreign currency with gold or the member's national currency.

The U.S.-backed IMF plan sought to end restrictions on the transfer of goods and services from one country to another, eliminate currency blocs, and lift currency exchange controls.

The IMF was designed to advance credits to countries with balance of payments deficits. Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates. This flexibility meant a member state would not have to induce a depression to cut its national income down to such a low level that its imports would finally fall within its means. Thus, countries were to be spared the need to resort to the classical medicine of deflating themselves into drastic unemployment when faced with chronic balance of payments deficits. Before the Second World War, European nations—particularly Britain—often resorted to this.

The IMF sought to provide for occasional discontinuous exchange-rate adjustments (changing a member's par value) by international agreement. Member nations were permitted to adjust their currency exchange rate by 1%. This tended to restore equilibrium in their trade by expanding their exports and contracting imports. This would be allowed only if there was a fundamental disequilibrium. A decrease in the value of a country's money was called a devaluation, while an increase in the value of the country's money was called a revaluation.

It was envisioned that these changes in exchange rates would be quite rare. However, the concept of fundamental disequilibrium, though key to the operation of the par value system, was never defined in detail.

Never before had international monetary cooperation been attempted on a permanent institutional basis. Even more groundbreaking was the decision to allocate voting rights among governments, not on a one-state one-vote basis, but rather in proportion to quotas. Since the United States was contributing the most, U.S. leadership was the key. Under the system of weighted voting, the United States exerted a preponderant influence on the IMF. The United States held one-third of all IMF quotas at the outset, enough on its own to veto all changes to the IMF Charter.

In addition, the IMF was based in Washington, D.C., and staffed mainly by U.S. economists. It regularly exchanged personnel with the U.S. Treasury. When the IMF began operations in 1946, President Harry S. Truman named White as its first U.S. Executive Director. Since no Deputy Managing Director post had yet been created, White served occasionally as Acting Managing Director and generally played a highly influential role during the IMF's first year.

International Bank for Reconstruction and Development

The agreement made no provisions to create international reserves. It assumed new gold production would be sufficient. In the event of structural disequilibria, it expected that there would be national solutions, for example, an adjustment in the value of the currency or an improvement by other means of a country's competitive position. The IMF was left with few means, however, to encourage such national solutions.

Economists and other planners recognized in 1944 that the new system could only commence after a return to normality following the disruption of World War II. It was expected that after a brief transition period of no more than five years, the international economy would recover and the system would enter into operation.

To promote growth of world trade and finance postwar reconstruction of Europe, the planners at Bretton Woods created another institution, the International Bank for Reconstruction and Development (IBRD), which is one of five agencies that make up the World Bank Group, and is perhaps now the most important agency [of the World Bank Group]. The IBRD had an authorized capitalization of $10 billion and was expected to make loans of its own funds to underwrite private loans and to issue securities to raise new funds to make possible a speedy postwar recovery. The IBRD was to be a specialized agency of the United Nations, charged with making loans for economic development purposes.

Readjustment

Dollar shortages and the Marshall Plan

The Bretton Woods arrangements were largely adhered to and ratified by the participating governments. It was expected that national monetary reserves, supplemented with necessary IMF credits, would finance any temporary balance of payments disequilibria. But this did not prove sufficient to get Europe out of its conundrum.

Postwar world capitalism suffered from a huge dollar shortage. The United States was running huge balance of trade surpluses, and the U.S. reserves were immense and growing. It was necessary to reverse this flow. Even though all nations wanted to buy U.S. exports, dollars had to leave the United States and become available for international use so they could do so. In other words, the United States would have to reverse the imbalances in global wealth by running a balance of trade deficit, financed by an outflow of U.S. reserves to other nations (a U.S. financial account deficit). The U.S. could run a financial deficit by either importing from, building plants in, or donating to foreign nations. Recall that speculative investment was discouraged by the Bretton Woods agreement. Importing from other nations was not appealing in the 1950s, because U.S. technology was cutting edge at the time. So, multinational corporations and global aid that originated from the U.S. burgeoned.[30]

The modest credit facilities of the IMF were clearly insufficient to deal with Western Europe's huge balance of payments deficits. The problem was further aggravated by the reaffirmation by the IMF Board of Governors in the provision in the Bretton Woods Articles of Agreement that the IMF could make loans only for current account deficits and not for capital and reconstruction purposes. Only the United States contribution of $570 million was actually available for IBRD lending. In addition, because the only available market for IBRD bonds was the conservative Wall Street banking market, the IBRD was forced to adopt a conservative lending policy, granting loans only when repayment was assured. Given these problems, by 1947 the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system's economic problems.[31]

The United States set up the European Recovery Program (Marshall Plan) to provide large-scale financial and economic aid for rebuilding Europe largely through grants rather than loans. Countries belonging to the Soviet bloc, e.g., Poland were invited to receive the grants, but finally they were forced by Stalin to reject the aid.[32] In a speech at Harvard University on 5 June 1947, U.S. Secretary of State George Marshall stated:

The breakdown of the business structure of Europe during the war was complete. … Europe's requirements for the next three or four years of foreign food and other essential products … principally from the United States … are so much greater than her present ability to pay that she must have substantial help or face economic, social and political deterioration of a very grave character.

— "Against Hunger, Poverty, Desperation and Chaos"[Notes 4]

From 1947 until 1958, the U.S. deliberately encouraged an outflow of dollars, and, from 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy. Dollars flowed out through various U.S. aid programs: the Truman Doctrine entailing aid to the pro-U.S. Greek and Turkish regimes, which were struggling to suppress communist revolution, aid to various pro-U.S. regimes in the Third World, and most important, the Marshall Plan. From 1948 to 1954 the United States provided 16 Western European countries $17 billion in grants.

To encourage long-term adjustment, the United States promoted European and Japanese trade competitiveness. Policies for economic controls on the defeated former Axis countries were scrapped. Aid to Europe and Japan was designed to rebuild productivity and export capacity. In the long run it was expected that such European and Japanese recovery would benefit the United States by widening markets for U.S. exports, and providing locations for U.S. capital expansion.

Cold War

In 1945, Roosevelt and Churchill prepared the postwar era by negotiating with Joseph Stalin at Yalta about respective zones of influence; this same year Germany was divided into four occupation zones (Soviet, American, British, and French).

Roosevelt and Henry Morgenthau insisted that the Big Four (United States, United Kingdom, the Soviet Union, and China) participate in the Bretton Woods conference in 1944,[33] but their goal was frustrated when the Soviet Union would not join the IMF. In the past, the reasons why the Soviet Union chose not to subscribe to the articles by December 1945 have been the subject of speculation. But since the release of relevant Soviet archives, it is now clear that the Soviet calculation was based on the behavior of the parties that had actually expressed their assent to the Bretton Woods Agreements. The extended debates about ratification that had taken place both in the UK and the U.S. were read in Moscow as evidence of the quick disintegration of the wartime alliance.

