Download bretton woods

BRETTON WOODS
1
The story before Bretton woods

The Gold Standard came to an
end during the depression of
1929-1933. The GS was not
deliberately devised, it evolved
with general practice.
2
The great interruption of world
trade eliminated the gains
from trade, which hindered
economic growth. When the
war replaced the depression,
no cooperation was possible.
3

It was in 1944 that the
representatives of Great Britain,
US and other allied powers met in
Bretton Woods, New Hampshire,
to
hammer
out
a
new
international financial order to
replace the failed gold standard.
4
BRETTON WOODS
• A system was required that
would keep countries from
changing exchange rates for
competitive advantage. This
means that some control was
needed, as well as reserve base
for deficit countries.
5
 The
reserves were to be provided
through an institutions created for
this purpose. The IMF was
established to collect and allocate
reserves in order to implement
the Articles of Agreement signed
at Bretton Woods.
6
The Articles of Agreement required
member countries to:
 Promote
international monetary
cooperation
 Facilitate the growth of trade
 Promote exchange rate stability
 Established a system of multilateral
payments.
 Create a reserve base.
7
 The
reserve was contributed by the
members countries according to a
quota system. Of the original
contribution, 25% was in gold and
75% was in the country’s own
currency.
 A country was allowed to borrow up
to its gold tranche contribution without
IMF approval.
8
The IMF lending ability
took the form of:





The Compensating Financing
Facility
The Extended Fund Facility
The Trust Funds
The Supplementary Financing
Facility
The Buffer Stock Facility
9
 The
most important feature of the
BWA was to have the values of other
currencies fixed in USD.
 J.M.
Keynes prefer an international
settlement system based on a new
currency unit –BANCOR. But the US
plan was accepted.
10
The inevitable collapse of
the BW was recognized by
a Yale economist Robert
Triffin.
11
The Triffin Paradox
In order for the stock of world
reserves to grow along with world
trade, the providers of reservesthe US, must run a BOP deficits.
These deficits are the means by
which other countries can
accumulate dollar reserves.
12
 The
more deficit occur, the more
the holder of dollars will doubt the
ability of the Federal Reserve to
convert dollar into gold at the
agreed price. This build-in
paradox means that the system is
doomed.
13
France started converting their dollar
holding into gold despite US
objection.
 This led other countries to worry
about whether enough gold would be
available for them after the French
had finished selling their dollars.

14
 By
1968, the run on gold was of
such a scale that a two tier gold
pricing system was established.
The official US gold price was
fixed at $35 per ounce.
15
 After
repeated financial crisis,
some relief came in 1970 with
the allocation of Special
Drawing Rights(SDRs).
16
 If
the SDR had arrived earlier,
it might have prevented or
postponed the collapse of the
Bretton Woods system.
 BY 1971 the fall was imminent.
17
15th August 1971 the largest
countries called the ‘group of Ten’
were called together for a meeting at
Smithsonian Institute in Washington
DC.
 On
18
 As
a result of the Smithsonian
Agreement, the price of gold
increases i.e. the US devalued its
dollar.
19
 By
the next month most major
currencies were floating. This was the
unsteady state of the international
financial system as it approached the
oil crisis by the end of 1973.
20
 Gold
was officially demonetized.
 Half of the IMF’s gold holdings was
returned to the members. The other
half was sold, and the proceeds were
used to help poor nations.
21
In March 1979 the European ‘joint
float’ was extended into a system
known as European Monetary System
(EMS).
 EMS consists of the European
common market countries, it was
based on the newly created European
Currency Unit (ECU).

22
The ECU is like SDR except that it is
designed for use within Europe and is
therefore based on European
currencies.
 ECU are used as reserves to the
central banks, which lend and borrow
them.

23
Other Institutions
 IBRD,
commonly known as the World
Bank was also a product of the BW.
 It is a lending institution that borrows
from govt. by selling them its bonds
and than use the proceeds for
development in underdeveloped
nations.
24
International Development Agencies (IDA)
 International Finance Corporation (IFC)
 The Bank of International Settlements
(BIS)
 Organization for Economic Cooperation
and Development (OECD).
 General Agreement on Tariff and Trade
(GATT).

25
26
27
28