Facing the Soviet Union, whose power had also strengthened and whose territorial influence had expanded, the U.S. assumed the role of leader of the capitalist camp. The rise of the postwar U.S. as the world's leading industrial, monetary, and military power was rooted in the fact that the mainland U.S. was untouched by the war, in the instability of the national states in postwar Europe, and the wartime devastation of the Soviet and European economies.

Despite the economic effort imposed by such a policy, being at the center of the international market gave the U.S. unprecedented freedom of action in pursuing its foreign affairs goals. A trade surplus made it easier to keep armies abroad and to invest outside the U.S., and because other nations could not sustain foreign deployments, the U.S. had the power to decide why, when and how to intervene in global crises. The dollar continued to function as a compass to guide the health of the world economy, and exporting to the U.S. became the primary economic goal of developing or redeveloping economies. This arrangement came to be referred to as the Pax Americana, in analogy to the Pax Britannica of the late 19th century and the Pax Romana of the first. (See Globalism)

Late application

U.S. balance of payments crisis

After the end of World War II, the U.S. held $26 billion in gold reserves, of an estimated total of $40 billion (approx 65%). As world trade increased rapidly through the 1950s, the size of the gold base increased by only a few percentage points. In 1950, the U.S. balance of payments swung negative. The first U.S. response to the crisis was in the late 1950s when the Eisenhower administration placed import quotas on oil and other restrictions on trade outflows. More drastic measures were proposed, but not acted upon. However, with a mounting recession that began in 1958, this response alone was not sustainable. In 1960, with Kennedy's election, a decade-long effort to maintain the Bretton Woods System at the $35/ounce price was begun.

The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the $35 per ounce official price. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market.

In 1960 Robert Triffin, Belgian American economist, noticed that holding dollars was more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.[34]

The first effort was the creation of the London Gold Pool on 1 November 1961 between eight nations. The theory behind the pool was that spikes in the free market price of gold, set by the morning gold fix in London, could be controlled by having a pool of gold to sell on the open market, that would then be recovered when the price of gold dropped. Gold's price spiked in response to events such as the Cuban Missile Crisis, and other smaller events, to as high as $40/ounce. The Kennedy administration drafted a radical change of the tax system to spur more production capacity and thus encourage exports. This culminated with the 1963 tax cut program, designed to maintain the $35 peg.

In 1967, there was an attack on the pound and a run on gold in the sterling area, and on 18 November 1967, the British government was forced to devalue the pound.[35] U.S. President Lyndon Baines Johnson was faced with a brutal choice, either institute protectionist measures, including travel taxes, export subsidies and slashing the budget—or accept the risk of a "run on gold" and the dollar. From Johnson's perspective: "The world supply of gold is insufficient to make the present system workable—particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."[36]

He believed that the priorities of the United States were correct, and, although there were internal tensions in the Western alliance, that turning away from open trade would be more costly, economically and politically, than it was worth: "Our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies."

While West Germany agreed not to purchase gold from the U.S., and agreed to hold dollars instead, the pressure on both the dollar and the pound sterling continued. In January 1968 Johnson imposed a series of measures designed to end gold outflow, and to increase U.S. exports. This was unsuccessful, however, as in mid-March 1968 a dollar run on gold ensued through the free market in London, the London Gold Pool was dissolved first by the institution of ad hoc UK bank holidays at the request of the U.S. government. This was followed by a full closure of the London gold market, also at the request of the U.S. government, until a series of meetings were held that attempted to rescue or reform the existing system.[37]

All attempts to maintain the peg collapsed in November 1968, and a new policy program attempted to convert the Bretton Woods system into an enforcement mechanism of floating the gold peg, which would be set by either fiat policy or by a restriction to honor foreign accounts. The collapse of the gold pool and the refusal of the pool members to trade gold with private entities—on 18 March, 1968 the Congress of the United States repealed the 25% requirement of gold backing of the dollar[38]—as well as the U.S. pledge to suspend gold sales to governments that trade in the private markets,[39] led to the expansion of the private markets for international gold trade, in which the price of gold rose much higher than the official dollar price.[40][41] U.S. gold reserves remained depleted due to the actions of some nations, notably France,[41] which continued to build up their own gold reserves.

Structural changes

Return to convertibility

In the 1960s and 1970s, important structural changes eventually led to the breakdown of international monetary management. One change was the development of a high level of monetary interdependence. The stage was set for monetary interdependence by the return to convertibility of the Western European currencies at the end of 1958 and of the Japanese yen in 1964. Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence.

Growth of international currency markets

Another aspect of the internationalization of banking has been the emergence of international banking consortia. Since 1964 various banks had formed international syndicates, and by 1971 over three quarters of the world's largest banks had become shareholders in such syndicates. Multinational banks can and do make huge international transfers of capital not only for investment purposes but also for hedging and speculating against exchange rate fluctuations.

These new forms of monetary interdependence made possible huge capital flows. During the Bretton Woods era, countries were reluctant to alter exchange rates formally even in cases of structural disequilibria. Because such changes had a direct impact on certain domestic economic groups, they came to be seen as political risks for leaders. As a result, official exchange rates often became unrealistic in market terms, providing a virtually risk-free temptation for speculators. They could move from a weak to a strong currency hoping to reap profits when a revaluation occurred. If, however, monetary authorities managed to avoid revaluation, they could return to other currencies with no loss. The combination of risk-free speculation with the availability of huge sums was highly destabilizing.

Decline

U.S. monetary influence

A second structural change that undermined monetary management was the decline of U.S. hegemony. The U.S. was no longer the dominant economic power it had been for more than two decades. By the mid-1960s, the E.E.C. and Japan had become international economic powers in their own right. With total reserves exceeding those of the U.S., higher levels of growth and trade, and per capita income approaching that of the U.S., Europe and Japan were narrowing the gap between themselves and the United States.

The shift toward a more pluralistic distribution of economic power led to increasing dissatisfaction with the privileged role of the U.S. dollar as the international currency. As in effect the world's central banker, the U.S., through its deficit, determined the level of international liquidity. In an increasingly interdependent world, U.S. policy greatly influenced economic conditions in Europe and Japan. In addition, as long as other countries were willing to hold dollars, the U.S. could carry out massive foreign expenditures for political purposes—military activities and foreign aid—without the threat of balance-of-payments constraints.

Dissatisfaction with the political implications of the dollar system was increased by détente between the U.S. and the Soviet Union. The Soviet military threat had been an important force in cementing the U.S.-led monetary system. The U.S. political and security umbrella helped make American economic domination palatable for Europe and Japan, which had been economically exhausted by the war. As gross domestic production grew in European countries, trade grew. When common security tensions lessened, this loosened the transatlantic dependence on defence concerns, and allowed latent economic tensions to surface.

Dollar

Reinforcing the relative decline in U.S. power and the dissatisfaction of Europe and Japan with the system was the continuing decline of the dollar—the foundation that had underpinned the post-1945 global trading system. The Vietnam War and the refusal of the administration of U.S. President Lyndon B. Johnson to pay for it and its Great Society programs through taxation resulted in an increased dollar outflow to pay for the military expenditures and rampant inflation, which led to the deterioration of the U.S. balance of trade position. In the late 1960s, the dollar was overvalued with its current trading position, while the German Mark and the yen were undervalued; and, naturally, the Germans and the Japanese had no desire to revalue and thereby make their exports more expensive, whereas the U.S. sought to maintain its international credibility by avoiding devaluation.[42] Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.[41]

In contrast, upon the creation of Bretton Woods, with the U.S. producing half of the world's manufactured goods and holding half its reserves, the twin burdens of international management and the Cold War were possible to meet at first. Throughout the 1950s Washington sustained a balance of payments deficit to finance loans, aid, and troops for allied regimes. But during the 1960s the costs of doing so became less tolerable. By 1970 the U.S. held under 16% of international reserves. Adjustment to these changed realities was impeded by the U.S. commitment to fixed exchange rates and by the U.S. obligation to convert dollars into gold on demand.

Paralysis of international monetary management

Floating-rate system during 1968–1972

By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. Gold outflows from the U.S. accelerated, and despite gaining assurances from Germany and other nations to hold gold, the unbalanced fiscal spending of the Johnson administration had transformed the dollar shortage of the 1940s and 1950s into a dollar glut by the 1960s. In 1967, the IMF agreed in Rio de Janeiro to replace the tranche division set up in 1946. Special drawing rights (SDRs) were set as equal to one U.S. dollar, but were not usable for transactions other than between banks and the IMF. Nations were required to accept holding SDRs equal to three times their allotment, and interest would be charged, or credited, to each nation based on their SDR holding. The original interest rate was 1.5%.

The intent of the SDR system was to prevent nations from buying pegged gold and selling it at the higher free market price, and give nations a reason to hold dollars by crediting interest, at the same time setting a clear limit to the amount of dollars that could be held.

Nixon Shock

A negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued.[43] The drain on U.S. gold reserves culminated with the London Gold Pool collapse in March 1968.[44] By 1970, the U.S. had seen its gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.

In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on 15 August 1971, Nixon issued Executive Order 11615 pursuant to the Economic Stabilization Act of 1970, unilaterally imposing 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock.

Smithsonian Agreement

The August shock was followed by efforts under U.S. leadership to reform the international monetary system. Throughout the fall (autumn) of 1971, a series of multilateral and bilateral negotiations between the Group of Ten countries took place, seeking to redesign the exchange rate regime.

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. The group also planned to balance the world financial system using special drawing rights alone.

The agreement failed to encourage discipline by the Federal Reserve or the United States government. The Federal Reserve was concerned about an increase in the domestic unemployment rate due to the devaluation of the dollar. In attempt to undermine the efforts of the Smithsonian Agreement, the Federal Reserve lowered interest rates in pursuit of a previously established domestic policy objective of full national employment. With the Smithsonian Agreement, member countries anticipated return flow of dollars to the U.S, but the reduced interest rates within the United States caused dollars to continue to flow out of the U.S. and into foreign central banks. The inflow of dollars into foreign banks continued the monetization process of the dollar overseas, defeating the aims of the Smithsonian Agreement. As a result, the dollar price in the gold free market continued to cause pressure on its official rate; soon after a 10% devaluation was announced in February 1973, Japan and the EEC countries decided to let their currencies float. This proved to be the beginning of the collapse of the Bretton Woods System. The end of Bretton Woods was formally ratified by the Jamaica Accords in 1976. By the early 1980s, all industrialised nations were using floating currencies.[45][46]

Bretton Woods II

Dooley, Folkerts-Landau and Garber have referred to the monetary system of today as Bretton Woods II.[47] They argue that in the early 2000s the international system is composed of a core issuing the dominant international currency, and a periphery. The periphery is committed to export-led growth based on the maintenance of an undervalued exchange rate. In the 1960s, the core was the United States and the periphery was Europe and Japan. This old periphery has since graduated, and the new periphery is Asia. The core remains the same, the United States. The argument is that a system of pegged currencies—in which the periphery exports capital to the core, which serves an intermediary financial role—is both stable and desirable, although this notion is controversial.[47]

The Bretton Woods system after the 2008 crisis

In the wake of the Global financial crisis of 2008, some policymakers and others have called for a new international monetary system that some of them also dub Bretton Woods II. On the other side, this crisis has revived the debate about Bretton Woods II.[Notes 5]

On 26 September 2008, French President Nicolas Sarkozy said, "we must rethink the financial system from scratch, as at Bretton Woods."[48]

On 24–25 September 2009 U.S. President Obama hosted the G20 in Pittsburgh. A realignment of currency exchange rates was proposed. This meeting's policy outcome could be known as the Pittsburgh Agreement of 2009, where deficit nations may devalue their currencies and surplus nations may revalue theirs upward.

In March 2010, Prime Minister Papandreou of Greece wrote an op-ed in the International Herald Tribune, in which he said, "Democratic governments worldwide must establish a new global financial architecture, as bold in its own way as Bretton Woods, as bold as the creation of the European Community and European Monetary Union. And we need it fast." In interviews coinciding with his meeting with President Obama, he indicated that Obama would raise the issue of new regulations for the international financial markets at the next G20 meetings in June and November 2010.

Over the course of the crisis, the IMF progressively relaxed its stance on "free-market" principles such as its guidance against using capital controls. In 2011, the IMF's managing director Dominique Strauss-Kahn stated that boosting employment and equity "must be placed at the heart" of the IMF's policy agenda.[49] The World Bank indicated a switch towards greater emphases on job creation.[50][51]

Pegged rates

Dates are those when the rate was introduced; "*" indicates floating rate supplied by IMF[52]

Japanese yen

Date # yen = $1 US
August 1946 15
12 March 1947 50
5 July 1948 270
25 April 1949 360
20 July 1971 308
30 December 1998 115.60*
5 December 2008 92.499*
19 March 2011 80.199*
3 August 2011 77.250*

Note: GDP for 2012 is $4.525 trillion U.S. dollars[53]

German Mark

Date # Mark = $1 US Note
21 June 1948 3.33 Eur 1.7026
18 September 1949 4.20 Eur 2.1474
6 March 1961 4 Eur 2.0452
29 October 1969 3.67 Eur 1.8764
30 December 1998 1.673* Last day of trading; converted to Euro (4 January 1999)

Note: GDP for 2012 is $3.123 trillion U.S. dollars[53]

Pound sterling

Date # pounds = $1 US pre-decimal value
27 December 1945 0.2481 4 shillings and ​11 12 pence
18 September 1949 0.3571 7 shillings and ​1 34 pence
17 November 1967 0.4167 8 shillings and 4 pence
30 December 1998 0.598*
5 December 2008 0.681*

Note: GDP for 2012 is $2.323 trillion U.S. dollars[53]

French franc

Date # francs = $1 US Note
27 December 1945 1.1911 £1 = 4.8 FRF
26 January 1948 2.1439 £1 = 8.64 FRF
18 October 1948 2.6352 £1 = 10.62 FRF
27 April 1949 2.7221 £1 = 10.97 FRF
20 September 1949 3.5 £1 = 9.8 FRF
11 August 1957 4.2 £1 = 11.76 FRF
27 December 1958 4.9371 1 FRF = 0.18 g gold
1 January 1960 4.9371 1 new franc = 100 old francs
10 August 1969 5.55 1 new franc = 0.160 g gold
31 December 1998 5.627* Last day of trading; converted to euro (4 January 1999)

Note: GDP for 2012 is $2.253 trillion U.S. dollars[53]

Italian lira

Date # lire = $1 US Note
4 January 1946 225 Eur 0.1162
26 March 1946 509 Eur 0.2629
7 January 1947 350 Eur 0.1808
28 November 1947 575 Eur 0.297
18 September 1949 625 Eur 0.3228
31 December 1998 1,654.569* Last day of trading; converted to euro (4 January 1999)

Note: GDP for 2012 is $1.834 trillion U.S. dollars[53]

Spanish peseta

Date # pesetas = $1 US Note
17 July 1959 60 Eur 0.3606
20 November 1967 70 Devalued in line with sterling
31 December 1998 142.734* Last day of trading; converted to euro (4 January 1999)

Note: GDP for 2012 is $1.409 trillion U.S. dollars[53]

Dutch guilder

Date # gulden = $1 US Note
27 December 1945 2.652 Eur 1.2034
20 September 1949 3.8 Eur 1.7244
7 March 1961 3.62 Eur 1.6427
31 December 1998 1.888* Last day of trading; converted to euro (4 January 1999)

Note: GDP for 2012 is $709.5 billion U.S. dollars[53]

Belgian franc

Date # francs = $1 US Note
27 December 1945 43.77 Eur 1.085
1946 43.8725 Eur 1.0876
21 September 1949 50 Eur 1.2395
31 December 1998 34.605* Last day of trading; converted to euro (4 January 1999)

Note: GDP for 2012 is $419.6 billion U.S. dollars[53]

Swiss franc

Date # francs = $1 US Note
27 December 1945 4.30521 £1 = 17.35 CHF
September 1949 4.375 £1 = 12.25 CHF
31 December 1998 1.377* £1 = 2.289 CHF
5 December 2008 1.211* £1 = 1.778 CHF
15 January 2015 Peg dropped Peg dropped amidst ECB 1 trillion euro Quantitative Easing devaluation.

Note: GDP for 2012 is $362.4 billion U.S. dollars[53]

Greek drachma

Date # drachmae = $1 US Note
1954 30 Eur 0.088
31 December 2000 281.821* Last day of trading; converted to euro (2001)

Note: GDP for 2012 is $280.8 billion U.S. dollars[53]

Danish krone

Date # kroner = $1 US Note
August 1945 4.8
19 September 1949 6.91 Devalued in line with sterling
21 November 1967 7.5
31 December 1998 6.392*
5 December 2008 5.882*

Note: GDP for 2012 is $208.5 billion U.S. dollars[53]

Finnish markka

Date # markka = $1 US Note
17 October 1945 1.36 Eur 0.2287
5 July 1949 1.6 Eur 0.2691
19 September 1949 2.3 Eur 0.3868
15 September 1957 3.2 Eur 0.5382
1 January 1963 3.2 1 new markka = 100 old markka
12 October 1967 4.2 Eur 0.7064. Pegged to a basket in 1971, floated in 1991
30 December 1998 5.084* Last day of trading; converted to euro (4 January 1999)

Note: GDP for 2012 is $198.1 billion U.S. dollars[53]

Norwegian krone

Date # kroner = $1 US Note
15 September 1946 4.03 Joined Bretton Woods. £1 = 20.00 krone[54]
19 September 1949 7.15 Devalued in line with sterling[55]
15 August 1971 7.016* Bretton Woods collapsed
21 December 1971 6.745 Joined the Smithsonian Treaty
23 May 1972 6.571 Joined the "European Currency Snake"
16 November 1972 6.611* The Smithsonian Treaty collapsed
12 December 1978 5.096* Left "the snake", linked to a "basket" of currencies
October 1990 5.920* Pegged to the ECU
12 December 1992 6.684* Fully floating

Note: GDP for 2014 is $339.5 billion U.S. dollars[53]

See also

General:

Notes

  1. ^ For discussions of how liberal ideas motivated U.S. foreign economic policy after World War II, see, e.g., Kenneth Waltz, Man, the State and War (New York City: Columbia University Press, 1969) and yuvi.c Calleo and Benjamin M. Rowland, American and World Political Economy (Bloomington, Indiana: Indiana University Press, 1973).
  2. ^ Quoted in Robert A. Pollard, Economic Security and the Origins of the Cold War, 1945–1950 (New York: Columbia University Press, 1985), p. 8.
  3. ^ Comments by John Maynard Keynes in his speech at the closing plenary session of the Bretton Woods Conference on July 22, 1944 in Donald Moggeridge (ed.), The Collected Writings of John Maynard Keynes (London: Cambridge University Press, 1980), vol. 26, p. 101. This comment also can be found quoted online at [1]
  4. ^ Comments by U.S. Secretary of State George Marshall in his June 1947 speech "Against Hunger, Poverty, Desperation and Chaos" at a Harvard University commencement ceremony. A full transcript of his speech can be read online at [2]
  5. ^ For a recent publication see Dooley, M.; Folkerts-Landau, D.; Garber, P. (2009). "Bretton Woods Ii Still Defines the International Monetary System". Pacific Economic Review. 14 (3): 297–311. doi:10.1111/j.1468-0106.2009.00453.x.

References

  1. ^ Edward S. Mason and Robert E. Asher, "The World Bank Since Bretton Woods: The Origins, Policies, Operations and Impact of the International Bank for Reconstruction". (Washington DC: Brookings Institution, 1973), 29.
  2. ^ Annie Lowrey (9 February 2011) End the Fed? Actually, Maybe Not., Slate.com
  3. ^ John Maynard Keynes, Economic Consequences of the Peace. MacMillan: 1920.
  4. ^ Hudson, Michael (2003). "5". Super Imperialism: The Origin and Fundamentals of U.S. World Dominance (2nd ed.). London and Sterling, VA: Pluto Press.
  5. ^ Charles Kindleberger, The World in Depression. UC Press, 1973
  6. ^ Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World. New York: Penguin Press, 2009
  7. ^ Keynes, John Maynard. "Economic Consequences of Mr. Churchill (1925)" in Essays in Persuasion, edited by Donald Moggridge. 2010 [1931].
  8. ^ Skidelsky, Robert. John Maynard Keynes 1883–1946: Economist, Philosopher, Statesman. London, Toronto, New York: Penguin Books, 2003.
  9. ^ a b Block, Fred. The Origins of International Economic Disorder: A Study of United States International Monetary Policy from WW II to the Present. Berkeley: UC Press, 1977.
  10. ^ a b Marie Christine Duggan, "Taking Back Globalization: A China-United States Counterfactual Using Keynes' 1941 International Clearing Union" in Review of Radical Political Economy, Dec. 2013
  11. ^ Helleiner, Eric. States and the Reemergence of Global Finance: From Bretton Woods to the 1990s. Ithaca: Cornell University Press, 1994
  12. ^ D'Arista, Jane (2009). "The Evolving International Monetary System". Cambridge Journal of Economics. 33: 633–52. doi:10.1093/cje/bep027.
  13. ^ Gardner, Richard. Sterling Dollar Diplomacy: Anglo American Collaboration in the Reconstruction of Multilateral Trade. Oxford: Clarendon Press, 1956.
  14. ^ "Review of Robert Skidelsky, John Maynard Keynes: Fighting for Britain 1937–1946". Brad Delong, Berkeley university. Archived from the original on 14 October 2009. Retrieved 14 June 2009.
  15. ^ Wang, Jingyi (2015). The Past and Future of International Monetary System: With the Performances of the US Dollar, the Euro and the CNY. Springer. p. 85. ISBN 9789811001642.
  16. ^ Uzan, Marc. "Bretton Woods: The Next 70 Years" (PDF). Econometrics Laboratory - University of California, Berkeley.
  17. ^ Dimitrova, K., Nenovsky, N., G. Pavanelli. (2007). Exchange Control in Italy and Bulgaria in the Interwar Period: History and Perspectives, ICER, Working Paper No. 40.
  18. ^ Hull, Cordell (1948). The Memoirs of Cordell Hull: vol. 1. New York: Macmillan. p. 81.
  19. ^ Hofmann, Claudia (2008). Learning in Modern International Society: On the Cognitive Problem Solving Abilities of Political Actors. Springer Science & Business Media. p. 53. ISBN 9783531907895.
  20. ^ Frank, E R. (May 1946). "The Great Strike Wave and Its Significance" (PDF). marxists.org.
  21. ^ Baruch to E. Coblentz, 23 March 1945, Papers of Bernard Baruch, Princeton University Library, Princeton, N.J quoted in Walter LaFeber, America, Russia, and the Cold War (New York, 2002), p. 12.
  22. ^ Lundestad, Geir (September 1986). "Empire by Invitation? The United States and Western Europe, 1945–1952". Journal of Peace Research. Sage Publications, Ltd. 23 (3): 263–77. doi:10.1177/002234338602300305. JSTOR 423824.
  23. ^ Ikenberry, G. John (1992). "A World Economy Restored: Expert Consensus and the Anglo-American Postwar Settlement". International Organization. The MIT Press. 46 (1): 289–321. doi:10.1017/s002081830000151x. JSTOR 2706958. Knowledge, Power, and International Policy Coordination
  24. ^ "Senior Official of the Bank of England (1944) In The Bretton Woods Sequel will Flop by Gideon, Rachman" (PDF). The Financial Times. 11 November 2008. Archived from the original (PDF) on 16 January 2014. Retrieved 25 March 2017.
  25. ^ P. Skidelsky, John Maynard Keynes, (2003), pp. 817–20
  26. ^ Prestowitz, Clyde (2003). Rogue Nation.
  27. ^ Eichengreen, Barry (1996). Globalizing Capital. Princeton University Press. ISBN 9780691002453.
  28. ^ Prashad, Vijay (2008). The Darker Nations. The New Press. p. 68. ISBN 1595583424.
  29. ^ Marie Christine Duggan (2013). "Taking Back Globalization: A China-United States Counterfactual Using Keynes' 1941 International Clearing Union" in Review of Radical Political Economy
  30. ^ Helleiner, Eric. States and the Reemergence of Global Finance: From Bretton Woods to the 1990s. Ithaca: Cornell University Press, 1994.
  31. ^ Mason, Edward S.; Asher, Robert E. (1973). The World Bank Since Bretton Woods. Washington, D.C.: The Brookings Institution. pp. 105–07, 124–35.
  32. ^ Poland: Carnations w: TIME (ang.). TIME Magazine, 1948-02-09
  33. ^ Raymond F. Mikesell. "The Bretton Woods Debates: A Memoir, Essays in International Finance 192 (Princeton: International Finance Section, Department of Economics, Princeton University, 1994)" (PDF). Princeton.edu. Retrieved 25 March 2017.
  34. ^ "Money Matters, an IMF Exhibit – The Importance of Global Cooperation, System in Crisis (1959–1971), Part 4 of 7". Imf.org. 5 September 2001. Retrieved 25 March 2017.
  35. ^ "Wilson defends 'pound in your pocket'". BBC News. 19 November 1967.
  36. ^ Francis J. Gavin, Gold, Dollars, and Power – The Politics of International Monetary Relations, 1958–1971, The University of North Carolina Press (2003), ISBN 0-8078-5460-3
  37. ^ "Memorandum of discussion, Federal Open Market Committee" (PDF). Federal Reserve. 14 March 1968.
  38. ^ United States Congress, Public Law 90-269, 1968-03-18
  39. ^ Speech by Darryl R. Francis, President Federal Reserve Bank of St. Louis (12 July 1968). "The Balance of Payments, The Dollar, and Gold". p. 7.
  40. ^ Larry Elliott, Dan Atkinson (2008). The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future. The Bodley Head Ltd. pp. 6–15, 72–81. ISBN 1-84792-030-6.
  41. ^ a b c Laurence Copeland. Exchange Rates and International Finance (4th ed.). Prentice Hall. pp. 10–35. ISBN 0-273-68306-3.
  42. ^ Gray, William Glenn (2007), "Floating the System: Germany, the United States, and the Breakdown of Bretton Woods, 1969–1973", Diplomatic History, 31 (2): 295–323, doi:10.1111/j.1467-7709.2007.00603.x
  43. ^ Blanchard (2000), op. cit., Ch. 9, pp. 172–73, and Ch. 23, pp. 447–50.
  44. ^ "Memorandum of discussion, Federal Open Market Committee" (PDF). Federal Reserve. 14 March 1968.
  45. ^ Mastanduno, M. (2008). "System Maker and Privilege Taker". World Politics. 61: 121. doi:10.1017/S0043887109000057.
  46. ^ Eichengreen, Barry (2011). Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Oxford: Oxford University Press. p. 61. ISBN 9780199753789.
  47. ^ a b Dooley, Folkerts-Landau, and Garber (2003): An Essay on the Revived Bretton Woods System NBER Working Papers; for a critique, Eichengreen, Barry (2004): Global Imbalances and the Lessons of Bretton Woods NBER Working Papers
  48. ^ George Parker, Tony Barber and Daniel Dombey (9 October 2008). "Senior figures call for new Bretton Woods ahead of Bank/Fund meetings". Archived from the original on 14 October 2008.
  49. ^ Joseph Stiglitz (7 May 2010). "The IMF's change of heart". Al Jazeera. Retrieved 10 May 2011.
  50. ^ Passim see especially pp. 11–12 2011WorldDevelopemntReport fullPDF World Bank (2011)
  51. ^ Passim see especially pp. 11–12 statement by World Bank director Sarah Cliffe World bank to focus "much more investment in equitable job creation" (approx 5 mins into podcast) World Bank (2011)
  52. ^ "Data & Statistics supplied by the International Monetary fund web site". Imf.org. Retrieved 25 March 2017.
  53. ^ a b c d e f g h i j k l m "The World Factbook — Central Intelligence Agency". Cia.gov. Retrieved 25 March 2017.
  54. ^ "Brief history of Norges Bank". Norges-bank.no. Retrieved 25 March 2017.
  55. ^ Historical exchange rate data 1819–2003, Jan Tore Klovland, Norges Bank

Further reading

  • Van Dormael, A.; Bretton Woods : birth of a monetary system; London MacMillan 1978
  • Michael D. Bordo and Barry Eichengreen; A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform; 1993
  • Harold James; International Monetary Cooperation Since Bretton Woods; Oxford University Press, USA 1996
  • Benn Steil: The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order; Princeton University Press, 2013

External links

1973–74 stock market crash

The 1973–74 stock market crash caused a bear market between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom, it was one of the worst stock market downturns in modern history. The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. It was compounded by the outbreak of the 1973 oil crisis in October of that year. It was a major event of the 1970s recession.

1992 Swiss referendums

Fifteen referendums were held in Switzerland during 1992. The first two were held on 16 February on popular initiatives "for a financially bearable health insurance" and "for the drastic and stepwise limitation of animal experiments." Both were rejected by voters. The next seven were held on 17 May on joining and contributing to the Bretton Woods system (both approved), a federal law on water protection (approved), a popular initiative "for the recovery of our waters" (rejected), a federal resolution on the popular initiative "against the malpractice of gene technology on humans" (approved), a federal resolution on creating a civilian service alternative to military service (approved) and a change to the Strafgesetzbuch and the Military Penal Code on sexual integrity (approved).A third set of six referendums was held on 27 September on a federal resolution on building a transalpine rail route (approved), a federal law on the standing orders of the Federal Assembly (approved), federal laws on the salaries and expenses of members of the Federal Assembly (both rejected), an amendment to the stamp duty law (approved) and a federal law on farmland (approved). The final referendum was held on 6 December on a federal resolution on the European Economic Area, and was narrowly rejected.

Bretton Woods

Bretton Woods can refer to:

Bretton Woods, New Hampshire, a village in the United States

Bretton Woods Mountain Resort, a ski resort located in Bretton Woods, New Hampshire

The 1944 Bretton Woods Conference, also known as the "United Nations Monetary and Financial Conference"

The Bretton Woods system, the international monetary system created at the 1944 Bretton Woods Conference

Bretton Woods, New Hampshire

Bretton Woods is an area within the town of Carroll, New Hampshire, United States, whose principal points of interest are three leisure and recreation facilities. Being virtually surrounded by the White Mountain National Forest, the vista from Bretton Woods toward Mount Washington and the Presidential Range includes no significant artificial structures other than the Mount Washington Cog Railway and the Mount Washington Hotel.

Bretton Woods was the site of the United Nations Monetary and Financial Conference in 1944 which has given its name to the Bretton Woods system and led to the establishment of both the World Bank and the International Monetary Fund in 1945. The Bretton Woods system ended in 1971.

Bretton Woods is located along U.S. Route 302, 5 miles (8 km) east of the village of Twin Mountain and 20 miles (32 km) through scenic Crawford Notch northwest of the town of Bartlett.

In 1772 King George III granted Sir Thomas Wentworth of Bretton Hall, a country house in West Bretton, West Yorkshire, and 82 others, a parcel of 24,640 acres (9,970 ha) of land to be laid out as a plantation in the White Mountains. The plantation became the town of Carroll, and the southeast corner of the land retained the name "Bretton Woods", after the estate.

Dollar glut

The dollar glut is a term for the accumulation of American dollars outside of the United States as a reserve currency, contrasted with the dollar gap, which led to the creation of the Marshall Plan following World War II. The eventual shift to a dollar glut forced the end of the gold standard in the United States and led to the collapse of the Bretton Woods system.

The stability of the Bretton Woods system came to depend upon the ability of the US government to exchange dollars for gold at $35 an ounce. The American ability to fulfill this commitment began to diminish as the postwar dollar shortage was transformed into an overabundance of dollars, also known as the dollar glut.

Every Nation for Itself

Every Nation for Itself: Winners and Losers in a G-Zero World is a 2012 non-fiction book by Ian Bremmer that explains the growing G-Zero power vacuum in international politics as no country or group of countries has the political and economic leverage to drive an international agenda or provide global public goods. The book gives a historical summary of the global political order and American role in world affairs from the post-World War II establishment of the Bretton Woods system up through the present day. It outlines the various tolls that the G-Zero will exact, potential winners and losers in such an environment, and makes predictions as to what kind of political order will succeed the G-Zero.

Fixed exchange-rate system

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed against either the value of another single currency, a basket of other currencies, or another measure of value, such as gold.

There are benefits and risks to using a fixed exchange rate. A fixed exchange rate is typically used to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable, or more internationally prevalent currency (or currencies) to which the value is pegged. In doing so, the exchange rate between the currency and its peg does not change based on market conditions, unlike in a flexible exchange regime. This makes trade and investments between the two currency areas easier and more predictable and is especially useful for small economies that borrow primarily in foreign currency and in which external trade forms a large part of their GDP.

A fixed exchange-rate system can also be used to control the behavior of a currency, such as by limiting rates of inflation. However, in doing so, the pegged currency is then controlled by its reference value. As such, when the reference value rises or falls, it then follows that the value(s) of any currencies pegged to it will also rise and fall in relation to other currencies and commodities with which the pegged currency can be traded. In other words, a pegged currency is dependent on its reference value to dictate how its current worth is defined at any given time. In addition, according to the Mundell–Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy to achieve macroeconomic stability.

In a fixed exchange-rate system, a country’s central bank typically uses an open market mechanism and is committed at all times to buy and/or sell its currency at a fixed price in order to maintain its pegged ratio and, hence, the stable value of its currency in relation to the reference to which it is pegged. To maintain a desired exchange rate, the central bank during a time of private sector net demand for the foreign currency, sells foreign currency from its reserves and buys back the domestic money. This creates an artificial demand for the domestic money, which increases its exchange rate value. Conversely, in the case of an insipient appreciation of the domestic money, the central bank buys back the foreign money and thus adds domestic money into the market, thereby maintaining market equilibrium at the intended fixed value of the exchange rate.In the 21st century, the currencies associated with large economies typically do not fix (peg) their exchange rates to other currencies. The last large economy to use a fixed exchange rate system was the People's Republic of China, which, in July 2005, adopted a slightly more flexible exchange rate system, called a managed exchange rate. The European Exchange Rate Mechanism is also used on a temporary basis to establish a final conversion rate against the euro from the local currencies of countries joining the Eurozone.

Foreign exchange derivative

A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rate(s) of two (or more) currencies. These instruments are commonly used for currency speculation and arbitrage or for hedging foreign exchange risk.

Gold Standard Act

The Gold Standard Act of the United States was passed in 1900 (approved on March 14) and established gold as the only standard for redeeming paper money, stopping bimetallism (which had allowed silver in exchange for gold). It was signed by President William McKinley.

The Act made the de facto gold standard in place since the Coinage Act of 1873 (whereby debt holders could demand reimbursement in whatever metal was preferred—usually gold) a de jure gold standard alongside other major European powers at the time.

The Act fixed the value of the dollar at ​25 8⁄10 grains of gold at "nine-tenths fine" (90% purity), equivalent to 23.22 grains (1.5046 grams) of pure gold.

The Gold Standard Act confirmed the United States' commitment to the gold standard by assigning gold a specific dollar value (just over $20.67 per Troy ounce). This took place after McKinley sent a team to Europe to try to make a silver agreement with France and Great Britain.

On April 19, 1933, the United States domestically abandoned the gold standard, whereafter independent states would remain assured of their US dollar holdings by an implied guarantee on their convertibility on demand: the Bretton Woods system formalized this international arrangement at the conclusion of World War II, before the Nixon shock unilaterally cancelled direct international convertibility of the US dollar to gold in 1971.

Gold parity unit of account

The gold parity unit of account was the unit of account used by the European Coal and Steel Community (ECSC) from 1958, and in the European Economic Community from 1962 until the early 1970s. The unit was fixed to the value of gold under the Bretton Woods system, and was equivalent to the US dollar which the ECSC had previously used.After the collapse of the Bretton Woods system, more than one unit of account was used until the European Unit of Account (EUA) was eventually adopted as a universal replacement from 1977. The EUA was replaced, in turn, by the European Currency Unit in 1981.

Index of international trade topics

This is a list of international trade topics.

Absolute advantage

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

Asia-Pacific Economic Cooperation (APEC)

Autarky

Balance of trade

Barter

Bilateral Investment Treaty (BIT)

Bimetallism

Branch plant economy

Bretton Woods conference

Bretton Woods system

British timber trade

Cash crop

Central European Free Trade Agreement (CEFTA)

Comparative advantage

Cost, Insurance and Freight (CIF)

Council of Arab Economic Unity

Currency

Customs broking

Customs union

David Ricardo

Doha Development Round (Of World Trade Organization)

Dominican Republic – Central America Free Trade Agreement (DR-CAFTA)

Enabling clause

Enhanced Integrated Framework for Trade-Related Assistance for the Least Developed Countries

European Union (EU)

Export documentsATA Carnet

ATR.1 certificate

Certificate of origin

EUR.1 movement certificate

Form A

Form B

TIR CarnetEuropean Free Trade Association (EFTA)

Exchange rate

Factor price equalization

Fair trade

Foreign direct investment (FDI)

Foreign exchange option

Foreign Sales Corporations (FSCs)

Forfaiting

Free Trade Area of the Americas (FTAA)

Free On Board (FOB)

Free trade

Free trade area

Free trade zone (FTZ)

General Agreement on Tariffs and Trade (GATT)

Generalized System of Preferences (GSP)

Genetically modified food controversies

Geographical pricing

Giant sucking sound (a colorful phrase by Ross Perot)

Global financial system (GFS)

Globalization

Gold standard

Gravity model of trade

Gresham's law

Heckscher-Ohlin model (H-O model)

Horizontal integration

Import

Import substitution industrialization (ISI)

International Chamber of Commerce (ICC)

International factor movements

International law

International Monetary Market (IMM)

International Monetary Fund (IMF)

International Trade Organization (ITO)

Internationalization

Internationalization and localization (G11n)

ISO 4217 (international standard for currency codes)

Leontief paradox

Linder hypothesis

List of tariffs and trade legislation

Maquiladora

Mercantilism

Merchant bank

Money market

Most favoured nation (MFN)

Nearshoring

New Trade Theory (NTT)

North American Free Trade Agreement (NAFTA)

Offshore outsourcing

Offshoring

Organisation for Economic Co-operation and Development (OECD)

Organization of the Petroleum Exporting Countries (OPEC)

Outsourcing

Purchasing power parity (PPP)

Rules of origin

Safeguard

South Asia Free Trade Agreement (SAFTA)

Special drawing rights (SDRs)

Special Economic Zone (SEZ)

Tariff

Tax, tariff and trade

Terms of trade (TOT)

Tobin tax

Trade

Trade barrier

Trade bloc

Trade facilitation

Trade Facilitation and Development

Trade finance

Trade pact

Trade sanctions

Trade war

Transfer pricing

Transfer problem

United Nations Monetary and Financial Conference

Uruguay Round (Of General Agreement on Tariffs and Trade)

Wage insurance

World Intellectual Property Organization (WIPO)

World Intellectual Property Organization Copyright Treaty (WIPO Copyright Treaty)

World Trade Organization (WTO)

International monetary systems

An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. It should provide means of payment acceptable to buyers and sellers of different nationalities, including deferred payment. To operate successfully, it needs to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade, and to provide means by which global imbalances can be corrected. The system can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, it can arise from a single architectural vision, as happened at Bretton Woods in 1944.

Italian lira

The lira (Italian: [ˈliːra]; plural lire [ˈliːre]) was the currency of Italy between 1861 and 2002 and of the Albanian Kingdom between 1941 and 1943. Between 1999 and 2002, the Italian lira was officially a national subunit of the euro. However, cash payments could be made in lira only, as euro coins or notes were not yet available. The lira was also the currency of the Napoleonic Kingdom of Italy between 1807 and 1814.

The term originates from the value of a pound weight (Latin: libra) of high purity silver and as such is a direct cognate of the British pound sterling; in some countries, such as Cyprus and Malta, the words lira and pound were used as equivalents, before the euro was adopted in 2008 in the two countries. "L", sometimes in a double-crossed script form ("₤"), was the symbol most often used. Until the Second World War, it was subdivided into 100 centesimi (singular: centesimo), which translates to "hundredths" or "cents".

The lira was established at 4.5 grams of silver or 290.322 milligrams of gold. This was a direct continuation of the Sardinian lira. Other currencies replaced by the Italian lira included the Lombardy-Venetia pound, the Two Sicilies piastra, the Tuscan fiorino, the Papal States scudo and the Parman lira. In 1865, Italy formed part of the Latin Monetary Union in which the lira was set as equal to, among others, the French, Belgian and Swiss francs: in fact, in various Gallo-Italic languages in north-western Italy, the lira was outright called "franc". This practice has obviously ended with the introduction of the euro in 2002.

World War I broke the Latin Monetary Union and resulted in prices rising severalfold in Italy. Inflation was curbed somewhat by Mussolini, who, on August 18, 1926, declared that the exchange rate between lira and pound would be £1 = 90 lire—the so-called Quota 90, although the free exchange rate had been closer to 140–150 lire per pound, causing a temporary deflation and widespread problems in the real economy. In 1927, the lira was pegged to the U.S. dollar at a rate of 1 dollar = 19 lire. This rate lasted until 1934, with a separate "tourist" rate of US$1 = 24.89 lire being established in 1936. In 1939, the "official" rate was 19.8 lire.

After the Allied invasion of Italy, an exchange rate was set at US$1 = 120 lire (1 British pound = 480 lire) in June 1943, reduced to 100 lire the following month. In German occupied areas, the exchange rate was set at 1 Reichsmark = 10 lire. After the war, the value of the lira fluctuated, before Italy set a peg of US$1 = 575 lire within the Bretton Woods System in November 1947. Following the devaluation of the pound, Italy devalued to US$1 = 625 lire on 21 September 1949. This rate was maintained until the end of the Bretton Woods System in the early 1970s. Several episodes of high inflation followed until the lira was replaced by the euro.

The lira was the official unit of currency in Italy until 1 January 1999, when it was replaced by the euro (euro coins and notes were not introduced until 2002). Old lira denominated currency ceased to be legal tender on 28 February 2002. The conversion rate is 1,936.27 lire to the euro.All lira banknotes in use immediately before the introduction of the euro, and all post-World War II coins, were exchanged by the Bank of Italy up to 6 December 2011. Originally, Italy's central bank pledged to redeem Italian coins and banknotes until 29 February 2012, but this was brought forward to 6 December 2011.

Jamaica and the International Monetary Fund

Jamaica joined the International Monetary Fund (IMF) in February of 1963 under the leadership of The Rt. Hon. Sir Alexander Bustamante, one year after the country’s independence. From 1963 to 1966, Rt. Hon. Sir Donald Sangster served as Jamaica’s governor to the IMF and World Bank, and represented Jamaica during delegations held at the IMF and World Bank's Washington D.C. headquarters. In 1963, the IMF made its first loan to Jamaica ever, in the amount of 10 million SDR’s. In 1967, Sir Donald Sangster was elected as Jamaica's second Prime Minister, simultaneously serving as Minister of Finance and Minister of Defense.Moreover, Jamaica played a pivotal role in hosting the 1976 IMF Interim Committee in Jamaica, during the IMF's changing role within the Bretton Woods system that, in 1944, had previously been established after World War II. In a letter to President Ford, William E. Simon highlighted the major revisions of the Bretton Woods system that took effect as a result of the ratification of the Jamaica Accords. The Jamaica Accords focus was to abolishment of the Gold Standard that the Bretton Woods System had previously established. In order to create a more stable international monetary system, the Jamaica Accords served to create a more versatile foreign exchange rate that focused on a floating foreign exchange rate. In addition to the abolishment of the Bretton Woods system, a secondary meeting was held in Jamaica that helped the Development Committee to refocus on developing countries financial problems within the International Monetary System. In conclusion, this meeting established the implementation of expanded access to IMF resources through a Trust Fund in order to create more support for developing countries.

London Gold Pool

The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.

The central banks coordinated concerted methods of gold sales to balance spikes in the market price of gold as determined by the London morning gold fixing while buying gold on price weaknesses. The United States provided 50% of the required gold supply for sale. The price controls were successful for six years until the system became no longer workable. The pegged price of gold was too low, and after runs on gold, the British pound, and the US dollar occurred, France decided to withdraw from the pool. The London Gold Pool collapsed in March 1968.

The London Gold Pool controls were followed with an effort to suppress the gold price with a two-tier system of official exchange and open market transactions, but this gold window collapsed in 1971 with the Nixon Shock, and resulted in the onset of the gold bull market which saw the price of gold appreciate rapidly to US$850 in 1980.

Nixon shock

The Nixon shock was a series of economic measures undertaken by United States President Richard Nixon in 1971, in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold.While Nixon's actions did not formally abolish the existing Bretton Woods system of international financial exchange, the suspension of one of its key components effectively rendered the Bretton Woods system inoperative. While Nixon publicly stated his intention to resume direct convertibility of the dollar after reforms to the Bretton Woods system had been implemented, all attempts at reform proved unsuccessful. By 1973, the Bretton Woods system was replaced de facto by the current regime based on freely floating fiat currencies.

Robert Triffin

Robert, Baron Triffin (5 October 1911 – 23 February 1993) was a Belgian-American economist best known for his critique of the Bretton Woods system of fixed currency exchange rates. His critique became known later as Triffin's dilemma.

Snake in the tunnel

The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies. It was an attempt at creating a single currency band for the European Economic Community (EEC), essentially pegging all the EEC currencies to one another.

Pierre Werner presented a report on economic and monetary union to the EEC on 8 October 1970. The first of three recommended steps involved the coordination of economic policies and a reduction in fluctuations between European currencies.With the failure of the Bretton Woods system with the Nixon shock in 1971, the Smithsonian Agreement set bands of ±2.25% for currencies to move relative to their central rate against the US dollar. This provided a tunnel within which European currencies could trade. However, it implied much larger bands in which they could move against each other: for example if currency A started at the bottom of its band it could appreciate by 4.5% against the dollar, while if currency B started at the top of its band it could depreciate by 4.5% against the dollar.If both happened simultaneously, then currency A would appreciate by 9% against currency B. This was seen as excessive, and the Basel agreement in 1972 between the six existing EEC members and three about to join established a snake in the tunnel with bilateral margins between their currencies limited to 2.25%, implying a maximum change between any two currencies of 4.5%, and with all the currencies tending to move together against the dollar. This agreement also led to the formal end of the Sterling Area.

The tunnel collapsed in 1973 when the US dollar floated freely. The snake proved unsustainable, with several currencies leaving and in some cases rejoining. By 1977, it had become a Deutsche Mark zone with just the Belgian and Luxembourg franc, the Dutch guilder and the Danish krone tracking it. The Werner plan was abandoned.The European Monetary System followed the "snake" as a system for monetary coordination in the EEC.

Triffin dilemma

The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit.

The use of a national currency, such as the U.S. dollar, as global reserve currency leads to tension between its national and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account, as some goals require an outflow of dollars from the United States, while others require an overall inflow.

Specifically, the Triffin dilemma is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the Bretton Woods system. John Maynard Keynes had anticipated this difficulty and had advocated the use of a global reserve currency called 'Bancor'. Currently the IMF's SDRs are the closest thing to the proposed Bancor but they have not been adopted widely enough to replace the dollar as the global reserve currency.

In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China explicitly named the reserve currency status of the US dollar as a contributing factor to global savings and investment imbalances that led to the crisis. As such the Triffin Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency role exacerbates the U.S. current account deficit due to heightened demand for dollars.

United Nations System
Members and observers
History
Resolutions
Elections
Related
Other
Global
Policies
Implementation
Bretton Woods system
Lists
Banknotes
Reports
Federal funds
History
Chairs
Current governors
Current presidents

This page is based on a Wikipedia article written by authors (here).
Text is available under the CC BY-SA 3.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.